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State audit criticizes health exchange procurement practices

Baltimore, MD -- From left, Stephanie Baptiste, Jaime Thomas, and Pamela Williams were among 14 new navigators being trained last fall to help people sign up for insurance coverage with the Maryland Health Exchange.  Amy Davis / Baltimore Sun

A state legislative audit sharply criticized Maryland health exchange officials for a wide range of fiscal failures, including how it awarded contracts to companies building the state's initially troubled online insurance marketplace.

The rollout of the Maryland Health Connection in 2013 was one of the worst under President Barack Obama's landmark health care reform initiative. The state ended up cutting ties with the initial contractor and replacing the technology behind the exchange.


In the report made public Friday, the Office of Legislative Audits also criticized exchange officials for failing to verify work done by vendors, contractors and grass-roots organizations; awarding too much in federal subsidies designed to help residents buy insurance; and not adequately securing the personal information of enrollees.

Health exchange officials said they did not agree with all the findings of the report — which covered the period from June 1, 2011, to July 23 of last year — but had already made changes to address most of the problems outlined in the audit. Some of the issues were addressed before the audit was completed.


"This was a young agency still in the process of putting in place best practices when it comes to fiscal oversight and protocols," said Carolyn Quattrocki, executive director of the Maryland Health Benefit Exchange, the entity that administers the online marketplace in which people buy plans. "We had different perspectives on some of the findings. But the important point is that we have made huge progress in a lot of areas."

The audit's conclusions gave credence to the chorus of critics, including Larry Hogan during his successful campaign for governor, who have questioned a lack of transparency at the exchange and raised concerns about how it was run. Under state law, the exchange board operates under a procurement process separate from normal state contracting guidelines.

The website crashed on its first day of operation in October 2013, hindering efforts by thousands of Marylanders trying to buy health insurance. The system's persistent troubles prompted the state to sever ties with the original contractor, Noridian Healthcare Solutions, which agreed to pay the state $45 million to settle claims about its role in the botched launch without admitting wrongdoing. Maryland eventually adopted technology used to build Connecticut's successful exchange.

The exchange spent $264.3 million of mostly federal funds through June 30, 2014, to get up and running and fix its problems, the audit found. It awarded $427.8 million in contracts in roughly the same time period.

Hogan's spokesman on Friday called the flubbed rollout of the exchange "a debacle" and "fiasco" while saying the items identified in the audit are unacceptable.

"Since taking office, the governor has been very clear about his procurement expectations for state agencies," Hogan spokesman Matthew A. Clark said in a statement. "Sole source contracts, poor record keeping and inadequate contract management all waste taxpayer money and are simply not acceptable practices in the Hogan administration. In the interest of Marylanders who fund the Exchange, it's essential that the issues raised in the OLA report are addressed."

A Baltimore Sun investigation earlier this year found that the exchange 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 Sun through public information requests.

State Sen. Guy Guzzone, who co-chairs the General Assembly's Joint Committee on Audits, said that while the findings were unsatisfactory, they were not extraordinary. He said he saw nothing in it that pointed to corruption or called for a purge of top leadership.


"We have had [audits] where single employees have taken liberties with contracting," he said. "This is not that kind of case."

Guzzone, a Howard County Democrat, said the agency's repeated disagreements with the auditors' findings reflect an "ongoing trend" in state government. But he noted that the exchange generally concurred with the auditors' recommendations and said the agency is making every effort to carry them out.

"As long as you make the improvements, I think the legislature will ultimately be pleased," he said.

The audit pointed out several instances in which sole sourcing and emergency contracts posed a problem.

State auditors reviewed five purchasing contracts worth $96.5 million and found the exchange did not follow its own procurement policies and could not provide documentation that it negotiated the best prices and terms.

"Consequently, there is a lack of assurance that [the exchange] obtained these services at the best value," the auditors wrote.


The report also criticized two contracts totaling $2.8 million awarded as emergency procurements that were for four- and five-year terms, saying they should have been for shorter periods. It also singled out two contracts for project manager support and software maintenance services that were not put out to bid when there were other vendors that could do the job.

House Minority Leader Nic Kipke said the audit suggests the exchange itself — and not vendors or the federal government — was responsible for the failed rollout.

"This just confirms that the problems we experienced were a result of mismanagement," said Kipke, a Republican from Anne Arundel County. "When the exchange had its initial rollout and everyone saw the disaster unfold, there were excuses given, [that it was] factors out of our control. …

"This audit confirms that the organization that was charged by the legislature to set up and establish this program to provide access to health insurance for Marylanders just did a terrible job."

Health exchange officials have acknowledged 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.

Among other findings in the audit:


•The agency paid $8.2 million in hourly wages to vendors without getting payroll records to make sure the work was done. Quattrocki disputed that finding and said exchange officials held regular meetings with and got consistent updates from vendors.

•The state also lost $199,000 in interest payments from the federal government because exchange officials did not submit requests for reimbursements from federal officials in a timely manner.

•The exchange didn't provide proper documentation to verify $23.4 million in outreach and enrollment work done by six "connector entities."

"It shows how these loopholes in our procurement system have become a huge opportunity for a very flawed process," said Jennifer Bevan-Dangel, executive director of the government watchdog group Common Cause Maryland. "The problem is the process as set could work if they followed it. But we consistently see these exemptions when an agency is allowed to go outside of it. The health exchange is a good example of that."

Guzzone said that when an audit turns up findings that are "egregious," his committee generally holds hearings.

"This is not one that would rise to that level," he said.


The audit also found that the exchange board violated open meetings laws, something it has already addressed. It also said that insufficient security mechanisms were in place to properly protect the personal information of hundreds of enrollees, an allegation Quattrocki disputed.

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The state auditors also conducted a performance report to identify what led to the troubled launch of the exchange. That will be released at a later time.

Former Gov. Martin O'Malley's presidential campaign referred questions about the audit to his former health secretary, Joshua Sharfstein.

"It shouldn't be a surprise that the first year of the exchange did not go as planned or as well as we wanted," said Sharfstein, who is now an associate dean at the Johns Hopkins Bloomberg School of Public Health. "But Maryland was the only exchange that was rebuilt, very effectively, to the point that is now a national model. And Maryland is the only one that has recovered funds from one of its vendors."

Sharfstein, who is not speaking on behalf of O'Malley's campaign, said that he didn't expect the audit's scrutiny to affect how O'Malley explains what happened to the exchange on the campaign trail.

"A lot of people know the story of the first year being really difficult, but people don't know the story of how, despite the technical problems, we enrolled hundreds of thousands of people in health care," Sharfstein said. "I would expect the governor to talk about how he led the rebuilding."