State, US investigations focusing on the cost of no-bid arrangement
By Kay Lazar
Globe Staff / December 24, 2010
The state inspector general’s office is investigating the Medicaid program’s contracting arrangements with the University of Massachusetts Medical School, examining whether no-bid contracts the school routinely receives to manage state health programs could be costing taxpayers too much money.
The federal government is conducting its own investigation, scrutinizing the cost of the UMass contracts.
The focus of investigators is Commonwealth Medicine, a UMass division that pays its top two executives more than $400,000 each in salaries and benefits, more than is paid to the governor and Medicaid director combined.
The division has received $415 million since 2007 to manage portions of the Medicaid program and to chase federal money owed the state. Created 11 years ago to provide expertise to the state more cheaply than it would have to pay private contractors, Commonwealth Medicine has evolved into something far more extensive.
It now administers big chunks of the Medicaid program, which has allowed the state to shift costs out of the state budget. More than 100 Medicaid billing staff members have been transferred to the UMass payroll.
The no-bid contracts that the state gives to Commonwealth Medicine are allowed under state law, on the assumption they save the state money, compared with awarding the work to private vendors.
But whether that is the case has been challenged by senior managers in the state’s Medicaid bureaucracy. In August, four top staff members warned that UMass could not handle a proposed $35 million contract to run a customer service operation for 1 million Medicaid recipients and that UMass had not demonstrated that it would provide the best value.
The inspector general’s investigation began after a request from a legislator to examine the proposed contract, and it has since expanded into a broader look at the no-bid contracts awarded Commonwealth Medicine by the Executive Office of Health and Human Services.
The $35 million contract “has really opened our eyes," Jack McCarthy, senior assistant inspector general, told the Globe.
“We are going to ask, ‘How did you determine that this is best value for the state, versus an outside vendor,’" said McCarthy, whose office has a mandate to detect fraud, waste, and abuse in government.
Dr. JudyAnn Bigby, the state health and human services secretary, defended the relationship with Commonwealth Medicine, saying the collaboration has let her agency tap expertise it could not otherwise afford.
Commonwealth Medicine, Bigby said, has been “instrumental in performing a whole set of very complex services . . . that would cost us much more money without their partnership."
The agency’s contracting with UMass started about 20 years ago and has grown considerably in the past decade, after UMass formed Commonwealth Medicine.
Combined state and federal payments to Commonwealth Medicine for the no-bid Medicaid contracts jumped 50 percent, from $89.6 million a year to $137.6 million, between 2007 and June of this year, according to state records. That does not include millions more that Commonwealth Medicine received to manage other state health programs, such as Prescription Advantage, a drug insurance plan that assists low-income seniors. State records show Commonwealth Medicine has received $305 million since 2007 for that no-bid contract.
Bigby said she did not know whether private contractors would be able to provide services more cheaply if the agency allowed them to bid on the work. But Bigby said UMass recently was given a contract to handle billing services in her agency’s departments of mental health and developmental disabilities at a price that was about half the cost the state was paying a private vendor.
Commonwealth Medicine’s executives said it is hard to compare the cost of their work to that of private firms because much of what they do is unique. For example, they said they have developed novel approaches to capture money owed the state by the federal government, work that is so time-consuming that most private vendors will not tackle it.
“So much of what we bring to the table just doesn’t have a parallel in the private sector," said Marc Thibodeau, Commonwealth Medicine’s director for health care financing.
The state’s health agency routinely awards no-bid Medicaid contracts to Commonwealth Medicine under state contracting rules known as Interdepartmental Service Agreements, or ISA’s, which allow state agencies to give contracts to each other without seeking outside bids, as long as they can demonstrate that the contracts provide “best value" compared with services from outside vendors.
The rules give agencies wide latitude in demonstrating that point, and state Comptroller Martin Benison, whose office oversees contracting, said it is mostly left it up to the agencies to make their own determination.
After it gets state contracts, Commonwealth Medicine usually subcontracts the work, again without bidding, to two nonprofit affiliates that are run by the same UMass executives who direct Commonwealth Medicine. The no-bid practice is allowed by a 1992 state law.
Senator Michael Morrissey, a Quincy Democrat who was elected Norfolk district attorney in November, said he requested that the inspector general investigate the proposed $35 million contract with Commonwealth Medicine after a constituent raised questions earlier this year.
Morrissey said that it appeared to be a conflict of interest for Commonwealth Medicine to receive a contract to run a customer service center when, at the same time, it also has a state contract to evaluate the quality of services provided in that Medicaid contract.
“It made all the sense in the world to me to have a third, disinterested party to take a look . . . to ascertain whether or not this is the direction we should be going," Morrissey said.
After the legislative request for an investigation, Bigby invited the inspector general to review the contract.
Shortly after that, Russ Kulp, a Medicaid director of operations, and three of his colleagues, wrote in an August memo to their bosses that giving Commonwealth Medicine the contract posed a “profound threat to our ability to deliver quality customer service."
They added, “We circumvented the process of evaluating vendors and choosing the one that demonstrated best value."
The managers said UMass had not demonstrated the “ability or experience" to handle such a massive operation, yet the state was poised to give Commonwealth Medicine the contract, to start Jan. 3, without receiving anything in writing from UMass about how it intended to fulfill its obligations.
Kulp declined comment.
His memo was not the first to warn of potential problems.
A separate four-member state team assessed the risks of giving the contract to UMass and, in an internal memo dated March 2009, concluded that transferring the work from the current outside vendor to UMass would be risky, because UMass was ill-prepared to provide some key services.
Internal state documents obtained by the Globe also suggest that taxpayers probably would have ended up spending more with Commonwealth Medicine for the customer service contract than with an outside company. A draft budget shows that Commonwealth Medicine proposed to charge about the same amount as the current vendor, but a footnote indicates that it would not offer key services provided by that vendor: customer assistance in enrolling in health insurance with managed care companies. That work was to be subcontracted by the state to an outside company.
The inspector general has urged the state to competitively bid the entire customer services contract. The state is negotiating with the current vendor to extend the contract into next year and will consider competitively bidding it after that, said Bigby, the health secretary. She said her agency believed that Commonwealth Medicine was a good choice to handle the contract, despite staff concerns.
Federal regulators are also looking into Commonwealth Medicine. Richard McGreal, associate regional administrator for the federal Centers for Medicare and Medicaid Services, said his staff is conducting a “focused review’’ of Massachusetts Medicaid spending, targeting administrative costs for UMass.
The contracting arrangement between UMass and the state has benefits for both parties.
Commonwealth Medicine typically receives a 19 percent overhead fee for each Medicaid contract. That money goes directly to UMass medical school’s general operating budget.
State records show that the school’s deputy chancellor for Commonwealth Medicine, Thomas Manning, received $526,000 last year in total compensation, and that Joyce Murphy, vice chancellor and chief operating officer of Commonwealth Medicine, was given $414,854. Six other Commonwealth Medicine executives received in excess of $200,000.
For the state, the contracting arrangement reduces stress on its budget. Because of federal Medicaid rules, Massachusetts is able to make its Medicaid budget look smaller, even though, in the end, taxpayers see no savings.
Here’s how it works: For every Medicaid-related service the state’s health agency awards to Commonwealth Medicine, it reduces by about 50 percent the amount the Legislature must appropriate for the work and shifts that spending to UMass books.
UMass puts up the rest, and the state’s health agency then seeks federal reimbursement for Commonwealth Medicine’s share of the bill, plus its fees, and forwards that money to Commonwealth Medicine.
Kay Lazar can be reached at klazar@globe.com.
© Copyright 2010 Globe Newspaper Company.
“
