Mr. Chairman and members of the Subcommittee, I am pleased to have the opportunity to provide written testimony on the draft Government Accountability Office (GAO) report entitled “Veterans Health Administration:  Improvements Needed in Design of Controls over Miscellaneous Obligations.”  Testifying on my behalf today and representing the Office of Management is Mr. Edward Murray, VA’s Deputy Assistant Secretary for Finance.  In 2007 the Department of Veterans Affairs (VA), Veterans Health Administration (VHA), used miscellaneous obligations to record over $6.9 billion against its appropriations that directly provide veteran care and support.  Seventy-five percent of those obligations were related to providing medical and dental care, pharmaceuticals, and hospital supplies for veterans.

We agree with all four of GAO’s recommendations and we are prepared to discuss the various initiatives planned or currently underway that support those recommendations to reduce the internal control risks associated with the use of miscellaneous obligations and to minimize their use.  Our leadership is committed to clearly articulating the expectation that VA will work to improve the guidance, oversight, and business processes associated with the use of miscellaneous obligations in the delivery of services to our veterans.

We are issuing additional policy and guidance, which will result in improved accountability of the miscellaneous obligations process. We have reports that will enable us to track these improvements.  Interim guidance was issued in January 2008 and was further refined in May 2008 by VHA since they are the predominant user of this method of financial obligation.  The Office of General Counsel has reviewed the interim guidance and has determined that the new guidelines, coupled with existing VA accounting policy, meet legal recording requirements.  A Department level policy will be issued in the near future.

I would like to begin by addressing VA's efforts to strengthen its policies and oversight related to the use of miscellaneous obligations while continuing to provide medical services and supplies for veterans.  My Office of Finance has been collaborating with VHA to develop policies to achieve those recommendations. We will also coordinate with the Office of General Counsel.  I would like to discuss the plan of action to address the four GAO recommendations:

GAO Recommendation 1.  Establish a process for the review of miscellaneous obligations by contracting officials, including requiring appropriate documentation that the review has occurred.

The current process in the interim VHA guidance requires new requests for miscellaneous obligations be routed for review by the appropriate contracting official and documentation of this review be documented by e-mail and included in the record for the obligation.  This interim process will be used until a system change can be made to accomplish this electronically in the Integrated Funds Distribution, Control Point Activity, Accounting and Procurement (IFCAP) system. The ability to create an electronic workflow, which allows the system to route documents through predefined reviews, is already a documented requirement for the Integrated Financial Accounting System (IFAS), the financial component of the Financial and Logistics Integrated Technology Enterprise (FLITE) Program.

GAO Recommendation 2.  Segregate duties for (1) creating, approving, and recording miscellaneous obligations, (2) the certification and payment of invoices, and (3) the receipt of the resulting goods or services. 

Miscellaneous obligation forms are used for both procurement and non-procurement expenditure obligations.  If the miscellaneous obligation is for goods or services not required to follow formal procurement procedures (non-procurement items), such as fee basis medical or dental services, authorizations for individual patients are tracked in the Fee Basis software system, which includes the appropriate approval requirements by the Requesting Service Approving Official, and payment of invoices is approved by a Fiscal Office employee, which provides appropriate segregation of duties.  Receipt for medical or dental services is documented by either an industry standard billing abstract document (UB04 or CMS 1500) or clinical information from the non-VA provider.  Fee Basis obligations totaled approximately $3.8 billion in fiscal year (FY) 2007.  Other non-procurement obligations, such as services from other federal government agencies, employee travel and tuition, residency agreements with affiliated universities, tort claims/settlements, and regulated utilities are all documented with backup source documents supporting the associated miscellaneous obligation document.

If the miscellaneous obligation is for one of the few procurement items approved to be documented by use of a miscellaneous obligation, such as nursing homes or home oxygen, separate software programs in the Veterans Health Information Systems Technology Architecture (VistA) are used to track all individual expenditures, which includes the appropriate approval by the Requesting Service Approving Official and the payment of invoices by Finance Service employees.  Verification that goods and services were received is made by the designated Contracting Officer Technical Representative (COTR) for the individual contracts.  Contracting officers perform all procurement duties for awarding the Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, and delegate authority to the COTR to place delivery or task orders against those established contracts and obligate the funds using a miscellaneous obligation method.

Future enhancements under IFAS include replacement of the de-centralized IFCAP system.  The resulting centralized system will have one point for controlling user provisioning that precludes individual stations from granting users multiple accesses to various functions.  This will improve and ensure segregation of actions.

One of the largest expenditures ($1.3 billion in FY 2007) obligated through miscellaneous obligation forms is for Pharmaceutical Prime Vendor drug purchases.  These expenditures are made against an established Prime Vendor contract, which was competitively awarded by a contracting team.  Between June 2 and July 2, 2008, ten web seminar training sessions were conducted for pharmacy and fiscal employees to establish a new mandatory process for documenting individual order information, using the electronic miscellaneous obligation form (VA Form 4-1358).  This new process provides a check and balance between the ordering and payment processes.  Receiving duties are performed by separate individuals.

GAO Recommendation 3.  Document the purpose, vendor, and contract number for miscellaneous obligations.

The interim VHA guidance specifically requires that miscellaneous obligations not included on the exception list are documented with the purpose, vendor and contract number (if applicable).  All exceptions for the use of miscellaneous obligations are stipulated in VHA “Revised Guidance on Miscellaneous Obligations, VA Form 4-1358” which specifies the authority to be provided when using that exception.  These same requirements will be included in the official Departmental policy when it is issued. Under the IFAS system, these three fields will be required to be completed in order to process the miscellaneous obligation.  Going forward the IFAS system which precludes processing of the miscellaneous obligation unless the 3 required fields are completed.

GAO Recommendation 4.  Establish an oversight mechanism to ensure that these control policies and procedures are fully and effectively implemented.

VHA will now track and trend the number and dollar amount of funds obligated using miscellaneous obligations in VHA by Budget Object Code every month.  This will enable VHA to determine whether our facilities are adhering to VA and VHA policy.  At this time, VHA is pursuing a new IFCAP patch that will provide an automated method for verifying that the purpose, vendor and contract number fields have been recorded on the miscellaneous obligation.  My Office of Business Oversight (OBO) will also review miscellaneous obligations during field reviews, with special emphasis on reviewing adherence to control policies and procedures in the use of miscellaneous obligations. 

Summary

VA is taking meaningful steps to resolve the current challenges concerning the use of miscellaneous obligations.  VA remains committed to improving its processes and we are confident that our challenges can be overcome for the benefit of both the veterans that we serve and the taxpayers.  I assure you: VA understands our challenges and is dedicated to improvement.

This concludes my statement.  The witnesses would be pleased to answer any questions the Subcommittee may have.