Audit Report on the Inventory Controls of Bellevue Hospital Center Over Noncontrolled Drugs And Medical and Surgical Supplies

AUDIT REPORT IN BRIEF

The New York City Health and Hospitals Corporation (HHC) provides City residents with comprehensive medical and mental health services, as well as treatment for substance abuse, regardless of ability to pay. HHC hospitals, clinics, and other facilities require substantial quantities of drugs and medical and surgical supplies, and must ensure that items are in stock when needed. To maintain inventory records, each facility has access to the HHC computerized OTPS (Other Than Personal Services) procurement management system. During Fiscal Year 2003, Bellevue Hospital , the facility covered by this audit, spent approximately $15 million for drugs (controlled and noncontrolled) and $8 million for medical and surgical supplies. Our objective was to evaluate the adequacy of the internal controls over Bellevue Hospital ‘s inventory of noncontrolled drugs and medical and surgical supplies.

Audit Findings and Conclusions

Bellevue Hospital has inadequate controls over its inventory of noncontrolled drugs and medical and surgical supplies. Our review of its inventory practices disclosed significant weaknesses in the issuing, recording, maintenance, and security of both types of inventories. It failed to institute and enforce the controls necessary to ensure the proper safeguarding and accounting of its inventories. Because of these significant weaknesses, we were unable to determine with reasonable assurance that inventory items were appropriately issued from the storerooms to the operating departments. As a result, we concluded that Bellevue Hospital ‘s noncontrolled drugs and medical and surgical supplies are vulnerable to theft and misappropriation.

The Pharmacy Department at Bellevue Hospital does not maintain its inventory records on an adequate or appropriate perpetual inventory system; it uses inventory cards kept next to the corresponding noncontrolled drug to manually record the receipt and issuance of the drug. Numerous unsupported adjustments were made to the inventory card balances, and discrepancies between the amounts on hand and the recorded balances were not investigated. The Pharmacy Department does not maintain a complete list of noncontrolled drugs kept in the stockroom, and has no documentation to support all the inventory issued from the Pharmacy stockroom. Further, the segregation of responsibilities in the stockroom was inadequate: the stockroom employee who receives and issues noncontrolled drugs also maintains and updates the inventory cards; and access to the Pharmacy was inadequately restricted.

Central Supply Stores, responsible for the purchasing and issuing of medical and surgical supplies, maintains no perpetual inventory records; instead, it conducts an inventory count at the end of each fiscal year. (Because there were no existing perpetual inventory records, we did not perform an inventory count of medical and surgical supplies.) In addition, our observation of the basement stockroom revealed that medical and surgical supplies were not always properly safeguarded, as excess inventory was stored in the basement hallways (photographs of the inadequate storage space appear in the body of this report).

Finally, neither the Pharmacy Department nor Central Supply Stores properly conducted their year-end physical counts. Moreover, the HHC auditors from the Office of Internal Audit did not adequately perform the inventory count verification at Bellevue Hospital Pharmacy Department and Central Supply Stores. Based on the figures shown on the inventory cards, Bellevue Hospital may not have included approximately $1.6 million of noncontrolled drugs in its valuation of inventory. Therefore, we estimate that HHC’s financial statements for Fiscal Year 2003 may also be understated by $1.6 million.

Audit Recommendations

The report makes 17 recommendations, some of which are listed below. Bellevue Hospital officials should:

• Institute and enforce proper internal controls over its inventory of noncontrolled drugs maintained in the stockroom. The Pharmacy should: maintain its inventory of noncontrolled drugs separate from the related inventory records; assign different personnel to handle the drugs and to update the inventory records; and ensure that only designated personnel have access to the stockroom.

• Ensure that the Pharmacy Department maintains a computerized perpetual inventory system for its inventory of noncontrolled drugs kept in the stockroom. The perpetual inventory records should be kept separate from the physical inventory.

• Ensure that adjustments to inventory records (for noncontrolled drugs) are documented, reviewed, and approved by appropriate Pharmacy officials.

• Restrict access to the Pharmacy stockroom to authorized stockroom personnel.

• Ensure that all noncontrolled drugs stored in the Pharmacy stockroom are correctly counted, and their total quantity and value correctly reported.

• Ensure that Central Supply Stores maintains perpetual inventory records, preferably on a computerized inventory system. Central Supply Stores should ensure that the persons updating the inventory records are different from the persons handling the inventory; and access to the inventory records should be restricted to designated personnel.

• Ensure that Central Supply Stores maintains all medical and surgical supplies in a locked and restricted area so that they are properly safeguarded.

• Ensure that when preparing and conducting the physical inventory count of the medical and surgical supplies, its staff follow the inventory count procedures outlined in the Inventory Procedures Manual.

HHC Response

The matters covered in this report were discussed with Bellevue Hospital officials during and at the conclusion of this audit. A preliminary draft report was sent to HHC officials on November 30, 2004, and was discussed at an exit conference on January 14, 2005. On March 3, 2005, we submitted a draft report to HHC officials with a request for comments. On March 18, 2005, we received HHC’s response, which included a letter from the Acting President of HHC and responses from officials at Bellevue Hospital and the HHC Office of Internal Audits.

In his letter, the Executive Director of Bellevue states: "While we agree with certain findings and disagree with the severity of others, we recognize the need for improvement cited in the audit and implemented the majority of the recommendations." The Assistant Vice President of the Office of Internal Audits, in his letter, states: "It is not the role of this office to value HHC’s inventory but to participate as part of a larger operation to ensure reasonable inventory valuations." The audit implementation plan, attached to their letters, showed that of the 17 recommendations made in the report, 14 recommendations have already been implemented and the remaining three will be implemented by June 30, 2005.

The full text of the HHC response is included as an addendum to this report.