Audit Report on the Inventory Controls of The Woodhull Medical and Mental Health Center, New York City Health and Hospitals Corporation, Over Non-Controlled Drugs and Medical and Surgical Supplies

EXECUTIVE SUMMARY

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. HHC has a computerized OTPS (Other Than Personal Services) procurement management system that stores perpetual inventory records. Each facility has access to the system, to maintain and update its records as necessary. This system, based on minimum and maximum quantities, includes a reorder point for each item at each facility, and automatically generates a purchase requisition when the reorder point is reached.

Woodhull Medical and Mental Health Center (Woodhull Hospital), the facility covered by this audit, is part of the HHC’s North Brooklyn Health Network (Network). Woodhull Hospital officials do not fully utilize the OTPS system: inventory shipments to Woodhull Hospital are recorded in the OTPS system, but inventory issued from the hospital’s own stockrooms is not recorded in the system. Both the Pharmacy and Material Management Departments keep only manual inventory records.

Drugs are categorized into two groups: controlled and non-controlled. Controlled drugs are regulated by the Drug Enforcement Administration (DEA), a federal law-enforcement agency that has strict requirements for the storage, record keeping, and dispensing of controlled drugs. The DEA, however, does not regulate non-controlled drugs. This audit reviews the inventory controls put in place by HHC and Woodhull Hospital over non-controlled drugs, as well as over medical and surgical supplies.

During Fiscal Year 2001, the total cost of drugs (controlled and non-controlled) purchased by the Pharmacy Department was approximately $6 million. The total for medical and surgical supplies purchased by Material Management was about $3 million. According to Woodhull Hospital officials, the value of the inventory of all drugs in the Pharmacy Department stockroom at the end of Fiscal Year 2001 was $1,015,590, and the value of the medical and surgical supplies in the Material Management stockrooms was $1,212,319.

The Pharmacy stockroom receives orders for non-controlled drugs from the subdivisions of the Pharmacy Department: Main Pharmacy, inpatient satellite pharmacy, and Out-Patient Pharmacy (OPD).

Material Management stores medical and surgical supplies (intravenous solutions, baby formula, diapers, syringes, needles, bed liners, tubing, etc.) in two stockrooms. Each unit of the hospital has one or more supply rooms where medical and surgical supplies are stored. The stockroom staff visit the assigned supply rooms each day and inspect the current inventory. They determine how much of each item should be restocked based on the amount currently on hand or in response to a request of the head nurse.

Once the stockroom staff decide what is needed in the supply rooms, they prepare an order sheet with a list of the items needed. (Occasionally, the staff receives completed order sheets from one of the units.) After they return to the stockroom, they assemble the items and record the issued items on the order sheet. The stockroom staff then deliver the goods to the appropriate units; the nurse for that unit signs off on the order sheets to document receipt.

Our audit objective was to review the internal controls over Woodhull Hospital’s inventory of non-controlled drugs and medical and surgical supplies.

The scope of this audit was January to March 2002. To achieve our audit objectives, we reviewed applicable HHC Operating Procedures and the Division of Material Management’s inventory procedures manual and the Policies and Procedures manual issued by the Woodhull Hospital Pharmacy Department. We interviewed hospital officials, including the Director of Material Management and the Director of the Pharmacy. We also interviewed some pharmacists. We performed a walk-through of all areas of the Pharmacy and of the intake and distribution system for medical and surgical supplies, from the receiving dock, to the stockrooms, to the supply rooms on the hospital floors. We observed the receiving operations and traced several shipments received and entered into the logbook to determine whether they were delivered to their appropriate destinations. We performed observations at each area operated by the Pharmacy Department and by Material Management. Based on these walk-throughs and observations, we prepared detailed flow charts of the movement of non-controlled drugs and of medical and surgical supplies.

We initially requested the OTPS perpetual inventory records from HHC in hard copy and on diskette, in order to determine whether they were accurate and reliable. However, hospital officials told us at the entrance conference that items are entered in the OTPS system only when received, and that the perpetual inventory records are kept manually. We therefore decided to perform a physical count of a sample of items and compare the results with the balances on the manual inventory records. For the non-controlled drug inventory, we randomly selected 200 items from a population of 1,062 non-controlled drugs listed in the Pharmacy Department’s formulary, which the Pharmacy Director told us was the most accurate listing of drugs stored in the stockroom. We did not perform a physical count for any medical and surgical supplies because we discovered that the manual inventory records that Material Management provided to us were created only two days prior to the start of our audit. No perpetual inventory records were maintained prior to January 27, 2002.

This audit was conducted in accordance with generally accepted government auditing standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. It was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

At the entrance conference for this audit, on January 29, 2002, Woodhull Hospital officials informed us that neither the Pharmacy nor Material Management uses HHC’s OTPS system to maintain their perpetual inventory records. They said that both Departments maintain manual records. During our initial walk-through of the Material Management stockrooms, however, we discovered that the manual perpetual inventory system itself had only been started three days before our walk-through. The Director of Material Management told us that perpetual inventory records were not maintained prior to January 27, 2002. While Material Management does conduct a required year-end inventory count during June, this does not take the place of the perpetual inventory records that they are required to maintain.

Since neither the Pharmacy Department nor Material Management keep perpetual inventory records on the OTPS system, neither unit had adequate inventory controls or was able to determine the dollar value of its inventory in a timely manner. Neither the Pharmacy Department nor Materials Management maintains a complete list of all inventory items, and the new manual inventory records instituted by Material Management are incomplete and inaccurate.

The auditors also found inaccuracies in the Pharmacy’s manual inventory records for the non-controlled drugs. We conducted a physical count of 200 non-controlled drugs with a recorded value of $136,712. For 27 (13.5%) of the 200 items, there was an actual count difference from that recorded on the manual stock card: for 13 items, there was a lower count in the inventory (valued at $590) than was recorded, and for 14 items, there was a higher count (valued at $648).

However, the inventory controls at Woodhull Hospital’s Material Management Receiving Department were adequate. We observed the receiving operations and subsequently reviewed and tested them. We found that the shipments received and logged by the Receiving Department were delivered to their appropriate destinations.

This audit makes ten recommendations, some of which are listed below. Woodhull Hospital should:

• Ensure that its Material Management Department maintains its inventory records on a computerized inventory system.
• Ensure that its Material Management Department maintains accurate and complete information on its manual stock cards until the inventory is converted to a computerized system.
• Maintain its Pharmacy Department’s perpetual inventory records on a computerized system.
• Ensure that the Pharmacy Department periodically conducts physical inventory counts to verify the accuracy of its records, and investigates all variances to determine their cause.

HHC should:

• Ask its Inspector General to more fully investigate the circumstances related to the absence of inventory controls in Woodhull Hospital’s Material Management section, to determine whether any theft of goods occurred.

The matters covered in this report were discussed with Woodhull Hospital officials during and at the conclusion of this audit. A preliminary draft report was sent to HHC officials on May 20, 2002, and was discussed at an exit conference on May 30, 2002. On June 5, 2002, we submitted a draft report to HHC officials with a request for comments. We received a written response from HHC officials on June 20, 2002, which included a memorandum from Woodhull Hospital’s staff. In its response, HHC said that it agreed with and will implement eight of the audit’s ten recommendations. HHC said, however, that it would not implement the two recommendations regarding the posting and monitoring of inventories on manual stock cards, since Woodhull Hospital would soon maintain computerized inventory records. The President of HHC stated, in part:

"We agree a computerized perpetual inventory system would be an improvement from our current manual process. . . . To expedite the facility’s conversion from a manual inventory system to a computerized perpetual inventory, the inventory process will begin on June 20, 2002. . . . Consequently, the implementation of recommendations two and three regarding the posting and monitoring of inventories on manual stock cards will not be necessary. The Materials Management Department is expected to complete the conversion to a computerized perpetual system, including the training of personnel and appropriate segregation of responsibilities by August 2002 and the Pharmacy Department by November 2002."