Terrell State Hospital Privatization Deal Scuttled After Audit

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

A plan to privatize Terrell State Hospital is dead following a scathing audit that raps the state health commission for bypassing its own contracting procedures.

The Texas Health and Human Services Commission canceled the deal — which was still being negotiated — immediately following the Wednesday release of a report by Texas State Auditor John Keel, commission spokeswoman Stephanie Goodman said.

The review of the deal is the latest setback for Texas Health and Human Services Executive Commissioner Kyle Janek. The commission is already being investigated for the way it awarded a $20 million anti-Medicaid fraud software deal to a single bidder in 2012. And late last year, a state audit dinged the agency for a messy telecommunications contract with AT&T that ballooned from $48 million to $80 million.

In this latest report, the state auditor took issue with the commission's October decision to tentatively select Geo Care LLC to run the hospital, one of the state's 10 psychiatric facilities. The audit found that the commission undervalued the contract and skipped having the deal blessed by the Texas attorney general's office, as required.

The commission "did not ensure that its decision to tentatively award a contract to GEO Care, LLC to manage selected operations at Terrell State Hospital provided the best value to the State," the audit said. The findings of the audit were first reported by The Dallas Morning News.

The auditor's report put the privatization deal at $30 million, an early estimate the commission had reported to the Texas Comptroller's Office. That figure was wrong and should not have been provided, Goodman said.

No final price tag for the privatization plan was reached before the project was put on hold after state Sen. Robert Nichols, R-Jacksonville, started raising questions about the deal. The commission's own operating budget for the facility is about $55 million a year. 

GEO Care, which eventually became the company known as Correct Care LLC, issued a statement expressing regret over the state's decision not to proceed. 

"Correct Care is disappointed in the audit's findings. We believe our proposal to build a new Terrell State Hospital on the existing campus would have benefitted patients, the Terrell community and the state of Texas," said Jeremy Barr, a spokesman for Correct Care LLC. 

Late last year, Nichols raised concerns about the project and asked Keel's office to review it. And at a February legislative hearing, Nichols grilled Janek about why the agency moved forward with a plan to privatize Terrell State Hospital, a 288-bed facility with 980 staffers, without vetting it with lawmakers.

Nichols has said he is concerned about efforts to privatize state hospitals because his district includes Rusk State Hospital. In 2012, the state dropped plans to privatize Kerrville State Hospital because the commission found it would not save money or improve patient care.