Audit Report on the Inventory Controls of Kings County Hospital Center, New York City Health and Hospitals Corporation, 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. Each facility stores its perpetual inventory records in the HHC computerized OTPS (Other Than Personal Services) procurement management system. During Fiscal Year 2002, Kings County Health Center (Kings County Hospital), the facility covered by this audit, spent approximately $13 million for drugs (controlled and noncontrolled) and $6 million for medical and surgical supplies. Our audit objective was to review the internal controls over Kings County Hospital’s inventory of noncontrolled drugs and medical and surgical supplies.

Kings County 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 its issuing, recording, security, and maintenance of both inventories. Kings County Hospital failed to institute and enforce the controls necessary to ensure the proper safeguarding and accounting of its inventories.

Our inventory count of sampled noncontrolled drugs revealed a gross discrepancy of 71 percent between the amounts on hand and the amounts recorded in OTPS. Our inventory count of sampled medical and surgical supplies revealed a gross discrepancy of 91 percent between the amounts on hand and the amounts recorded in OTPS. Furthermore, approximately four months prior to our inventory count, the Kings County Hospital officials made adjustments of $6.1 million and $2.5 million, respectively, to its Fiscal Year 2002 year-end inventory count of noncontrolled drugs and medical and surgical supplies, without investigating the cause of the discrepancies.

These inventory discrepancies may result from the extensive record-keeping and security weaknesses that we found. Because of those weaknesses, Kings County Hospital inventory records for noncontrolled drugs and medical and surgical supplies cannot be relied on to ensure that adequate stock levels are maintained and that loss from thefts and misappropriation would be detected.

We also found that there was unrestricted access to the Pharmacy stockroom, noncontrolled drugs were issued from the stockroom without proper authorization, and there were inadequate controls over the expired drugs as well as inadequacies in the related checks and credits that can be received for returnable expired drugs. In addition, we found that Materials Management took up to two months to record in OTPS the issuances of medical and surgical supplies from the stockroom. Besides the delay in entering information, we found that there were many discrepancies between the data in the OTPS system and in the Scan Module system—the computer system used to determine the medical and surgical supplies needed in the supply rooms in the patient units. In many cases, the two systems had different catalog numbers for the same item.

The report makes 20 recommendations, some of which are listed below. Kings County Hospital officials should:

• Require periodic physical counts of the inventory to verify the accuracy of its inventory records, and investigate all variances to determine their cause.
• Ensure that appropriate adjustments are made to the OTPS system to accurately reflect the inventory of noncontrolled drugs and of medical and surgical supplies. Officials should review, approve, and document all adjustments.
• Ensure that a written authorized requisition is obtained for all noncontrolled drugs issued from the Pharmacy stockroom. The requisition should include the names and quantities of drugs requested, the names of subdivision personnel requesting the drug, and the authorizing signature.
• Restrict access to the Pharmacy stockroom to authorized stockroom personnel.
• Adequately safeguard expired drugs before they are removed from the hospital.
• Ensure that all checks and credits for returnable drugs are received by the hospital and, if applicable, applied to vendor payments.
• Ensure that all issues from the Materials Management stockroom are immediately entered in the OTPS inventory system.
• Ensure that the Scan Module system has up-to-date catalog numbers for medical and surgical supplies and that those numbers are identical to the catalog numbers in OTPS.

The matters covered in this report were discussed with Kings County Hospital officials during and at the conclusion of this audit. A preliminary draft report was sent to HHC officials on May 28, 2003 and was discussed at an exit conference on June 11, 2003. We submitted a draft report to HHC officials with a request for comments on June 12, 2003, with a request for comments. We received a written response from HHC officials on June 25, 2003.

HHC officials agreed with the findings and either have implemented or are in the process of implementing all 20 recommendations. However, they disagreed with the auditors’ representation of the inventory discrepancies in the aggregate, in which inventory overages and shortages are combined. They stated, "This is neither fair nor appropriate and can be misleading. Overages and shortages should be netted against each other or presented separately, to properly reflect the value of inventory variances."

This report fairly and accurately presents the discrepancies found in the inventories of noncontrolled drugs and medical and surgical supplies in Kings County Hospital. The combined discrepancies represent the total (absolute) value of the inaccuracies in the inventories. When ensuring the accuracy of inventory, each unjustified shortage and overage is considered a discrepancy. To present a complete picture of the conditions found, the combined discrepancies, as well as the shortages and overages, should be presented in the report. To net the shortages and overages, as suggested by HHC, would distort the effect of the internal control weaknesses noted.