Outsourcing Walter Reed

Philip Mattera [1] heads the Corporate Research Project [2], an affiliate of Good Jobs First.

Reports of substandard conditions at the Walter Reed Army Medical Center have outraged the country. But that anger should not be directed only at the callous Army officials running the facility.

The full story behind the scandal involves a misguided program to “reinvent government” through outsourcing, a company that botched the delivery of ice to victims of Hurricane Katrina and a giant hedge fund led by a former member of President Bush’s cabinet. The private sector has indirectly had a hand in converting the once legendary Walter Reed into a symbol of the shameful treatment of people who have been maimed in the service of their country.

The dismal state of some facilities at Walter Reed cannot be directly attributed to poor performance by a contractor. After all, it has been only a few months since a politically connected firm called IAP Worldwide Services started taking over many of the management functions at the medical center.

Yet a battle over whether to outsource those functions has been going on since early 2000, when the Army commenced a cost-comparison study of support services at the medical center. Such studies—which were being promoted by the Clinton administration’s “reinventing government” initiative led by Vice President Al Gore—forced groups of federal workers to compete with potential contractors to figure out which could perform a given function more efficiently.

The process dragged on for several years, and finally it was determined that the bid by federal civilian employees at Walter Reed was the better one. However, that decision was overturned by the Army Audit Agency, which was upheld by the GAO on a technicality. This allowed IAP to get a five-year, $120 million contract.

Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform, has been gathering evidence that the prospect of outsourcing (and likely job cuts) had a detrimental effect on morale and efficiency at Walter Reed. That idea is not just theory. Last September, Walter Reed Garrison Commander Peter Garibaldi sent an internal memorandum to his superiors warning that substantial numbers of skilled workers were leaving because of the impending takeover by IAP.

It is also possible that managers at Walter Reed were letting things slide, knowing that any problems would soon be dumped in the lap of a contractor. While it may not be possible to quantify, there is every reason to believe that the drawn-out outsourcing process and the controversial reversal of the initial finding in favor of the federal workforce contributed to the deterioration of physical conditions at the medical center.

And all this was to create a new revenue opportunity for IAP. The company is an odd choice to help manage one of the nation’s premier military medical facilities. It was founded in 1989 by a South Carolina entrepreneur who enlisted the help of a logistics expert who had recently left the Army. They rode the rising wave of military outsourcing in the 1990s, specializing in supplying electric generators, while also getting federal civilian contracts for prosaic functions such as providing ice in natural disasters (a responsibility it later botched during Hurricane Katrina). Last year IAP got a $103 million contract to handle file management at the IRS but was unable to get up and running by the specified start date.
 
Management of the company is now in the hands of Al Neffgen and David Swindle, two former executives with Halliburton subsidiary Kellogg, Brown & Root—one of the giants of military outsourcing and the subject of numerous allegations about overcharging the federal government. Today, IAP’s board of directors includes former Vice President Dan Quayle, a former commandant of the Marines and a former vice chief of staff of the Air Force. Such connections have undoubtedly helped the company rise up the ranks of federal contractors. Its volume of business with Uncle Sam has grown from about $222 million in 2000 to some $1.2 billion in 2005.

IAP’s growth has also been aided by the fact that it is controlled by the giant hedge fund Cerberus Capital Management, which has taken over dozens of companies and is now more of a conglomerate than an investment fund. Cerberus, like IAP, is no stranger to the revolving door. It is surely no coincidence that the hedge fund chose former Bush Treasury Secretary John Snow as its chairman a few months ago while IAP was intensifying its effort to take over a multi-billion-dollar military logistics contract now held by Halliburton.

The entire situation is a remarkable illustration of how the federal government has become a vehicle for the promotion of private interests. The zeal with which large contracts are awarded to a small universe of companies, with little attention paid to performance, suggests that outsourcing is less an effort to improve efficiency and more a matter of enriching those with the right connections.

But this time the privatization game may have backfired in the face of  the Bush administration and its friends in the corporate world. It is one thing to screw workers—unfortunately, that’s now considered business as usual—but in the case of Walter Reed the ultimate victims are a much more revered group. The stark evidence that the Bush Administration, for all its rhetoric about supporting the troops, is much more interested in supporting the contractors, could be leading to a political earthquake.