System Failure

The Comptroller Says HS Systems Overcharged for Screening Disabled Welfare Recipients. So Why Did the Company Win a Fat New Contract?

The private company that performs medical exams of New York City's disabled welfare recipients billed the city $662,974 more than its contract called for—in some cases for work it was never specifically commissioned to do—and then had an unfair advantage in winning a new $30 million contract last month, an audit by the city comptroller's office has shown.

According to the audit, between October 1995 and September 1998 HS Systems charged the city's Human Resources Administration steep prices for radiological services—billing, on average, 364 percent more than the standard reimbursements by Medicaid.

Although the contract stipulated HS Systems was to receive $29 for X rays, HRA ultimately paid between $53 and $133 for each study performed—a total of $623,218 more than intended, the audit said. (HS Systems claimed its fees were reasonable, but later repaid the city $114,653.) HRA also paid an excess of $37,281 over the contracted amount for lab services and $2475 for "emergency services" not specifically mentioned in the contract, the audit estimated.

HS Systems' Manhattan facility: Some disabled clients have had to wait outside.
HS Systems' Manhattan facility: Some disabled clients have had to wait outside.

In 1995, HRA signed a contract in which it agreed to pay HS Systems $6 million a year. It wound up disbursing an average of $9.5 million annually, largely because the company, which was compensated according to the number of client exams, racked up far more appointments than anticipated.

HS Systems was nonetheless awarded a lucrative new contract this March, three months after the audit documenting the possibly inflated charges was sent to HRA.

HS Systems is owned by financier William D. Witter, president of the Dean Witter Foundation and son of investment banker Dean Witter; Ralph M. Richart, M.D., a Columbia University professor of pathology; and Noel deCordova Jr., a Poughkeepsie lawyer.

HS Systems has worked for the city for more than 20 years providing medical assessments of welfare recipients. It determines who is eligible for disability benefits, who isn't, and therefore who must clean parks or sweep streets under the city's Work Experience Program (WEP).

At a time when Mayor Rudy Giuliani is battling Comptroller Alan Hevesi over contracts with welfare-to-work companies, HS Systems' situation highlights the difficulties in privatizing social services—namely, maintaining a fair process for awarding contracts and then keeping tabs on winning vendors.

Such issues recently made headlines when a New York State Supreme Court justice blocked $104 million in city contracts with Maximus, a Virginia company hired to help welfare recipients find jobs. The judge agreed with the comptroller's charge that the contracting process was corrupted. Maximus has since suspended its operations in the city.

"The contracting of HS Systems fits a pattern of recent contracting used to favor preconsidered or favorite contractors of HRA at the expense of innocents who are out there without connections," said Glenn Pasanen, associate director of City Project, a budget-watchdog organization.

HRA opened the disability-screening contract to competitive bidding last year by issuing a request for proposals (RFP). But according to one bidder, the agency did not provide sufficient information to allow new applicants to submit truly competitive proposals.

Craig Connell, director of medical operations at New York Diagnostic Centers, which bid against HS Systems and others for the 1999 contract, said the recent contracting process favored the incumbent provider. "We asked what volume of patients we could expect to see," Connell said. "But HRA said they didn't know. So we were in the dilemma of having to guess how much testing would be done. It makes it tough on a first-time bidder with no insight."

The comptroller's office agreed. "It appears that the RFP gives HSS an unfair advantage over all other vendors since HSS is the only vendor that possesses all the data necessary to formulate a comprehensive proposal," the audit said. Connell said HRA told him HS Systems was unable to come up with the necessary data.

HS Systems president Yvonne Jones would not comment for this article. HRA did not disclose the number of bidders, but co-owner Witter insisted the contracting process had been fair. "I understand the bidding was very extensive," he said. "A lot of people bid."

In a letter to the comptroller, HRA agreed HS Systems had overbilled for laboratory studies but rejected the audit's findings that HS Systems had overcharged the HRA for X rays and emergency services. HRA said that price comparisons between HS Systems, a comprehensive diagnostic facility, and two private radiology groups were inappropriate. HRA added that the audit report "demonstrates the auditors' limited understanding of the medical field and the complexities of the services provided under the terms of the HSS contract."

In the letter, HRA also defended the contracting process. The agency said it eventually provided additional information to help other bidders. But Connell, for one, said that was not enough. When he asked about the number of HIV tests he could expect to perform, Connell said, HRA only provided the number of clients who tested HIV-positive, not the total number tested. He added that HS Systems could easily have provided those numbers by examining doctors' records. But releasing such specifics, he said, could have cost HS Systems its competitive advantage.

Under the terms of its contract, HS Systems was paid by the exam between 1995 and 2000. This arrangement is not unusual, but may have given the company a financial incentive to keep its clients coming back. The 1995 agreement said HS Systems would receive $18 million over three years. Yet HS Systems eventually received $38 million over four years because of a sharp increase in medical testing. The number of exams jumped by roughly 30,000, going from 55,000 to 60,000 tests in 1996 to 85,000 to 90,000 in 1998, according to the audit.

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