When is a State Contract Too Big to Fail?

Part two of two.

For nearly five years, a state contractor allowed workers with limited expertise to approve dental claims for Texas’ Medicaid program, the joint state-federal insurer. State spending on orthodontic services spiraled out of control; by 2012, federal and state auditors found that the contractor’s actions had opened the door for a “massive Medicaid fraud scheme” that cost taxpayers hundreds of millions of dollars.

More than two years later, Texas health officials have reeled in spending on Medicaid orthodontic services and pursued legal action against health care providers who billed for the services. But a Texas Tribune investigation found that while health officials have repeatedly raised concerns with the contractor, a Xerox subsidiary called the Texas Medicaid and Healthcare Partnership, they have not severed its multiyear contract worth hundreds of millions of dollars.

Critics accuse the state of dragging its feet because of the contractor’s political ties to Gov. Rick Perry, a claim the governor’s office says is not true.

“It’s a major contract, and changing vendors is a complex process,” Stephanie Goodman, a spokeswoman for the Texas Health and Human Services Commission, wrote in an email. “If we made a change too quickly, we would put services for 3.8 million people with Medicaid coverage at risk.”

Goodman said the agency now plans to divide that contract into four or five smaller contracts. “You have a lot of eggs in one basket, and so it does make it hard to take a quick action on the contract,” she said.

The health agency’s current five-year contract with the Texas Medicaid and Healthcare Partnership is valued at $759 million. From 2011 to 2013, the state paid the contractor $527 million to process Medicaid claims, despite concerns as early as 2008 that it was not properly reviewing dental claims. A state audit that year found that the contractor had one dentist who reviewed roughly 10 percent of orthodontic claims. Employees without dental licenses reviewed the remaining claims, which the audit suggested was problematic.

Goodman said the state’s contract required the contractor to use “qualified clinical personnel” who would “use their medical expertise” and state-approved guidelines to evaluate the medical necessity and cost-effectiveness of Medicaid services. The contractor said in the 2008 audit that its contract did not require routine orthodontic claims to be reviewed by a licensed dental professional.

“It always has been our objective to work with the state to resolve these issues and continue to provide services to Texans,” a Xerox spokesman, Kevin Lightfoot, wrote in an email. The company worked with the state to develop and incorporate the protocols for approving Medicaid orthodontia claims.

The state renewed its contract with the Texas Medicaid and Healthcare Partnership in 2009 shortly after the audit, Goodman said, once the contractor had “agreed to a series of corrective actions and assured the state it was in full compliance with state policy and requirements of the contract.” The corrective action did not stipulate how many dentists the contractor needed on staff.

The problems persisted. WFAA-TV in Dallas revealed in December 2011 that Texas was spending more Medicaid dollars on orthodontics than the other nine most populous states combined. In April 2012, an audit found that the contractor was "essentially rubber-stamping forms for approval," and still had only one dentist on staff to evaluate thousands of claims each month.

“Since the prior authorizations were not effectively reviewed by qualified dental professionals,” the audit states, “the problem grew and both Texas and federal taxpayers became victims.”

Four months after the audit was released, state officials signed a two-year extension of the company’s contract, saying that severing ties could have jeopardized Medicaid patients’ access to timely care.

The health agency’s investigative arm mounted an aggressive campaign to reclaim Medicaid dollars from dentists and orthodontists accused of filing fraudulent claims. Some providers have settled, and others have watched their business dry up because of frozen Medicaid payments. None have been found criminally liable.

State Rep. Richard Peña Raymond, D-Laredo, chairman of the House Human Services Committee, questioned why providers had been singled out while the contractor has not been penalized. “In the end, the doctors thought they were doing it right,” he said. “And they got confirmation from the people that we hired.”

The Texas attorney general’s office has been investigating the role of the contractor for more than a year and has held extensive negotiations, the office’s communications director, Jerry Strickland, wrote in an email.

“If the state can reach a substantial settlement that redresses all potential losses by Texas taxpayers,” Strickland wrote, “then this matter may be resolved without the significant expense and uncertainty associated with drawn-out litigation.” He said if a settlement was not reached in the next month, the state would plan to go to court.

Texas signed its first contract with the Texas Medicaid and Healthcare Partnership in 2004. At the time, Affiliated Computer Systems owned the company. Xerox acquired Affiliated Computer Systems in 2010.

Raymond said he believes the Texas Medicaid and Healthcare Partnership has not faced legal action because of its ties to Perry. According to a 2012 report by the left-leaning Texans for Public Justice, a watchdog organization that tracks money in politics, Mike Toomey, Perry’s friend and adviser, lobbied on behalf of Affiliated Computer Systems before becoming the governor’s chief of staff in 2002. After Toomey left the governor’s office, he again lobbied for the company from 2006 to 2010. Toomey, who began lobbying for Xerox in 2012, is listed as one of the company’s representatives; he declined to comment for this article.

Rich Parsons, a spokesman for Perry, said the suggestion that the governor had played a role in keeping the contractor was “nothing more than a baseless partisan attack.”

“The governor has long made clear that he expects any state agency that suspects fraud or mismanagement to aggressively pursue appropriate action,” Parsons said.

State Rep. Lois Kolkhorst, R-Brenham, the chairwoman of the House Public Health Committee, said it was clear the state had “contracted with a company that was not doing what I would view as due diligence.” She added that she did not think the state “had the proper tools in place to monitor the system.”

The challenge with hiring contractors to run elements of the state’s Medicaid program is that there often are not enough state workers to properly oversee them, said Anne Dunkelberg, the associate director of the liberal Center for Public Policy Priorities.

“I’m not saying there’s no honor among our state contractors,” she said, “but we shouldn’t be running our contracts on the honor system.”

Xerox’s challenges of late extend beyond the Texas Medicaid program. The city of Houston sued the company in July for allegedly breaching its contract to collect money from private insurers, public payers like Medicare, and individuals who received ambulance transfers and other emergency medical services.

Xerox has denied the allegation and filed a countersuit against the city for allegedly wrongfully terminating its contract.

In Nevada, consumers filed a class-action lawsuit in April against both the state and Xerox, alleging that technical glitches on Nevada Health Link, the insurance exchange the company built for the state, caused people who had purchased health insurance to remain uncovered.

“Were there surprises as this first-of-its kind project rolled out?” asked Lightfoot, the Xerox spokesman. “Yes, but we knew there would be, and we were prepared to respond to them. We have pulled in resources from throughout Xerox and from outside vendors to get all aspects of Nevada Health Link right.”

Alaska contracted with the company in 2007 to build a computerized Medicaid payment system by 2010. The system eventually launched in October 2013 and continues to have glitches, state officials there say, including bounced claims and a failure to pay providers on time. Bill Streur, the commissioner of the Alaska Department of Health and Social Services, said the state had paid the company $6 million of a $36 million project, and stopped payments until the problems are resolved.

“These are highly complex technological implementations, and the timeline for a quality implementation is based on many factors,” Lightfoot said. The schedules for state contracts are developed in accordance with each state and approved in advance by the federal government, he added.

“Every week there’s incremental improvement,” Streur said in an email, “but we’ve still got a long way to go.”

Cathaleen Qiao Chen contributed to this report. 

This story was produced in partnership with Kaiser Health News, an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.