For state-funded technology, failure a likely option

Bad estimates, poorly written contracts and lax oversight cost taxpayers millions of dollars during the development of the state's new Medicaid system. And experts say these are reflective of broader problems plaguing the process of buying and building big technology projects in North Carolina and across the country.

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Tyler Dukes
Mark Binker
RALEIGH, N.C. — Over the last seven years, thousands of children have passed through the exam rooms of Dr. Albertina Smith's office off Capital Boulevard.

The evidence is all over the walls.

From floor to ceiling, Sunshine Pediatrics is plastered with hundreds of drawings in crayon and marker. They represent just a fraction of Smith's 3,800 patients, 90 percent of whom are on Medicaid.

Educated in North Carolina, Smith attended school through a scholarship program that encouraged the care of needy patients. She's taken a special interest in caring for families on Medicaid, the joint federal-state program that provides health care for the poor and disabled.

"For the past seven years, it's been good for me," Smith said. "In fact, because I had so little capital when I started the practice, it was easy to start because Medicaid is typically very reliable when it comes to payment."

When the state flipped the switch on its new Medicaid system in July, it created a big problem for Smith – about 90 percent of her payments just stopped coming.

"In my mind, the beginning of July was like 'Apocalypse Now,'" Smith said. "As far as I was concerned, my revenue came to a halt."

She wasn't alone.

DHHS Secretary Aldona Wos and Chief Information Officer Joe Cooper testify before a General Assembly oversight committee on Oct. 8, 2013.
Over the last few months, providers and lawmakers have demanded answers from the state Department of Health and Human Services about the rocky roll-out of NCTracks, a massive technology revamp meant to streamline reimbursement and make it easier for policy-makers to track often erratic Medicaid costs. As state officials have noted in legislative testimony and scathing audits, the implementation has had its share of problems.

But technology experts say the deeper issues with the state's new Medicaid system go back several governors and DHHS secretaries to the start of the contract process. Bad estimates, poorly written contracts and lax oversight that cost taxpayers millions of dollars are among the root causes. Experts say the issues with NCTracks are reflective of broader problems plaguing the purchase and development of big technology projects for every state government in the country, including North Carolina.

"These projects are huge. They're very complex," said State Auditor Beth Wood, whose office examined the issue of state technology in an April report. "I'm not sure that, on the front end, we've taken the time or that we have the talent to plan a huge project the magnitude of NCTracks properly."

IT failure a widespread problem

According to data from the Standish Group, a Boston-based IT consulting firm that tracks the status of more than 50,000 technology projects across the country, the vast majority of state government IT initiatives in the U.S. either fail completely or come in significantly over budget and behind schedule.

From 2003 to 2012, data analyzed by Standish for WRAL News show that only about 12 percent of large state government projects are successful – in other words, on time and on budget.

An eight-year project in Florida to implement a child welfare information system scheduled for launch in 1998, for example, was delayed until 2005. When it was done, according to a Standish report, the final cost was $230 million, nearly seven times the original estimated budget.

In North Carolina, challenges like these mean big business.

Across all state agencies, 116 technology initiatives are now in various stages of development, according to state Chief Information Officer Chris Estes. That portfolio represents a total of about $1.6 billion, a mix of state and federal taxpayer dollars.

An April audit by Wood's office of the 84 trackable state technology projects found they took an average of 65 percent longer to complete and cost more than twice original agency estimates. That's an additional $356.3 million, the audit showed.

The larger price tags often haven't come with better results.

About a decade ago, under a Democratic governor, the state awarded a $171 million contract to Affiliated Computer Services to replace North Carolina's 15-year-old Medicaid information system. The project was originally scheduled to last two years.

But when that deadline came, Wood said, it was clear to state officials at the time that the company couldn't deliver. With $5.6 million already spent, the state terminated the contract. Settling the resulting lawsuit by ACS cost the state another $10.5 million.

"Because of the poor contract that we had, we paid them $16 million to go away," Wood said.

The current contract was awarded to CSC in January 2009. By then, the cost of the project had jumped to $265 million.

Like its predecessor, CSC had more than two years to do the job, and just like its predecessor, the firm sought to extend the contract past the August 2011 launch date. In July 2011, the state gave CSC two more years to finish and launch. The final cost as of July 2011 was $484 million, close to triple the price tag of the original contract. The federal government paid for about 90 percent of the amount.

NCTracks has been the most high profile of those problematic systems, but is far from an outlier.

Problems with another DHHS system, NC FAST, delayed processing of food assistance claims this summer. Students across the state, including some in Wake County, saw report cards and other important reports delayed by growing pains associated with Home Base, a computer system rolled out by the Department of Public Instruction this year.

For complex tech, contract is key

In almost every problematic case Wood's office has examined, including the long saga of NCTracks, the issues began with bad contracts.

She said state workers normally tasked with hiring companies and purchasing goods aren't knowledgeable enough about the technology they're looking to build or buy.

"I'm not sure the state of North Carolina, with the salaries that we pay, has the necessary people on board that can see everything that needs to be seen for these more complex systems," Wood said.

As a result, vendors – not state officials – write the contracts, and Wood said these companies don't always have the state's best interest at heart.

"Once you sign that contract with the vendor, you can't break it. You're theirs," Wood said. "They can take us to the bank, and we'll never see it coming."

Cost overruns have played out repeatedly in North Carolina projects, Wood's audits show. The new food stamp system implemented by DHHS jumped from an estimated $25.2 million to an actual $48.2 million. The Turnpike Authority's toll collection system went from $19.8 million to $41.1 million.

As the audits make clear, some of the largest spikes in cost come from an expansion of the size of projects – the change from a small pilot program to a whole-state solution, for example. But many more are simply the result of bad estimates that go unchallenged by the state's Information Technology Services division, Wood said.

"We've even had people at ITS tell us that you really don't know how much a project's going to cost until you sign the contract and get started," Wood said. "That is just wrong, because the vendor has all the cards. They have all the power, and they know it."

From the vendor's perspective, according to Red Hat National Sales Director John Punzak, it can be difficult to balance both a competitive bid and a risky project complicated by politics. 

"You just can't possibly know everything you're getting into as a vendor. There's just no way to uncover all the risk and all the issues," Punzak said. "At the end of the bid cycle, the winner can't price enough risk into it, and they can't understand the resistance in implementing the change."

State officials make these risks more complicated, Wood said, when they can't adequately explain the requirements of the project at the beginning.

"When I'm talking about upfront planning, I'm talking about making sure that you define what the system needs to do," Wood said. "Then, let the vendor tell you how that needs to be built."

Over the course of long-term projects, rapidly evolving technology prompts government officials to change these requirements in the middle of the process.

Chris Estes, state chief information officer, discusses efforts by his Information Technology Services staff to prototype new state agency websites in the Innovation Center on Jones Street on Dec. 13, 2013.

Estes, who as CIO heads up the state's ITS division, compares the process to buying a car.

"If we buy a car in 2008 to drive it in 2013, we want it to have all the features that a 2013 car has. Now we're trying to convert a 2008 car into a 2013 car while we're driving it. We've got to stop doing that," he said. "We've got to lock down and say we're buying a 2008 car that can only do 2008 things, and if we want to upgrade to a 2013, that should be a separate project with a separate timeline and a separate budget."

Until now, Wood's audits show, ITS has played a nominal role in the oversight of state agency technology projects. 

"You don't wait until you get to the end of a project like NCTracks and find out that it blew up," Wood said. "There's testing that's done along the way, there's building that gets done by phase and nobody's really stepping back and challenging the agency responsible for it."

She said she hopes that will change with Estes, who took the job under Gov. Pat McCrory in January.

"We're in the process of trying to fix that," Estes said. "But specifically, it's not working as well as it should."

For users, technology failures have consequences

Whether the problems with systems such as NCTracks originate in the planning or the execution, it's the state's current leaders who hear from angry users like Smith, the pediatrician who is still struggling to get paid five months later.

It's a message state Sen. Jeff Tarte, R-Mecklenburg, a member of the General Assembly's IT oversight committee, says he gets loud and clear.

At Sunshine Pediatric, Dr. Albertina Smith has collected drawings from her patients over the last seven years. About 90 percent of those patients are on Medicaid.

"Everyone wants to blame prior administrations, but at the end of the day, we're the ones who accepted it on our watch. We said, 'Yeah, it's good to go, turn it on.' So, we're the ones that have to be held accountable," said Tarte, a former partner at Ernst & Young who now runs his own technology consulting firm. "At some point, it's not about assigning blame to anybody. Let's just get it working. Let's fix it."

Smith said DHHS still owes her about $24,000 in Medicaid reimbursement fees, an amount that represents at least a dozen pay periods to her small practice.

She's been in frequent contact with DHHS officials, who granted her an emergency loan in August to help her stay afloat. Since then, she said, she's gotten assurances each month that payment will come soon.

DHHS spokesman Ricky Diaz said in an email that the agency is working to address Smith's issue, which is specific to only 80 providers out of 77,000. He added that even one provider impacted negatively is "one too many."

Although DHHS officials have been helpful, Smith said, she gets the impression that, much like herself, they "didn't know what they were getting into."

"At the very least, there should have been a higher level of due diligence in making the decision in hiring any company," she said. "Then, you put in incentives to make sure they get the work done. You give them incentives to get it right. You actually give them responsibility to get it right."

Those suggestions match many of the recommendations in Wood's audit, nearly all of which Estes said his staff will work to implement over the coming years.

In the meantime, Smith said she'll keep waiting.

Wednesday's story is the first of a two-part WRAL News series on the systemic problems with massive state technology projects. Check part two for a look at the ways state leaders could fix North Carolina's ailing process for acquiring and building new software.

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