STATE OF CONNECTICUT

EDS Contract Compliance Report 

I. Overview A. Introduction

The Policy Services Division, Compliance Review Unit, began an audit in February 1999 of private information technology vendors selected for outsourcing projects by The Department of Social Services (DSS). Our primary audit objective is to determine the extent to which vendors have adhered to their contractual obligations. Initially, we conducted a review of the compliance of Electronic Data Systems, Inc. (EDS), with its contractual obligations to the State of Connecticut DSS.

B. Overall Contractual Relationship Between EDS and DSS

EDS has processed Medicaid claims for DSS (and The Department of Income Maintenance, one of its predecessor agencies) since April 1981. There have been three primary Medicaid claims processing contracts, as amended (which are referred to in this report as contracts A, B, and C), that relate to the processing of these Medicaid claims.
 
Contract A, as amended, began in April 1981 and extended to December 31, 1987. Contract B, as amended (referred to as The CT-Plus contract) was signed in December 1986, and commenced its operation starting January 1, 1988. The terms of this contract called for five years of operations with up to two additional one-year extensions.
 
Contract C, as amended, is the current contract for the continued Medicaid claims processing operation. The contract also called for the design, development and implementation of a replacement Medicaid Management Information System (MMIS) (referred to as the Connecticut Advanced Information Management System or CT-AIM) by EDS. The contract began on November 15, 1993, and runs through December 30, 2000. The contract required full functionality implementation of the CT-AIM system by December 30, 1994.
 
Contract C (in total amount of $87,203,899) calls for the continued Medicaid claims processing through December 30, 2000, as well as the design, development and implementation of a replacement MMIS. EDS is to continue to process Medicaid claims, on a fee per claim based schedule, using the existing MMIS, until the replacement MMIS is developed and implemented.
 
The cost to process these Medicaid claims and related expenses (MMIS operations) for the contract period is estimated to be $77,622,893.10. The Federal Government's Health Care Financing Administration (HCFA) had approved federal financial participation (FFP) of 75% of total cost for MMIS operations. Thus the total cost to process Medicaid claims for the contract period is allocated to DSS in amount of $19,405,723.28 (25%) and to HCFA in amount of $58,217,169.83 (75%).
 
Contract C also included the design, development and implementation of the replacement MMIS, or CT-AIM with the optional components of Prospective Drug Utilization Review (PRO-DUR) with Electronic Claims Management (ECM), Automated Eligibility Verification System (AEVS), and Electronic Claims Capture (ECC) for a total cost of $9,581,005.90. HCFA had approved 90% FFP of total cost for replacement MMIS development, thus the $9,581,005.90 cost is allocated to DSS in amount of $958,100.59 (10%) and HCFA in amount of $8,622,905.31 (90%).
 
In an additional contract, (with the then Department on Aging), effective January 1986, EDS was required to implement and operate an information processing system in support of ConnPACE, the Connecticut Pharmaceutical Assistance Contract to the Elderly and Disabled. The ConnPACE Management Information System is a modified Medicaid Management Information System. EDS is the fiscal agent for the ConnPACE contract, and performs pharmaceutical claims processing, eligibility determination, eligibility fee collection, ConnPACE identification card issuance, drug rebate processing, recipient/provider communications, and check processing.

C. Scope of Review

Our review and report was generally confined to Medicaid Contract C. The primary reason for this was due to the availability of relevant documentation. The State's record retention policy requires agencies to retain most documentation for three years or until audited. Based on an analysis of Contract C provisions, as amended, and the EDS response to the Request for Proposal (RFP), we identified the services that EDS was expected to provide to DSS under the current contract. There have been four amendments to the contract, with Amendment number four becoming effective October 1998.
 
In addition to our review of Contract C, as amended, and the EDS response to the RFP, we also performed a review of the following:
1. EDS vendor invoices (provided by DSS) - these invoices provided a detailed description of services provided to DSS, as well as a calculation of fees due, based on the volume of transactions processed for the period. Our review was generally limited to documents from the most recent three years.
 
2. Invoice Vouchers (Form CO-17) for goods and services rendered to the State of Connecticut (provided by DSS for most recent three years and by Comptroller's Accounts Payable Division for prior years) - included a brief description of goods and/or services completed and payment amount, as well as identifying the specific commitment that the payment was made from. These Form CO-17 payment amounts were verified to contract provisions for compliance, and were matched to a listing of payments from DSS to EDS, per the Comptrollers "CAS" system, to verify completeness;
 
3. Auditors of Public Accounts (APA) audit reports (per section 2-90 of the Connecticut General Statutes) - we reviewed recent DSS audit reports for conditions related to EDS performance at DSS. We also reviewed APA working papers that supported reportable conditions, related to EDS findings;
 
4. APA "Special Review" - The APA advised us that they had conducted a "Special Review" (related to their responsibilities under P. A. 97-9, Section 45), to determine if EDS would be eligible for the contract award relative to the State of Connecticut's proposal to privatize its management information systems. The review was performed "to determine why the contract between DSS and EDS for the replacement MMIS was terminated, specifically whether EDS failed to perform or otherwise breached a material obligation of the contract". A subsequent APA internal memorandum concludes that the contract has not been terminated, but continues in effect per contract Amendment Number Three effective December 23, 1997.
We sent a written request to the APA to obtain a copy of all "Special Review" materials. The APA did not issue a formal report as part of this review, which was completed in August 1998. The review is supported by numerous memorandums that serve to document the events that resulted in the eventual termination of the development of the CT-AIM by EDS;
 
5. Interviews with DSS management staff - we interviewed several DSS management staff to obtain confirmation or clarification on various events that occurred during the current contract period.

D. Summary of Findings

1. Review of EDS Vendor Invoices and Invoice Vouchers (Form CO-17)

Our review of EDS vendor invoices and invoice vouchers (Form CO-17), for compliance with contract provisions indicated that fees calculated and payments made were generally in compliance with relevant provisions of Contract C, as amended. Schedule 1 (attached) indicates payments made to EDS for the fiscal years ended June 30, 1988 (the first full year that this information was available on the Comptroller's CAS System) through June 30, 1998 and payments made for fiscal year 1999, through February 1999.
 
During this period, payments totaling $345,807,918.80 were made to EDS. Of this amount, $218,546,484.82 (for the fiscal years June 30, 1988 through June 30, 1996) represented ConnPACE provider payments, which are "pass through payments" made to reimburse EDS, for the actual payments to ConnPACE providers for their services. After June 30, 1996, the method of transferring funds directly to EDS for "pass through" payments was changed.
 
DSS now draws its funds from the "0000-6100-615 (ConnPACE) fund" held by the Office of the State Treasurer to a DSS bank account. Actual payments to EDS for their Medicaid and ConnPACE processing services rendered for the period July 1, 1987 through February 1999 were determined to be $127,261,433.98 ($345,807,918.80 less $218,546,484.82).
 
We have determined that EDS has been paid $1,844,455.00 for achieving certain Contract C milestones, of the $9,581,005.90 amount per contract for the design, development and implementation of the CT-AIM. DSS management has indicated that a final settlement of an additional $3,400,000 for EDS work on CT-AIM has been negotiated, and is included with Amendment Number Five, which is with Office of the Attorney General, awaiting review and approval.

2. Auditors of Public Accounts (CGS Section 2-90) Audit Reports

We reviewed recent DSS audit reports for conditions related to EDS performance. The audit report for fiscal years June 30, 1994 and 1995 identified the following condition regarding "Third Party Liability (TPL) - Data Matches with Blue Cross/Blue Shield (BCBS)" (in part): "As part of DSS' contract with EDS, they are to perform the matching of Medicaid files against those of BCBS. Our review noted that although EDS, as part of its overall contract with DSS, has the responsibility to perform a data match with Blue Cross/Blue Shield (BCBS), it failed to do so."
 
The APA determined that "EDS has not done the data matches with BCBS because of a number of extenuating circumstances and DSS did not follow-up to ensure that matches were performed. It has been estimated that DSS could be losing as much as $2,000,000 per year in TPL cost avoidance recovery dollars."
 
During our interviews of DSS management staff, they confirmed to us that EDS had failed to do these data matches, but stated that at the time, DSS did not consider this to be a priority item. DSS management stated that they were able to modify the contract of Health Management Systems, Inc., in 1996 (responsible for performing Medicaid files matches against all other private insurance carriers) to allow them to match DSS files with BCBS.

3. Auditors of Public Accounts "Special Review" Materials

Termination of CT-AIM Development Agreement
 
We reviewed numerous memorandums which were obtained as part of this review, that serve to document the events that led to the eventual termination of the (Contract C) development of the CT-AIM by EDS.
 
Contract C required the design, development, implementation, and the claims processing operation of the CT-AIM. The contract was amended twice prior to DSS' decision to terminate the scope of work relative to the development of the CT-AIM.
 
DSS management was frequently critical of EDS' inability to provide timely and complete detailed workplans on CT-AIM development during the entire development period. These detailed workplans enforce adherence to the project schedule and thoroughly reflects the tasks that need to be completed. The absence of timely and complete detailed workplans made it difficult for DSS and Maximus (which is a consulting firm hired to monitor EDS performance) to monitor EDS performance on the project. In May 1994, DSS Deputy Commissioner William H. Diamond wrote the following to EDS "I am emphatic in saying that our patience is wearing thin and our confidence in your organization has seriously eroded. I can tell you categorically that you have a very dissatisfied customer in the State of Connecticut".
 
EDS had also initially contemplated using the existing "Vermont AIM" model, as the base model for the Connecticut project. In April of 1994, EDS suggested that the existing "Indiana AIM" model be used as the base for the Connecticut project, primarily because of speed and volume requirements. This change in base model for the Connecticut project contributed to the delay in the development of the CT-AIM.
 
In addition, in September of 1996, EDS wrote to DSS "the size and scale of this effort have become far greater than either of our teams envisioned when we began this project, and have proven to be much more costly".
The design, development and implementation effort began in 1993, failed to meet the initial December 30, 1994 implementation date, failed to meet the subsequent December 29, 1995 implementation date (Amendment 1), and again failed to meet the subsequent September 20, 1996 implementation date (Amendment 2). HCFA rejected a request for a third extension by DSS. At this point, DSS decided to terminate the scope of the work related to the development of the CT-AIM.
 
After EDS' failure to meet the third required operational start date of September 30, 1996, DSS notified EDS, that pursuant to (Contract C) Section 7.7 (Operational Start Date - Damages), EDS would be liable for all costs incurred by the State to continue current MMIS and contractor operations, and that EDS has forfeited all claims to reimbursement of monthly expenses or operational payments for that month and each month thereafter until the State approves operational readiness. In addition, pursuant to contract Sections 8.1.1 (Key Dates  Performance Requirement) and 8.1.2 (Key Dates - Damages) the State imposes liquidated damages of $1,293,000 for failure to have the CT-AIM system developed, tested and installed by the required due dates.
 
EDS counsel did not believe that the State was entitled to any damages at that point in time.
Payments to EDS for claims processing were suspended for the processing period of October 1996 through November 1997. Upon settlement of this dispute (Amendment Three) in December 1997, DSS made a payment of $16,925,206.87 for EDS processing costs for this period. As part of the settlement, liquidated damages were not imposed.
 
Two procurement objectives of the replacement MMIS were met, the Automated Eligibility Verification System (AEVS), which was implemented in April 1995 and the Prospective Drug Utilization Review, Electronic Claims Management (PRO-DUR), which was implemented in September 1996. DSS management indicated that these two enhancements (which were implemented on the existing MMIS) did represent significant achievements of the replacement MMIS efforts. With the exception of these changes, no other significant enhancements occurred relative to the development objectives of the replacement MMIS contract.
 
It is the opinion of DSS management that Contract C between DSS and EDS has not been terminated, but continues in effect as amended by Amendment Three, effective December 23, 1997. This amendment resulted from DSS' decision to terminate development of the CT-AIM, and its acknowledged needs to ensure continued operations of a certified MMIS and to maintain fiscal agent support for the Connecticut Medicaid Program. The amendment obligates EDS to continue Medicaid claims processing operations under the existing MMIS.
 
Maximus Contract Monitoring of EDS Performance
 
Maximus is a technology-consulting firm that provided management consulting services to assist DSS during its reprocurement process of its MMIS. Maximus also provided DSS with management consulting services in relation to Contract C monitoring of EDS' performance for the design, development and implementation of the CT-AIM.
 
Maximus submitted periodic status reports to DSS on EDS' Contract C performance. Several of these reports indicated problems with EDS delivering updated detailed workplans. Without these detailed workplans, Maximus cannot adequately provide monitoring of the progress of this project.
 
Maximus also provided an analysis of the Contract C provisions for termination of the contract and suspension of work, due to EDS' problems in meeting CT-AIM implementation deadlines. They address the risks of terminating the contract (EDS would likely initiate legal action against the State), and suspending work on the contract (the loss of contractual leverage and likely financial impact should the State of Connecticut decide to suspend work on the AIM system).

E. Conclusion

EDS has processed Medicaid claims for DSS since April of 1981. DSS management, in general, indicated that they were satisfied with EDS' efforts over the years in the routine processing of these claims. However, Contract C, which required the design, development and implementation of the replacement MMIS (CT-AIM) by December 30, 1994, was amended twice prior to DSS' decision to terminate the scope of the work related to the development of the CT-AIM in December 1996. Primary reasons for EDS' failure to develop the CT-AIM were as follows: 1) EDS' inability to provide timely and complete detailed workplans; 2) The delays that resulted from the change in base model, from the "Vermont AIM" model to the "Indiana AIM" model as the base model for the Connecticut project and 3) EDS' own admission that "the size and scale of this effort have become far greater than either of our teams envisioned when we began this project, and have proven to be much more costly".
 
Two procurement objectives of the replacement MMIS were met, the Automated Eligibility Verification System (AEVS) and the Prospective Drug Utilization Review, Electronic Claims Management (PRO-DUR). DSS management indicated that these two enhancements (which were implemented on the existing MMIS) did represent significant achievements of the replacement MMIS efforts. With the exceptions of these changes, no other significant enhancements occurred relative to the development objectives of the replacement MMIS Contract.

II. Chronological Description of Events

A. Procurement Information Pertaining to the Connecticut MMIS Replacement Project

The State of Connecticut uses the services of a contractor to operate and maintain the State's certified Medicaid Management Information System (MMIS). The CT-Plus contract (Contract B) was due to terminate on December 31, 1994. Due to the approaching expiration of the contract, the age of the current system, and the increased need for the MMIS to be flexible and support enhanced expenditure control efforts, as well as expanded reporting, the (then) Department of Income Maintenance concluded that it should procure a new MMIS. The HCFA encouraged this effort by providing 90% FFP of the total cost of the replacement MMIS development.
 
The procurement objective was to competitively acquire the services of a qualified contractor to design, develop, implement and operate a new (state owned) MMIS. The selected bidder was required to design, develop, implement and operate a new MMIS to:
 
1. Meet or exceed all system requirements in 42 CFR 433, Subpart C and Part 11 of the State Medicaid Manual;
 
2. Meet or exceed System Performance Review (SPR) standards;
 
3. Meet or exceed all functional requirements identified in the RFP;
 
4. Provide the flexibility to support future program initiatives;
 
5. Provide for the incorporation of an Automated Eligibility Verification System (AEVS) with Electronic Claims Capture (ECC), at the option of the State;
 
6. Provide for the incorporation of Prospective Drug Utilization (PRO-DUR) with Electronic Claims Management (ECM), at the option of the State;
 
7. Provide Enhanced Claims Editing, at the option of the State;
 
8. Provide the information and processing necessary to support the Clinical Laboratory Improvement Act (CLIA);
 
9.Provide for intuitive, flexible and comprehensive reporting which will satisfy the requirements of PA 91-347, "An Act Concerning Access to Computer-Stored Records";
 
10. Provide the State with a cost-effective technical solution in meeting the Connecticut MMIS requirements.
 
The State will also use the services of the selected contractor to maintain and modify the new MMIS, as well as to provide equipment for system access and medical assistance program support services throughout the term of the contract.
 
In August of 1992, DSS entered into a contract with Maximus Inc., for management consulting services, to assist DSS during the reprocurement process. MMIS RFP development began shortly thereafter.
 
DSS released a Request for Proposal (RFP) for a new Medicaid Management Information System (MMIS) in May of 1993. The RFP release was based on the September, 1992 approval, by the Federal Government's Health Care Financing Administration (HCFA), of DSS' Advanced Planning Document (APD), which contained a budget of $10 million for design, development, and implementation of a new MMIS. Enhanced federal financial participation (FFP) for the project (90% of total cost for MMIS development, and 75% of total cost for MMIS operations) was also approved at this time.
 
A Bidder's Conference was held on May 20, 1993 relative to this procurement. Seven firms were represented at the Bidders' conference and a total of twelve Letters of Intent were received from potential bidders. DSS received two proposals from prospective vendors. The State's review team evaluated both proposals. EDS was awarded the right to negotiate a contract to undertake the new MMIS or CT-AIM project on September 13, 1993. After negotiations, EDS agreed to design, develop and implement a new MMIS, the Connecticut AIM System, including optional components that include PRO-DUR, ECM, AEVS and ECC for a total cost of $9,581,005.
 
The scope of the work outlined in the RFP was divided into four major tasks. The four tasks set forth in the RFP were as follows:
 
1. Development and Implementation Task - includes the activities required to successfully design, develop, test and implement a new MMIS;
 
2. Operations Task - consists of those activities that the contractor must perform to operate the Connecticut MMIS;
 
3. Maintenance and Modification Task - consists of those activities that the contractor must perform throughout the life of the contract to maintain the MMIS in accordance with the RFP. It also includes those activities needed to modify and maintain the MMIS in accordance with changing program policies, program growth, new technologies or other revised requirements;
 
4. Turnover Task - includes activities that would occur prior to conclusion of the contract, in the event the contract is terminated for any reason. It includes those subtasks necessary to turn over the MMIS to DSS.

B. Description of EDS Performance - Development of the Replacement MMIS or CT-AIM

The "EDS AIM System", is a client server based system, that offered faster access to client data. It was developed to include the following key components:
 
1. Client/Server computing - this equipment configuration allows EDS to provide processing power to the end user and the vendor-independence of an "open system", while providing mainframe computing capacity to support processor-intensive functions;
 
2. Relational database management system - this type of database offers increased user access to information through data elements defined by their interrelationships with other data elements;
 
3. Table driven processing - the AIM System stores groups of valid values in tables for use during processing to improve flexibility in responding to program changes;
 
4. Rules-based processing - the AIM System contains tables of rules that define the system's edit and audit criteria, in the form of Structured Query Language statements that are recalled, then executed. This segregation of complex processing logic improves the ability to rapidly respond to new program initiatives;
 
5. Ad-Hoc reporting based on fourth generation reporting tools - Ad-Hoc reporting provides users with easy access to all current MMIS program data for viewing, manipulation, and extraction.
 
The existing MMIS system is a mainframe-based system.

1. MMIS Contract - Effective November 15, 1993

EDS submitted their first detailed workplan to DSS on January 10, 1994. DSS rejected the detailed workplan on January 26, 1994, as recommended by Maximus. It was determined that revisions be required to be made prior to DSS committing to any other deliverable, since some of the revisions are of a global nature and are of major importance to the schedule.
 
On February 4, 1994 EDS again submitted a detailed workplan, which was rejected by DSS on February 23, 1994. On March 4, 1994, EDS notified DSS that they could not comply with section 1.12 (section 1.12 addresses "deliverables submission and acceptance" by the due dates presented in the Response to the RFP for the MMIS Development and Implementation Tasks) of the contract, since they could not resubmit the corrected detailed workplan deliverable. The reason given for non-compliance was cited as the need to continue researching methodologies for Detailed System Design (DSD). EDS did submit the DSD portion of the detailed workplan on March 23, 1994, but again, DSS concluded that this product was unacceptable. During the entire development period, the lack of an acceptable detailed workplan continued to be a problem.
 
Maximus also had developed concerns about DSS project management on the project. Maximus felt that the lack of DSS day to day management continuity and detailed focus on the project has impacted project momentum.
EDS made a presentation to DSS on April 29, 1994 that indicated that implementation was not possible until approximately July - October 1995, depending on whether the Connecticut AIM was being developed using the Vermont Aim model (which EDS confirmed was the base model initially contemplated for the Connecticut project), or the Indiana AIM model as the base.
 
EDS' recommendation is now to use the Indiana AIM model as the base for Connecticut, primarily because of volume and speed requirements. The Indiana model was developed using a methodology called Iterative Event Partitioning (IEP). The IEP methodology is a combination of techniques that facilitate the quality development and implementation of a large-scale client/server application. EDS will also change the platform to an Oracle database, supported by Hewlett Packard servers.
 
EDS now believes that the Vermont AIM solution is better suited for states with smaller claim volumes, (Rhode Island and New Hampshire utilize a system similar to Vermont). The Indiana AIM solution is better suited to systems with larger volume and performance requirements, similar to Connecticut.
 
In recognition of the adverse effects that the delay would have on Connecticut Medical Assistance initiatives, EDS pledged to work with the state to mitigate the hardship by providing certain functionality of the new AIM system prior to its actual operational start date, including establishment of a point-of-sale network for eligibility verification. It was clearly acknowledged that EDS would absorb the financial burden associated with the delay.

2. Contract Amendment Number One - Effective December 5, 1994

The first amendment to the contract between DSS and EDS became effective on December 5, 1994. The primary purpose of the amendment was to include certain revisions and responsibilities that were included in a Special Progress Report (SPR) dated July 15, 1994. The amendment, which was approved by HCFA, included the following:
 
1.The operational start date for the Connecticut AIM system is modified to be December 29, 1995 and as a result the CT AIM operational period is reduced by one year. EDS will continue to process claims and perform other MMIS related activities for the 1995 calendar year through the use of the Connecticut Title XIX Plus System, the current MMIS;
 
2. EDS agrees to reimburse DSS up to $1,478,777 for estimated expenses due to the extension of Connecticut's Maximus contract for an additional twelve months;
 
3. Identified certain improvements that EDS agreed to make at no cost to DSS;
 
4. The price per claim to be paid to EDS, for the final year of operations of the current MMIS will be reduced to an effective rate of $0.5672 per claim (from an effective rate of $0.6498). Compensating EDS for only those services that represent a bona fide value added service to DSS during 1995 derived the cost per claim.
 
Maximus, in its January 1995 status report on EDS' performance, indicates that EDS has not delivered an updated CT- AIM Detailed Workplan since December 8, 1994. Maximus indicates that they cannot adequately provide monitoring of the progress of this project without a workplan from EDS. They indicate that project slippage is quite evident, and that DSS should demand a corrective action plan to address the obvious schedule slippage.
 
In February 1995, DSS named Joyce Thomas as DSS Commissioner. Shortly thereafter, a hiring freeze and a restriction on the use of overtime was instituted as a result of the transition to a new Governor. DSS experienced the forced untimely departure of two durational full-time MMIS Development Team members, the exit of a third full-time member to another State Agency and the departure of a fourth full-time member. DSS, in its February report to HCFA, indicates that DSS is currently in the position of not having a sufficient number of full-time MMIS and Implementation Team members to continue the level of commitment, dedication and quality that has been established since the writing of the APD and RFP.
 
EDS submitted a revised Detailed Workplan on March 8, 1995. DSS, in their response to the revised Workplan, note that the dates from the event set Detailed Workplan distributed in certain kickoff meetings are drastically different than the dates reflected in the revised Detailed Workplan. In addition, it is noted that there are numerous discrepancies between the accepted planned start dates of the Detailed Workplan submitted September 1, 1994 compared to those presented on March 8, 1995. In addition, DSS noted that EDS had actually shortened the proposed time span on 20 remaining event sets. "Beginning Event Sets" and related documentation, (there were thirteen finished to date), took longer than originally planned, minimally at least twice as long. DSS had difficulty accepting the logic in shortened timespans on these 20 remaining event sets. If these events do indeed take longer than the revised dates, the entire schedule would be effected. As a result, DSS felt that there would be an inherent flaw of logical timing within this revised workplan, a flaw that places the December 29, 1995 implementation date at risk.
 
Event set documentation is a compilation of multiple, intermediate deliverables and includes: 1) Event Transaction Diagrams; 2) Data Models; 3) Test cases for all event set windows, reports and processes; 4) Conversion plans and conversion plan test cases documenting the cross-walk to convert data from current "CT Plus" files to "AIM"; 5) Reference manual pages and 6) a cross-walk listing to validate that the event set documentation validates specific RFP requirements.
 
DSS sent a letter, dated April 26, 1995 to EDS that imposed "Consequential Damages - Failure to Meet Contract Performance Requirements" in accordance with Section 7 of the contract. DSS informed EDS of its responsibility to reimburse DSS for its reasonable costs incurred to issue Medical Assistance Identification Cards to its Medicaid eligible client population for the month of April 1995. The July 15, 1994, SPR set forth an operational start date of March 1, 1995, for the support of DSS' plastic Medical Assistance Identification Cards. The support was to be provided by establishing on-line provider access to eligibility verification through the use of telephones, point of sale devices and personal computers. In February 1995, DSS and EDS agreed to implement Automated Voice Response System (AVRS) on March 1, 1995, but to move the implementation date for the point of sale devices and personal computers software access methods to April 1, 1995. DSS concluded that the performance of the AVRS system in March was unacceptable. In addition, DSS had to issue paper Medical Assistance Identification cards for the month of April due to the poor quality of the deliverables for the point of sale and personal computer access methods. DSS stated that in its reasonable judgement, consequential damages of $24,695.69 (in accordance with section 7.8 "Recovery" of the contract) to cover the cost of the issuance of paper identification cards are the responsibility of EDS.
 
Maximus presented their comments and recommendations relative to its review of the March 8, 1995 Revised Detailed Workplan (RDW), EDS' responses to HCFA comments on the RDW, and the June 9, 1995 revised Project Workplan. Maximus felt that DSS would most likely be asked to make concessions or be put in a position where they will have to make concessions due to the proposed schedule. For example, if EDS did not plan on the same approach to a process that DSS wants, DSS will most likely be asked to concede to the EDS approach. A second area of concession will be on deliverables review and testing. If meeting the finish date of an event set is the prevailing goal, the workflow may be extremely heavy at the end of the event set timeline. Without additional resources, deliverable reviews and testing would require a concession to the level of detail. These decisions regarding concessions would be difficult for DSS. Later in the month, Maximus advises that based on its analysis, the December 29, 1995 implementation date may be in jeopardy.
 
At an August 16, 1995 DSS CT-AIM status meeting, it was noted that EDS had acknowledged that a fully functional AIM system will not be ready for December 1995. DSS identified three options: 1) move the implementation date; 2) schedule a phased implementation and 3) stop the project and terminate the contract. In addition, it was noted that on August 14, DSS obtained information regarding recent problems in the State of Indiana with their AIM system, which included backlogged Medicaid claims, potential provider litigation and fines levied against EDS.
Maximus, in an October 18, 1995 letter to DSS assessed the following areas related to the CT-AIM:
 
1.The current status of AIM;
 
2.The EDS contract provisions for termination of the contract and suspension of work;
 
3.An assessment of the impact of Medicaid reform, Block Grants and Managed Care on AIM;
 
4.The loss of contractual leverage and likely financial impact should the State of Connecticut decide to suspend work on the AIM system.
 
The current status of AIM
 
Based on Maximus' review of the August 21, 1995 event set worksheet and the July 15, 1994 Special Progress Report, the current status of the AIM project was assessed using three different scenarios that were 1) aggressive; 2) moderate and 3) conservative. Based on these scenarios, it was concluded that from 71% to 76% of the AIM project event sets had been completed, thus 29% to 24% of the event sets remained to be completed.
 
The EDS contract provisions for termination of the contract and suspension of work
 
Regarding termination of the contract, in a letter dated October 18, 1995 to Michael Starkowski, Sue Pepin, Maximus, stated "EDS would likely initiate legal action to seek temporary or permanent injunction against the State on the AIM project. This action would mean that no further work could be completed on the project until the matter was resolved. The State would also have to deal with the HCFA on making this significant change to the Advance Planning Document, with the possible withdrawal of enhanced Federal Financial Participation (FFP). The political fallout from this action should also not be underestimated as EDS would likely file a claim for equitable adjustment (for the full amount of costs incurred regardless of the contract amount) or take legal action against the State".
 
Regarding suspension of work, Maximus advised that the State might suspend work at any time. However, EDS would likely seek financial relief for any ongoing costs incurred. It is also likely that EDS staff would be reassigned to other projects, and when the project was restarted, EDS would expect, and probably be entitled to, reimbursement for start up costs to assemble a new team in Hartford, as well as to bring the new team up to speed on the contract.
 
An assessment of the impact of Medicaid reform, Block Grants and Managed Care on AIM
 
There are many changes being evaluated and discussed by Congress, but it is unclear what the federal government will do or when they will act. It is unlikely that the pending legislation will initiate a wholesale shift to managed care, but if it does the scope and complexity of the system will likely remain the same.
 
The loss of contractual leverage and likely financial impact should the State of Connecticut decide to suspend work on the AIM system.
 
The State needs to consider carefully the issue of accountability and financial exposure before making a decision to suspend work on the contract. EDS has a contract for $9.986 million to develop and implement AIM (including ConnPACE). It is believed that EDS has incurred an additional $5 million to date and that it will take them an additional $3 million (or more) to complete the project. At this time, EDS is contractually responsible to deliver AIM at approximately $10 million, regardless of the fact that they will likely incur $8 million more in costs to complete the project.
 
The State has secured enhanced FFP at 90% for the development costs of AIM. Therefore the State's share of the costs for AIM is approximately $1million. Maximus feels that if the State were to suspend work, EDS would likely take the opportunity to recoup some part of the $5 million incurred above and beyond the contract amount. The change order or renegotiated scope of work would likely cost much more than it would cost if these changes were made to an implemented MMIS. The bottom line is that EDS could shift some portion of their costs to the State.
 
Maximus feels that by changing the project at this stage, the State would be in effect relieving EDS of its contractual accountability. Maximus strongly recommends that the State make the decision to remain on course with the project.
 
In a December 5, 1995 memo from DSS to EDS, DSS indicates its outright disapproval of the Revised Project Plan - CT AIM Implementation, which was submitted by EDS on November 21, 1995. The primary concern of both Maximus and DSS was that construction of the workplan is different than that of the understanding that Maximus and DSS had as a result of the numerous workplan meetings in August and September of 1995.

3. Contract Amendment Number Two - Effective April 19, 1996

Contract Amendment Number Two established an extended operational start date for the replacement MMIS from December 29, 1995 to September 20, 1996.
 
On February 13, 1996, DSS submitted a request for approval of Advanced Planning Document Amendment Number Two. The amendment encompasses extending the design, development and implementation phase through September 20, 1996, as well as requesting needed budgetary adjustments related to in-house and consultant support for the project during the extension. In general, DSS blamed EDS' lack of attention to workplan management as the principal reason that the project was not successfully completed by December 29, 1995.
 
DSS discusses in this request that serious consideration was given to termination of the project and the contract as well as the imposition of liquidated damages and penalties. DSS states that these options were rejected in large measure because both EDS and DSS bore responsibility for schedule slippage. DSS felt that they did not have the in-house capacity to rapidly absorb the critical and complex processing of Medicaid claims, particularly in the face of its newly instituted welfare reform initiatives. Without continuation of the AIM development effort it was felt that EDS would not continue in its fiscal agent capacity for the State, thereby placing clients, medical providers, the newly established managed care initiative as well as the traditional fee-for-service program administration at risk.
 
On February 19, 1996, HCFA approved the MMIS APD amendment number two to the CT AIM MMIS contract to extend the replacement MMIS implementation from December 29, 1995 to September 20, 1996. The amendment was effective on April 19, 1996. The HCFA approval also authorizes FFP in additional MMIS project costs.
 
On August 15, 1996, DSS advised HCFA that examinations conducted by DSS and Maximus in late May, indicate that there was serious slippage in AIM development activities that had either been ignored or camouflaged by EDS. This discovery caused DSS staff to question the viability of the September 1996 AIM operational start date. On June 26, 1996 EDS acknowledged that September 1996 was not an achievable operational start date. DSS states that on June 27, 1996, at a meeting attended by HCFA, DSS, Maximus and EDS, EDS management stated that the failure to achieve a September 1996 operational start date was due to EDS' failure to manage its resources to the approved workplan.
 
Subsequently, EDS submitted a revised workplan on August 7, 1996. This workplan submission was also rejected by DSS because of questions raised and inconsistencies in the plan. Shortly thereafter, DSS staff contacted the Connecticut Office of the Attorney General for the purpose of reviewing available options. Among these options are contract termination, the imposition of liquidating damages and contract continuation with development methodology and/or testing adjustments.
On August 23, 1996, DSS and Maximus developed materials related to an AIM Project Decision Tree, as well as a listing of specific pros and cons for consideration at each decision point. These materials attempt to delineate all options currently available to DSS at this point in time.
 
On August 23, 1996, DSS sent EDS a Notice of EDS Default. The purpose of the notice was to advise EDS of DSS intentions to begin deducting liquidated and consequential damages well in advance of the required fifteen calendar days, so that EDS may address the problem and reallocate resources so as to meet contractual requirements and avoid, or at least minimize, the damage to the State and to EDS.
 
EDS responded to this letter, by saying, "the size and scale of this effort have become far greater than either of our teams envisioned when we began this project, or have proven to be much more costly". EDS hopes that DSS will view EDS' continued investment of time and resources, far in excess of implementation payments, as a sign of EDS' commitment to the State. EDS further states that while they understand that DSS' may enforce contractual provisions, EDS believes both parties will be best served by focusing on the implementation of the Pharmacy POS system, followed by the remainder of the system functionality.
 
HCFA notified DSS on September 9, 1996 that federal funding of the Connecticut MMIS replacement project would terminate on September 20, 1996, since it appears that the MMIS will not be operational by that time. Their concern is amplified by the fact that the Connecticut MMIS replacement project has already been extended twice for a total of twenty-one additional months beyond the original twelve month implementation date of December 31, 1994. HCFA indicates that any federal funding of the Connecticut MMIS project beyond September 20, 1996, is dependent upon DSS submission and HCFA's approval of an amendment to the MMIS APD which explains the Department's need and justification for continued federal funding of the project. To be approved, the APD amendment must clearly demonstrate that the MMIS project is a viable effort that ultimately will result in a fully operational MMIS that meets all federal and MMIS contractual requirements.
 
In an October 30, 1996 status update to HCFA, DSS indicates that negotiations were initiated with EDS, in early October, relative to the development of a new AIM workplan and a contract amendment for the continuation of the AIM project. DSS' goal was to provide EDS with enough information to finalize the revised workplan by an agreed upon, October 18, 1996 deadline. DSS indicates that EDS' creation of the revised workplan by October 18, 1996 was critical, since DSS had given HCFA a commitment to either a detailed status report or the MMIS APD amendment by October 31, 1996. In an October 11, 1996 meeting, it became clear that the October 18 workplan would not include certain areas of functionality that DSS had expected.
 
In the formal negotiations meeting on October 18, EDS indicated that they could not provide a revised AIM workplan, but proposed a phased-in AIM implementation, with claims processing beginning in December 1996, and the balance of AIM becoming operational around April 1997. DSS was skeptical of EDS' ability to provide these items by the dates proposed. In addition, DSS stated that along with HCFA, they had taken a negative position relative to the phased-in implementation and indicated that DSS required the full AIM functionality on day one of AIM operations.
 
At this meeting, an Attorney General's office representative, provided a summary of EDS' requirements (from DSS' perspective) for successful negotiation as being: 1) additional development time; 2) severely curtailed testing efforts; 3) a phased-in implementation; 4) reduced functionality; 5) agreement to process encounter claims through the MMIS; 6) an interim increase in the rate paid per claim to compensate EDS for Pharmacy POS and 7) additional funding for allegedly out-of-scope functionality.
 
In a meeting held on October 23, 1996, EDS again failed to provide DSS with a revised AIM workplan. DSS had hoped at a minimum, that EDS would provide a "worst case" workplan with an implementation date of October 1997. EDS did not want to give the impression that they could or would sign a contract amendment with an October 1997 implementation date.
 
DSS also indicates in this October 30, HCFA status update, that as of October 25, DSS had not received a reply from EDS relative to the unresolved issues. As a result, on October 30, DSS sent a letter to EDS imposing liquidated damages for AIM delays, in accordance with the contract. DSS concludes the update by saying that that they are unable to present HCFA with its most logical and prudent next steps, much less provide an APD revision or a contract amendment for review. DSS states that they are clearly at a major and critical decision point, and that our next course of action is dependent upon the reaction of EDS to the "damages" letter, and to our request for a workplan.
 
The October 30 letter from DSS to EDS, which imposes liquidated damages against EDS for AIM delays, provides notice to EDS of its failure to perform in accordance with the contract. DSS indicates that EDS failed three times to meet the operational start date as per Section 7, (Consequential Damages - Failure to Meet Contract Requirements) of the contract, as amended. DSS indicates that EDS would be held "liable for all costs incurred by the State to continue the current MMIS and Contractor Operations". DSS imposed liquidated damages, under Section 8, (Liquidated Damages - Failure to Meet Performance Requirements) of the contract, in the amount of $1,293,000, since, for the third time, EDS has failed to meet the required operational start date.
 
DSS, in this letter also pointed out that in accordance with Section 9, (Deductions of Damages From Payments) of the contract, that the State may at its sole discretion, return a portion or all of any liquidated damages collected as an incentive payment to the Contractor, for prompt and lasting correction of performance deficiencies. While we make no commitments in this regard, the "promptness" and "lastingness" of the corrections will be factors in our consideration. Finally, as the contract also provides in Section 8.1.2 (Key Dates - Damages), these damages shall be in addition to any amounts assessed for delays in obtaining Federal certification and/or meeting the operational start date. The liquidated damages are in addition to the damages imposed for failure to meet the operational start date.
 
From August 1996 to December 1996, EDS submitted three separate revised AIM project workplans to DSS. DSS' review of each document revealed that while EDS was attempting to develop a workplan acceptable to DSS, the workplans presented did not define a clear approach to the AIM, design, development and implementation effort.
 
EDS, in correspondence to DSS dated November 12, submitted a legal response to DSS regarding the liquidated damages imposed by DSS and addresses DSS' intention to withhold payment to EDS for its September invoice (for routine claims processing) in amount of $1,031,194. EDS legal counsel, in general, does not believe that the State is entitled to any legal damages at this time. DSS and EDS subsequently exchange numerous legal responses on these issues going forward.

4. Contract Amendment Number Three - Effective December 23, 1997

In a June 27, 1997 letter to HCFA, DSS seeks HCFA approval of DSS Amendment Number Three to its Medicaid Management Information System APD. This amendment serves to formalize information provided to the HCFA of the decision made by the State of Connecticut to terminate the activities relative to the design, development, and implementation of a Medicaid Management Information System (MMIS). As a result of those termination activities, the State has worked to revise its approach to acquiring the automated functionality necessary to support its program administration and business needs. The request for approval of the APD amendment includes a request for "FFP for additional efforts necessitated by design, development and implementation (DDI) contract termination that had not been previously required nor planned".
 
On December 23, 1997, the Attorney General's office approved this Amendment Number Three to the MMIS contract. The amendment provides for the continued operation of the MMIS claims processing operation by EDS. In addition, this amendment required DSS to retroactively pay for the processing of MMIS and ConnPACE claims by EDS for the months dating back to October 1996 to November 1997 (see attached Schedule 1 which indicates the annual payment history from the Office of the Comptroller to EDS, from 1988 to the present). This payment amount of $16,925,206.87 is included (along with ConnPACE payments) in the 1998 Medicaid charge amount of $26,898,893.12.
 
EDS continues to be obligated to maintain the current enhanced HCFA certified MMIS and to complete various enhancements to the current MMIS. Payment rates for claims processing have been increased to $0.70 per claim for claims processed from October 1996 through June 1997. For MMIS claims processed from July 1997 through June 1999, DSS shall reimburse EDS at the rate of $0.65 per claim. Effective with claims processed from July 1999 and each year thereafter, the rate will be adjusted for the Consumer Price Index.

5. Contract Amendment Number Four - Effective October 19, 1998

Amendment Number Four to the contract was effective October 19, 1998. Its purpose was to make changes to the Connecticut Medicaid Management Information System, inclusive of the ConnPACE Program, to bring the Connecticut MMIS into Year 2000 (Y2K) compliance. The amendment terminates upon implementation of final Year 2000 revisions that shall occur no later than December 31, 1999. EDS shall be paid a total of $5,578,900 in consideration for the services performed pursuant to this amendment. Payments will be made in accordance with an approved deliverable schedule.

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