This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide.
With Ontario taxpayers still reeling over the Ontario government’s $1 billion (CAD) eHealth spending scandal, the provincial Auditor General released another report that revealed further procurement improprieties in the health sector. Rather than being contained within a single government agency, the October 2010 Special Report: Consultant Use in Selected Health Organizations confirmed widespread spending irregularities within hospitals. The report also found procurement infractions within the Local Health Integration Networks (LHINs) that, ironically, were created to provide oversight and control over healthcare system spending. As with the prior eHealth report, the Auditor General’s 2010 report cited failures in institutional governance as the key contributors to the unhealthy procurement practices.
While they may have initially been created to solve some of the administrative problems faced by Ontario’s complex and increasingly expensive health sector, the Auditor General report uncovered significant gaps in the accountability protocols of the LHINs. As the Auditor General stated:
Local Health Integration Networks (LHINs) are required by their Memorandum of Understanding with the Ministry to comply with certain government directives, policies, and guidelines, including the Management Board of Cabinet’s Procurement Directive. For the 2007/08 to 2009/10 fiscal years, the three LHINs we visited had annual expenditures on consultants ranging from $224,000 to $1.4 million per year.
We concluded that all three LHINs we selected had inadequate processes and practices for most of the period we examined for ensuring that consulting services were planned for, acquired, and managed in accordance with the requirements of the Directive. We recognize that LHINs were established only four years ago and have since been required to quickly implement their key systems and procedures. However, the extent of non-compliance with the mandatory requirements in the Directive that we found was significant. We did note some improvement with recent contracts we sampled following the introduction of the updated Procurement Directive in July 2009.
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In addition, in April 2010, the Ontario Internal Audit Division reported the results of its audit of three other LHINs’ compliance with the Directive between April 2008 and August 2009. The internal auditors identified weak control over consulting-services contracts, noted the absence of business cases, found contracts that were single-sourced with insufficient documentation or justification, noted a lack of signed contracts and proper approvals, found consecutive and follow-on engagements that were awarded without competition, and identified consultants that had not been selected from the Ministry’s mandatory vendor-of-record listing. The internal auditors informed us that they were planning to review the remaining 11 LHINs by the end of the 2013/14 fiscal year.
As the report indicates, the LHINs appeared to have been rushed into operation without first having the appropriate governance structures put in place to guard against improper procurement practices. The Auditor General determined that “the LHINs did not meet the Directive’s requirements most of the time. For example, at least 75% of the single-sourced contracts did not meet the specific exemptions allowed for in the Directive, and they lacked formal documentation and/or prior approval.” This represents a far cry from the original purpose of the LHINS, which was to solve existing problems in the health sector, rather than to add to them.
The Auditor General noted that Ontario’s hospitals were also not immune from the dependency on sole-sourced consulting contracts. In fact, the report found a prevalence of un-competed and poorly documented consulting contracts across the reviewed hospitals:
Each hospital we visited had policies requiring competitive procurement practices that met the requirements of interprovincial and national trade agreements. However, most policies lacked specific requirements designed to promote the cost-effective use of consultants. For instance, policies did not require assignments to be well defined or properly justified before consultants were engaged; nor did they require adequate contractual arrangements with fixed ceiling prices, payments tied to specified deliverables, or proper management of consultant performance. Most of the policies we reviewed also lacked the requirement to document and retain the records of procurement decisions.
Most hospitals had a policy in place to avoid any real or perceived conflict of interest when acquiring consultants, although further guidance was typically not provided to managers on how to administer a conflict-of-interest declaration. Generally, the hospitals we visited did not ensure that conflict-of-interest declarations were obtained from the consultants they engaged. Only a few of the hospitals we visited had established standardized document templates for such declarations from consultants and they were not consistently used.
The report also documented a weak oversight function, noting that “the hospitals had no policies or processes that required senior management to report to the board of directors on their use of consultants, and most boards were not aware of hospitals’ procurement practices, since their approvals were required only for total operating and capital budgets on a departmental basis.” This lack of transparency allowed the sole-sourcing to persist without effective checks and balances.
As with the eHealth report, the Auditor General’s review of health sector consulting revealed systemic deficiencies caused by a lack of proper institutional governance. This report serves as another useful case study for institutions interested in taking a preventative approach to avoiding spending improprieties through the proactive implementation of sound governance structures.
