Memorial Healthcare's Vendors Get VETTED

By Aaron Krol 

November 14, 2013 | When Memorial Healthcare System implemented VETTED in mid-2012, it was considered a mere cautionary measure. In 2009, Memorial, the country’s second-largest public healthcare network administering six Florida hospitals, had uncovered a cozy relationship between a vendor and hospital employees that included kickbacks for awarding contracts. Memorial’s CEO, Frank Sacco, and CFO, Matt Muhart, took decisive action to prosecute and convict those involved, but with 5,800 vendors providing supplies and services to Memorial’s hospitals, they decided that preventive measures were needed to validate the entire vendor system. Partnering with the IBM business partner Information Management Consultants, Inc. (IMC), who had previously worked with Memorial on an invoice-processing software system, they set out to adapt IBM’s big data management platform, i2, to the complexities of scouring a large vendor network for signs of fraud. The result is VETTED, the first comprehensive big data solution for vendor validation, and it has turned out to be an indispensable tool for Memorial’s day-to-day operations.

“Most companies out there have absolutely zero knowledge of what their vendor database is made up of,” forensic accounting expert Joe Palmar told Clinical Informatics News. “It’s analogous to if I asked you how many contacts you have in your cell phone.” Palmar is president of the Palmar Consulting Group, a partner in the VETTED project and the firm that rooted out the fraud case in 2009. With over a decade of experience helming an organization that manages accounting and fraud examination for multimillion-dollar companies, and a special commendation from the FBI for his efforts in a large fraud investigation case, Palmar has as firm a grasp as anyone on the density of information needed to understand one’s business partners. VETTED looks at the usual publicly-available data on a company: whether it’s on the federal government’s Excluded Party List, alerts from the Office of the Inspector General, D&B records. But it also drills into the people involved in the company, searching for lawsuits, criminal records, bankruptcies, liens, and other red flags.

Most importantly, VETTED draws connections between the companies in its databases. This is the true big data aspect of the program. “The amount of data that you have for vendors in a typical organization is gigantic,” says Palmar. “When you start thinking about not only who these vendors have relationships with, but think of the volume of transaction history at an organization that spends close to a billion dollars in disbursements on an annual basis,” the complexity multiplies rapidly. Buried in that data may be telltale traces of shell companies, fictitious entities created only to serve the interests of unscrupulous vendors. VETTED seeks out shell companies by searching for interlocked information – multiple ownership, or “proximity alerts” when vendor personnel or headquarters are located near each other.

Millions in Savings

VETTED’s effectiveness has surprised even its creators, not only because of its ability to catch shady business practices that trained administrators miss, but because it reveals how much abuse can exist in the shadow of an organization the size of Memorial, which processes 300,000 transactions a year for everything from pharmaceuticals to plumbing and has never before had the capacity to review each one. In the year and a half since the beta program began running, vendors have been exposed as shell companies used to create fake competitors to bid on contracts, and three companies were caught price rigging a proposal when their leadership proved to be interlocking. Disturbing criminal records have also surfaced, such as an individual with a history of sexual offenses attempting to win a contract at a children’s hospital. “When we bring [new analysts] on,” says Palmar, “we have to mentor them for the first week or two, because they just cannot believe that people are that corrupt.” There is no reason to believe Memorial is especially vulnerable to these dangers, but VETTED makes them visible and preventable, keeping third-party corruption from affecting Memorial’s bottom line or ethical standards.

The VETTED program is patented and ready for adoption by other organizations, not limited to the healthcare industry. Already, a scaled-down version has been developed for smaller companies that have to deal with large numbers of vendors. “We have an install in a psychiatric healthcare provider in South Florida that has about 400 vendors, and probably does $40 million in revenue,” says Palmar. “This is a completely scalable down, and scalable up, product to cover any organization from the size of a small psychiatric facility to a Raytheon.”

As first adopters of this technology, Sacco and Muhart have brought Memorial into the vanguard of best practices in hospital administration, a fact that was recognized at IBM’s annual Business Partner Summit on November 3-7 in Las Vegas, Nevada. Memorial Healthcare and IMC received a Best Practice Leader Award and Business Partner Award of Achievement, respectively, at the event. These awards recognize innovation in deriving value from IBM data management platforms, and were awarded to Memorial and IMC on the basis of VETTED’s success in combating fraud, as well as another cost-saving program built on IBM technology, an Enterprise Content Management (ECM) application for electronic processing of invoices. The ECM application routes invoices directly to the relevant departments for verification, compares the invoices to standing orders, and makes automatic payments for amounts under a certain threshold, greatly reducing the time and hands-on activity required to fulfill all of Memorial’s financial obligations.

“It works great here [at Memorial],” says Palmar, “because with so many departments, so many hospitals, no one in the past used to know – at the end of a year, the end of a quarter, the end of a month – where are all the invoices?” The ECM application also saves the hospital system a considerable amount of unnecessary outlays – in excess of $70 million a year – by capturing vendor discounts for prompt payment, a standard practice in healthcare supplies that rewards hospitals with one- or two-percent rebates for rapidly processing invoices. In a system the size of Memorial, these discounts add up. “A percentage of half a billion dollars is worth going after,” says Palmar, “and that’s what we’ve been able to do.” Fraud prevention through VETTED has added another estimated $3 million in savings.

The combination of VETTED and ECM invoice processing makes Memorial a role model for purchasing administration in the hospital system, but in a sense, Sacco and Muhart are just catching up to the pace of modern data analysis. Most of the information needed to power VETTED is publicly available, and while vendor vetting takes a huge amount of data by human standards, it is easily within the capabilities of a platform like i2, which has been used in law enforcement analytics for years. Memorial and IMC may have been the first partners to develop this kind of automated vendor fraud analysis, but their major insight was not how it could be done, but simply that it should be.

Palmar sees a lack of information as the only barrier to widespread adoption of programs like VETTED across the healthcare system. “If you’ve never been burned by vendor-related fraud,” he says, “because no one’s ever detected it,” it can be difficult to appreciate how widespread the problem of fraud is. “We need to get in front of boards, and we need to get in front of audit committees and CFOs, and show them, this is what you don’t know.” With the savings demonstrated over the past year, Memorial and IMC could provide the example hospitals need to bring their financial administration into the era of big data.



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