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Three years after deadline, $61m HHS computer system remains behind schedule.


Late in 2005, when John Stephen was commissioner of the state Department of Health and Human Services, he pushed for adoption of the largest computer contract in New Hampshire history--a $61 million, five-year deal to develop and run the massive Medicaid Management Information System.

At the time he said, "I take pride in this bid," adding that the contract was "tighter than I ever expected as commissioner."

But Stephen--the current Republican candidate for governor--is "uncomfortable" talking about the deal now, referring all questions to the current commissioner, Nicholas Toumpas. His opponent, Gov. John Lynch--who oversaw the Executive Council's approval of the bid, without weighing in on it himself- also referred questions to Toumpas.

For his part, Toumpas--while vigorously defending the steps he has taken to implement the contract--won't comment on whether entering the deal was the right move in the first place. 'That was before I got involved," he said.

It is no surprise that no one is taking ownership of the deal because that "tight" contract has resulted in a system that is three years behind schedule, and counting. HHS officials are hoping that it won't be more than another year before it finally goes online, but no one is really sure how long it will take to complete, or how well it will perform.

The contract does require that the winning bidder--Affiliated Computer Services--would "make the State whole for any losses" if it missed the deadline of Nov. 1, 2007. But how much ACS will ultimately pay for the delay is the subject of negotiation.

Thus far, the state has paid ACS $14.4 million, and got back a check for $500,000.

Meanwhile, ACS has been given another $6 million worth of work from the state--partly because, since the system has taken so long to build, there have been more federal requirements to meet, and partly because the state discovered more things that it wanted or needed the system to do.

At this point, it appears unlikely that the penalty will match that reward.

The losing bidder back in 2005 was Electronic Data Systems. It cried fouled at the time, alleging to Lynch and then-Attorney General Kelly Ayotte that Stephen and the state got snookered in a bait-and-switch tactic: that ACS bid a cheaper technology that couldn't really do what New Hampshire wanted and would be using the state as a guinea pig to develop a new, untested technology that it would later sell to other states.

But over the years, New Hampshire has stuck with ACS, preferring delay to disruption. Other states, however, have given up on the firm, canceling contracts, sometimes resulting in lawsuits and multimillion-dollar settlements.

Indeed, in the last two years, ACS contracts were terminated in at least three states--Minnesota in March 2008; Wyoming in January 2009 and Idaho in March 2009.

Maine's experience

This is a story about what Executive Council Ray Wieczorek- who originally voted for the contract--now repeatedly calls a "mess."

Last August, in fact, Wieczorek even expressed his frustration by voting against extending the ACS contract.

"This thing seems like a Rube Goldberg job to me. They don't know where they are going, like Columbus when he left Spain, I guess. He didn't know where he was going either," he said.

"It is not a Rube Goldberg. It is something that is designed against the criteria and the functionality that we contracted for," HHS Commissioner Nicholas Toumpas replied. But he admitted that "we are on the outside of the envelope in terms of being late. It's a painful slog. I wish it could go faster."

Toumpas said trying to undertake a massive modernization is always messy, and New Hampshire is trying to avoid the disaster that has happened in other states by being patient. Still, he admitted, "There are times when I want to pull my hair."

Medicaid is the biggest program in the biggest state agency, with some $800 million in payments to some 7,000 providers to service 100,000 recipients.

While half-funded by the federal government, it is run by the individual states, and each state has formulated its own rules on how to run it and its own computer system to manage it.

For years, EDS (a company founded by Ross Perot) had more such contracts than any other company, a mainframe legacy system that is so complex that the states never even bid out the work to anyone else.

EDS won New Hampshire's bid in 1993, and that is the contract that remains in effect, extended by $10 or $15 million every year.

The state, under criticism for continually giving EDS such massive no-bid contracts year after year, and under pressure from the federal government to update its computer system, finally put the contract out to bid in 2004.

Other states were doing the same thing, and there have been horror stories galore, including the experience of Maine.

In January 2005, as New Hampshire was going through its bidding process, Maine took the low bid on a new Web-based system provided by an untested vendor and it proved a disaster.

Hundreds of thousands of claims that should have been paid weren't. Some providers shut their doors. Others turned away Medicaid patients. The state had to pay some $30 million to fix the damages, wounding its credit rating.

The commissioner who awarded the contracted resigned at the end of 2005.

Among the lessons learned from Maine's experience: Don't experiment with untested technology. Don't go with an untested vendor. Don't necessarily go with the lowest bid. Put enough staff resources training in, so state employees know how to use it. And don't rush into going online unless you test the darn thing.

That was why New Hampshire wanted to "transfer and enhance" an existing Medicaid Management Information System, or MMIS, so it would be "potentially less expensive, require less development time and involve less risk than building a new custom-designed MMIS."

In 2005, state staffers spent hundreds of hours evaluating four bids, narrowing them down to two finalists: EDS and ACS. "Bidding war" would be an understatement, as lobbyists and lawyers for each side attacked the other's creditability.

EDS had the experience, both in New Hampshire and with more state systems around the country. But ACS had a few states under its belt as well as a bid that was $10 million lower. The bid to develop the system was about the same: $26 million. The difference was on the rest of the contract, to run it for at least three and up to five years.

EDS lit into ACS's record, forwarding articles about its troubles in implementing new systems.

For instance, Georgia, one of the states whose system New Hampshire's was supposed to be based on--and ACS's home state--had an "April Fool of a start-up" on April 1 2003, according to the Atlanta Journal Constitution.

"The apparent tactic is to win through low-price bids and then increase margin once the contract has been secured," wrote Ed Dupont, a former New Hampshire Senate president who was a lobbyist for EDS.

The day before the 2005 vote, Nixon Peabody attorney David Vicinanzo, representing ACS, provided pages of "negative" press against EDS, including accusations that it overcharged its home state of Texas, resulting in a $24.5 million settlement. The result was Texas' switch to ACS, and, "EDS launched a campaign of disparagement and vindictive protests against ACS in attempt to discredit its main competitor," according to Vicinanzo.

This all came to a head on Nov. 2, 2005, when Stephen brought what Lynch quipped was an "army" of staff members, as the chairman of ACS Paul Davis looked on, to back Stephen's recommendation: accept the low bid of ACS.

"I didn't watch that process until they presented to me at my desk a recommendation of who this vendor is. The team gave me a recommendation, not only was it the best product, it was the best price by $11 million," Stephen said at the time.

ACS's bid ominously used the phrase the "road not taken" to illustrate the worthiness of its bid, but the Robert Frost poem was meant to indicate that there are alternative roads to EDS. ACS technology, it said, was a "proven, operational system"--the Omnicaid MMIS that it operated in Colorado, New Mexico, Georgia and Mississippi and was at the time being developed in North Carolina.

Other state officials who evaluated the system hammered home that point as well.

"The technology proposed here is current, common and tried. It is not leading-edge, something you've never seen worked before," said Richard Bailey, then the state's chief information officer.

But neither Stephen, Bailey nor anybody else mentioned a sentence tucked into the contract: "the parties may agree to substitute a more advanced, state-of-the-art technology, which may include a different system development methodology."

Second chances

Executive Councilor Debora Pignatelli, who talked to officials from other states and who got an earful from both sides, said at the time that no matter who was picked, "there are going to be glitches ... but in the end I have to go with the proposal that is going to save our taxpayers $10 or $11 million."

To this day, she believes she made the right decision.

However, only Pignatelli and Wieczorek were convinced at the time, and the proposal originally lost on a 3-2 vote and was tabled until the following month, when the discussion primarily focused on whether ACS would be performing the work in-state.

Stephen, backed up by then-Deputy Attorney General (and now Attorney General) Michael Delaney, continued to emphasize again how air-tight the contract was: There was no extra cost for overruns, and ACS would not be paid until it finished each "deliverable" to the state, with a strict timetable. There also was a hold-back provision of $3.5 million. There was a performance bond of $5.2 million. And an extra 5,000 hours was thrown in to deal with changes because of new federal regulation after implementation.

"I think there are enough provisions and safety nets," Stephen said. "That is as good as we can get."

The rest of the council signed on, and things seemed be going smoothly for nine months, until August 2006, when Stephen dropped something of a bombshell on the Legislative Fiscal Committee.

ACS was going to be late in delivering the MMIS system, he told the panel, because it was doing something new.

"The traditional strategy for development of an MMIS involves a state transferring a system that is already in operation in another location and then customizing the system to address the unique requirements of that state. The agreed-upon strategy between ACS and New Hampshire is different in that the base platform for what will be New Hampshire's system is ACS's new and state-of-the-art MMIS. While this will leave New Hampshire with a cutting-edge system when completed, it can also necessitate a delay in delivery during development," Stephen wrote. "The many benefits of such a system dearly outweigh the added risk of a new implementation."

Because of all these "firsts," Stephen wrote, "ACS has underestimated the effort involved in the transfer, customization and initialization of the newest generation of its MMIS in New Hampshire."

ACS called the new technology Enterprise, and described it in a bid to Alaska as "designed ... from the ground up, rather than merely adopting from older systems."

But while Stephen was saying yes to ACS and Enterprise, North Carolina was saying no. Only a month earlier, the state terminated an ACS contract after ACS tried to switch technology. Such a switch, according to one state analysis, would enable ACS to "renegotiate" the contract.

"ACS has not demonstrated the ability to approve deliverables," said the analysis.

In January 2007, ACS sued North Carolina for $40 million. The parties settled 10 months later, with the state paying $10.5 million to get out of the contract. It rebid the contract in January 2009 to another vendor. The system was supposed to be completed in August 2011, but officials there don't believe that deadline will be met either.

"This is so mean-spirited and competitive that vendors will bid knowing they won't meet the deadline just to get their foot in the door, and then they think they will get a second chance," said one North Carolina official involved in the process who asked not to be identified.

ACS has gotten lots of second chances. Since August of 2007, New Hampshire has regularly extended the deadline of the contract of EDS as well as a number of other related contracts as it waits for its new system, and pays for these systems to be updated.

For instance, the federal government requires all state computer systems to include a National Provider Identifier, so providers will be recognized across various different systems and states. Stephen sought a waiver so the state wouldn't have to include it on the old system because it would soon be included in the new. But that waiver was denied, and EDS was paid at least $2 million to develop that functionality.

Stephens credited ACS for acknowledging that the missed deadlines were primarily its fault, and for adding 50 more people to the job to speed things up. The problem was that the state--under budget constraints--could not add staff as well, resulting in what Stephen at the time called a "compression."

"The schedule presents an unrelenting demand," Stephen wrote in an update to the Executive Council.

Meanwhile, EDS lobbyists and lawyers were writings letters of protest to Lynch and Ayotte.

"One project was put out to competitive bidding and the state almost immediately contracted for an entirely different project," wrote Greg Smith of the McLane Law firm and a former attorney general himself, in a letter purportedly hand-delivered to Ayotte in August of 2007.

Smith asked Ayotte to "take immediate action to investigate this matter" in order to "restore integrity of the competitive bidding process."

Ayotte--now the Republican candidate for U.S. senator--referred all calls about the ACS deal to the current AG's office, which did not return them by deadline.

Stephen would not answer questions about the contract directly. He is "uncomfortable speaking about it" because "he can't access what has happened between the vendor and the state, which would be crucial to rendering any opinion in the status of the MMIS contracts," said campaign spokesperson Greg Moore--who served as HHS spokesperson under Stephen. Moore referred all questions to Toumpas.

Toumpas was optimistic when he took over as acting commissioner "There is no information right now that I'm looking at that says there is going to be a further delay," he said in August 2007, when the EDS contract was extended to June 2009, at a cost of $10.3 million.

"Has ACS breached the contract? Are they in violation of the contract?" Lynch asked in December 2007, when the ACS contract was extended again, though at no additional cost.

"No they are not. Because every step along the way ... We are agreeing to give them additional time," Toumpas replied.

In June 2009, the state increased the amount of the ACS contract by $6 million, saying that the changes that were needed were not envisioned, let alone included in a contract drawn up four years ago.

"Things have changed dramatically in the Medicaid program," Toumpas said at the time. "The bulk of this are new requirements, new functions that we believe we need as a result of changes in the state program, as well as the federal."

In August 2010, the Executive Council voted another $11.8 million extension, to the end of 2011, in EDS's contract, because it did not look like ACS would be ready until then.

Where it stands

It is true that implementation of such projects is frequently delayed, though usually by no more than a year or two.

EDS says its average implementation period for its eight systems that have earned certification over the past three years has been 25 months. New Hampshire's also was supposed to done in about two years, but ACS signed that contract five years ago, or three years late.

"We adjust the price and say we are held harmless if it is stuff that they cause. Who arbitrates that?" Lynch asked Toumpas in June 2010.

"The finance people have been working it out," Toumpas answered

ACS reiterates that it would not charge more for delays that are its fault, and would reimburse the state for delays it caused, but it's not clear what that means.

Both sides agree that those costs include the difference between what the state is paying EDS for contract extensions and what it would have paid ACS had the job been completed on time. Thus far, that has only amounted to $500,000 in fiscal year 2009. But what about other contracts that have been extended, or the extra staff hours the department puts in?

These are the things that need to be worked out in fiscal year 2010 and 2011, Toumpas said.

So that's where it stands. But where does Lynch stand? After all, on the campaign trail, he has attacked Stephen's record as HHS commissioner. But here he only offers discreet silence.

"The award, brought forward by the previous commissioner of HHS, has proven a challenge. With Nick Toumpas's hands-on management, we are confident we will see it through to completion," said Colin Manning, the governor's spokesperson.

And the competitors themselves? Despite all the backbiting behind the scenes, they only had positive things in prepared statements. William R. Ritz, a public relations manager at HP, which now owns EDS, had this to say:

"HP's focus is on serving the health-care providers and taxpayers of New Hampshire. We are proud of the high level of service HP has provided over the years and will continue to do for the duration of our contract."

And Ken Ericson, director of corporate communications for ACS, which is now part of Xerox, had this to say:

"We are committed to delivering to the citizens of New Hampshire the most advanced tools available to improve the quality of both care and service. The timeline for a quality implementation is based on many factors, and the schedule is developed in collaboration with our state partners. When operational, the system will process millions of claims and pay billions of dollars to doctors and hospitals on behalf of New Hampshire Medicaid beneficiaries with the highest degree of accuracy and timeliness, saving the state money and positioning New Hampshire as a leader in Medicaid administration and population health management.

Bob Sanders can be reached at
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Title Annotation:STATE GOVERNMENT; Health and Human Services
Author:Sanders, Bob
Publication:New Hampshire Business Review
Geographic Code:1U1NH
Date:Oct 8, 2010
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