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Ruling: State owes IBM for welfare overhaul


  • Photo courtesy of 401(K) 2012 via Flickr Creative Commons

By Lesley Weidenbener

A Marion County judge ordered the state Wednesday to pay $52 million plus interest and fees to IBM, the spurned partner in its controversial welfare modernization program.

The total includes $40 million that Superior Judge David Dreyer had previously ordered plus a new $12 million judgment that largely covers equipment the state's Family and Social Services Administration kept when it terminated a 10-year contract with IBM early.

Still, Dreyer did not hold the state fully responsible for problems implementing a system that aimed to make it easier for Hoosiers to apply to Medicaid, Food Stamps and other welfare programs.

"Neither party deserves to win this case," Dreyer wrote in his 73-page ruling. "This story represents a perfect storm of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers."

The state had sought $400 million from IBM but got nothing out of the ruling. Gov. Mitch Daniels said the state would appeal.

"Here's what matters: Indiana, which eight years ago had the nation's worst welfare system, now has its most timely, most accurate, most cost effective and fraud free system ever," Daniels said in a statement. "That was always the goal and changing vendors was essential to achieving it. We'll seek and expect a reversal, and either way, it's all been well worth it to solve the problem we set out to fix."

IBM officials said the ruling "confirms the essential role IBM played in reducing fraud and laying the framework for the welfare eligibility system that is currently serving Indiana's neediest citizens."

"This case was all about whether the state would fulfill its clear and explicit contractual promises," said Robert Weber, the company's senior vice president and general counsel, in a statement. "The court's decision is an important one for all companies who do business with the state because it makes clear that the state is not above the law."

In 2006, Indiana signed the 10-year, $1.3 billion contract with IBM to oversee a consortium of companies that would implement an overhaul the state's eligibility system, which state officials said was saddled with outdated technology, high error rates and problems with fraud.

IBM - working with the other firms - developed a system that required Hoosiers to use the web or the phone to apply for services, a move that created new options for many of the system's savvier users but eliminated the old system's face-to-face contact that older and disabled users relied on.

For years, Daniels defended the new system as an enormous improvement. But as complaints continued to roll in about lost documents, backlogs, inaccuracies and other problems, Daniels decided to change the system and in 2009 fired IBM.

State officials opted instead to work directly with the other companies in the consortium, rather than using IBM as the overall manager.

But the break up was messy, leading the state and IBM to sue one another - the state for breach of contract and the company seeking back payments and equipment FSSA had kept. A five-week trial earlier this year led to Dreyer's ruling on Wednesday.

As broken down by IBM, the court awarded the company:

$42.5 million in connection with contract termination payments.

$9.5 million in compensation for IBM equipment the state wrongfully retained.

$10 million in interest, plus costs, for the period of time that the state improperly withheld payment to IBM.

The court decision details a complicated relationship between the state, IBM and its key subcontractor, ACS Corp. Dreyer said the "competence of the parties in this project is sometimes open to question."

The partnership had difficult moments when the state implemented a new insurance program for low-income adults, when the recession led to an influx of applicants for assistance and when a devastating flood led the state to move its services into the field.

And while state officials were offering praise for IBM and the modernization publicly, officials at ACS were lobbying FSSA to fire IBM. That was occurring despite a contract requirement that contact between the state and vendors go only through IBM.

Eventually, state officials decided to go to a "hybrid system" that two longtime welfare officials drew up on a restaurant napkin, according to the court decision. The goal was to combine the best parts of the new system - fraud prevention and online access - with the personal contact and local case management of the old system.

At the time, Daniels said the decision to move to the hybrid system had nothing to do with IBM's performance. But IBM insisted that it needed contract changes and more money to implement the hybrid system and FSSA officials said it didn't have the money. The state then terminated the contract and cited two alleged failures as a basis for that termination - quality and timeliness.

Dreyer said in his ruling that IBM did not fail to provide promised services to the state - although "some benefits were not received as smoothly as the parties would have expected" - and therefore was not in breach of its contract.

"Modernization is the foundation on which the state hybrid system now stands," Dreyer wrote. "For better or worse, and through much transition difficulty, the contract, including IBM's efforts, conferred the overall aggregate benefit sought by the state: A new welfare system that works better."

Dreyer also chided the state for implementing what it called "an untested theoretical experiment" that substituted personal caseworkers with computers and phone calls.

"This is now admitted to be an error, and there is nothing in this case, or the court's power, that can be done to correct it, or remedy the lost taxpayer money or personal suffering of needy Hoosiers," Dreyer wrote.

Democrats, who have derided the modernization system since it was first announced, said the big losers after Wednesday's decision were Indiana's taxpayers.

"In their usual efforts to avoid responsibility for anything they have done wrong, the governor and his minions will claim that this ruling is beside the point. They will say their decision-making was right all along," House Minority Leader Pat Bauer, D-South Bend, said in a statement.

"But this is yet another example of an administration that continues to screw up at every conceivable opportunity in its final days in office," he said. "Fortunately, their end is in sight. Unfortunately, they will be long gone when the final bills come due for the taxpayers of Indiana."

Lesley Weidenbener is managing editor of The Statehouse File, a news service powered by Franklin College journalism students and faculty.


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