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October 2, 2014

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Silver State Exchange:

Nevada’s $16 million no-bid project with Deloitte reveals firm’s growing influence in health care

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Gov. Brian Sandoval wanted help. The state’s software to carry out the Affordable Care Act was riddled with glitches in March, six months after it launched.

Sandoval ordered a review, and the $1.5 million contract went to a firm the state knew well: Deloitte Consulting.

Deloitte, one of America’s largest accounting firms, had built part of the software to help consumers sign up online from a home computer. In its audit, Deloitte delivered a damning report that found 1,500 bugs in software built primarily by a competitor. One of Deloitte’s key recommendations: Connect the state’s system with the federal version, HealthCare.gov.

To help accomplish the recommendation, Nevada would need to hire another contractor. Again, it hired a firm it knew well: Deloitte.

The state granted Deloitte a $16.4 million agreement without requiring the company to compete with other firms. Competitive bids, standard practice in public contracting, help ensure taxpayers get the best value. Nevada used an exemption for emergencies.

In total, Deloitte has contracts worth $45 million related to the exchange, with nearly all of it paid by the federal government.

Deloitte’s work in Nevada shows the company’s growing influence in the $1.4 trillion business to build and market President Barack Obama’s Affordable Care Act. A handful of blue-chip companies won bids to build health insurance exchanges in 17 states. The companies included Deloitte, Oracle, Xerox, IBM and CGI.

Many of those states and the federal government struggled to get their software working in the first year.

With enrollment starting again in November, health care leaders are scrambling to repair their broken systems or build new ones. Deloitte’s work in Nevada shows how the state is racing to make that happen and what it will cost.

In several states, Deloitte has become the auditor and fixer for leaders desperate for a solution. The firm successfully built health care software for Connecticut and Kentucky, and both states have become models.

Michael Willden, Sandoval's chief of staff and a former director of the Nevada health department, said Deloitte's work has been "successful without a doubt."

He said no-bid contracts were rare in his time with the health department. But he added: "You have a vendor with successful experience in the state. Why would you want to start from scratch? We just want to change or add to the scope of work."

Bradley Herring, a Johns Hopkins University professor who studies health care policy, said positive “narratives developed” about Deloitte’s work, suggesting the firm had earned a good reputation. “That perpetuates a lot,” he said.

Maryland Gov. Martin O'Malley

"Somebody asked me, 'What have you learned from this experience?' and I've learned we should have hired Deloitte instead of IBM.”

Deloitte officials declined a request for an interview.

In an email statement, spokesman Paul Dunker said the company is “fully committed to the state of Nevada and its communities, and we have been working collaboratively with the Division of Welfare & Supportive Services.” He referred further questions to state officials.

Deloitte and Nevada

Obama signed the Affordable Care Act in 2010. After Sandoval backed a state-controlled exchange in 2011, Nevada became the only state with a Republican governor to do so.

A year later, Nevada approved its first agreement with Deloitte for work on the exchange, a $28 million contract to build software.

The software would handle the complicated task of deciding whether a consumer is eligible for Medicaid, the federal program that provides health insurance to low-income Americans.

Deloitte worked alongside the state’s primary software contractor, Xerox, which won a competitive bid in 2012 for a $73 million contract. The company’s task: build software that enrolls and bills consumers on Nevada’s exchange. Deloitte finished No. 2 to Xerox on the bid.

Deloitte’s and Xerox’s software had to work together. Consumers who wanted to sign up through the state exchange went to the website Nevada Health Link. People who qualified for Medicaid were supposed to be channeled to Deloitte’s software. Everyone else was moved into Xerox’s system.

Click to enlarge photo

Mike Willden, chief of staff to Gov. Brian Sandoval and former director of the Nevada Department of Health and Human Services.

Before Nevada Health Link went live Oct. 1, state leaders knew the software had bugs. They planned to work through the issues in the first few months. But by November, consumers began reporting serious problems signing up and paying for insurance.

The exchange’s director, John Hager, resigned in February. A month later, Sandoval ordered the audit.

That’s when Deloitte auditors stepped in. The 90-page review revealed thousands of problems with Xerox’s work. It also reported issues with Deloitte’s own Medicaid software, though significantly less than with Xerox.

The audit also recommended Nevada tie its Medicaid software into the federal system, a job the state later hired Deloitte to complete.

Dunker, Deloitte’s spokesman, declined to comment on the connection except to say: “Every client weighs their options and makes decisions based on what they believe is best for their project and the people they serve.”

In May, the state fired Xerox and is working with U.S. health officials to use the federal software for the next enrollment period in November. That work applies only to non-Medicaid consumers.

For the Medicaid software, the state turned to Deloitte to tie into the federal software. To make that happen, the Nevada Department of Health and Human Services expanded Deloitte’s existing $28 million contract. The contract’s ninth amendment came in June and was worth $16 million.

That amendment was issued without a competitive bidding process. Nevada’s Board of Examiners, which reviews state contracts, approved Deloitte’s agreement in a June 12 meeting where it considered $296 million worth of contracts. The board includes three statewide elected leaders: Sandoval, Secretary of State Ross Miller and Attorney General Catherine Cortez Masto.

Miki Allard, the health department’s spokeswoman, said they didn’t have time to wait for competitive bids, which can stretch on for months. To meet the November deadline, she said, “it’s going to be a Herculean effort.”

But Herring, the Johns Hopkins professor, said competitive bids often help protect taxpayers.

“The bidding process is super important,” he said. “You need competitive pressures to have government agencies or quasi governmental agencies review these things carefully and pick not the cheapest one, but the one with the best value.”

Deloitte as the fixer

Nevada isn’t the only state that has parted ways with its software builder.

This year, Massachusetts fired CGI. Oregon fired Oracle, and Maryland won’t renew IBM’s contract.

Nevada also isn’t the only state that has turned to Deloitte for repairs in the second year. Oregon, Minnesota and Maryland have hired Deloitte since April for more than $63 million combined.

Despite its successes, Deloitte doesn’t have a perfect record in government information technology projects, an industry challenged by complexity, corporate hierarchy and government bureaucracy. Deloitte had problems with unemployment software it built in California and Massachusetts, where it was fired after receiving $54 million in state funds.

But in the health exchange industry, Deloitte’s stock is rising.

In Maryland, where the failed exchange cost $200 million, Gov. Martin O'Malley told reporters the problems boil down to one mistake:

"Somebody asked me, 'What have you learned from this experience?' and I've learned we should have hired Deloitte instead of IBM.”

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