In State Contracting, Failure is an Option

Texas's tendency to privatize state services has led to contracting scandals erupting regularly. But a history of cost overruns or bad performance hardly bars a company from winning future jobs.

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

In 1991, the Texas attorney general’s office signed an $11 million contract to computerize its child-support payments system. By 1997, the deal with Andersen Consulting had ballooned to more than $68 million and was three years behind schedule. A state audit found the company deserved its fair share of the blame for overpromising and underperforming. 

A decade later, Andersen Consulting had renamed itself Accenture and was in the crosshairs of Texas lawmakers again after an $899 million contract to manage the Children's Health Insurance Program and run call centers enrolling Texans in food stamps and Medicaid went awry. Poorly trained staff and technical problems led to a series of well-publicized snafus, including applicant backlogs growing by thousands and misinformed workers denying benefits to eligible families. Texas ultimately paid Accenture $244 million and canceled the contract.

Despite the two high-profile flubs, Accenture’s relationship with Texas appears stronger than ever. The company is in charge of most of the state’s Medicaid claims processing, as well as a $99 million upgrade of the AG’s child support payments system, two areas synonymous with its past missteps.

That a company with a 20-year history of troubled state contracts would continue drawing state business does not surprise capital veterans who have tried to reform the state’s contracting system.

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“My observation over the years is we have often entered into contracts that may not have been in the best interest of the state, and we try to overcome it by managing them poorly,” said Carl Isett, a Republican state representative from Lubbock from 1997 to 2010 who worked on contracting issues and is now a lobbyist. “It’s just the recurring theme.”

With the eruption of yet another contracting scandal, one that's sparked at least three separate investigations, Texas lawmakers are again promising to beef up oversight of the private businesses the state hires. Yet the questionable no-bid contract awarded to Austin tech firm 21CT for Medicaid fraud detection software is just the latest chapter in Texas' troubled adventures in outsourcing.

Over the past two decades, Texas has pursued a wave of privatization of public functions with the belief that corporations could save taxpayer money while improving the delivery of essential government services. But multiple contracts representing billions in public dollars have blown up in the state's face, prompting lawsuits, ethics investigations, wasted funds and frustrated Texans. 

The pattern that emerges is one of famously business-friendly Texas repeatedly fumbling its efforts to hold the businesses it hires accountable.

An audit released Wednesday found a lack of due diligence with 46 of 53 contracts tested at the Office of Violent Sex Offender Management. Before that, 12 of 14 audits conducted between 2012 and 2014 of various programs found weaknesses in contracting oversight. It’s not a recent phenomenon. Dozens of audits going back to the 1990s have found similar problems with contract management and procurement across a wide stretch of state government agencies. And conflict of interest questions similar to those now dogging the 21CT deal have periodically emerged over other state contracts in the past.

“I think it’s gotten worse rather than better in terms of the oversight, the accountability and making sure that people aren’t taking advantage of the contracting process,” said state Rep. Sylvester Turner, a Houston Democrat who has been critical of privatization efforts since joining the Legislature in 1989.

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For its part, Accenture pointed to its long relationship with Texas as proof of its value to the state.

“Accenture has a proven track record of success on complex, large-scale IT projects,” spokesman Joe Dickie said. “Accenture is proud of its work for many Texas state agencies over the past several decades.”

Yet Accenture is just the tip of the iceberg. While contracting problems have arisen in nearly every corner of state government, including foster care, standardized testing and border security, Texas’ highest-profile disasters have coincided largely with hulking information technology projects that come in over budget, behind schedule or both. Some examples:

Electronic Data Systems: The company, which was bought by Hewlett-Packard in 2008, served as the state’s Medicaid claims administrator from 1977 to 2003. The state auditor accused the company of overbilling the state $51 million in 2001 and 2002, as well as charging the state for millions in improper expenses. The company ultimately paid Texas $24.5 million to settle problems with the contract.

IBM: The company signed an $863 million contract in 2006 to consolidate the state’s far-flung data centers and run them for seven years. A 2008 server crash led to the loss of data that potentially compromised some Medicaid fraud investigations, prompting Gov. Rick Perry to temporarily suspend data transfers. After months of trading barbs in the press, IBM and the state reached a settlement and the work was transferred under new contracts to Xerox and Capgemini. By then, the state had paid IBM for most of its contract.

Xerox: Last year, the Texas Health and Human Services Commission fired Xerox from a Medicaid contract after it was revealed that Texas was paying more for Medicaid dental services than several other states combined. In an ongoing lawsuit, state officials charge that hundreds of millions of public dollars were spent on unnecessary dental work because Xerox rubber-stamped claims. Xerox has maintained that it properly followed its contract, a document that some lawmakers have argued was poorly written. The federal government has criticized the health commission’s oversight of the contract. 

The fallout from the Xerox contract demonstrates one of the challenges facing state agencies trying to quickly undo a major contract. The health commission fired Xerox but couldn’t stop providing Medicaid dental services. It had to hire another contractor quickly, and without a bid. Yet transferring the work to Accenture, which had served as a subcontractor to the project, still took years

“With a contract like Xerox, you can’t just fire them tomorrow without a replacement, and you don’t have time to competitively bid that to replace them,” said Stephanie Goodman, a spokeswoman for the health commission. “If you don’t replace them, doctors don’t get paid for serving Medicaid patients.”

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Despite past problems, Xerox, Accenture and IBM continue to land millions of dollars in business with the state, in part because they are among the small number of firms able to work on the scale a state as big as Texas demands, according to interviews with people with experience on both ends of the state contracting process.

“They’re all big players in the state because these are big, resource-driven processes and needs that we have,” Isett said. “There are not a lot of vendors that can handle that kind of volume.”

A Push for Temporary "Freeze-Outs"

State Rep. Garnet Coleman, a Houston Democrat first elected in 1991, said he would support temporary “freeze-outs” from future bidding by companies that have been shown to handle past contracts poorly. Yet more important than holding vendors accountable, he said, is boosting the state’s resources so that agencies aren’t outgunned when dealing with the private sector.

“The only way to do outsourcing properly is to have enough people working on the agency side to do appropriate oversight of the company that has the contract,” Coleman said. “What we don’t want is the tail wagging the dog, which is what usually happens.”

Coleman recalled being in the Legislature in the 1990s, when “outsourcing” emerged as a buzzword, coming up constantly in hearings and in policy proposals. Texas was drawing national attention for its efforts to transfer responsibilities onto the private sector, which Republican lawmakers predicted would lower costs while producing a reliable, efficient and technologically sophisticated delivery of services.

In 1997, under Gov. George W. Bush, the state began taking bids to outsource the state’s welfare, Medicaid and food stamp programs, predicting the move would save the state at least $10 million a month. The concept, viewed at the time as the most ambitious privatization effort by any state, fell apart after President Bill Clinton denied Bush’s request for a waiver from federal rules requiring that government employees handle much of that work. Bush accused Clinton of siding with politically powerful labor unions over good policy solutions.

The setback slowed, but didn’t stop, Texas’ march toward privatization. In 2003, Gov. Perry signed House Bill 2292, which consolidated 12 health and human services agencies into five and ultimately replaced thousands of state workers with private contractors handling duties like screening welfare recipients.

More than a decade later, the bill’s author and lead proponent, former state Rep. Arlene Wohlgemuth, described the bill as a success in its goal of shrinking state government and outsourcing services better handled by the private sector. Yet contracting oversight needs to be reformed, she said.

“In my opinion it is one of the greatest weaknesses of state government,” said Wohlgemuth, executive director of the Texas Public Policy Foundation, a conservative think tank. “We need to do a better job of enforcing the contract once we have agreed upon it and auditing those contracts.”

New Directive From Abbott

Last month, newly elected Gov. Greg Abbott directed all state agencies to follow a new enhanced set of contracting rules, including requiring agencies to publicly disclose all no-bid contracts, as well as a “public justification” for use of the no-bid method.

Abbott’s order is just one reaction to the health commission's no-bid contract with 21CT, which has drawn allegations of cronyism and incompetence. Yet for all the coverage that deal has received, it is a relatively small item in state contracting. Most big contracts are for highway projects and with organizations providing health services to Texans. And for the most part, they operate without incident.

“Our largest contracts are for critical services,” Goodman said, referring to HHSC, which represents more than one-third of the state budget. “It’s the companies that pay the doctors for a lot of Medicaid services. It’s the company that keeps your Lone Star [food stamps] card working.

“One area where I think we’ve done a good job is the health plans. We’ve done a lot of good work to strengthen the terms of those contracts and hold providers to them.”

The health plan vendors, who handle billions of state and federal dollars, deliver on time and with fewer problems because there’s more than one contractor in the region, Goodman said. If one had to be pulled, the others remain and there’s no interruption in service.

Contractors are also required by state lawmakers to be more transparent than in the past. If they’re late or are fined for performance, you can see it on the health commission's website. The agency has also, in recent years, shortened the time it takes to go from a warning to a fine for a contractor.

“You don’t get a whole lot of warning now,” Goodman said. “You are out of compliance, you get a fine.”

Discussions continue among lawmakers on what they can do this session to improve contract oversight. Turner has seen his share of contracting scandals over the years draw immediate hot outrage only to peter out with little improvement. He said he hopes this time lawmakers will take contracting abuses more seriously.

“We’re prepared to throw the book after the welfare mom, but the people who are getting the $10 or $20 or $150 million contract, we deal with them in a very different fashion,” Turner said. “When there are questions raised about whether there’s been abuse of the contract, we’re not as animated or outraged.”

Terri Langford contributed to this report.

Disclosure: Accenture and the Texas Public Policy Foundation are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here. 

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