Mr. Chairman, Ranking Member Donnelly, members of the subcommittee, thank you for the opportunity to appear before you today to discuss the Department of Veterans Affairs (VA) prosthetic purchasing practices and their impact on Academy Medical, a VA-verified Veteran-Owned Small Business.
My name is Dan Shaw, I am the managing partner of Academy Medical, L.L.C. (Academy), located in Wellington, FL. Academy is a reliable source of supply for biologics, and holds a mandatory-source Federal Supply Schedule (FSS) Contract issued by VA's National Acquisition Center. My fellow managing partner, Patrick Papa, and I graduated in 1991 from the U.S. Naval Academy, where we first met in 1987. Academy Medical is so named to pay homage to our Alma Mater. Accompanying me here today is Mr. Steven Kent, our Director of Government Sales, and Mr. Stephen Schurr, a subject matter expert in the field of biologics.
My testimony here today is pleasantly overtaken by events. By memorandum dated May 23, 2012, the Veterans Health Administration (VHA) notified VHA procurement and prosthetics personnel engaged in the ordering of biological implants of its policy on ordering biological implants using the FSS Program. We are very pleased with this change in VHA's position, one which will benefit Academy and other FSS contract holders for biologics--it levels the playing field and respects the mandatory source nature of VA's FSS Program. We have worked long and hard to get VHA to adopt this policy. I have a copy of the policy and would like to offer for inclusion in the record of today's hearing.
We hope the subcommittee will encourage VA to formalize this VHA policy memorandum by having it formally codified to amend the VA Acquisition Regulations. Policy of this magnitude should be formalized for perpetuity, as policies are easily forgotten as time goes on or through leadership changes. This is especially true given there is likely to be short and long-term resistance to this policy, especially by purchase cardholders.
One concern we hope the subcommittee will clear up with VA's witness here today, is whether the VHA policy applies to all biological implant procurements, to include those acquired as micropurchases by government purchase cardholders. We estimate nearly 95 percent of biological implants are acquired by purchase cardholders who are neither trained or nuanced in the use of FSS contracts. This will have a major impact on the success or failure of VHA's policy from a supplier perspective, and could potentially result in no improvement for FSS contract holders.
With this new policy will come a new issue: Compliance and Enforcement. While we are elated with and applaud VHA's leadership for the new policy, our experiences show VHA currently fails to follow established waiver. Past performance, as in government contracting, is a good indicator of what can be expected in the future. To that end Mr. Chairman, if this policy is to be effective and successful, VHA have to develop and mechanism to monitor and enforce compliance The policy memorandum is silent on this. We know the devil is always in the details, and hopefully this subcommittee will consider establishing some type of follow-up on this policy or reporting requirements from VHA in terms of the implementation, monitoring, compliance and enforcement with the program to determine if the spirit and intent of the policy is being embraced and executed.
We hope this new VHA policy will make a difference. We estimate VA purchases approximately $175 million in biologics annually. As of May 23, 2012, we sold only $74,000 in biologics to VA through our VA mandatory source Federal Supply Schedule contract in Fiscal Year 2012. We think this will be a good deal for the taxpayers too. We know we can save them money. In addition, if VA makes better use of the schedules program, it will avoid Competition in Contracting Act (CICA) violations, by fragment . In addition, VA will be assured of receiving high-quality Trade Agreement Act-compliant products and also reap the revenue from the FSS Program Industrial Funding Fee, used to fund its Supply Chain Management Operations.
Academy will continue to take every logical step to be successful in the VA market place. We obtained our verification from VA's Center for Veterans Enterprise, as well as a mandatory-source Federal Supply Schedule contract, yet we continue to struggle in the VA market place. What is hurting Academy, and undoubtedly other Veteran-Owned Small Businesses (VOSBs) and Service-Disabled Veteran Small Businesses (SDVOSBs), is VA's use of authority granted it under Section 8123, Title 38, United States Code. Although VHA's new policy for the procurement of biological implants is welcome news to us and other FSS contract holders, Section 8123 still looms large as long as this authority exists and is likely to be applied to open market procurements for biologics not procured through the FSS Program.
This authority, established in September 1958, grants VA sweeping and unprecedented authorities to acquire "prosthetic appliances" without regard to any other provision of federal law. Simply put, this authority has become the easiest of easy buttons for VA to use to buy prosthetic appliances. VA is purported to spend about $3.5 billion annually for prosthetic appliances.
Perhaps the Section 8123 authority was needed back in 1958, to assist Orthotist & Prosthetist trying to improve the quality of artificial limbs of World War II and Korean War Veterans upset about substandard appliances. But this was some 25 and a half years before the advent of the Federal Acquisition Regulation (FAR), when the old, arcane procurement system provided users with less flexibility. Clearly the authors of Section 8123 never envisioned a new and ensuing procurement regulatory system such as the FAR would provide such significant flexibility for the government to buy everything from A to Z, including biologics, while simultaneously providing much needed best value and transparency in the procurement process. It is also unlikely they realized VA's spend for prosthetic appliances would approach the significant spend it has today, nor is it likely they envisioned how the definition of prosthetic appliances would grow, now to even include biologics. Biologics were not even introduced into traditional healthcare practice until the 1960s.
Many current and former government procurement professionals we spoke with opine the FAR's flexibilities actually obviate the need for the authority contained in Section 8123. If the Section 8123 authority is to remain, it should be significantly curtailed or controlled to the highest levels of VA's procurement infrastructure without power to re-delegate this authority. Section 8123 must include the much needed transparency, and it must be the authority of last resort.
VA's formal definition of prosthetic appliances does not officially include biologics. We learned on April 27, 2012, from officials in Veterans Integrated Service Network 8, the VA Sunshine Healthcare Network, that biologics are actually included in the definition of prosthetic appliances. It appears when VHA Directive 2003-037, Prosthetics Simplified Acquisition Procedures Training, Dated July 16, 2003, expired July 31, 2008, the Veterans Health Administration prepared a new and ensuing directive which was never formalized or formally issued. The expired directive set forth procurement procedures for prosthetic appliances, and VA's use of Section 8123 was essentially the authority of last resort to buy prosthetic appliances.
The new, un-issued directive expands the definition of prosthetic appliances to include anything implanted into the body for a period in excess of 30 days. This would include biologics. We have attempted to get the un-issued directive through a Freedom of Information Act request, but were denied because the document is considered "pre-decisional" and is therefore exempt from release. Since VA is using the directive and makes decisions on buying its biologics in accordance with this directive, for nearly four years now, it would seem this is no longer "pre-decisional." Since this is clearly no longer "pre-decisional," we hope the subcommittee will encourage VHA to formalize this document and make it available to the public, as needed. This provides greater transparency and helps VA's industry partners understand the rules of the road at VA.
We recently learned VA determined and subsequently notified this subcommittee the authorities in Section 8123 trump even the Veterans First Contracting Program authorities contained in Sections 8127 and 8128. The unprecedented and extraordinary contracting authorities granted to VA under its Veterans Contracting Program were effective June 20, 2007. It would seem in passing Public Law 109-461, the Veterans Benefits, Healthcare and Information Technology Act of 2006, Congress would have specifically exempted Section 8123 procurements from Sections 502 and 503 Public Law 109-461. But it did not. In light of VHA's new biological implant procurement policy, this issue needs to be addressed for non-FSS biological procurements which will be conducted on the open market.
In closing Mr. Chairman, although the U.S. Naval Academy provided us with a stellar education and prepared us for some of the most challenging situations we would face as naval officers, nothing in our time at Annapolis could have adequately prepared us as entrepreneurs for the daunting challenge of dealing with an incalcitrant and non-responsive bureaucracy such as VA. The news of VHA's new biological implant procurement policy gives us hope and levels the playing field, and for that we are very grateful. We seek only to be a reliable source of supply of biological implants, to be treated respectfully and given the opportunity we have earned to be VA's industry partner. We have no ax to grind, we simply have a business to run, and work to create an environment that engenders trust, mutual respect and cooperation, as VA provides its services to America's heroes.
Thank you for your distinguished leadership and that of this subcommittee. , our predicament and those of similarly situated VOSBs and SDVSOBs will improve; that we can match our private sector success in the VA market place. We never sought an adversarial relationship with VA, we seek only to be trusted business partners with VA, to be given the respect and opportunity we have earned.
Thank you for holding this hearing Mr. Chairman. We will be happy to respond to any questions you or the subcommittee's members have.