July 9, 2004

Perry Laments CHIP Management Revelations
But Says Agency Taking Steps to Fix Problems

By Mike Hailey
Capitol Inside Editor

Governor Rick Perry says that he finds it "more than disconcerting" and "inexcusable" that the state appears to have lost millions of dollars in Children's Health Insurance Program funds as a result of poor contract management and monitoring at the Health and Human Services Commission.

State Switching CHIP Contractors as Republicans Brace for Auditor's Report State Auditor Says HHSC Abused Fiduciary Duty on Contracting for CHIP

The auditor's report was released a day after Capitol Inside reported that some Republicans were concerned that past problems with CHIP contracting, cutthroat competition during a recent rebidding process and publicity over program cuts had the potential to balloon into a major issue for opponents to use against Perry and other GOP candidates in future campaigns.

More than 500,000 Texas families were enrolled in the state-federal program last year. But that number could be cut in half in the fairly near future if some projections hold true.

As the news about the audit sent tremors through political circles, speculation intensified on what effect the findings and other related events could have on the political fortunes of the Republican governor and other elected officials tied to the HHSC or the CHIP program. There's no apparent evidence that Perry was involved directly in decisions that resulted in problems with CHIP contractors and subcontractors at HHSC. But while his fingerprints might be missing, his long shadow looms over the commission's handling of the CHIP program.

The governor appointed the agency's commissioner, Albert Hawkins, who returned to Texas after two years in Washington where he was a high-level official in President George W. Bush's White House. Perry's former chief of staff, Dr. Mike McKinney, had worked as a top executive for one of the two finalists for the CHIP contract before going to work for the governor. The governor's current chief of staff, Mike Toomey, was considered to be on the side of the other finalist because he had lobbied for a firm that had been contracted by the main CHIP provider in rural areas for the past four years.

While lamenting the state auditor's findings, Perry insisted that the HHSC under the direction of Hawkins had been attempting to clean up problems that existed before the current commissioner took over as the agency's leader in late 2002. The governor said the commission had taken steps "to ensure tax dollars are being efficiently and appropriately spent, including improving management of the CHIP program and renegotiating the contract with a different provider."

Hawkins, a former Legislative Budget Board analyst who was Bush's budget director in the governor's office, had only been on the job a few months by the time reports began to surface about possible irregularities in the CHIP contracting process. Questions about the use of CHIP funds started coming to light in April 2003 when Community Health Solutions, the subcontracted program manager, accused another subcontractor of trying to ruin its reputation in order to take over its share of the business the companies were getting from CHIP. The commission decided to test what it perceived to be a more competitive market and reopen the bidding process in July that year. Three companies responded to a request for bids - and the commission narrowed the list of finalists to Superior HealthPlan Network and Clarendon. Clarendon and its subcontractors had a bevy of powerful lobbyists, which Superior was able to match with an influential lobby team of its own.

Toomey had represented USA Managed Care, which had been hired by Clarendon as its network provider, until he gave up his lobby business in order to take McKinney's place on the governor's staff in late 2002. McKinney, who served in the Texas House with Perry, had worked as a top executive for Superior its parent company, Centene Corporation, before taking the job as Perry's top aide in 2001. He's currently serving as a vice chancellor in the University of Texas Health Science System. Even though McKinney had reportedly unloaded his stock in Superior before going to work for the governor's office, representatives for the rivals in the rebidding process suspected that he had a hand in his ex-employers push for the CHIP rural services contract that Clarendon now holds. At the same time, others involved in the behind-the-scenes campaign for the contract suspected Toomey of trying to call shots from the governor's office to help Clarendon keep its business with the state. Toomey's former lobby partners - Bill Messer and Ellen Williams - are still representing USA Managed Care.

Two other key lobbyists in the CHIP contracting saga - Hillco's Neal T. "Buddy" Jones and Bill Miller - have been working as consultants for Clarendon's subcontracted program manager, Community Health Solutions. A number of other high-powered lobbyists that have been in the middle of the recent competition as well.

The HHSC maintained in a statement that its decisions "should be judged in the context of the conditions that existed" at the time it inherited the CHIP program after the Legislature approved it and wanted it up and running in a hurry in 1999. No rural health system for children had ever been established in Texas and as a result there was no information on which to base expectations and cost estimates. Most companies saw the rural program to be too risky, leaving Clarendon as the only insurance firm to "actively negotiate" with the state.

Since that time the commission noted that it had hired a new rural provider while tightening contract specifications and implementing improved monitoring and management controls. Critics, however, say that the HHSC replaced a contractor that provoked the state auditor's examination with a provider that had the weakest financial rating of the three competitors in the recent bidding.

Superior got the job after offering the lowest bid - and it believes the criticism it has received since that time is sour grapes by competitors who lost fair and square.