EDS Takes $40 Million Hit on Texas

EDS Takes $40 Million Hit on Texas <@VM>EDS Denies Fraud Charges

Richard Brown

Electronic Data Systems Corp. will have to absorb $40 million in unforeseen development costs on a computerized Medicaid system it is building for the state of Texas.

EDS has fallen more than two years behind on the new system, known as Compass 21, that would upgrade the Medicaid processing system the Plano, Texas, company manages for the state.

The delays are due in part to changes to the original contract requested by the state, and also to problems EDS has experienced in delivering the system initially scheduled for completion in November 1999, said Jerry Miller, bureau chief for information resources for health-care financing at the Texas Department of Health.

EDS and its subsidiary, National Health Insurance Co., have already received payment of $69 million from Texas for the original contract work, and they are due $7 million for the subsequent state-requested changes. The company also has expended about $40 million in unforeseen work on the contract, said Allyson Davidson, National Health Insurance's chief information officer and Compass 21 project sponsor.

EDS agreed to bear most of the additional costs on the project because the state is a long-standing customer, she said.

Electronic Data Systems Corp.
www.eds.com

Headquarters Plano, Texas
Chairman and chief executive officer Richard Brown
Founded 1962
Employees 122,000
Revenue in 2000 $19.2 billion
Net income in 2000 $1.1 billion
New contracts signed in 2000 $32.6 billion
Business EDS offers systems integration, corporate outsourcing, data center management and re-engineering for global corporations and government.


EDS and National Health Insurance of Austin, Texas, are implementing the project together.

To date, state and federal officials have agreed to two extensions of the project. Compass 21 has drawn criticism from state legislators, who have questioned why Texas has paid $69 million for a project that is two years behind schedule.

EDS and state officials, however, contend that the company has fixed problems with the Compass 21 system, and EDS has moved up the launch to August from December.

"We are in good shape," said Miller. The system is now processing claims at the rate of 14,000 per hour, exceeding the 13,000 per hour required by the contract.

"We are in better position now than last year at this time, and we have five more months to tweak the system," he said.

Rep. Garnett Coleman, who serves on the Texas House of Representatives appropriations and public health committees, also expressed confidence that Compass 21 would be successfully completed. Coleman, in fact, said that Texas had demanded a lot from EDS in building the new systems.

"As the customer, we expect them to do back flips," he said.

The demanding requirements were contained in a request for proposal issued in 1997 by the Texas Department of Health for a contractor that would serve as both a technology provider and health insurance administrator. No other companies competed against EDS on the contract.

In October 1997, EDS and the Texas Department of Health signed a two-year, $69 million contract for the ongoing administration of the state's Medicaid program and replacement of the 20-year-old legacy Medicaid management information system.

Compass 21 is designed to process records faster and meet regulatory requirements better than the legacy system it replaces.

During the design phase of the project, the Texas Department of Health added requirements to comply with state and federal regulations and to better meet the needs of the state's medical community. "The state drove the changes ... and there was a ripple effect on the contract," said the health department's Miller.

To compensate the contractor for the changes it was requesting, the state agreed to pay EDS an additional $7 million. EDS has not yet received the $7 million for those changes, Davidson said.

EDS asked the Texas Department of Health for extensions on two separate occasions. The first request was made in June 1999 for an extension to be made until May 2000. The second request was submitted in September 2000 asking for an extension until December 2001.

The extensions required state officials to file revised advance planning documents with the U.S. Health Care Financing Administration, said Miller.

In summer 2000, federal officials had an onsite meeting with EDS representatives and the health department, who assured them that EDS would be able to deliver the system it proposed in 1997, said a HCFA official who asked to remain anonymous.

EDS not only struggled to accommodate modifications the state requested but also encountered technological problems that were keeping it from achieving performance levels the contract required.

When EDS and state officials began initial testing of the system in February 2000, they found that it was only able to process about 600 claims per hour rather than the 13,000 per hour required by the contract.

"It was a startling revelation," said Miller, who said the technological approach for record processing had an adverse impact on the project timeline.

While the contract was in progress, EDS was busy developing "new technologies" that would allow it to process the claims at a faster hourly rate, said Ken Smalling, director of communications for EDS' southwest region.

What's more, EDS is overlapping some of the phases of the project and has come up with new testing and data conversion procedures that will allow it to compress the schedule, said Davidson.

Between now and Aug. 6, EDS will complete system testing, conduct user acceptance testing with the state, convert data, train users and issue new documentation and implement and certify the system, said EDS officials.Electronic Data Systems Corp.'s progress on the Compass 21 project has been obscured recently by allegations that National Health Insurance Co. overcharged the state for administrative costs associated with the Medicaid claims processing portion of the contract.

The contract, awarded in October 1997, calls for National Health Insurance to administer the state's Medicaid program and provide a new computer system.

Local law enforcement officials Feb. 21 raided the headquarters of National Health Insurance in Austin, Texas, searching for evidence to verify the fraud allegations that the company overcharged the state $10 million.

The raid followed a grand jury investigation sparked by anonymous letters to the Texas House of Representatives Appropriations Committee, reported the Austin American-Statesman.

EDS called the allegations of fraud by unnamed individuals "baseless," and said in an official statement that the investigation was "a very Texas-specific issue being driven by political and competitive pressures associated with the state Medicaid budget shortfall."

Moreover, the overbilling allegations have no connection to the Compass 21 project, said Ken Smalling, director of communications for EDS' southwest region.

An official with the U.S. Health Care Financing Administration said the alleged fraud is not necessarily related to Compass 21. HCFA is responsible for seeing that Medicare and Medicaid are properly administered by contractors and state agencies.

Jerry Miller, bureau chief for information resources, health-care financing for the Texas Department of Health, said it would be an immeasurable loss if the controversy forced the state to switch contractors now. Texas would lose efficiencies in the new system, lose its investment to date and jeopardize its good communications with stakeholders in the Texas medical community, he said.

But Rep. Garnett Coleman, who serves on the Texas House of Representatives appropriations and public health committees, said any wrongdoing on the Medicaid program administration portion of the contract would have a bearing on EDS' ability to keep the Compass 21 contract. The appropriations committee can cancel any state contract, he said.

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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