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U.S. Paid Healthcare.gov Contractor $4 Million to Fix Its Own Mess

Why do taxpayers have to foot the bill when government contractors screw up?

The U.S. government paid the main healthcare.gov contractor $4 million to correct defects of the botched site and withheld only $267,420 of what it owed the company, according to a new federal audit.

The report on the Centers for Medicare and Medicaid Services (CMS) and its contract with CGI Federal is to be published today by the Health and Human Services Office of Inspector General. It is the latest in a series of audits critical of federal oversight of the private companies that built the insurance marketplace at the heart of Obamacare. Although CMS replaced the contractor a few months after healthcare.gov's meltdown in 2013, the agency had little power to recover the money it spent trying to fix the site.

Like many deals between the federal government and private companies, CGI Federal’s contract allowed the company to pass along its costs to taxpayers and to take a fee on top of that—essentially, its profit. If the health insurance site didn't work, the government could withhold part of that fee, but taxpayers were still responsible for paying the underlying costs. "Cost reimbursement contracts place the risk of performance on the government,” according to the inspector general's report.

Federal watchdogs have criticized contract structures that put taxpayers at risk for cost overruns. President Barack Obama tried to steer agencies away from these types of deals early in his presidency. In a March 2009 memorandum, he said such arrangements should be reserved for "when circumstances do not allow the agency to define its requirements sufficiently” to set a price, he wrote. 

Yet the share of that money flowing through contracts structured like CGI Federal’s, known as “cost plus fixed fee,” has increased from 10 percent to 18 percent since 2009, according to data compiled by Bloomberg Government.

CGI Federal didn't respond to an e-mail seeking comment.

Healthcare.gov stumbled for months after it opened on Oct. 1, 2013, as CMS and its contractors scrambled to fix it. The total value of all CGI Federal's contracts for the site exceeded $250 million. In the five months that followed the bungled launch, CGI Federal billed taxpayers for $56 million. The government withheld $267,420 of that and approved the rest, including about $4 million in costs the auditors determined were to correct defects in the broken software. (Despite the flaws at healthcare.gov and some state-based marketplaces, 8 million people ultimately enrolled in health plans in the first year; enrollment for 2016 health plans will begin Nov. 1.)

CMS, which manages federal health programs, including Obamacare, "did not validate the accuracy of the amount" that it withheld from CGI Federal for defective work, according to the report. The agency "did not have the authority to withhold costs related to correcting defective work," the auditors wrote.

The auditors found it impossible to verify whether the $267,420 the government withheld was the correct amount, because CGI's monthly invoices didn't always specify which charges were related to repairing problems. The bills "did not identify details necessary to support the charges, such as the employees’ names, hours worked by each employee, and the employees’ hourly rates," the auditors wrote.

The auditors also said CMS, the government agency, didn't accurately record all the money it spent on healthcare.gov and identified $24 million they said was misclassified as unrelated to the marketplace. The agency is "unable to accurately account for and report" the total cost of healthcare.gov, the inspector general's office wrote.

In comments included in the audit, CMS took issue with that finding, noting that the $24 million supported other aspects of its work on Obamacare but wasn't directly related to healthcare.gov. More broadly, the agency has "sought to implement extensive contracting reforms and to make needed changes," HHS spokeswoman Meaghan Smith said in an e-mail. That includes replacing CGI Federal with consulting firm Accenture, the main vendor responsible for healthcare.gov since January 2014. Accenture's contract is structured to link payment more closely to performance and is monitored in weekly and monthly meetings.

"We have already put in place a number of reforms to limit costs and to ensure accountability for our progress," Smith said, "and we are always looking for ways to further improve our contracting systems."

—With Brian Friel 

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