State Auditor: "Operational Defects" Led to 21CT Deal

^{*Editor's note: This story has been updated throughout.}

A scathing state investigative report of the Texas Health and Human Services Commission's much-maligned $20 million contract for fraud tracking software has revealed "operational defects" within the agency's procurement process.

According to the report, which was released Thursday, the pricy software deal was left in the hands of the agency's deputy inspector general to direct. He had no prior contracting experience, and the contract was irregular in that the state paid hundreds of thousands of dollars for work and services that were not provided. The report didn’t identify the deputy by name, but the only deputy at the time was Jack Stick.

"The Commission and the [Office of Inspector General] did not form an agreement with 21CT that adequately protected the state’s interests and that ensured that the OIG received the goods and services it sought to procure," the report said.

The health commission’s handling of the 21CT contract has been scrutinized since December, when a $90 million extension was canceled after news reports revealed that a lobbyist for the company was a former business partner of Stick's.

The deal, finalized in December 2012, has resulted in the forced resignation of Stick and his former boss, Inspector General Doug Wilson. Stick, who did not immediately respond to a request for comment for this article, has denied any wrongdoing. And 21CT spokesman Mike Rosen said the company did nothing wrong.

"21CT followed all contracting and procurement protocols as directed by state officials," he said.

The health commission had little to say about the findings.

"The SAO report notes that the former OIG deputy inspector general for enforcement directed the procurement," said Stephanie Goodman, spokeswoman for the health commission. "The matter is still the subject of a criminal investigation so we cannot comment further."

Not only did the audit heap harsh criticism onto the commission, but it delivered new details about the contract, including how it is on hold while the agency quietly moves through legal channels to get a refund from 21CT.

Among the other problems revealed in the report: 

• Stick was not the only executive with a prior relationship with 21CT. As reported by The Texas Tribune, a former commission executive knew 21CT chief executive Irene Williams when he and Stick discussed 21CT's software product. The report does not mention the executive by name but notes that the person "had an existing relationship with 21CT management, and that individual helped to foster a connection between 21CT and the Commission, the OIG and the former deputy IG." The Tribune has reported that that executive was Stanley Stewart. 

• The 21CT deal was unusually structured. Instead of paying for goods and services provided by the Austin firm, the health commission paid 21CT in 11 installments. As a result, the commission paid 21CT $405,000 for laptop computers that were never received.

• The 21CT contract was not logged into the health commission's contract database until eight months after the deal was signed. By not logging it in a timely fashion, the contract escaped some monitoring.

• Stick's promotion to chief counsel violated the health commission's employment policy regarding conflicts of interest because his wife, Erica, was chief of staff to Executive Commissioner Kyle Janek. This is the first time any entity has announced that there was a violation of employment policy. "Reporting to a spouse represented a structural conflict of interest that undermined the effectiveness of the Commission's processes and was a violation of the Commission's employment policies," the audit said. Erica Stick was placed on paid administrative leave in December, and she later resigned. There is no evidence connecting her to the 21CT deal.

• Stick communicated directly with 21CT from his personal email account. He also emailed other Texas agencies and other states promoting 21CT's product.

• The health commission misled the federal government. The audit points out, as the Tribune had reported earlier, how the commission told the Centers for Medicare and Medicaid Services that the 21CT contract was competitively awarded in order to receive $18 million of the $20 million software price tag. There were no other bidders. Also, when it came time to apply for another $77 million in federal funds to pay for a contract extension with 21CT, the company was allowed to revise the health commission's pitch to the feds. 

The auditor's office report follows the second of four investigations launched after news reports revealed Stick's former business partner was a lobbyist for 21CT. The state public integrity unit and the FBI are still both investigating whether the contract was bungled or officials broke laws. Three days ago, a team selected by Gov. Greg Abbott found the agency “has experienced a program failure" and that its contract with 21CT “skirted” the edge of state law.

Abbott, who called his team’s findings "deeply troubling," said he wanted time to consider the report before making any decisions about the agency. The Texas Legislature has also made reforming state contracting one of the top issues this session.

The report ends with a list of recommendations to the Legislature to beef up contracting oversight and avoid problematic contracts. It says lawmakers should require that any payments exceeding $1 million be approved in writing by the health agency's executive commissioner and that all future purchases should be competitively bid.

It also pointed out how the Texas Department of Information Resources' Cooperating Contracts program, which the health commission used to purchase 21CT's services, needs strengthening.

"The structure of the Cooperative Contracts program enabled the Commission and the OIG to misuse that program," the report stated.

The auditor's office pointed out how the Department of Information Resources relies on vendors — rather than agencies — to let them know when agencies make purchases from its vendor catalog. 

"Therefore, there is a risk that the Department of Information Resources may not become aware of all purchases made through cooperative contracts," the report said.

And although DIR recommends that agencies obtain three bids from three different vendors, the auditor's office recommends that three bids be required.