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State loses legal fight on welfare overhaul

Judge rules for IBM but criticizes both sides

– A Marion County judge Wednesday battered both sides in the legal battle over the state’s ill-conceived and botched welfare privatization, but in the end awarded IBM Corp. $52 million.

Indiana got nothing from the lawsuit except a legal bill upwards of $8 million.

“Neither party deserves to win this case,” Marion County Judge David Dreyer said in his ruling. “This story represents a ‘perfect storm’ of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame and Indiana’s taxpayers are left as apparent losers.”

Dreyer said the state owes IBM $12 million, mostly for equipment left in the state’s possession when the contract was canceled. He earlier found the state had to pay IBM $40 million in subcontractor fees.

The state had sought hundreds of millions for breach of contract, but Dreyer awarded nothing.

Gov. Mitch Daniels said “we’ll seek and expect a reversal, and either way, it’s all been well worth it to solve the problem we set out to fix.”

He focused on the current state of the system: “Here’s what matters: Indiana, which eight years ago had the nation’s worst welfare system, now has its most timely, most accurate, most cost-effective and fraud-free system ever. That was always the goal, and changing vendors was essential to achieving it.”

IBM officials said the ruling confirms the essential role IBM played in reducing fraud and laying the framework for the welfare eligibility system that currently serves Indiana’s neediest residents.

“This case was all about whether the state would fulfill its clear and explicit contractual promises,” said Robert Weber, IBM senior vice president and general counsel.

“The court’s decision is an important one for all companies who do business with the state, because it makes clear that the state is not above the law.”

Human services advocates, as well as Democrats, called the contract into question continually from the beginning as some Hoosiers were abruptly denied or cut off of Medicaid and other benefits.

“Not only are Hoosiers left footing the bill for Mitch Daniels’ ill-conceived privatization effort, but we cannot forget that his outsourcing scheme caused physical harm to vulnerable Indiana families,” said Dan Parker, chairman of the Indiana Democratic Party.

“This proves that the governor’s system was a failure, but money can’t repair the damage done to the neediest Hoosiers who couldn’t get the service they deserved from state government.”

The ruling came more than three months after final arguments in the case. The trial lasted six weeks and included more than 130 hours of testimony and 100 witnesses.

The basic question was whether IBM breached a $1.37 billion, 10-year contract with the state.

The state had planned to modernize welfare system by moving to a “remote eligibility” system, in which Hoosiers seeking food stamps, Medicaid and other public assistance no longer would have face-to-face meetings with case managers but would instead apply online and through call centers.

In October 2009, Daniels canceled the contract after three years because of service complaints about the automated system. The state then created a hybrid system with an increased focus on face-to-face contact.

The state sued IBM in May 2010, and IBM countersued.

Dreyer said IBM was not in breach of the contract despite some signs of poor performance. He pointed out the value the state received from the contract, including improved welfare-to-work rates and decreased fraud.

And he noted that the current “hybrid” system uses the work-flow-management system IBM designed, though it was given a new name.

“Modernization is the foundation on which the state hybrid system now stands. For better or worse, and through much transition difficulty, the contract, including IBM’s efforts, conferred the overall aggregate benefit sought by the State: a new welfare system that works better,” Dreyer wrote.

Most interesting, though, was Dreyer’s point-by-point recitation of remarks by state officials who had cheered the contract and its work for years.

The state pursued IBM to run the hybrid system. But when IBM wanted more money, the contract was abruptly canceled.

“Only when the state’s budget crisis prevented the parties from reaching an agreement on financial terms did the state decide that it would ‘cut out the middle man,’ ” the ruling said.

Dreyer also noted that subcontractor ACS Inc. – which now has the contract with the state under the hybrid system – “failed to make any serious effort with respect to its portion of the (corrective action plan) responsibilities” and even directly lobbied state officials to terminate IBM.