Failure to penalize troubled vendor makes Maryland a ‘laughingstock,’ lawmaker says

State lawmakers were unsparing in their criticism of the Maryland Department of Health on Tuesday, accusing the agency of failing to pursue financial compensation against a vendor that has acknowledged serious shortcomings.

One after another, members of the General Assembly’s Joint Audit and Evaluation Committee expressed astonishment that the agency decided — as a matter of policy — not to seek liquidated damages from Optum, a health claims-processing company whose shortcomings were the subject of a harsh audit last month.

The Minnesota-based firm processes billions of dollars in behavioral health claims each year. The review of Optum’s performance, which was conducted by the Office of Legislative Audits (OLA), uncovered numerous problems.

Auditors discovered more than $220 million in payments for behavioral health services that lacked proper documentation or haven’t been recovered, lapses that prevented the state from receiving nearly $30 million in federal reimbursement for which it was eligible. In addition, mental health providers, who have been stretched thin and subject to burnout since the pandemic began, have been forced to spend long hours reconciling payment errors.

Agency officials gamely sought to reassure lawmakers that they have penalized and withheld payments from Optum, but they acknowledged that they decided not to seek liquidated damages for fear of harming their relationship with the firm. The admission appeared to stun members of the panel.

“I think it sends the wrong message to contractors that work with the state — and makes a laughingstock of our contracting process,” said Sen. Clarence Lam (D-Howard), a committee co-chair. “If we enter into contracts with vendors who are unable to deliver, and yet do not pursue damages when those contractors are costing the state millions of dollars… it’s an example of what’s broken with our state procurement process.” 

Del. Kirill Reznik (D-Montgomery) called the agency’s decision “unconscionable” and a dangerous precedent. 

Although auditors calculated that the state has suffered hundreds of millions in losses due to Optum’s struggles — through claims that were improperly denied, duplicate payments, overpayments and uncollected federal funds — the firm was treated gently, auditor Josh Adler said. 

“It’s almost, in my mind, it’s like [they were] too big to fail,” he told the panel. “The department’s position was just ‘we can’t do anything.’” 

Lam suggested it will fall to the incoming administration of Gov.-elect Wes Moore (D) to chart a new course, though another auditor, Brian Tanen, cautioned against delay. “The findings are not static,” he said. “The potential losses increase every day that goes by.” 

Health Secretary Dennis Schrader, who skipped a Nov. 1 discussion lawmakers convened, was absent on Tuesday as well. His absence frustrated lawmakers who wanted to know who set the policy not to sanction Optum more harshly. 

The agency officials who spoke on Schrader’s behalf rejected the claim that the contractor’s failures hurt the state financially. 

“It is our contention that the state has not lost money,” said Assistant Secretary Webster Ye, pointing to unspecified payment withholdings and penalties. His comments elicited sounds of disbelief from Del. Andrea Harrison (D-Prince George’s) that were audible during the online meeting.

“I don’t believe that there have been losses,” said Deputy Secretary Steve Schuh. He said the decision not to seek liquidated damages — what he called “the nuclear option” — should not be interpreted as a sign the agency is satisfied with poor performance. 

Lam called Schuh’s comments “non-sensical.” He said the department’s defense of its actions represented “such a contortion of the truth that it puts Cirque du Soleil to shame.” 

Problems with ‘virtually every aspect of the contract’ 

Lawmakers from both parties signaled their unhappiness with the agency’s oversight and the amount of time it takes to get information. “We’re not getting the answers that we think we should be getting,” said Del. Steven Arentz (R-Upper Shore). “I think it’s important, because we’re dealing with a lot of money here. A lot of taxpayer dollars.”

Although nearly all OLA audits of government agencies uncover some areas where improvement is needed, chief auditor Greg Hook said the MDH’s performance in this instance was notable. “Due to the financial significance and repeat nature of many findings, we determined that MDH’s accountability and compliance level was ‘unsatisfactory.’” That designation triggers a formal “follow-up review” within the next 12 months. 

Adler told lawmakers that auditors “identified problems with virtually aspect of the contract” — including gaps in the initial procurement, a failure to vet Optum’s many subcontractors, a failure to test Optum’s system before it went live, shortcomings in the system itself, and the agency’s unwillingness to impose stiffer penalties. 

He said the agency feared that if it went after the vendor more aggressively, “it would discourage [the company] from resolving the many problems it has.” Another fear, he said, was that Optum might file suit against the state in response. Adler called the health department’s stance “contrary to the intent of state law.” 

Although the company has two years remaining on a five-year contract, the agency has signaled it is moving on. Earlier this month officials acknowledged they are nearing completion on a revamped procurement process will be used in the search for a replacement. 

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