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VA Contracts Go to Ex-Chief's Company
Anthony J. Principi has held key positions at the Diamond Bar medical firm before and after heading the agency. Fees could exceed $1 billion.

By Walter F. Roche Jr., Times Staff Writer
April 23, 2006
http://www.latimes.com/news/local/la-na-contractor23apr23,0,5890330.story?coll=la-home-headlines


WASHINGTON A Diamond Bar company headed by former Veterans Affairs Secretary Anthony J. Principi could get fees exceeding $1 billion from the VA, much of it on contracts approved and amended while he ran the agency, records show.

Principi was president of the medical services company QTC Management Inc. before he joined President Bush's Cabinet in 2001. He ran the VA for four years, then returned to the firm as chairman of the board.

While he was VA secretary, Principi's past and future corporate home collected about $246 million in fees, according to VA records. Congressional Budget Office projections show the contracts could be worth as much as $1.2 billion through 2008.

Principi said he had no role in awarding, amending or administering VA contracts with QTC.

"While at the VA, I had no contact with QTC on any business matter and recused myself entirely from any issues or business that QTC might have had with the VA," he said in e-mail responses to written questions. He said he complied with federal statutes barring contact with the VA after his departure.

Citing his two sons' recent combat service, Principi said: "Caring for these young men and women we send to war is the only thing that motivates me whether I'm in public service or in any aspect of business, where their interests are at stake."

Whether, or to what extent, Principi stands to benefit from QTC's success was not determined. He said he held nonvested stock options in QTC, but did not say how many shares.

Principi's firm administers medical exams to veterans seeking disability assistance. It also examines soldiers before they are discharged. The results of the exams play a substantial role in VA disability benefit decisions.

Though the VA is QTC's biggest customer, the company does similar exams for other agencies and private insurers.

According to its website, QTC owns and operates 31 medical evaluation facilities and has produced "more than 2.5 million" medical exams and reports.

Principi, deputy VA secretary and acting secretary under President George H.W. Bush, also served as Republican chief counsel and staff director of the Senate Armed Services Committee a decade ago.

Principi graduated from the U.S. Naval Academy in Annapolis, Md., and is a Vietnam veteran. He was a partner in the San Diego law firm Luce, Forward, Hamilton & Scripps, according to his White House biography.

In 1996, he was named chairman of a congressional task force on veterans issues. His panel recommended having a standardized, comprehensive physical exam for outgoing military personnel. That recommendation led to exams conducted by QTC.

The firm began its relationship with the VA in 1998, conducting disability exams under a pilot program. Principi joined the company in 1999.

QTC's initial performance drew some criticism. As mandated by Congress, its work was reviewed by a private consulting firm, which said QTC's fees were much higher than expected.

A QTC hearing exam, for instance, averaged $495.55 compared with $89.80 for an in-house VA exam. Even with an adjustment for possible hidden VA costs, the difference exceeded 400%. For a general medical exam, QTC's average fee was $393.52 compared with the VA's $225.58, the consultants found. They recommended further cost-comparison studies, but such an analysis was not done.

VA officials, in a written response to Times questions, said a follow-up study was not done "because the [QTC] fee schedule was studied carefully by the technical evaluation teams and found to be reasonable and fair."

In the program's third year, Principi was nominated to be VA secretary. He told the Senate panel considering his confirmation that he had "terminated all relationships with QTC and waived any and all future rights or benefits that could flow from [his] relationship with that organization."

Still, Principi's 2001 financial disclosure listed a $250,000 bonus he said he received from QTC before his confirmation Jan. 23.

The next year, he was photographed with QTC officials at a business forum in Orange County. Principi was the featured speaker, and QTC's founder and then-principal owner, Steeve Kay, was a sponsor.

Right after becoming head of the VA, Principi appointed a task force on the backlog of veterans' claims. In its report to Principi, the panel lauded QTC's performance and recommended that the medical exam program continue or expand.

Principi said he had nothing to do with that review or the recommendation. The head of that panel later was appointed a top deputy to Principi.

The favorable Principi task force report was cited as justification for language inserted in the 2003 VA budget authorizing continuation and expansion of the program. That extension and expansion had been requested by Principi's agency.

The task force urged that the expansion and continuation be done on a competitive basis; the VA awarded a new contract to QTC after giving rival contractors 30 days to submit proposals. No other bids were submitted. Some competitors said they learned of the new contract only after it was awarded.

Sahniah Lambert, a physician with MSLA, a competing firm based in Pasadena, said she contacted the VA about bidding, but no one returned her calls.

During Principi's leadership of the VA, his agency also awarded QTC performance bonuses, as provided for in the contract.

The firm emerged in 2003 as the sole private contractor selected to perform the comprehensive joint discharge physical exams recommended by the Principi task force.

The VA has since made multiple amendments to two successive QTC contracts, increasing the number of approved sites for the exams and thereby adding to the contract's value. As the number of sites multiplied, so did QTC's revenue from $8 million in fees in 1998 to $69.1 million in 2005.

Principi wrote in response to questions that he had nothing to do with the expansion of sites while he was secretary.

Veterans groups and radio talk shows recently have seized on Principi's ties to QTC and accused him of conflicts of interest.

John Hennon, who broadcasts a veterans show in Illinois, said he was convinced that QTC "was contracted to deny as many claims as it could." He blamed Principi. He said it was "not a surprise" that the former secretary had an interest in QTC.

Skip Dreps, head of government relations for the Northwest chapter of Paralyzed Veterans of America, said: "I'm disappointed in the secretary." He said he regretted "even the appearance of a conflict of interest."

QTC has additional critics.

North Carolina attorney Hugh Cox, who frequently represents veterans, accuses the company of working with the VA to deny disability claims.

"Significant numbers of QTC medical examiners issue addendums to previous medical reports creating an appearance that VA officials communicate off-the-record with the QTC examiners to alter the veteran's chance of receiving benefits," Cox wrote in an e-mail response to questions.

Cox said Principi's involvement with the firm before and after he was VA secretary was "of special concern" while taxpayers continued to pay "increasing and unchecked amounts to QTC."

One of Cox's clients, Vietnam veteran Jimmy S. Pollock, was told to appear for a physical exam scheduled two days before he received the notice. "They put me down as a no-show," he said.

According to VA data, QTC has been paid $6.2 million since May 2003 for no-show exams. VA officials say QTC's no-show rate is 10.86%, "which is considered excellent."

Seattle psychiatrist Philip B. Plattner, who has worked at veterans health facilities for 23 years, was one of the first to question QTC's expanded role. He launched a letter-writing campaign warning that veterans could be the victims of inadequate evaluations.

In a letter to several members of Congress, Plattner said the switch to QTC exams had the appearances of a "good old boys plan to privatize VA services, which will cost our country and our veterans dearly."

Plattner said the VA was paying double what it should. He cited data from a May 2005 VA inspector general's report that showed the average cost of a QTC exam was $590.

Principi, in his response to questions, defended QTC's performance, noting that the company in its 25 years failed only once to get its contract renewed. "If mistakes are made," he said, "QTC employees strive hard to correct them."

The value of QTC's federal contracts became apparent late last year, when the firm was sold to Spectrum, a Massachusetts-based venture capital firm, for a reported $270 million.

A partner who spearheaded the Spectrum purchase was Steven Price, a colleague of Principi's in the George W. Bush administration who served as a deputy Defense secretary. Price was named to the QTC board immediately after the purchase, but has since stepped down.

Principi acknowledged discussing with Price his return to QTC before the sale. "Spectrum approached me about joining the company if they were successful in purchasing QTC," Principi wrote.

Spectrum and QTC refused to disclose whether QTC's VA contract was pledged as security for the $150-million-plus loan used to finance the purchase.

An investment firm's report on the sale noted QTC's "very close relationship" with the VA and said QTC "has integrated its process and systems with the VA and has even co-located several offices at VA facilities."

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Times researcher Janet Lundblad in Los Angeles contributed to this report.