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Vangent Contract Highlights Medicare-Agency Waste Concerns

May 17 (Bloomberg Government) -- When the U.S. Centers for Medicare and Medicaid Services needed help managing a telephone hotline last year, it didn’t open up competitive bidding for the work. The $929 million contract, one of the agency’s biggest, was instead given to a company that’s done the job since 2002.

The award to Vangent Inc. highlights concerns among U.S. lawmakers as they crack down on waste at the Medicare agency, which is gearing up to help expand health-care coverage to more Americans.

At a time when federal departments are using more competition among suppliers to pare costs, the Medicare agency is increasingly using single-source deals, according to Bloomberg Government data. Almost a third of all contracts at the agency last year weren’t competitive, up from about 28 percent in 2000. The percentage fell for all agencies combined.

“Absolutely, it’s a concern,” said Steven Schooner, co-director of the Government Procurement Law Program at the George Washington University Law School. “The way you get value for money is by injecting market-based competition.”

The Centers for Medicare and Medicaid Services, or CMS, relies “heavily” on a small number of contractors, according to a fact sheet prepared for a hearing by Senator Claire McCaskill, a Missouri Democrat who heads a subcommittee on contracting oversight.

The 10 largest recipients of CMS contracts received more than 40 percent all CMS contract dollars last year, according to Bloomberg Government data.

Biggest Contractors

The biggest CMS vendors after Vangent in fiscal 2009 were Hewlett Packard Co., WellPoint Inc., Palmetto GBA LLC, Lockheed Martin Corp., IBM Corp. Trailblazer Health Enterprises, Highmark Medicare Services Inc., First Coast Service Options Inc. and Noridian Mutual Insurance Co., Bloomberg Government data showed.

“We are fully committed to the competitive acquisition process,” said CMS spokesman Peter Ashkenaz. Eileen Cassidy Rivera, a spokeswoman for Arlington, Virginia-based Vangent, declined an interview request, referring questions to CMS.

As the U.S. health-care overhaul begins to take shape, the CMS is being watched more closely. The agency already provides health care to almost a third of all Americans.

CMS must cut as much as $500 billion from Medicare over the next decade, and try to do so without reducing care for seniors. It also must add an estimated 16 million uninsured Americans to the ranks of Medicaid, the federal and state health program for the poor.

MaCaskill and other lawmakers question the agency’s ability to take on these tasks, pointing to its accounting standards and contracting practices. The Government Accountability Office, the investigative arm of Congress, has warned of “pervasive deficiencies” in CMS contract management.

‘Run-Away Costs’

The accord with Vangent, valued at as much as $929 million through 2013, is a so-called cost-incurred contract. That payment structure, potentially more expensive than a fixed-price deal, drew fire from Senator McCaskill.

“There is not an incentive on the part of the contractor to keep costs down,” McCaskill said at a hearing on CMS contracts she held in Washington on April 28. “Whatever the cost is, it’s going to be paid. If you don’t have someone looking over their shoulder, you’re going to have run-away costs.”

McCaskill said there will be “a lot of scrutiny” on the agency and how it handles contracts.

Non-Competitive Contracts

The 31.8 percent of contracts without competitive bidding at CMS compares with 18.7 percent for the Homeland Security Department, 21.7 percent for the Transportation Department and 12.6 percent for the Education Department. The figure for all federal agencies fell to less than 31 percent in 2009 from 37 percent in 2000, Bloomberg Government data showed.

Some agencies relied more on non-competed contracts than did CMS. The Department of Housing and Urban Development awarded 32.4 percent of its contracts without competition, while the Department of Defense’s ratio was 36.7 percent.

George Washington University’s Schooner, a former procurement specialist in the Office of Management and Budget, said there may be cases when a lack of competition can be justified if costs of shifting contractors are too great. As a general rule, though, increasing reliance on non-competitive contracts may be a troubling sign, he said.

In the case of the Vangent contract, the agency was permitted to award it last year as “follow-on” work because Vangent had won the contract in a competition in 2006, CMS’s Ashkenaz said.

Changing contractors for the Medicare hotline could take a year to complete and cost the agency $27 million to as much as $97 million, according to Ashkenaz.

“During a 12-month transition period, CMS risks less than optimal customer service to the beneficiaries while the new contractor works through a learning curve,” he said.


The 1-800-MEDICARE line handles can more than 1 million calls a month and employ more than 4,000 customer service representatives.

Contract work through the Department of Health and Human Services -- chiefly the Medicare hotline -- accounted for about 44 percent of Vangent’s $584 million in 2009 revenue, according to an annual statement filed with the Securities and Exchange Commission.

Vangent’s history with CMS goes back to 2002, when the company -- then known as NCS Pearson Inc. -- won a contract valued at about $225 million through an open competition.

Airport Screening

A federal audit faulted NCS Pearson in 2005 for its work for the Transportation Security Administration in assessing and hiring airport passenger screeners after the 2001 terrorist attacks in New York and Washington. The company denied wrongdoing.

In 2008, the company agreed to pay $5.6 million to settle allegations that it submitted false claims in connection with airport screening, the Justice Department said at the time.

In 2007, Pearson Government Solutions, the successor to NCS Pearson, changed its name to Vangent and was purchased by Veritas Capital, a New York-based private equity firm that invests in companies providing services to governments.

Kerry Weems, a former acting administrator of CMS, joined Vangent in December as senior vice president and general manager of its Health Systems group.

According to federal acquisition rules, cost-reimbursement contracts like the one awarded to Vangent “are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.”

Call Volume

Ashkenaz, the CMS spokesman, said a fixed-price contract was not practical in the case of the Medicare hotline because CMS couldn’t always predict when the hotline would experience a surge in call volume that would require additional staff.

He said the hotline has about 2,650 service representatives. He said the number can jump to more than 4,000 during peak periods, often in the fall.

Most contracts for call-center operations are typically some form of fixed-price agreement, with some adjustments to allow for incentives for better performance or penalties for poor performance, said David Butler, executive director of the National Association of Call Centers.

“If this is a sole-source and it allows for price escalation, that’s great for the contractor but it seems sort of odd to me,” Butler said.

Rodney Benson, director of the CMS Office of Acquisition and Grants Management, told Congress he is conducting a study of his office staffing requirements and is determined to correct all of the accounting deficiencies identified by the Government Accountability Office.

“I don’t want to make excuses,” he told McCaskill at the hearing. “This time we’re going to get it right.”

To contact the reporter responsible for this story: David Lerman at; Paul Murphy at

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