State officials say they were wary of cracking down on Medicaid payments contractor

State health department officials Tuesday told a legislative oversight panel that they declined to pursue severe  damages against a nonperforming contractor because they feared litigation and that the contractor would walk away, leaving the state holding the bag.

Members of the Joint Legislative Audit Committee were told ongoing issues with Optum Maryland have cost the state more than  $500 million. But health department officials tried to deflect the issue, saying that the imposition of less severe penalties has resulted in the state saving millions on the bottom line of the four-year deal.

“It certainly looks like there has been hundreds of millions of dollars that have been lost by the state, and I think that the answer provided by the department was insufficient and such a contortion of the truth that it really puts Cirque du Soleil to shame,” said Sen. Clarence Lam, D-Baltimore and Howard counties and co-chair of the committee.

Lam called the agency’s claim of savings “nonsensical.”

Optum Maryland, a subsidiary of Minnesota-based Optum, was awarded a  a five-year contract in 2019 to pay Medicaid claims for roughly 260,000 people in Maryland receiving mental health or substance abuse disorder treatments.

The contract, which expires in 2024 plus one option to renew for two years, came at a cost of $198.2 million.

But almost since its inception, the payment system has failed at almost every turn, officials acknowledged.

And from the start of Tuesday’s hearing, Maryland Department of Health officials, including Webster Ye, assistant secretary for health policy, and Deputy Health Secretary for Healthcare Financing and Medicaid Steve Schuh, declined to answer many questions. Instead, the pair relied on written responses provided to auditors and the committee.

Optum, the lowest bidder and one that had unseated an incumbent contractor, failed to have systems in place to quickly and properly pay service providers, officials said.

The Maryland Insurance Administration found Optium did not comply with prompt payment laws. Optum said it was unaware that the law applied to its work in Maryland. The company entered into a consent agreement with the agency to fix problems, but admitted no fault.

Ye acknowledged the automated system needed for making payments to treatment providers and to seek reimbursements from the federal government was not properly tested.

Even so, the state has declined to impose severe penalties allowed by the contract for Optum’s failure to perform.

Legislative Auditor Greg Hook told lawmakers the disagreement between his office and the department “deals with a lack of accountability for vendor non-performance and for state employee responsibility making when determining to not assess and collect liquidated damages as allowed for in state contracts.”

Auditors noted that the agency did not assess penalties against Optum for breach of contract totaling nearly $21 million.

The department could have assessed about $30,000 per day in penalties, according to a response provided by health department officials.

Failure to impose the more severe penalties runs contrary to department policy, auditors said.

Instead, the department withheld nearly $6 million in various payments to Optum.

“It is our contention that the state has not lost money,” said Ye.

Schuh, the deputy secretary, agreed.

“I don’t believe there have been losses,” said Schuh. “We did advance over a billion dollars, as you know. We’ve been working diligently to collect those funds.”

Schuh said all but $140 million had been collected and “by the end of this month those remaining dollars will all be subject to installment payment plans or to claims withholding to repay the entirety of the amount by next summer.”

Lam called the department’s explanations and written responses “alternative facts.”

“If you’re going to tell us the sky is green, I don’t think we can believe that,” said Lam. “We’re looking at an audit report that shows over a half-billion dollars of losses to the state.”

Auditors Tuesday disagreed, providing lawmakers with a chart outlining more than $535 million in losses related to the contract with Optum.

Josh Adler, an accountant and auditor for the office, said health department officials feared Optum would “stop and run,” meaning the company would stop paying benefits if the state enforced the contract. He said it was not clear the company made that threat.

“I’m not sure if it was that explicit, but the department’s position was that they were afraid of that and they did not want to be in the position where they did not have a contractor and they have to do all the services the contractor was supposed to do,” Adler said.

“It’s almost, in my mind, too big to fail, and when the contractor isn’t performing well, the department’s position was well, we can’t do it,” said Adler.

Ye, in response to questions from Lam, acknowledged concerns about Optum abandoning the contract if liquidated damages were imposed.

“We believe that imposing liquidated damages at this point is not an effective way in ensuring that the state receives a working product for a mission-critical health care services system,” Ye said.

Included in that summary were uncollected overpayments and federal funds, denied federal claims, duplicate payments and improperly denied claims.

The vast majority were characterized as ongoing losses, meaning they could grow — perhaps daily — if the agency takes no action.

Nearly $29 million will never be recouped, Adler said.

“Twenty-eight point eight million dollars is gone,” he said. “We’re not getting it.”