Canceled contract leads to lawsuit, billing dispute

It is the largest service contract in state history.

It has turned into a huge headache as well.

The contract in question is a $171 million, five-year deal with Affiliated Computer Services to install a new Medicaid claims-processing system for the state Department of Health and Human Services.

Affiliated Computer Services won the contract in 2004. A new system to process millions of claims from hospitals, doctors and others to be paid by the state and federal health insurance program for the poor and disabled was supposed to be ready this year.

It now may not be ready until closer to the end of the decade. The state has been sued by ACS and the company that had the previous contract to process Medicaid claims. And in July, DHHS canceled its contract with ACS.

The state has not yet rebid the job.

"It's still in the planning stages of how it's going to be done," said Mark Van Sciver, a spokesman for DHHS.

The state had been weighing the advantages of canceling the ACS contract and starting fresh at least since April, state records show.

On Feb. 1, ACS had asked DHHS for an additional $42 million, saying the state was responsible for delays that increased company expenses.

DHHS secretary Carmen Hooker Odom turned down the company's request in April, saying ACS had not justified it.

After the contract cancellation, the company sued the state agency, and the two sides appear to be on the threshold of another argument about money.

Renee Montgomery, ACS' Raleigh lawyer, said the state owes the company about $27 million for its work, on top of about $5 million already paid.

The department's contract administrator told the company in an Aug. 1 letter that it calculated $33 million in contract reductions because the company missed deadlines. The company's original bid to replace the existing claims system was $19 million.

Legislators are curious about how the contract went wrong, but don't have a say in how it is handled.

"It's obviously not the way that I would prefer that it goes," said state Sen. Vernon Malone, a Raleigh Democrat.

But Malone, who is chairman of committees in the state Senate concerned with computer technology and health and human services spending, said he was "relieved when the secretary terminated the contract" because it gave the department the chance at a fresh start.

"I thought it would wipe the slate clean and, hopefully, flush away the mistakes that may, and I underscore may, have gotten us where we are," he said.

In the meantime, the department is considering extending through 2009 the contract with Electronic Data Systems, the company that has run the claims system for nearly 30 years. ACS objects to the extension.

Lurking in the background is a DHHS draft audit from two years ago that claimed EDS overbilled the state $19 million by charging too much for computer use. Though legislators wanted the state to try to get the money repaid, there has been no movement to collect.

EDS continues to maintain that the audit was wrong.

"That audit is old news," said Bill Ritz, an EDS spokesman. "It was based on a misunderstanding of the contract language."

DHHS has refrained from acting on the audit until the company's lawsuit against the state is settled, Van Sciver said.