Recent high-profile controversies involving the State Health Plan, mental health services, and office supply overcharges have raised red flags for some North Carolina lawmakers. They’re considering rewriting the rules governing state contracts.

“A first-year law student, the first day of law school, could do a better job on those contracts,” said Sen. Dan Clodfelter, D-Mecklenburg, referring to state contracts linked to the State Health Plan for government workers, teachers, and retirees.

Clodfelter and other legislators highlighted flaws in those contracts and others during an Aug. 3 meeting of the General Assembly’s Joint Legislative Program Evaluation Oversight Committee. During that meeting, lawmakers signaled their willingness to seek changes.

“Certainly, I would be for anything that could improve the efficiency and certainly anything we could do to make it a more professional process,” said House Majority Leader Hugh Holliman, D-Davidson.

Democrats were not alone. “Any time that you do contracts, they ought to have some kind of system that works to protect the taxpayers that pay it,” said Rep. J.H. Langdon, R-Johnston. “What we’ve got is a system that’s not doing that. What we need is legislation that fixes contracts.”

“It appears to me that we’ve got a mess that needs to be fixed for the taxpayers, if nothing else,” Langdon added. “Sen. Clodfelter, I’m not an attorney, but I think any of us could do better contracts than we’ve heard of today just because we care about doing it right.”

Controversial contracts

Those comments followed a two-hour hearing called to answer questions about three specific sets of state contracts.

The first, Blue Cross and Blue Shield’s contract to administer the State Health Plan, has come under fire for the secrecy of its provisions. In the budget year ending in June 2008, the health plan paid Blue Cross $97.5 million to process 9.4 million claims for the plan, according to a February 28 News & Observer report. The plan serves roughly 665,000 government workers, teachers, and retirees.

While those numbers represent about $10 per claim, Blue Cross responded to the initial newspaper article by contending that its actual profit margin for administering the main health plan contract was just 0.625 percent. Critics inside and outside the General Assembly have said they did not have enough information from Blue Cross to judge whether its statements were accurate.

The second contract involved Office Depot’s provision of office supplies to state agencies. Former State Auditor Les Merritt released a report last September that revealed Office Depot had overcharged state agencies by $294,000 over a six-month period. The contract negotiated by the state Division of Purchase and Contract did not protect the state’s interests, according to a news release from Merritt. The auditor also criticized the P&C division’s monitoring of the contract.

The third contract involved a mental health program called community support. A February 2008 News & Observer report indicated that North Carolina had wasted at least $400 million on the program, which was part of state government efforts to shift mental health services from government-run hospitals to private outpatient care. Among the eye-catching charges were bills of $61 per hour for contractors who took mental-health clients to malls or movies or sat with them as they completed homework assignments.

A state audit released in July 2008 pointed to problems involving the relationship between the N.C. Department of Health and Human Services and ValueOptions Inc., a Virginia-based firm hired to certify treatments and community-support services eligible for Medicaid reimbursement.

Lawmakers scheduled the Aug. 3 hearing to learn more details about the contracts from representatives of the N.C. Justice Department, State Health Plan, P&C division, and DHHS, along with current State Auditor Beth Wood.

Problems revealed

“How do we make these mistakes?” Wood asked during her presentation. “How do we get in these situations? One thing I think it’s important to note — and this was the case with the Blue Cross and Blue Shield contract and possibly the (ValueOptions contract) — on the front end of these contracts a lot of times are projections. There are numbers used, and they project how the services will be rendered and the costs involved with these services. If your projections are flawed, then obviously the performance will be at a problem also.”

The “key” to dealing with contracts filled with projections is monitoring, Wood said. “We have yet another contract in the Auditor’s Office that we’re working on … and again the monitoring is an issue in that agencies will say it’s (the Department of Administration’s) responsibility to monitor these contracts,” she said. “And I don’t know that there is any statutory provision of who’s responsible to monitor.”

The question-and-answer session with Wood highlighted a key complaint from lawmakers.

“Have you been denied access by any of the suppliers to the state regarding any issues where you want to audit?” asked Rep. Nelson Cole, D-Rockingham.

“Blue Cross and Blue Shield,” she answered.

“Follow-up question: Why?”

“It’s in the contract that we can’t,” Wood responded. “We would not be allowed to look at those numbers.”

“This is inconceivable,” Cole said. “Because of the contract, you are denied access to those millions of dollars of money that we spent as to whether they were spent properly or wound up somewhere else. We don’t know that.”

The State Health Plan’s top officer also criticized elements of the Blue Cross and Blue Shield contract. Jack Walker was not involved in developing the current State Health Plan contract. He returned to his old post as the plan’s executive administrator last summer after lawmakers fired his predecessor.

“It was a ‘cost-plus’ contract,” Walker explained to the committee. “It had no caps, no reason for any cost-saving initiatives. It lacked any requirements for reporting on what their costs were. … It had weak provisions for auditing.”

“Are bonuses allowed?” Walker asked. “Can marketing expenses of Blue Cross and Blue Shield be charged to the plan? How is overhead to be allocated? There’s a whole host of things that should have been done but were untouched in the negotiation of this contract.”

AG stays mum

While the auditor suggested some possible improvements to the laws regarding state contracts, some legislators were disappointed that Attorney General Roy Cooper’s staff offered no suggestions.

“Were you given this list of questions to be asked of you that you were supposed to respond to?” Cole asked Don Teeter, the attorney speaking on behalf of the N.C. Justice Department.

“Yes, sir, the written response was above my pay grade,” Teeter explained. “And I believe that the chief of staff has indicated with somebody over here that the Attorney General’s Office respectfully declined to make a written response.”

“So in essence what you’re saying is we’ve asked them questions, and they will not respond,” Cole replied. “The Attorney General’s Office will not respond.”

“That’s my understanding, that they have asked not to respond,” Teeter said.

“That’s an insult,” Cole replied.

Legislators are likely to discuss state contract laws again. Any recommendations from the Program Evaluation Oversight Committee would require support from the full N.C. House and Senate to become law.

Mitch Kokai is an associate editor of Carolina Journal.