An audit released Friday blasted the state health department for not holding a major contractor accountable, even after it cost the state hundreds of millions of dollars in overpayments and millions in lost federal dollars.

The Maryland Department of Health in 2019 hired administrative services provider Optum to process payments for the state’s behavioral health care system, providing addiction and mental health services for low-income Marylanders. The five-year contract with one two-year renewal option totals $198.2 million.

But the audit found the state never vetted any of Optum’s subcontractors, ignored warnings about the vendor from a current customer, and failed to test the system used to process providers’ claims before launching it.

System failures caused the state to overpay mental health and substance-use disorder providers $223.5 million, underpaid other providers and caused the state to miss out on millions more in federal matching funds.

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In a seemingly unrelated finding, the health department also skirted state procurement laws in awarding nearly $20 million in IT contracts.

“This was a disaster. A disaster from the beginning to the end,” said Josh Adler, assistant director of the Office of Legislative Audits.

Once the problems were identified, the Maryland Department of Health chose not to pursue $20.5 million in damages and withhold payment as allowed by the contract. State auditors recommended the agency recoup payment from Optum for damages. The agency disagreed, however, saying such an action “would have maximized the chances of litigation, adversarial working relationship, and further minimum performance by the vendor,” according to the report.

Sen. Clarence Lam, a Democrat who co-chairs the legislature’s Joint Audit and Evaluation Committee, said he was “frustrated” with the state’s decision not to recoup damages. The agency’s handling of the Optum contract sends a troubling message to private vendors who do business with the state, Lam said.

“The reason these provisions are in the contract is to hold the contractor’s feet to the fire,” he said. “It’s almost as though these contracts have no teeth if they fail to deliver.”

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Despite warnings from another state that Optum “struggled to manage detailed patient claim data,” the health department hired the company without disclosing the negative feedback to the state’s spending approval board during the procurement process.

The Board of Public Works, the state board that approves contracts, questioned Optum’s lack of experience, but the health department said it conducted “a lot of due diligence” in choosing Optum, according to the report.

The state health agency said they have already made “significant changes that will enhance all future procurements” including a “more rigorous pre-award review.”

Christine Hauser, a spokesperson for Optum, said the company recognizes “that the system did not live up to expectations,” but has worked closely with the state and providers to address issues. Optum said the claims system has performed “within industry standards” since August 2020. A spokesperson for the health department confirmed Optum’s system is now processing claims.

But some providers are rejecting Optum’s assertions.

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Shannon Hall, executive director of the Community Behavioral Health Association of Maryland, said while the claims processing system has somewhat improved, “it is not processing claims reliably and consistently with federal rules.” Providers are still getting denied and error rates are very high, Hall said.

Hall compared the ordeal to waiting for your paycheck to hit your bank account and instead it lands in your coworker’s account. “That’s what the Optum system was doing,” Hall said.

Hall’s trade organization represents over 100 mental health and addiction treatment providers who treat about 90,000 Medicaid patients. She’s heard from providers who have to dedicate extra staff to track and follow up on claims from a system that should be automated.

“The system failed, but what also failed was the state government. They had the power to leverage control over Optum, and they did not do that,” Hall said. “The next administration is going to have to come in and do that on day one.”

In its response, the health department concurred with the majority of the audit’s recommendations. The agency reported outstanding overpayment balances had been reduced to $146 million as of September, and the department plans to have a new contract before the Board of Public Works by the first half of 2023. Subsequent proposals will include graduated financial penalties for contractors who do not monitor their subcontractors or deliver on promises.

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On the rogue contract procurement, the auditor recommended the agency “comply with State procurement regulations.”

The health department agreed.

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