Finding 499531 (2023-012)

Procurement Federal Agency: U.S. Department of Health and Human Services Program: Congressional Directives (ALN 93.493) Pass-through Entity: N/A Federal Assistance Identification Number or Pass-Through Number: CE146419 Federal Award Year: Year ended December 31, 2023 Type of Finding: Material Weakness in Internal Control over Compliance; Material Noncompliance Finding Criteria: 45 CFR 75.303(a) requires that each non-Federal entity must "Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award…”. 45 CFR 75.327(a) requires that "The non-Federal entity must use its own documented procurement procedures which reflect applicable State, local, and tribal laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in this part." 45 CFR 75.327(i) requires that "The non-Federal entity must maintain records sufficient to detail the history of procurement. These records will include, but are not necessarily limited to the following: rationale for the method of procurement, selection of contract type, contractor selection or rejection, and the basis for the contract price." 45 CFR 75.328(a) requires that "All procurement transactions must be conducted in a manner providing full and open competition consistent with the standards of this section. In order to ensure objective contractor performance and eliminate unfair competitive advantage, contractors that develop or draft specifications, requirements, statements of work, or invitations for bids or requests for proposals must be excluded from competing for such procurements." 45 CFR 75.328(d) requires that "The non-Federal entity must ensure that all prequalified lists of persons, firms, or products which are used in acquiring goods and services are current and include enough qualified sources to ensure maximum open and free competition. Also, the non-Federal entity must not preclude potential bidders from qualifying during the solicitation period." 45 CFR 75.329(b) requires that "...Small purchase procedures are those relatively simple and informal procurement methods for securing services, supplies, or other property that do not cost more than the Simplified Acquisition Threshold. If small purchase procedures are used, price or rate quotations must be obtained from an adequate number of qualified sources." All procurements for this grant occurred at the county hospital which is specifically exempted from state statutes related to procurement for political subdivisions. For federally funded procurements, decisions greater than the Simplified Acquisition Threshold of $250,000 defined in 48 CFR 2.101 require the use of formal procurement methods, as described below. 45 CFR 75.329(c) requires that "Bids are publicly solicited and a firm fixed price contract (lump sum or unit price) is awarded to the responsible bidder whose bid, conforming with all the material terms and conditions of the invitation for bids, is the lowest in price. The sealed bid method is the preferred method for procuring construction, if the conditions in paragraph (c)(1) of this section apply. (1) In order for sealed bidding to be feasible, the following conditions should be present: (i) A complete, adequate, and realistic specification or purchase description is available; (ii) Two or more responsible bidders are willing and able to compete effectively for the business; and (iii) The procurement lends itself to a firm fixed price contract and the selection of the successful bidder can be made principally on the basis of price. (2) If sealed bids are used, the following requirements apply: (i) Bids must be solicited from an adequate number of known suppliers, providing them sufficient response time prior to the date set for opening the bids, for local, and tribal governments, the invitation for bids must be publicly advertised; (ii) The invitation for bids, which will include any specifications and pertinent attachments, must define the items or services in order for the bidder to properly respond; (iii) All bids will be opened at the time and place prescribed in the invitation for bids, for local, and tribal governments, the bids must be opened publicly; (iv) A firm fixed price contract award will be made in writing to the lowest responsive and responsible bidder. Where specified in bidding documents, factors such as discounts, transportation cost, and life cycle costs must be considered in determining which bid is lowest. Payment discounts will only be used to determine the low bid when prior experience indicates that such discounts are usually taken advantage of; and (v) Any or all bids may be rejected if there is a sound documented reason." 45 CFR 75.329 (d) requires that “Procurement by competitive proposals. The technique of competitive proposals is normally conducted with more than one source submitting an offer, and either a fixed price or cost-reimbursement type contract is awarded. It is generally used when conditions are not appropriate for the use of sealed bids. If this method is used, the following requirements apply: (1) Requests for proposals must be publicized and identify all evaluation factors and their relative importance. Any response to publicized requests for proposals must be considered to the maximum extent practical; (2) Proposals must be solicited from an adequate number of qualified sources; (3) The non-Federal entity must have a written method for conducting technical evaluations of the proposals received and for selecting recipients; (4) Contracts must be awarded to the responsible firm whose proposal is most advantageous to the program, with price and other factors considered; and (5) The non-Federal entity may use competitive proposal procedures for qualifications-based procurement of architectural/engineering (A/E) professional services whereby competitors' qualifications are evaluated and the most qualified competitor is selected, subject to negotiation of fair and reasonable compensation. The method, where price is not used as a selection factor, can only be used in procurement of A/E professional services. It cannot be used to purchase other types of services though A/E firms are a potential source to perform the proposed effort.” 45 CFR 75.329(f) requires that "...Procurement by noncompetitive proposals is procurement through solicitation of a proposal from only one source and may be used only when one or more of the following circumstances apply: (1) The item is available only from a single source; (2) The public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation; (3) The HHS awarding agency or pass-through entity expressly authorizes noncompetitive proposals in response to a written request from the non-Federal entity; or (4) After solicitation of a number of sources, competition is determined inadequate." The county hospital procurement policy requires that all county hospital purchases must have a purchase order and be processed through Supply Chain Management using Peoplesoft FSCM in order to ensure purchases are compliant with all clinical and safety mandates and done in a cost effective manner. The policy also requires that Supply Chain Management is the only department authorized to contact suppliers for the purpose of placing orders and negotiating pricing. Condition: The county hospital does not have effective internal controls over the procurement requirement of the Congressional Directives program, which resulted in two instances of noncompliance. During our testing we noted: Small Purchases: In our sample of six small purchases we found the following exceptions for five of the selections: ‐ The county hospital purchased lab equipment with a total cost of $118,000 but did not seek more than a single quote when two distributors were available, which resulted in noncompliance with the procurement requirements. The price of the equipment is set by the manufacturer. The county hospital cited sole source as the procurement method but the circumstances cited by the county hospital , an established relationship with the vendor, did not meet one of the allowable criteria under the regulations. The county hospital was unable to provide support that it maintained records documenting the history of the procurement. ‐ The county hospital obtained architectural services with a total cost of $31,259 using noncompetitive negotiation but none of the criteria allowing for noncompetitive procurements were met, which resulted in noncompliance with the procurement requirements. The county hospital was unable to provide support that it maintained records documenting the history of the procurement, including the selection of the architect for this procurement or the initial selection. ‐ The county hospital obtained fluid management equipment with a total cost of $39,756 but did not maintain documentation of the history of the procurement decision, including the decision to use the pricing available through a Group Purchasing Organization. ‐ The county hospital purchased infant care equipment with a total cost of $83,676 but did not maintain documentation of the history of the procurement decision, including the decision to use the pricing available through a Group Purchasing Organization. ‐ The county hospital purchased imaging equipment with a total cost of $170,370 but did not maintain documentation of the history of the procurement decision, including the decision to use the pricing available through a Group Purchasing Organization. Formal Methods: In our sample of two procurements requiring formal methods we found the following exceptions: ‐ The county hospital purchased infant care equipment with a total cost of $345,923 by seeking quotes from two different vendors, but based on the size of the procurement the county hospital should have utilized one of the formal procurement methods such as sealed bids or competitive proposals. The county hospital later decided to use the pricing available through a Group Purchasing Organization but was unable to provide support that it maintained records documenting the history of the procurement. ‐ The county hospital selected ultrasound equipment with a total cost of $600,000 by seeking product demonstrations from three different vendors. The county hospital did not maintain records to demonstrate that the responses were the result of public solicitation. The county hospital was unable to provide documentation to support that it maintained records documenting the history of the procurement, including a cost/price analysis and decision to use a contract through a Group Purchasing Organization. During 2023 the county hospital did not have written procurement policies that conformed to the requirements of the Uniform Guidance, including the requirement to maintain records of the history of the procurement. State law specifically exempts the county hospital from the State's own laws related to local government procurement, but this has not been replaced by local laws or policies and procedures specific to procurement. Cause: For most specialized medical equipment purchased by the grantee, the department identifying the need for the equipment is also responsible for selecting the vendor. Personnel making procurement decisions do not appear to receive training in the requirements related to procurement for federally funded projects, including the limited circumstances where noncompetitive procurements are allowed or the maintenance of required records of the history of procurement. Effect: The county hospital is not complying with the procurement requirements applicable to the program, including properly maintaining records of procurement decisions and processes that ensure fair and open competition between an adequate number of potential vendors. Context: For 2023 we identified four procurements greater than the simplified acquisition threshold and ten procurements less than the simplified acquisition threshold. We selected two procurements and six procurements, respectively, from this population of expenditures that occurred during 2023. We found control deficiencies with both of the selections greater than the simplified acquisition threshold and five control deficiencies and/or exceptions in the selections less than the simplified acquisition threshold. The sample sizes were based on guidance from chapter 11 of the AICPA Audit Guide, Government Auditing Standards and Single Audits. Questioned Costs: $149,259 known Repeat Finding?: No Recommendation: We recommend that the county hospital develop a procurement policy that conforms to federal requirements, including the most stringent between the Uniform Guidance at 2 CFR 200 and the United States Department of Health and Human Services Uniform Administrative Requirements at 45 CFR 75. We recommend that the county hospital develop a document retention policy related to procurement. We further recommend that a standardized procurement process is developed for micropurchases, small purchases less than the simplified acquisition threshold, and formal procedures for all other procurement decisions. Noncompetitive, or “sole source” procurements should also be standardized and when applicable, include documentation to justify the limitation of competition. View of responsible officials of the auditee: Hennepin Healthcare System Inc. has reviewed and acknoledges the finding and recommendation.