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Xerox Loses $248 Million CA State Contract, Alleges Unfair Practices

10 Jan, 2013

Charleston, WV - January 07, 2013  - Technology giant Xerox alleges West Virginia officials cut a multi-million dollar "side deal" that allowed a California company to unfairly win what is perhaps the largest contract in state government history, according to information provided by the Charleston Daily Mail publication.

The publication's capitol reporter Ry Rivard indicated that Atlanta-based Xerox is challenging the outcome of a $248 million computer contract the state Department of Health and Human Resources signed last month with California-based Molina Medicaid Solutions. Former U.S. Sen. Carte Goodwin, a Charleston lawyer, is representing Xerox. The company wants DHHR to cancel the contract with Molina. Xerox's protest reveals for the first time why the contract was rebid in 2011. The second bid was scrapped in March 2012 after it became tainted by a conflict of interest.

The state is seeking a new computer system to process claims for the state's 420,000 Medicaid recipients. The system, known as a Medicaid Management Information System, or MMIS, will process more than 18 million claims a year for the next decade. Molina runs the current MMIS, but the state now wants to replace that aging system. Last year, the state paid Molina about $40 million, according to state auditor's records. Xerox alleges Molina won the new contracts after a number of DHHR missteps.

First, Xerox alleges DHHR gave Molina access to Xerox trade secrets in 2011.Second, Xerox alleges Molina cut a $10.5 million deal in summer 2011 that allowed Molina to underbid its competitors. Those competitors included Xerox, Texas-based HP Enterprise Services and Maryland-based CNSI. Third, Xerox alleges Molina had special access to DHHR officials who awarded the recent contract. Xerox's protest is the latest twist in a bidding process that has dragged on for nearly two years. Xerox's allegations are also the latest in a parade of horribles spilling out of DHHR, the largest agency in West Virginia government.

In summer 2012, DHHR awarded a marketing contract to the highest bidder. The department's two top lawyers have filed whistleblower lawsuits against the state after they were suspended for questioning that decision. Gov. Earl Ray Tomblin asked for a quick resolution of that situation, but that was in September. A number of other contracting issues have come up, including one that threatened to limit West Virginians' access to hepatitis C tests. 

Perhaps Xerox's most serious allegation involves a 2011 deal worth at least $10.5 million the state struck with Molina. Xerox contends this deal allowed Molina to upgrade the very system that DHHR was trying to replace and then "undercut" competitors when it came time to bid on the new contract. Because of that, Xerox alleges, Molina was able to reduce its cost proposal and become the lowest bidder, something that gave the company a significant advantage in winning the contract last week.

"In other words," Goodwin wrote on Xerox's behalf, "the state cut a side deal with Molina to pour its foundation, and then asked the remaining vendors to bid on the cost of building the entire house." A DHHR spokeswoman said the federal government required the upgrade. Perhaps to underscore the point, Xerox's protest includes cost proposals for a Montana MMIS contract. Montana's Medicaid population is less than half the size of West Virginia's but Xerox underbid Molina in that state by $50 million.

Contracts in West Virginia are awarded on the basis of cost and on a review team's assessment of how well a company's plans jibe with the state's needs. In West Virginia, Xerox came in third behind HP and Molina.Xerox further alleges that Molina officials had special access to DHHR officials when they negotiated the $10.5 million "side deal" because they had contract with Ed Dolly and Tina Bailes, two senior DHHR officials who were also deciding who would win the new contract.

That negotiation "gave Molina an unfair competitive advantage by allowing it access to BMS officials that no other vendor had," Xerox said.
Xerox's protest also reveals publicly the reason the MMIS contract was rebid the first time: DHHR's purchasing office "inadvertently" sent documents containing Xerox's trade secrets to two of the other bidders, HP and Molina.

While HP returned the information unopened, two Molina employees downloaded and viewed Xerox's information, according to Xerox. The state and Molina took steps to correct the problem at the time, according to Xerox. Namely, Molina agreed not to modify its bid as the bidding process moved forward, a step that would ensure that it was not using Xerox's bid to get an upper hand. But then the state decided to rebid the contract. Xerox alleges this made matters worse. "Unfortunately, the State compounded its error by deciding to rebid the contract, thereby allowing Molina to be privy to Xerox's proprietary commercial and staffing information in crafting its subsequent bids," Xerox said. Molina did not comment.

"As this is a protest directed at the state, we cannot comment on this," spokeswoman Sunny Yu said in an email.

DHHR spokeswoman Marsha Dadisman said the department was reviewing Xerox's protest. MMIS contracts are a major business proposition for states and for companies. Some have run significantly over budget. Xerox has a project in New Hampshire that is several years behind schedule and millions of dollars over budget. DHHR scrapped the MMIS bid a second time in March 2012 after it became tainted by a conflict of interest. That was after DHHR's purchasing practices drew the attention of Legislative Auditor Aaron Allred in late February.

Allred began asking then-DHHR Secretary Michael Lewis if a private contractor who worked for both the state and a company that had financial stake in the contract might have used his position to try to sway the outcome. HP said it might employ a subcontractor who, in turn, employed an individual who had some say in the crafting of the state's MMIS bid request. The pushback against Allred was strong, and he was criticized for being a pawn in some kind of corporate espionage attempt against HP. The fight for MMIS contracts across the country is also competitive and it may never clear what has happened behind the scenes in West Virginia. Companies have hired lobbyists to work on the deal. HP, for instance, retained Tom Heywood, who was major player in Gov. Earl Ray Tomblin's two campaigns for governor.

Nancy Atkins, commissioner for the Bureau for Medical Services, which oversees the state Medicaid program, was a consultant for HP before she returned to DHHR in 2009. Atkins has not been involved in preparing or reviewing the contract for the Medicaid computer system.
Molina employs former DHHR Secretary Ruth Ann Panepinto. Molina has a few other revolving-door representatives. Jane Cline, the former state insurance commissioner who left government last year, has lobbied for Molina.

Xerox, of course, now has a former U.S. senator working its case. Goodwin was general counsel to former Gov. Joe Manchin and is now a lawyer at Charleston-based Goodwin and Goodwin, a firm Goodwin's two uncles founded with the help of his father. Xerox is also represented by James Kirby, the former top lawyer for the state's Department of Administration, which oversees most state purchases. Xerox said DHHR's inexperienced purchasing office has played a role in the multi-year MMIS mess. DHHR requested the ability to bypass the state's main purchasing office on certain contracts, including the MMIS. The entire Medicaid staff collectively has about 17 years of purchasing experience. By comparison, the top official in the state's main purchasing office has nearly twice that many years experience.

DHHR is expected to lose its special purchasing powers during this year's legislative session because of what is happening. For info contact writer Ry Rivard at ry.riv...@dailymail.com or 304-348-1796.

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