The HHSC-21CT Contract Investigations: How Did It Get to This Point?

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Contract High is an occasional series looking at how Texas outsourced crucial state services for two decades — and got smoked.

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_{Editor's note: This story has been updated with comment from James Frinzi, former lobbyist for 21CT.} 

The Texas Health and Human Services Commission’s selection of little-known Austin software maker 21^st Century Technologies Inc. for a $20 million contract has resulted in forced resignations at the agency, three investigations, a lawsuit and a Texas Legislature that can’t stop talking about contract reform.

So what exactly went wrong?

If you ask health commission representatives, the deal to purchase Medicaid fraud software from 21CT now appears flawed from the start. If officials had understood more clearly how the company was selected, they would have insisted on opening up the job to more bids.

“Based on what we know now, it appears that it should have been purchased another way,” said Stephanie Goodman, an HHSC spokeswoman.

But if you ask Jack Stick, who brokered the deal in 2012 when he was the HHSC deputy inspector general, he merely followed directions from HHSC procurement staff when he selected 21CT to provide a fraud tracking tool to help the state uncover more Medicaid overpayments to health care providers. And 21CT officials say they, too, followed the rules.

“I didn’t do anything wrong,” Stick told The Texas Tribune.

Scrutiny of the deal has resulted in HHSC canceling a $90 million extension of 21CT’s contract that would have kicked in last December. And the episode has renewed criticism about whether Texas has enough oversight to hold the businesses it hires accountable.

But the blame continues to be pointed in different directions as the state’s public integrity unit, the state auditor’s office and a team handpicked by Gov. Greg Abbott look into the contract. And the health commission is doing its own investigation to see if the contract was intentionally crafted to avoid a competitive bidding process.

Since 2005, state agencies have been required to purchase computer products and services through the “Cooperative Contracts” program administered by the Department of Information Resources, or DIR. 

The idea was to streamline repetitive purchases, like laptops and printers, for agencies. Vendors compete to get into the program, but they do not have to submit to an additional competitive bidding process once they are selected by the agency.

Seeking a Software Upgrade

Stick, who was first hired by HHSC as deputy inspector general in June 2011, said he chose 21CT’s software to jump-start the agency’s office of inspector general, which he said was lagging in its investigations of Medicaid overpayments to health care providers and recipients of other welfare programs, including food stamps.

Stick said there was a dire lack of up-to-date software that could more quickly analyze all information about a health care provider.

“We knew we had a catastrophic need for new technology, and I also knew we were losing money to both intentional and inadvertent overbillings," said Stick, who was later promoted to HHSC chief counsel but was forced to resign last December.

Since 2003, when both HHSC and the inspector general’s office were created, the amount the agency recovered in Medicaid overpayments has not moved dramatically. Each year from 2004 until 2013, HHSC recovered amounts in the $300 million to $400 million range. A lot, to be sure, but it didn’t quite make sense given the addition of more staff in recent years.

Soon after he joined HHSC, Stick said he ran into Stanley Stewart, a contractor who had been hired to help HHSC turn around the Texas Integrated Eligibility Redesign System, known as TIERS, the new computer system HHSC had installed to sign up Medicaid and food stamp recipients.

Stewart, who had been given the title of HHSC deputy chief of staff — a rare move by the agency for a contractor — successfully helped reverse the problems with TIERS, according to Goodman, and as a result, the error rates in the food stamp program for Texas decreased dramatically.

Stick told Stewart about how he was looking for a better way to look at providers and their billing and payment history instead of having to watch investigators open up several tabs on their computers to look at all the information available for one health care provider listed on a spreadsheet.

“They were hampered by the TIERS system, which I think there were 16 different windows to complete a claim,” Stick recalled.

Stewart remembers that initial meeting with Stick.

“I remember Jack and I were in a conversation about Medicaid and Medicaid fraud and how they weren’t being very successful and they were looking for something to do analytics,” said Stewart, who splits his time between Austin and Michigan. 

A Product Wins Favor

In that conversation, which both Stick and Stewart recalled, 21CT’s name came up. Stewart had met the company’s chief executive, Irene Williams, at a conference and recalled how she was doing analytics work for the federal government. Through that conversation, Stick recalled meeting Williams in 2007 and seeing a demo of an analytical tool her company had built when he briefly worked for AutoGov, a health care analytics firm run by Gregg Phillips, a former HHSC executive.

Stick said he looked at a demo from 21CT and others, but it was clear to him that 21CT’s product was what they needed.

From there, Stick said it was a matter of following directions from HHSC’s procurement office to buy the software.

“I don’t know shit about procurement.” Stick said. “At the time, I did not know physically what to do. I didn’t know how to buy something.”

Once Stick verified 21CT was a vendor included in DIR’s “Cooperative Contracts” program, the agency began drawing up the purchase order.

In December 2012, HHSC signed a $20 million purchase order with 21CT. 

A Closer Look From Health Commission

But HHSC is now saying that after a closer look at the contract, it is trying to determine if it was intentionally crafted to keep HHSC from seeking competitive bids for the Medicaid software work. The contract, as it was written, did not itemize costs for 21CT staff and their time operating the software.

“We later realized the line item for licensing fees included the staff and time to customize the product for OIG and perhaps do even more work,” Goodman said. “That's an unusual way to list those costs.”

She added that based on what the agency knows now, 21CT’s services should have been purchased another way — either through a different DIR program or by requesting permission from DIR for HHSC to competitively bid out the work.

DIR officials say the Cooperative Contracts program has saved the state some $275 million.

“DIR Cooperative Contracts include all the necessary terms and conditions, and price discounts for hardware and software for compliance with state procurement law,” said Priscilla Pipho, a DIR spokeswoman.

But a Houston Chronicle report on Saturday shows that three-fourths of the vendors that compete to be included in the program are accepted, prompting even DIR interim chief Todd Kimbriel to concede that the acceptance into the agency’s catalog is “too high.”

Once HHSC moved to purchase 21CT’s fraud-tracking software, known then as LYNXeon, little was heard about it until last fall when news reports questioned how and why HHSC hired 21CT, a relative newcomer in the Texas contracting world.

Why the chatter? For starters, the $20 million deal did not immediately look like $20 million. It was several purchase orders that totaled $20 million, according to the DIR's Pipho. That's legal. But it explains why it didn't catch attention from the start. Second, there was speculation that because Stick had previously knew Williams, he unfairly steered the contract — something he has denied — to her company. 

A November story by the Austin American-Statesman revealed that Stick was once business partners in 2002 with James Frinzi, who until last December was a lobbyist for 21CT. Both men denied a conflict of interest.

“Their relationship with him had no impact whatsoever,” Stick told the Tribune, pointing to how the company didn’t hire Frinzi until months after the contract with HHSC was signed. But by that time, 21CT was at work with Stick to get approval for a $90 million contract extension. Frinzi has said he received little for his efforts, and 21CT said he was hired to lobby in Oklahoma, not Texas.

And despite previous statements by Stick that he and Frinzi are no longer friends following a physical altercation in 2009, the Houston Chronicle reported the two were in at least one business together in 2011, according to paperwork, which would have been the time Stick began looking at 21CT’s software as an answer for OIG’s backlogged investigations.

Frinzi has attributed the 2011 document to bad paperwork that indicated the two were working together when they had not for years.

Frinzi, on Tuesday told the Tribune he did not communicate with Stick about 21CT when HHSC was purchasing the company's software.

"There are no emails, calendar events, agendas, phone records, or communications between me and Stick during the time of the procurement," he said. 

Comments Stir Controversy

Adding fuel to the quickly developing narrative were Frinzi’s own comments to the Statesman, after the $90 million extension was canceled, that 21CT had plans to have Stick come work for them.

“They thought that he was going to come over and run it, make it big, take it public,” Frinzi told the newspaper. 21CT has subsequently sued Frinzi over the remarks.

Stick has consistently said there was no quid pro quo in hiring 21CT. And Williams has denied such a design.

“There was no plan for me to work at 21CT,” Stick told the Tribune. “Irene and I did not discuss it."

But Frinzi has stood by his statements. “I didn’t make any false statements or disparaging statements," he told the Tribune last year.

As the questions mounted, both Stick, along with his former boss, Inspector General Doug Wilson, were asked to resign from HHSC by mid-December.

Meanwhile, HHSC Executive Commissioner Kyle Janek, a former state senator, defending himself and the agency, is left at the helm, telling reporters after the resignations that he was “misled” by Stick, something Stick argues is not true.

"No way I could have signed off on a $20 million contract without a lot of other people knowing and approving,” Stick said.

But even Stewart, who watched demos of the 21CT software when he was still at HHSC at the time, was shocked when he learned later of the $20 million price tag for the product.

“I was surprised at that,” Stewart said, adding he learned of it only after he left HHSC and began following the 21CT story late last year. “I think everybody would have choked if it was going to be $20 million. No where at any presentation did I hear a figure of $20 million.”