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Friday, August 2, 2013

Procurement controversies -- Daytona Beach, Florida

There is a lot to this story, and much more including a larger story than extracted here, so you should probably best just click the link and go straight to it. I've decided to categorize this as another in the procurement controversies series because it seems such a common drama as to almost represent a genre of procurement controversy in which undue influence and conflict of interest, or the appearance of it, becomes central. 

But remember, I do not validate or imply the veracity of these stories, using them only as hypothetical contexts in which procurement issues can be dissected and studied.

If it is not obvious at the start, bear in mind that this involves a public hospital, thus public contracting principles are involved.

Vendor sues Halifax Health over bid
Hospital denies vendor claim of favoritism, and says the goal is to save money

The enabling act that governs the public hospital’s procedures requires purchases over $10,000 to be subject to competitive bidding.

John Johnson, board chairman, said Halifax Health’s administration has an obligation to look for ways to reduce costs, and Johnson believes that’s what the hospital is trying to do in this case. “My highest priority has always been patient care, and I do not see that this particular issue is impacting that,” Johnson added.

Spinal Resources Inc. alleges Halifax Health has illegally steered business to an entrepreneur with ties to the hospital’s biggest donor. The company requested the injunction to stop the planned purchase of spinal implants and instrumentation by Halifax Health. Spinal Resources Inc. allege in their legal filing that the hospital shut out their company and others in favor of a startup launched five months ago called Cognitive Kinetics. The startup may receive more than $1 million from the deal, while becoming the main supplier of spinal implants to Halifax Health, according to documents The News-Journal obtained as part of a public-records request.

That startup’s founder is Bill Christy, a longtime executive in the medical supply field. He’s also known locally to have a personal association with Lesa France Kennedy, the CEO of International Speedway Corp., which owns Daytona International Speedway and 12 other tracks across the United States. The France family made the largest donation in Halifax Health’s history when they gave $10 million in 2009 to build a 10-story tower that bears the family name.

In its legal filing, Spinal Resources alleges the invitations to bid “were developed and issued with no actual intention of fairly considering the bids.” Halifax Health had already decided well in advance in favor of Cognitive Kinetics, the complaint alleges. Although Cognitive Kinetics was notified about the bid process, other vendors were not, and the specifications for the bid were written with information provided by Cognitive Kinetics, the legal filing states.

In the complex world of hospital finance, where lives are at stake and the pressure to hold down costs is immense, hospital officials said they feel a responsibility to explore every opportunity that helps them meet both goals. Reducing the number of vendors and giving the hospital more control over the process is an example of that, and Christy was the best man to pull it together, said John Guthrie, a spokesman for Halifax Health. “It’s driven by the fact we need to find a new cost model,” Guthrie said.

Spinal Resources’ legal filing claims Halifax Health’s neurosurgeons were told in May or early June by top-level administrators, including Halifax Health CEO Jeff Feasel, that they would no longer be able to use their preferred vendors because the hospital had already selected a new vendor for spinal implants.

Christy dismissed Spinal Resources as a “disgruntled vendor” that is disparaging a community leader in “a desperate attempt to throw as many allegations against the wall” as possible. France Kennedy was never involved in any discussions regarding Cognitive Kinetics or business at the hospital, he said.

Christy said Tom Beall, Halifax Health’s director of supply chain management, approached him in the fall of 2012 when the hospital was exploring how to reduce costs and streamline the process of spinal implant surgeries. Christy incorporated Cognitive Kinetics on Feb. 22 and signed a nondisclosure agreement with Halifax Health three days later. Although doctors are “strongly encouraged” to use Cognitive Kinetics, they are not being forced to use a specific company, Guthrie said.

In a Feb. 27 email on the subject, Beall wrote that hospital officials were interested in “a totally different type of relationship” in which the hospital or one of its corporations would partner with private investors and perhaps physicians to create a distributorship for spinal and orthopedic implants. “It is a very unique type of corporation which really has not been done anywhere in the country that I am aware of but it has the potential to save us millions in supply costs,” Beall wrote in an email to Shelly Shiflet, the hospital’s assistant general counsel. “Mr. Christy has ties to manufacturers and venture capitalists that would be crucial to the success of this type of venture.”

In a May 22 letter to the health system’s chief financial officer — labeled “personal and confidential” — Christy outlined “preliminary understandings and good faith intentions” on the potential purchase of an ownership interest by Halifax Health in his company. The News-Journal obtained the letter as part of a public records request. According to the letter, Halifax Health would have the option to purchase 85 percent of Cognitive Kinetics’ units of membership for $1.15 million, which would be paid in cash immediately upon transfer of the ownership interest.

Guthrie said the hospital planned to submit the details of a potential partnership with Christy to the Board of Commissioners once the details were ironed out.

Cognitive Kinetics also began holding training sessions at the hospital before bidding had closed, according to schedules obtained by The News-Journal. three days before the bid process closed – on July 5 – the hospital signed an agreement with Cognitive Kinetics

A contract cover sheet indicates the hospital planned to purchase $461,448.65 in implants and $109,259 in instruments. Halifax Health is eligible to receive a rebate equal to 50 percent of Cognitive Kinetics’ earnings before interest and taxes, according to the agreement. Guthrie said that while the hospital bought the implants from Cognitive Kinetics, it has not purchased the instrumentation.

On July 17 – days after Spinal Resources raised questions about the bid process – Halifax Health reissued the bid to include both spinal instrumentation and implants, according to the legal filing. That call for bids closed last Friday. Guthrie said Halifax Health doesn’t need to competitively bid purchases of implants, although it must bid purchases for instruments. Halifax Health chose to extend its bid to include implants to give every vendor a chance to win the hospital’s business, Guthrie said. For the most part, instruments are implant-specific and can only be used with a specific manufacturer’s products.

Halifax Health banished Spinal Resources and two other vendors from the hospital before bidding closed. In a July 24 letter, the hospital criticized the vendors for removing “critical instrumentation” without notifying operating room staff or senior management, an action the hospital considered “unethical” and potentially jeopardizing patient safety. As a result, Beall wrote in the letter, Halifax Health would no longer do business with the vendors.

“The evidence in this case is overwhelming,” said Smith, who filed the complaint in Circuit Court. “I think this is a classic case of favoritism in the bid process and is exactly why we have case law in Florida that prevents this kind of bid steering.”

For the hospital and Christy, it isn’t a case of bid steering. It’s about protecting the taxpayers and patients. “We are really interested in reducing these costs — that’s the bottom line,” Guthrie said. “If it’s the right thing to do for safety and expense for the hospital we’ve got to do it.”

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