Health exchange relies on non-competitive bidding to fix website

A look into how Md.'s health exchange awarded contracts.

As the state struggled under the national spotlight to fix its deeply flawed online health insurance marketplace last year, officials awarded more than $84 million in contracts without competition, about a third of the money spent on the troubled website.

About 15 companies benefited from the "sole-source" and "emergency" contracts that did not use competitive bidding, according to documents obtained by The Baltimore Sun through public information requests.

The Maryland Health Benefit Exchange's lack of transparency has been criticized by government watchdogs and state officials, including Gov. Larry Hogan during his successful campaign, but the amount of the noncompetitive awards is now raising eyebrows among government procurement experts and prompting pledges from the administration to curtail the practice.

"The exchange ran a serious risk that by sole-sourcing these big and important contracts it would end up paying more and getting a lower quality or slower performance," said Charles Tiefer, a University of Baltimore law professor who served on the federal Commission on Wartime Contracting in Iraq and Afghanistan.

"If I told my law students that an agency used sole-source contracting so much of the time," he added, "they'd be appalled, and they would wonder why we have competition laws at all."

Exchange officials acknowledge that they relied heavily on noncompetitive contracting but say they faced a true emergency in trying to launch the website and then rebuild it when the first one didn't work properly, because deadlines loomed to provide health coverage to thousands of uninsured residents.

The state was also taking flak for having launched one of the worst state exchanges at a time when the lieutenant governor, who oversaw health care reform, was running an ultimately unsuccessful campaign for governor and the governor at the time was considering a run for president.

The situation was "unprecedented," said Carolyn Quattrocki, the exchange's executive director. "We couldn't fail again."

After passage of the Affordable Care Act in 2010, the General Assembly passed legislation that gave the board of the quasi-governmental exchange permission to bypass the normal state contracting system to save time, a move that drew criticism from state Comptroller Peter Franchot.

Contracting troubles developed almost immediately. The prime contractor began feuding with a subcontractor that it hired without exchange officials' knowledge. The deeply flawed website crashed on its first day and limped through open enrollment. Exchange officials later decided to dump the contractor and its technology.

Then-Gov. Martin O'Malley said the state would sue the contractor, Noridian Healthcare Solutions; officials now are trying to settle the matter.

After firing Noridian, exchange officials needed to quickly build a new website before the next open enrollment period, just seven months away. That's when they accelerated the use of single-source and emergency contracts, documents show.

Officials repeatedly cited tight deadlines and "uniquely" qualified vendors in the documents. Some worked on the state of Connecticut's exchange technology, which Maryland adopted to successfully revamp its site and enroll about 290,000 people in health insurance this year.

"It's really a tremendous story," said Quattrocki, who was brought in when the website was foundering. "Looking back, I think we made good decisions. There were exigent circumstances and extraordinary efforts and we were successful, and that was by no means guaranteed."

But procurement experts such as Tiefer said competitive bidding might have provided better guarantees of quality, efficiency and pricing.

"Holding competitions and doing contracting the right way couldn't have done any worse, and may have done better," he said.

The exchange decided to switch to Connecticut's technology after an assessment by Optum/QSSI. The Columbia-based contractor, also hired to help the troubled federal health exchange, was brought in on an emergency basis in late 2013 to help make the flawed site functional enough to enroll consumers.

The two-month contract was worth $4 million, but as QSSI worked through or around technical problems, the contract was modified three times to expand responsibilities, each time without competitive bidding, records show, and was eventually worth about $36 million.

QSSI did not respond to requests for comment, though Quattrocki praised the firm's performance.

Exchange documents show the move to the Connecticut technology was supported by Isabel FitzGerald, the state secretary of information technology, who came in to oversee website fixes.

While the code was free, it needed to be retrofitted for Maryland. Documents show the exchange reached out to just one other company that couldn't identify the necessary resources before awarding that contract to Deloitte LLC for $41 million, the largest of the emergency awards.

FitzGerald's husband, Paul Fitzgerald, was a principal at Deloitte, a national consulting firm. The Maryland Ethics Commission signed off on it after FitzGerald sought its advice, so the exchange board was satisfied, Quattrocki said.

Fitzgerald, who left her position recently after being widely praised for her role in fixing the site, declined to comment on procurement. Deloitte did not respond to request for comment.

Xerox garnered a pair of no-bid awards, including a $6.9 million information technology contract and a $430,000 project management contract.

The company had a long-standing relationship with the state and FitzGerald, as it worked on technology related to Medicaid, which also needed to be integrated with the new health exchange since it enrolled people in both public and private health insurance.

In emails obtained under public-records laws, FitzGerald discussed awarding Xerox another sole-source contract for work then done by Noridian because the exchange was about to cut ties with the firm. But the state did not make the award after FitzGerald complained at least twice that Xerox was "greedy."

The state still did business with Xerox, however, awarding it two more contracts through competitive bidding, including a $29 million multi-year contract for website hosting, one of the exchange's largest awards. Xerox declined to comment, though Quattrocki said the company offered the best deal among many vendors that bid.

Maryland, which chose to run its own exchange rather than use the federal website, was not the only state to rely heavily on no-bid contracts.

"High levels of sole-source, uncompeted contracts is a major challenge in every system, including in the federal one," said Daniel I. Gordon, senior adviser to the government procurement law program at George Washington University Law School.

He said no-bid contracts were considered such a problem in federal contracting that President Barack Obama issued a memo in 2009 expressing the need to reduce such "wasteful" practices, though there is no evidence the practice has subsided.

In California, the legislature closed a loophole after media reports of health exchange officials awarding $184 million worth of no-bid contracts, or 20 percent of its contract spending. Most of the money in California and Maryland came from federal coffers.

The governor of Pennsylvania also recently banned noncompetitive bidding, though the move was aimed at private law firms and unrelated to the health exchange, according to Common Cause officials in Pennsylvania.

The consumer group has been working on the issue nationwide and believes many states are beginning to curtail the practice as taxpayers demand better financial oversight in tight economic times.

Jennifer Bevan-Dangel, executive director of Common Cause Maryland, said the group expects the state to move away from such contracting.

"This is a very significant number of bids — and a very large amount of taxpayer money — spent on a noncompetitive bidding process," she said of the exchange contracts. "Unfortunately, this seems to be an all-too-common problem in Maryland right now. Governor Hogan has seen these issues emerge at the Board of Public Works meetings, and we urge him to begin a process of comprehensive procurement reform."

Even on the contracts that were competitively bid in Maryland, it's not easily determined how many vendors were considered. Some contractors complained they were not given an explanation why they lost, though experts including Gordon said losing bidders usually have the right to a prompt debriefing where they can learn why they lost.

Exchange officials said they are considering what information to offer about contracting online and what format would be easiest for vendors and the public to access. They also are formalizing the existing process so the exchange staff can ensure all policies are followed, Quattrocki said.

Now that the exchange is up and running smoothly, she said the exchange also "is moving away from a reliance on emergency and sole-source contracts."

Hogan, meanwhile, has replaced some members of the exchange board. His office issued a statement reiterating his opposition to noncompetitive bidding on the exchange and beyond.

"Since taking office, Gov. Hogan has directed agency chiefs to correct issues related to single- and no-bid contracts," the statement said. "Without a thorough and competitive bidding process, taxpayers are unable to trust that their money is being spent as efficiently as possible."

meredith.cohn@baltsun.com

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