Analysis: State In No Hurry to File Suit Over Health Exchange, Faces Disclosure of Improper Actions

By Charlie Hayward,

State officials responsible for overseeing construction of the health exchange platform faced two frightful choices under the contract to produce the website in the months preceding the Oct. 1, 2013 ”go live” date:

-- Terminate Noridian, and fail to bring any health exchange platform to market; or

-- Keep Noridian on the job while violating major contract provisions designed to maintain equilibrium between payments to Noridian, and the quality and completeness of their work.

The state decided on the latter.

The decision crept into existence over several weeks, while executives were wrangling over a project they were unfit to manage; one they’d lost control over. Consequently, the exchange paid 97%, or $50 million, of the $51.5 million fixed price for an openly defective platform—one which was constructively abandoned on opening day Oct. 1, and formally abandoned six months later.

The decision enabled top officials to bet against the odds that the platform would function at a fraction of its design. And it would buy time while the state blamed Noridian, and before anyone could figure out who was to blame.

The overpayments appear to exceed $10 million. They were improper because they were made in violation of the express provisions of Noridian’s contract. And if, as appears likely, they were charged to the U.S. Department of Health and Human Services, they are a questionable use of federal money.

Root causes originated before October 2011

According to Noridian’s president Tom McGraw, the exchange’s original request for proposals dated October 2011 identified 261 requirements. After the contract was awarded, McGraw said the exchange “added 227 new requirements, changed 28 requirements and dropped 73 requirements.”

The evidence suggests these changes were made without at the same time amending the contract or pricing the modifications.

McGraw’s assertions indicate the original design specifications were almost certainly unfit to put out for public bidding, because they would be “unbidable” and “unbuildable.” This would explain the low number of bidders, who knew virtually all risk of performance would be on the successful bidder because of the way the contract was written.

The extent of the changes alleged by McGraw demonstrates the thorough contradiction between the O’Malley-Brown administration’s political vision to elevate Maryland to the top of Obamacare implementation, and the realities of cost, risk, and schedule.

This built-in contradiction trickled down into the project management team, where we now know nobody was in charge; giving the project no chance of succeeding.

Contract’s terms included multiple safeguards against overpayments

Noridian’s official contract ran just over 300 pages, including highly technical specifications describing functions the platform would perform, and computer programming methods to follow. The contract included administrative provisions designed to assure that cumulative payments would not exceed a reasonable approximation of the percentage of work actually finished. These provisions were called Retainage and Progress (or milestone) Payments.

Retainage was a portion of the contract’s price deliberately withheld until work was finished, in order to assure the contractor would satisfy its obligations to meet deadlines and build a quality product.

Section 1.36, Retainage, specified 25% of each invoice would be withheld until Noridian satisfactorily met all contract requirements. According to the O’Malley administration and its top agency officials, Noridian never met all contract requirements. The exchange paid all but $1.5 million of the contract price despite the alleged defects.

Faulty work was improperly paid

The contract specifically defined seven milestones events which were intended to limit cumulative payments to work actually finished.

The contract’s Scope of Work consisted of 14 functional elements. Almost all of the 14 required “functional capabilities” were either only partially operating or were useless on October 1 because they did not work or were not even built. Moreover, Noridian failed to meet most of the contract’s Technical and Operational Capabilities and Service Level Metrics.

In the contract, milestone payments #5 and #6 were calibrated to federal certifications and approvals. If Federal concurrences were conditioned on resolving questions then payment was not due until all questions were addressed. Milestone payment #7 was due upon completion of the fully-functional exchange. According to the O’Malley administration, Noridian did not deliver a functioning exchange. The money was paid anyway.

Abnormal contract termination

Noridian was terminated Feb. 23, 2014 and a month later O’Malley, referring to the now-abandoned platform, declared the “…ship couldn’t even get out of port.”

Yet Noridian was terminated via phone call, leaving doubt which of two termination methods in the contract was used: “default” or “convenience.” The type of termination has crucial significance about who will pay the consequences of default. In fact, the act of terminating Noridian did not itself conform to the contract if the exchange made the termination without reference to type.

Problem with performance bond

A mandatory performance bond was meant to insure the owner (the exchange) against the contractor’s failure to perform. My earlier story said such a bond might have been a theoretical solution to avoiding litigation. If the state would only invoke its rights against the surety, it wouldn’t need to spend good money after bad to clean up the failed exchange platform.

Assuming the exchange secured the bond, it now seems highly unlikely the insurer would be on the hook for paying one penny. This is because the exchange did not take the actions required in law to minimize the surety’s loss on the bond. Those actions are listed in my previous story.

Election season brings half-truths

And now the state is revealing an extreme distaste for “rushing to file suit,” while Noridian acts as its somnambulant partner.

Democrats all over the state have been running from the costly exchange problems. Instead, we hear only about the high number of enrollments.

A bill (HB 1361) sponsored by Del. Kathy Szeliga, R, Baltimore and Harford Counties, would have required an audit to be completed by Sept. 1. It failed to attract any Democratic sponsors, and died in oblivion.

Instead the legislative audit will finished some time after the election, as will the report from the federal inspector general on the use of federal funds.

Millions in damages

The state arguably suffered hundreds of millions of damages from Noridian’s alleged failure to perform the contract. Litigation is expensive and will damage the reputations of everyone involved. It could conceivably bankrupt Noridian.

The decision by the state to bring a case would invite countersuits, resulting in lengthy trial proceedings. Taxpayers will be the paymasters, even where the state itself played a major role in the project’s failure.

The Affordable Care Act gets its name from the purported affordability of insurance premiums. It is surely not named after the massive, continuing and largely hidden federal and state costs of implementation, including uncounted billions of waste and improper payments.

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