Nearly three years ago a little-known state agency that provides workers' compensation insurance to thousands of Maryland businesses began an unusual relationship with a fledgling company that was among the bidders for a multimillion-dollar contract to manage care for injured workers.
Although the proposal from Statutory Benefits Management Corporation had not gotten top ratings in the competition, it emerged as the surprise winner after the chief executive of the agency abruptly halted the bidding process, threw out all the bids and negotiated a pact exclusively with SBMC. Justification for the action was later called "deficient, almost nonexistent" by an outside auditor.
Since then, records show, the Maryland Injured Workers Insurance Fund, or IWIF as the agency is known, has experienced a series of problems with the new company. Some top IWIF officials have openly expressed frustration and demanded improvements.
Yet when the IWIF board meets tomorrow, it will not be to consider finding a new managed-care contractor. Instead it will consider a proposal to extend the SBMC contract until June of 2000.
And IWIF records show there were plans, though they are now on a back burner, to buy SBMC outright, a deal that would net millions for SBMC officials.
IWIF is an independent state agency created by the state legislature in 1914 to provide workers compensation coverage to companies across the state. Run by a board appointed by the governor, IWIF acts in many ways like a private enterprise.
With $1 billion in assets, it competes directly with private insurance companies. Yet the agency also has two members of the General Assembly on its payroll, and has been amenable to hiring people recommended by politicians.
Its chief executive is Paul M. Rose, an accountant and former legislative auditor, who once owned a Baltimore County liquor store.
A near-insurrection
It was Rose who engineered IWIF's 1996 switch from a nationally-known firm that had been providing the service, to SBMC, a Maryland-based company founded in 1994. It was also Rose who defended SBMC against a near-insurrection by angry members of the IWIF board, and it was Rose who has taken the lead in promoting SBMC despite the problems with the current, $7 million-per-year contract.
The role played by IWIF's managed-care contractor is critical. The company receives the first report of an on-the-job injury and then manages and oversees the care provided. The goal is to get workers healthy and back to work as quickly as possible, a benefit to workers and employers.
In an interview last week, Rose repeatedly praised SBMC, citing the firm's "cutting edge" efforts and crediting it with creating "a visionary managed-care program" specially designed for IWIF's needs.
Start-up problems
Rose dismisses the criticism of SBMC, much of it from members of his own staff, as the result of normal start-up problems.
"It's not like handing off a baton in a relay," Rose said of the changeover to SBMC beginning in mid-1996.
And Louis J. Nicholas, the chief executive officer of SBMC and the head of its parent company, said his firm has made major improvements at IWIF.
"Did we make them more cost-effective and efficient? Positively we did," said Nicholas.
The history of the contract to manage medical and rehabilitative care for injured workers goes back to 1993, when IWIF chose Intracorp, a national firm that is a subsidiary of insurer Cigna Corp., as the provider. But as Intracorp's three-year contract neared an end, Rose began to raise questions about the company's performance.
At its March 1996 meeting, Rose informed the IWIF board that with the Intracorp contract due to expire June 30, the agency would be seeking proposals in a process called a "Request For Information" or RFI. Fred J. Pelosi, then an IWIF vice president who was put in charge of the procurement process, assembled a selection committee to review them.
By the May 24 deadline, Intracorp and 11 other interested parties,including SBMC and the Johns Hopkins University, had submitted proposals to take over the entire contract. Several other firms submitted proposals to take over parts of the program.
Just as the selection team began the review process, however, Rose ordered it halted, contending that none of the proposals was adequate. Instead, Rose later told the board, he decided to pursue a contract with SBMC because SBMC was willing to "customize" its proposal to meet IWIF's needs.
By that time only five of the other proposals had even been looked at by any of the committee members.
'Not a unilateral decision'
Rose said that the decision to scrap the bids was not his alone, but had the support of key staff.
L "It was not a unilateral decision," he said in an interview.
However, in a May 22 memo to Rose, Pelosi outlined a series of deficiencies in the SBMC proposal that had been detected by the selection panel. Among the problem areas cited was the lack a detailed implementation plan, the lack of a medical network to provide services, the failure to provide financial statements and unclear pricing.
Another member of the selection committee, who asked not to be identified, said SBMC rated "dead last" at the time the review was halted.
Nevertheless, Rose personally negotiated a contract with SBMC. series of suggested changes in the contract from Pelosi and his staff were not adopted, memos show.
In a letter to the then-board chairman, Rose wrote that "the urgency of the managed-care program and the related impact on operations compel me to act immediately."
Members of the IWIF board later complained in an executive session that Rose subsequently presented them with the SBMC contract at the last minute.
"The board was presented with a contract already signed, sealed and delivered," board member Joseph M. Coale III is quoted as saying in the minutes of the Dec. 17, 1996 closed session.
Bid process questioned
As a result of complaints from Coale and others, the board eventually hired accounting firm Ernst and Young to review the process leading to the contract. And the auditors reported they were unable to figure out from reviewing agency records why the bids were suddenly jettisoned.
"It is not clear why awarding a contract became a matter of urgency less than two weeks after the closing date for the receipt of the proposals," the audit report states.
That report also concluded IWIF had failed to follow its own established procurement procedures, including maintaining records to justify its actions.
"The file did not contain material documenting key parts of the procurement process," the report states. "There was no documentation in the file for the need for haste in changing the procurement to a contract for a customized system."
"There was no evidence in the files of a written price evaluation, which is required by IWIF procedures," the report adds.
In an April 21 memo responding to the critical audit report, Rose defended his actions.
"In summary while some of the documentation was indeed technically missing from the procurement file, there were other documents, as referenced in the analysis, which justified the deviation from the standard procedures and requirements of the procurement policy," Rose wrote.
He added that further review of the bids would have been "useless and a waste of time for all concerned."
Rose told the IWIF board in a June 5, 1996 memo that, "We are confident of SBMC's ability to plan, design and manage a fully integrated medical management system to support our claims department." SBMC, Rose assured the board, "can begin immediately."
Visits to headquarters
In fact, even before SBMC had submitted its bid for the new contract, the firm's president, Spencer Vavas, had become a frequent visitor to IWIF's headquarters on Loch Raven Boulevard, and had sent a one-page memo to Rose relating to IWIF operations.
Nicholas said Vavas's role was informal and was solely an attempt to make an assessment of IWIF's operations. He said SBMC had not been paid.
He likened Vavas' visits to IWIF headquarters to "a doctor visiting a patient to get a pulse and a temperature. You go in and get information," he said.
Interviews with current and former IWIF staffers and a series of internal memos and reports show that there were considerable problems once SBMC won the contract and officially took over the program. They describe the situation as chaotic.
Improvements demanded
In a Nov. 18, 1996 letter to SBMC, a clearly frustrated IWIF official wrote, "I am demanding that SBMC muster the resources to assist you to correct the problems immediately and bring this program to the level of performance promised."
The situation was so serious that IWIF staff and equipment had to be lent to SBMC. And the old contract with Intracorp, which was supposed to expire June 30, was extended to the end of August. Rose insisted that the work Intracorp did in July and August was not redundant, but necessary to assure a smooth transition.
Nicholas blamed the start-up problems on IWIF's former contractor and said SBMC was forced to take over the operation in an unusually short period of time.
SBMC's current contract runs out in June and Rose already is moving to extend it. The agenda for the board's November monthly meeting tomorrow includes the proposal to keep SBMC on board until June of 2000.
A series of memos were attached to the agenda to justify the extension, which is being proposed without bids.
One reason cited was a general improvement in IWIF's fiscal condition, although there was no direct evidence SBMC had anything to do with this.
Management shakeup
But the memos also disclose that SBMC has just finished a major shake up of its management team on the IWIF contract. Among those transferred to other duties was company President Spencer Vavas.
In an interview last week, IWIF board Chairman Stanley Potter defended the original contract award and the recommendation for an extension.
"They [SBMC] have been able to integrate their programs into our system," he said.
Asked about problems with the start-up, Potter said, "There's always start-up problems." Nicholas said the recent administrative shifts were due to a change in focus from creating a new system to operating that system.
"We built the car. Now we need someone to drive it," he said.
Vavas declined to comment on the state contract, stating that it was against his policy to comment on matters relating to company clients.
IWIF board members contacted said they were still reviewing the contract extension proposal and had not made a decision on how they will vote tomorrow.
Just before Rose proposed extending the contract, IWIF records show plans were in the works to have IWIF buy the company outright in a deal that could be worth millions to SBMC owners.
Proposed acquisition
In a public notice issued Oct. 9, IWIF invited financial consulting firms to submit proposals "for analysis of a prospective business acquisition."
Bidders who attended an Oct. 15 conference asked the name of the company IWIF is planning to buy.
"The company is Statutory Benefits Management Corp," an official transcript of the session states.
"By looking at your proposal, it seems like you're ready to acquire this company," one of the potential bidders stated, according to the transcript.
"Yes," was the one-word answer from the IWIF official.
Records filed with the U.S. Securities and Exchange Commission show that SBMC was, until recently, a wholly owned subsidiary of United American Healthcare, a Michigan firm. United American recently sold SBMC and other firms to a company headed by Nicholas for $17.75 million.
The SEC filings, dated Sept. 28, indicate, however, that another sale of SBMC may be imminent. A 23-page stock pledge agreement indicates that SBMC could be sold for $11 million or more.
Rose said that none of the potential bidders responded to the proposal and that the purchase plan was now "a back-burner issue."
Nicholas, who said the SEC filing was not accurate, said it will be up to the board to decide whether or not to extend his company's contract.
"It is a huge operation," Nicholas said of IWIF, adding that his firm's $7 million-a-year pact "is not a big deal."
Pub Date: 11/23/98