OIG Investigation Leads to $1.85 Million Settlement with Prison Health Services, Inc.

Philadelphia, July 25, 2012 – Following a Philadelphia Office of the Inspector General investigation into a woman-owned subcontractor arrangement, the City of Philadelphia has entered into a $1.85 million settlement with a prime city contractor and will initiate debarment proceedings against the subcontractor.

Philadelphia Inspector General Amy Kurland today released a summary of the OIG’s investigation, which found that prime contractor Prison Health Services, Inc. (“PHS”), now known as Corizon Health, Inc., subcontracted with JHK Inc. to make it appear that JHK—a City-registered, woman-owned business — had provided pharmaceutical supplies to the Philadelphia Prison System. In fact, JHK was paid only for the use of its name and its woman-owned business certification.

“For more than four years now, the Philadelphia Inspector General has been aggressively rooting out fraud and corruption in city government and among those who do business with the city,” said Mayor Michael A. Nutter. “I applaud Amy Kurland and her hard-working staff who have saved or recovered millions of dollars on behalf of taxpayers. Regarding this case, the City will not tolerate any business that fraudulently circumvents our anti-discrimination policies.”

The Inspector General said, “Many disadvantaged yet qualified small businesses are still struggling to keep people on the payroll. We’re committed to leveling the playing field here in Philadelphia so all businesses can compete for City contracts and create jobs for talented minority-, women- and disabled-owned businesses.”

In documents provided to the City, PHS represented that it had entered into a subcontract with JHK worth 40 percent of its $196 million health-care contract with the Philadelphia Prison System.  Instead, from 2007 to 2011, Secure Pharmacy Plus LLC and Maxor National Pharmacy Services Corporation actually provided pharmaceuticals to the Philadelphia Prison System while PHS paid JHK more than $410,000, about 1 percent of the total contract value, to make it appear that JHK was supplying pharmaceuticals.

PHS took the position that it fully disclosed its subcontractor arrangement with JHK to the City.  However, while PHS did request and receive approval from an employee at the Philadelphia Prison System who oversaw the City’s contract with PHS, PHS never notified the Office of Economic Opportunity (“OEO”), which oversees compliance with the City’s anti-discrimination policies, or its predecessor, the Minority Business Enterprise Council (“MBEC”) of the arrangement, as it was required to do.

The City seeks qualified minority, woman and disabled-owned businesses to play a significant role in all of its contracts, but prime contractors can seek a reduced participation goal when they have made a good faith effort to find certified minority-, women- or disabled-owned vendors (M/W/DSBEs) but are not able to meet the participation goals.

Angela Dowd-Burton, Executive Director of the Office of Economic Opportunity added, “This investigation and settlement represents another example of the commitment this Administration has made to inclusion practices in the business community.  The Administration will continue to improve the participation of M/W/DSBEs and will aggressively pursue those businesses that circumvent their commitments to M/W/DSBEs.”

To comply with the City’s anti-discrimination policies, M/W/DSBEs must perform a commercially acceptable function under any subcontracting agreement.  OEO defines a commercially acceptable function as performing, managing or supervising meaningful work or supply efforts that are distinct from other parts of the contract and consistent with the anticipated cost of business.

JHK admittedly failed to provide any services to the Philadelphia Prison System other than placing its name on paperwork PHS submitted to the City.

In addition to the settlement with PHS, Kurland recommended that the City remove JHK from the OEO registry of certified M/W/DSBEs and initiate debarment of JHK and its owner from participation in any City contract for two years.  Acting on the IG’s recommendation, the City has removed JHK from its registry and begun the debarment process.

Upon learning of the OIG’s investigation, PHS worked cooperatively with the OIG and made good-faith efforts to comply with the City’s policies relating to M/W/DSBE participation, including promptly replacing JHK with another certified WBE engaged in the provision of pharmaceutical services.

As part of the settlement, PHS agreed to strengthen its corporate compliance program by reviewing all of its subcontracting agreements to ensure compliance with City anti-discrimination policies.  PHS has appointed an M/W/DSBE Compliance Team Member, who ensures that M/W/DSBE requirements are fully understood by PHS personnel and who, along with PHS’s in-house counsel, must approve the M/W/DSBE portion of any bid or contract submitted to the City or any City-related agency.  PHS will also provide training to its employees about these requirements.

Additionally, PHS is developing a corporate-level vendor diversity program and will join the National Minority Supplier Development Council and the Women’s Business Enterprise National Council in order to continue to promote diversity among its vendors nationwide.

Kurland noted that “the OIG is pleased with the way PHS responded to its investigation by taking responsibility for using a pass-through subcontractor arrangement and taking aggressive measures to ensure compliance with City policies going forward.”

The OIG will continue its ongoing probe into companies paying M/W/DSBEs to act as pass-throughs on City contracts and into companies that allow prime contractors to use their name and M/W/DSBE certification without performing any real work.

“We hope this investigation sends a message that compliance with the City’s anti-discrimination policies is essential,” Kurland said.

The settlement agreement and case executive summary are available at http://ph.ly/OIGReports.

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