State Junks $179 Million Medi-Cal IT System, Will Start from Scratch

Combine years of delay, ever-changing rules and requirements, state and federal red tape, and a once mighty company now in deep financial trouble, and what do you get?

In California’s case, the junking of a $179 million computer modernization project to process claims for Medi-Cal, the state’s health-payment program for low-income residents.

The project, put out to bid in 2007 and still far from completion, was finally put to rest on Monday when the state Department of Health Care Services announced a legal settlement with Xerox Corp., the project contractor, under which Xerox will pay the state approximately $120 million.

That means Medi-Cal’s existing computer system – creaky, patched-together, and decades old - will continue to operate for however long it takes the state to contract out and build a replacement.

According to the settlement, Xerox will continue to run the existing system until 2019.

The DHCS is putting a bright face on the project’s demise, calling it, in a press release issued Monday, an “opportunity” to reevaluate current needs. A fresh start, it went on, will ensure “modern, robust and sustainable system.”

DHCS noted it's not the only state with such problems: “Many other states … have adjusted their strategies” toward their Medicaid computer systems, the release said. (Medi-Cal is California’s version of Medicaid.)

Indeed, several parties in Texas and Alaska, both public and private, have sued the Xerox subsidiary Xerox State Healthcare over contract problems.

The department declined to comment beyond the press release. The settlement requires that DHCS and Xerox both approve in advance any public statement for the next 30 days.

In a statement, Xerox said the settlement agreement finalizes the announcement it made last fall "that it did not expect to complete implementation of the Health Enterprise Platform in California." Xerox added that it is "pleased to work with DHCS to continue processing Medi-Cal claims through September 2019."

California’s drawn-out competition for the project began in 2007. Xerox won the contract in 2010. By 2012, the project was already in trouble. Delays caused the state to impose on Xerox a “corrective action plan.”

Originally scheduled for completion by the end of this year, the project isn’t close to done, the settlement indicates.

Whenever government computer systems fall behind schedule, which is common, critics blame red tape. In this case, the massive Medi-Cal replacement contract with Xerox was inked just five days before President Obama signed the Affordable Care Act into law. As new regulations under the law worked their way through the health care system, requirements for the Medi-Cal project continued to change.

Compounding matters, Xerox fell into deep trouble. Its stock has lagged far behind the market in general. The company is under pressure from investor activist Carl Icahn. Late last year, Xerox said it would wind down its Medicaid computer systems business in California and Montana, take a $385 million charge against earnings, and “focus on profitable market segments.” That meant the end of the California project.

Several companies compete in the Medicaid system market. As of February, Xerox was the number-two provider, covering 11 states. The leader, HP Enterprise Systems, covers 18.

Xerox will pay about $103 million in cash, provide computer hardware and software worth $15 million, and abandon payment claims worth roughly $5 million more.

DHCS has reported it had paid Xerox $9 million for the replacement system, $8.1 million of that with federal funds.

This story was produced by Kaiser Health News, which publishes California Healthline, a service of the California Health Care Foundation.