A new report by the Department of Veterans Affairs Office of Inspector General (IG) has found another large business improperly benefited from federal small business contracts. The offender this time is Health Net, ranked 221 in the most recent Fortune 500 with $11.9 billion in revenue last year.
According to the IG, Health Net “encouraged” a former senior VA official to set up a company called Enterprise Technology Solutions (ETS) that would be eligible for service-disabled veteran-owned small business (SDVOSB) contracts. (The size limitation for an SDVOSB is $7 million in annual revenue.) ETS won three such contracts with the VA, and two other contracts were awarded to another SDVOSB (owned by a former Health Net employee) which ETS acquired in 2009. The five contracts had a total value of $82 million between 2009 and 2011.
The IG found that ETS subcontracted all of the work to Health Net. The contracts required the prime contractor to perform at least 51 percent of the work, but according to the IG, ETS “did not perform any work under the contracts, much less a minimum of 51 percent of the tasks required by the contracts.” The majority of the contract revenues ultimately went to Health Net, leading the IG to conclude that ETS’s sole function was to use its SDVOSB status to benefit Health Net – in other words, to act as a “pass-through”. In addition, the IG also determined that ETS and Health Net failed to deliver the expected cost savings on the contracts.
The IG recommended terminating the five ETS contracts and referred ETS to the VA’s suspension and debarment office. The IG did not recommend any actions against Health Net.
As POGO takes great pains to point out, the contractors themselves aren’t entirely to blame for misconduct in federal small business contracting. In this instance, the IG found that VA personnel responsible for administering the contracts were fully aware that Health Net, not ETS, was performing all of the work. The VA also did not properly justify its decision to award the contracts as SDVOSB set-asides rather than through full and open competition. As illustrated above, there was unquestionably a less-than-arm’s-length relationship between the VA, Health Net, and ETS. This kind of conflict of interest may occur more than we realize at the VA because, as the IG informs us, this is the third report in recent years identifying improper sole-source contracting at the VA involving former VA employees who formed or worked for SDVOSBs. (Those other reports, in case you’re interested, are posted here and here.)
Neil Gordon is an investigator for the Project On Government Oversight.Follow @NEGordon