State of Neglect: Outsourcing enriches contractors, ex-legislators
By GREGG JONES / The Dallas Morning News
Monday, January 5, 2009
For the weak and the vulnerable, Texas has long been an especially hard place. Year after year, national surveys place the state at or near the bottom in such categories as assistance to poor children and the malnourished, treatment of the mentally ill and care of the disabled. This story is part of The Dallas Morning News' 'State of Neglect' series examining how the state determines whom it protects and whom it excludes– and how special interests and their lobbyists strongly influence the writing of laws and the workings of state government.
Texas will pay private companies billions of dollars this year to provide health and human services to its neediest residents. Contractors will coordinate care and process benefits, operate call centers for welfare applicants and cut checks for state health workers.
The national economy may be collapsing, but it's another boom year in the state's effort to outsource functions it once performed.
Government outsourcing in Texas expanded dramatically with 2003 legislation that crunched 12 health and human services agencies into five, negotiated lower prices with drug companies and replaced state workers with private contractors to screen and administer welfare benefits. It has since grown to include such functions as data management across state agencies and payroll processing for state employees.
"Anytime state government can provide the same or better services more efficiently and cost-effectively, the citizens benefit," said Allison Castle, spokeswoman for Gov. Rick Perry.
Some have benefited more than others: Former Perry aides, state agency staff and legislators have gone to work for private companies that have profited from the outsourcing.
The architect of the landmark legislation, for example, has earned between $1 million and $2 million as a lobbyist specializing in health care over the past four years.
Former state Rep. Arlene Wohlgemuth said the result of her legislation, known as House Bill 2292, has been smaller government that still served the needs of vulnerable Texans.
"By reducing administrative costs, more money was available for social services programs, the benefits of the poor were protected and funding for foster-care programs actually increased," Wohlgemuth said.
The revolving door from public to private sector does more than enrich former public officials, critics contend.
"It undermines public faith in government when they see that kind of thing happening," said Andrew Wheat of Texans for Public Justice, a liberal group that tracks lobbying and campaign contributions. "It reconfirms the sense that these people are operating on the take and not in the public's best interest."
Policies and profits
The state Health and Human Services Commission reported more than $15.5 billion in contracts in fiscal year 2007, according to the most recent figures available from the Legislative Budget Board, the Legislature's fiscal and budgetary office. That was 58 percent of overall state spending on health and human services and an 11 percentage-point increase over fiscal year 2003 contracting.
This year's health and human services budget is $29.3 billion. Commission spokeswoman Stephanie Goodman said nearly $25 billion was for contracts, including payments to doctors, pharmacies, hospitals and private companies.
The belief that outsourcing promotes efficiency and cost savings is one that conservative activists and corporate interests have promoted in Austin over the last decade. It shaped HB 2292.
Gregg Phillips had a foot in both the corporate and political worlds that produced the legislation. He was hired as a senior official at the Health and Human Services Commission just as Wohlgemuth was introducing the first draft of HB 2292.
As a deputy executive commissioner at Health and Human Services, Phillips played a leading role in shaping the legislation and promoting some of its more controversial elements. When state Rep. Brian McCall, a Plano Republican, expressed concerns about the plan to replace state welfare administrators with privately run call centers, Wohlgemuth arranged for him to tour an Austin call center that was handling applications for another state program. Phillips was his guide, McCall said.
Later, Phillips directed the agency's business case analysis, which predicted that the call centers would be cost-effective. (The call center program has cost taxpayers more than $250 million and is still not fully functional three years after its launch.)
Phillips was a former Republican Party fundraiser who presided over privatization initiatives as Mississippi's human services chief in the 1990s. A Mississippi legislative committee concluded in 1995 that Phillips had created "an appearance of impropriety" by going to work for a company after awarding it a $557,000 contract while in his state job.
From 1997 until August 2002, Phillips worked on health-care contracts for Deloitte Consulting LLP, a major government outsourcing firm, according to his state personnel file.
Chris Britton, a former Republican legislative aide who had worked for Wohlgemuth and had advised Perry on health and human service issues when he was lieutenant governor and governor, was also heavily involved in the legislation.
Just weeks after leaving the governor's staff in late 2002, Britton was hired by Wohlgemuth to perform budget and legislative policy analysis, Britton said in an e-mail response. State campaign finance records show Wohlgemuth paid him $10,000 from campaign funds in 2003. Britton now works for Accenture LLP, another big outsourcing firm that along with Deloitte won contracts with the state after the passage of HB 2292.
Deloitte and Accenture also may have been involved in discussions about the outsourcing legislation. Phillips' office calendar shows that he met repeatedly with representatives of the two companies during the time he was working on the legislation. The Houston Chronicle first reported those meetings in 2005.
In a recent telephone interview, Phillips told The Dallas Morning News that he had "a lot of interaction with a lot of folks" but could not remember whether he met with Deloitte and Accenture while working on the bill.
Deloitte spokeswoman Melissa Norcross Wolf said the company "had no involvement in the drafting of HB 2292."
Health and Human Services Executive Commissioner Albert Hawkins said Accenture and Deloitte were among many parties interested in HB 2292. He defended the involvement of private contractors in discussions regarding the legislation.
"There's all kind of input that is provided into the legislative process from people who have expertise or those that might be interested in some business opportunity down the road," he said.
Hawkins said he was confident that Deloitte and Accenture did not improperly influence the legislation.
"The drafting process is under the control of the Legislature," Hawkins said. "While we share information about it, it's up to the author and the legislative committees as to what to include in their bills."
In this case, Wohlgemuth and her colleagues included the prevailing orthodoxy on outsourcing state health services, including the use of call centers to process applications for Medicaid, food stamps and cash assistance.
Supporters said that would save time and millions of dollars by eliminating the jobs of thousands of state workers who accepted benefit applications in offices around Texas.
From March 11, 2003, when Wohlgemuth filed HB 2292 in the Texas House, until it was signed three months later, the bill grew from 20 pages to 300 pages, including more than 150 amendments.
Wohlgemuth told colleagues the bill would "cut out inefficient bureaucracy, streamline programs that belong together, delete the duplication of services provided by the state and make government more user-friendly to the citizens of Texas." It would also save the state $1.1 billion, she said.
That was an irresistible pitch for lawmakers facing a $10 billion budget shortfall.
Once signed, the law set in motion another high-stakes competition as companies vied for contracts, drawing on well-established ties to key lawmakers.
Texas law bans contributions to lawmakers while the Legislature is in session and generally prohibits corporations and labor unions from directly contributing to politicians. But they are allowed to give money through political action committees, or PACs, registered groups set up by corporations, labor unions, professionals and others to accept and make campaign contributions.
The money given to officeholders by the Deloitte & Touche Texas Political Action Committee typifies the sort of targeted contributions made to advance a corporation's interests in Austin.
Since 2002, the Deloitte PAC has contributed more than $270,000 to political candidates and causes in Texas, according to state records. The largest contributions typically go to top officeholders – it has contributed more than $30,000 to Perry since 2004 and $17,500 to House Speaker Tom Craddick, who wields vast influence over legislation. Dozens of other contributions have gone to lawmakers on committees that deal with issues and legislation of interest to Deloitte.
In July 2003, the first month that Deloitte could resume contributions to lawmakers following the end of the legislative session, the Deloitte PAC made only one donation: $1,000 to Wohlgemuth, at the time a member of the powerful House Appropriations Committee and chairwoman of its subcommittee on health and human services.
In September 2003, the Deloitte PAC contributed $1,000 to Rep. Dianne Delisi, then chairwoman of the State Health Care Expenditures Select Committee. She is also the mother-in-law of Deirdre Delisi, the governor's then-deputy chief of staff.
The next month, Deloitte Consulting won the first contract resulting from Wohlgemuth's legislation. The Health and Human Services Commission chose Deloitte as the lead consultant in the consolidation of agencies, a contract worth more than $1.8 million. A $1.2 million consulting contract went to Accenture. And Virginia-based Maximus Inc., another outsourcing firm that has since become a major player in Austin, won a $712,000 contract.
HB 2292's grand prize, however, was a contract to outsource the screening process for welfare benefits and to create call centers for accepting applications. The competition pitted outsourcing rivals Accenture and IBM, both of which hired a well-connected cast of lobbyists that included former legislators or executive branch staff.
In 2005, Health and Human Services awarded the $899 million call center contract to Accenture. IBM formally protested and later sued the state, alleging contract irregularities.
IBM later withdrew the lawsuit. It declined to discuss its decision with The News, and Hawkins said IBM's complaints "were unfounded."
About 16 months later, IBM won an $863 million contract to manage state data for Texas. Supporters said the contract would save the state $159 million over seven years. (In October, after the state had already fined IBM $900,000 for failing to complete timely backups, Perry suspended further data transfers to IBM.)
When Accenture's four call centers began taking social services applications in January 2006, delays immediately plagued the system. Thousands of applications piled up, and by May the state halted further rollout of the call centers.
In 2007, the state canceled the contract at Accenture's request. A report by the Health and Human Services inspector general later criticized the agency for a flawed bid evaluation and inadequate contract oversight. It also found the Deloitte-designed software was significantly slower than the old state-run system.
Hawkins had supported the call centers as a way to save $600 million over five years. But problems have indefinitely delayed the system's statewide rollout, and so "we didn't achieve the savings," agency spokeswoman Goodman said.
Instead, Texas spent $30 million dealing with various problems with the Accenture contract and another $10 million on retention bonuses to keep experienced staff from leaving. For less than two years of work on the project, Accenture and its subcontractors were paid about $210 million.
The state paid Deloitte $116.6 million before the company turned the new computer system over to Accenture in 2005, even though there were still more than 500 defects, the inspector general's office later noted. After Accenture gave up the call centers contract, the state hired Deloitte back and is paying the company $115.6 million to help maintain the system through 2010.
Texas hired Maximus to take over operation of the four call centers and to perform other health and human services work. It has paid Maximus $141.2 million over the last two years.
Those who rely on health and human services programs, and their advocates, say the state has saved money through outsourcing but in a way that is seldom discussed: by delaying or denying care to people in need, inadvertently or by design.
Roxanne Anderson, 39, a part-time library aide for the city of Grand Prairie, said she couldn't afford to take her three children – ages 7, 9 and 11 – to the doctor if they weren't covered through the subsidized Children's Health Insurance Program for working-poor families. Anderson said she liked the convenience of a call center in applying for benefits, but lost paperwork at one of the centers resulted in her children losing their coverage for a month in early 2008. Front-line staff at the call centers also don't know much about the program, she said.
"It takes them a long time to find out answers to questions, and quite often I have to get transferred to a second layer," Anderson said.
Celia Hagert, an expert on state social programs at the nonpartisan Center for Public Policy Priorities in Austin, said these are common complaints since the state began outsourcing applicant screening.
Outsourcing this work raises a potential conflict between a private company's need to maximize profits and the state's emphasis on providing benefits to qualified applicants, regardless of the time or effort required, she said.
Whether that conflict has cost Texas taxpayers is not fully known. Government oversight agencies – particularly the state comptroller and auditor – have analyzed only a few troubled contracts to determine what, if anything, was saved by shifting government functions to private contractors.
A 2006 federal review found that Accenture's call center workers performed so badly that a "high percentage of cases" had to be returned because of missing information and other errors.
A Texas comptroller's office review that same year said the call center project was a case study in poorly executed outsourcing.
"Successful outsourcing relies on two things: well-written contracts that base payment on the contractor's good performance, and strong contract management practices to oversee the contractor's work," the review concluded. "The Accenture arrangement has neither of these. HHSC's lack of proper contracting practices has led directly to project delays, cost overruns and failed service to Texans."
Last month, after 20 months of negotiations, the Health and Human Services Commission announced that the Accenture team had agreed to forgo $70.9 million in payments it was seeking from the state. The team also agreed to repay $20 million and provide a $10 million credit against future work performed by Maximus.
Winners and losers
Health and human services officials said taxpayers have profited from HB 2292, specifically $962 million in savings from the consolidation of state agencies and workforce reductions, as well as the introduction of a preferred drug list for Medicaid patients.
"More importantly, I think, for the long run, we have put in place a more rational structure and way of providing those services that will be cost-effective over years to come," Hawkins said.
Lawmakers, lobbyists, former health and human services staff and former Perry aides have profited in various ways, as well.
Craddick, who became House speaker after the 2003 Republican takeover of the Legislature, secured a call center and a document processing center for the entire system for his hometown, Midland.
Britton, the former Perry aide who now works for Accenture, got part of a state contract awarded to a company founded by Phillips, the former Health and Human Services official.
Britton's wife, Tiffiny, a former Texas House and Senate staffer, works for Wohlgemuth's Austin lobbying and consulting firm, Three Point Strategies, according to the firm's Web site. Like Wolhgemuth, her clients are mainly in the health-care sector, Texas Ethics Commission records show.
Since leaving his Health and Human Services Commission position in 2004, Phillips has won government outsourcing contracts from Texas and other states. In 2007, he hired Wohlgemuth for up to $25,000 to lobby for one of his firms, GHT Development Corp.
Wohlgemuth, in turn, persuaded a former House colleague to insert an amendment in a bill that would have steered a state contract to GHT Development. That former colleague was Appropriations Committee Chairman Warren Chisum, who 18 months earlier had received a $9,000 contribution from a Wohlgemuth campaign fund, according to Texas Ethics Commission records.
After questions were raised by lawmakers, the amendment was stripped from the final budget legislation.
Phillips denied any attempt to steer a contract to his firm.
"I guess I don't understand what's inappropriate about a private business person hiring someone who's able to help them in the Legislature," he said. "Neither we nor she have violated any rules, laws or anything else."
Wohlgemuth didn't respond when asked about the amendment recently, but in 2007 she told The News: "I was trying to advantage my client."
GHT Development won a $275,000 no-bid contract in 2007 to supply the Texas Youth Commission with an automated placement system for juvenile inmates, state records show. Wohlgemuth had recommended Phillips, according to Jay Kimbrough, who was brought in to reform TYC and now serves as Perry's chief of staff.
A staff report in November by the Legislature's Sunset Advisory Commission found that Phillips' system had experienced such "significant problems" that TYC was still operating its old system.
Wohlgemuth ran unsuccessfully for a seat in the U.S. Congress in 2004 and resurfaced two months later as a lobbyist. One of her first clients was the Texas Optometric Association. Two years earlier, while still a legislator, Wohlgemuth had voted to cut optometry benefits for the children of working poor. The 2005 Legislature restored them.
Wohlgemuth's daughter, Cristen, a former lobbyist, served on the governor's staff from January 2007 until June 2008 when, the governor's office said, she went to work for Chisum.
"Former legislators who lobby do not violate either the spirit or the letter of Texas ethics laws," Arlene Wohlgemuth told The News in an e-mail. "People ... know that when I talk with them on behalf of a client they can rely on two things: first that what I tell them is absolutely truthful, and second that I bring to them only those ideas I believe are in the best interests of the State and her citizens."
Texans for Public Justice, which is critical of lobbyists and the influence of corporate money in state politics, said former lawmakers who use their legislative contacts and expertise for later profit erode confidence.
"Not many of these lawmakers remain there for life, and a shocking number of them wind up in the lobby," Wheat said. "If you have that in the back of your mind, you don't want to offend the biggest lobby interests in the state."
Staff writer Ryan McNeill contributed to this report.
Texas campaign finance facts
• Texas does not limit the size of campaign contributions to nonjudicial candidates.
• Corporations and labor unions may not give to candidates. They can give to political parties for administrative costs, spend on ballot measures and pay overhead of political action committees, which collect donations and give to candidates.
• Legislators and top state officials cannot take contributions during the Legislature and for 30 days before and after, or inside the Capitol or its annex. Both restrictions came from a 1989 incident in which poultry magnate Lonnie "Bo" Pilgrim passed out $10,000 checks on the Senate floor during a workers' compensation debate.
• Limits on judicial candidate contributions vary by office. For a Texas Supreme Court candidate, limits are $5,000 from an individual and $30,000 total from a law firm or its members. A Supreme Court candidate can take a total of $300,000 from all general-purpose political action committees. Judicial candidates may raise money from seven months before they file until four months after election day.
Campaign contributions to House Human Services Committee members
* The Texas Ethics Commission does not require filers to report the names of donors with uniformity or consistency. Nor does it routinely monitor reports for accuracy. Consequently, misspellings are common and contributors' names can be presented inconsistently. The variations in information make it impossible to know with absolute certainty the total amount of money received by a lawmaker.
SOURCES: Texas Ethics Commission, Texas Legislature
Analysis: Staff writer Ryan McNeill