Watch “State Contracts 101”
Wednesday, April 23, 2014
at 7 p.m. on LPB.
“State Contracts 101”
A big push by Governor Jindal has been the privatization of
state government operations which he says will save taxpayer
money. To accomplish this, the state has contracted with outside
providers for professional, personal and consulting services.
Currently, Louisiana has nearly 13,000 active contracts - the
majority for $50,000 or more.
A proposed bill this legislative session would reduce state
spending on contracts by 10 percent. But the Jindal administration
says that contracting in state government is already being reduced.
And some of the biggest contracts are essential to provide assistance to the public such as the
administration of health insurance programs or to fill drug prescriptions for retirees.
So, is the privatization of state services through contracts cost-effective? And how
necessary and appropriate are the majority of state contracts? Will proposed legislation help rein
in their costs or create arbitrary caps that hinder agencies in delivering much-needed services?
Louisiana Public Square looks for answers on “State Contracts 101.”
Current State Contracts
According to the Division of Administration’s Louisiana Transparency & Accountability
(LaTRAC) online database, Louisiana is currently involved in 12,948 active contracts with a total value
of $19.5 billion. Just more than half of these are for $50,000 or greater.
State contracts are entered into between a Louisiana state agency and a vendor. These contracts
fall into two levels, according to Robert Travis Scott, director of the Public Affairs Research Council of
Louisiana, or PAR. “When you’re talking government contracting you’re talking about simple things like
a contract to buy paper; or more complicated things like having a company build a road for you or a
building.” Scott says, “And then you have a much higher level of contracting which is privatization and
that would be when the government or state employees are performing a function and now we’re going to
let that be performed by a private entity.“
Contracting Process
After the selection process (which usually has a Request for Proposals), the contracting agency
will draw up a contract. After both parties sign, the contract then goes over to the Division of
Administration's Office of Contractual Review (OCR) for final approval and signature. Their review is
mostly technical and legal. They are making sure the correct legal protections are in the contract, that is
has a monitoring provision, that the right accompanying paperwork is signed off on, etc. Only after the
Director of OCR signs off on a contract is it binding on the state. In addition, if it is a privatization
contract, the Civil Service Commission has to approve it as well since state employees will be affected.
Data processing/information technology contracts over $100,000 must be reviewed by the Procurement
Support Team (PST). At the discretion of the OCR Director, other consulting services contracts with a
value greater than $140,000 may also require PST review.
Basically the onus of creating and monitoring contracts is on the agency. There are certain
outside reviews by DOA, the Legislative Auditor or, Civil Service, but ultimate review comes down to
the agency level.
Questionable State Contracts
Louisiana State Treasurer John Kennedy says many of Louisiana’s state contracts need to be reviewed,
reduced or eliminated. Some of the questionable state contracts he has highlighted include:
 $94,000 in taxpayer money on a California consultant to "assist students to learn valuable social
skills through organized play on their recess and lunch periods" (Contract #672113)?
 $874,930 on a consultant to "provide ... assistance to disadvantaged business enterprise
companies doing business with DOTD" (Contract #658942)?
 $19,500 to DHH to "coordinate two Golden Glove Boxing tournaments" (Contract #710616)?
 $57,100 to "inform and educate the Hispanic community ... of seatbelt usage" (Contract
#708691),
“We don’t need all these consulting contracts.” Kennedy recently told LPB, “And the remainder we’re
not negotiating enough to get a good enough deal for taxpayers.”
Supporters say HB 142 is a solution
HB142, sponsored this session by Rep. Jerome Richard, I-Thibodaux, would require a 10% reduction
of state professional, personal, and consulting contracts with the savings deposited into the Higher
Education Financing Fund. Richard recently told LPB, “We spend about 6 billion dollars each year on
state consulting contracts. If HB142 passes it says you cut 10 percent of last year’s dollar figure which
would roughly be 6 million dollars.”
Richard’s bill was prompted by a speech he saw given by Treasurer Kennedy in
2011 about the Treasurer’s work as a member of the Streamlining Government
Commission. One of the Commissions’ recommendations was to cut 10 percent
from the amount spent on state contracts. “We’re trying to say ‘We know there’s waste in government;
there’s ways you can cut government; make some cuts; you make them; you guys are administration.’”
Richard says, “And it’s not ten percent across the board; it’s ten percent anywhere you see fit.”
This is the fourth year that Rep. Richard has introduced this bill; the only change this year being the
dedication of savings to Higher Ed. The last two years the bill passed unanimously out of the House and
last year it made it all the way to the Senate Finance Committee only to receive a 4-4 tie vote. “Normally
this would be a good government bill for republicans, for conservatives, to cut costs and to downsize
government which is what I’m about,” Richard says, “Yet in Senate Finance; three Democrats and one
republican supported the bill, and four republicans voted against it. Doesn’t make sense to me at all.”
An analysis of a similar bill by the Legislative Fiscal Office in 2013, estimated savings of $528 million
annually.
Kennedy, who has spoken at the Legislature in favor of HB142 says, “We’ve gone from 12 billion to
19 billion to 25 billion dollars state budgets over a time when we haven’t added people; we’ve lost a
Congressional seat; and inflation has been under 2 percent. Don’t tell me we don’t have the money to
fund LSU and our Community College System and our other universities; we do; we just need to spend 10
percent less for God’s sake.” Kennedy says the state should negotiate like businesses do. “Just imagine
what would happen if the Governor wrote all thirteen thousand of our consultants and said ‘Times are
tough in Louisiana; we need money for Higher Education; we want you to reduce your contract this year
by 10 percent or 5 percent or 3 percent. Otherwise we’re going to bid it out again.’ They’re not going to
say ‘no.’ They’re going to moan and groan and they’re going to do it. In this economy? They’re not going
to walk away from a consulting contract because we’ve asked for a modest discount.”
Opponents say HB142 is not good government
At the 2013 hearing of Rep. Richard’s bill, Division of Administration Chief of Staff Steven Procopio
testified that the amount of state contracts is reducing. For 2013, there was “a reduction of 153 million
dollars in all means of finance and 22 million dollars in state general fund dollars,” Procopio said. The
Jindal administration also has said that cutting all $50,000 contracts only would reduce overall contracts
by 1 percent. Large scale contracts affecting coastal protection, health care providers and pharmaceutical
services also would need to be cut in order to hit the 10 percent target.
This session, Division of Administration Commissioner Kristy Nichols testified against HB142 before
the House Appropriations Committee saying, “This approach does not lend itself to good government.
It’s an arbitrary approach to putting in a plug that you don’t know will have any value at all.” HB142
passed out of Appropriations on April 15th.
Privatization Contracts
Faced with recurring revenue shortfalls over the last several years, Governor
Jindal has searched for ways to reduce state spending. Many of his efforts have
focused on moving some duties formerly handled by the state to private entities.
These privatization contracts, Jindal has said, will ultimately save Louisiana money.
The privatization measures have created mixed results.
Charity Hospital System
One of Governor Bobby Jindal’s largest privatization efforts has been of the state’s charity hospital
system involving nine public-private ventures that impact all but one of LSU’s 10 charity hospitals.
Public-private ventures impact nine LSU charity hospitals in Baton Rouge, New Orleans and Lafayette.
The Lallie Kemp Medical Center in Independence is still run by LSU. The Jindal administration claims
the privatization move will result in savings of about a hundred million dollars. About 7,000 state workers
lost their jobs due to the privatization move.
LACKING FEDERAL APPROVAL Earlier this month, the federal government told state officials it
would not pay $307 million – at least for the time being – for medical services
delivered at the new privately operated LSU public hospitals. The Centers for
Medicare and Medicaid Services disburses the dfederal portion of the state federal
program that pays for care for the poor and uninsured. At issue with CMS are the
state’s plan for funding the privatization plan and the leasing of six public hospital facilities to private
entities. Receipts from the lease deals are about $140.2 million, revenues that are expected for the state
government’s budget for the fiscal year that began last July. Louisiana taxpayers could have to foot the
bill, if CMS doesn’t approve the state financing plans for the hospital privatization. State Department of
Health and Hospitals (DHH) Secretary Kathy Kliebert told The Advocate that she remains confident that
the federal health agency will approve the financing plans.
UNSUSTAINABLE? The Jindal administration’s privatization of LSU public hospitals is fraught with
“considerable uncertainties” and “may not be financially feasible in later years,” a Public Affairs
Research Council report concludes. Don Gregory, former state Medicaid Director and co-author of “The
New Safety Net” says that about half of the money invested in the private/public partnerships is federal
money that comes from uncompensated care. “We’re concerned because Obamacare calls for an
eighteen billion dollar reduction in that source of funding between now and 2020,” Gregory recently told
LPB, “It may be necessary to revisit those long term agreements during the next (gubernatorial)
administration.” State Rep. Katrina Jackson, D-Monroe says that the private contracts put the taxpayer
on the hook if something unforeseen happens,“Jindal is promising that the state’s taxpayers, will fund the
private companies to full extent of the contract.” Gregory points out that the new partnership agreements
will be more difficult for the administration to manage financially because in the past if there was a
revenue shortfall in the hospital system; they would curtail the availability of services to patients. “That’s
going to be harder to do,” Gregory says, “when those private partners are guaranteed their costs.”
COSTING MORE
As reported in The Advocate on May 28, 2013, “The total operating expense
associated with the privatization of the LSU hospitals will hit $1 billion during the next fiscal year. That’s
more than there is in the current year’s budget – $955 million for the state to operate the charity
hospitals.”
The Legislative Fiscal Office in February said that there could be as much as a $13.75 million shotfall
related to hospital retiree insurance benefit costs for which the state is on the hook. DHH has determined
that $10 million of the legacy costs are not matchable by federal dollars.
Rep. Kenneth Havard, R-Jackson, says that while it cost $100 million to run the Earl K.
Long charity hospital in Baton Rouge in 2012, since the private contract with Our Lady of
the Lake was signed, costs have continued to climb. “The year after that it was 138 million
dollars; this year 14/15 we’re projected at 169 million dollars.” Havard recently told LPB,
“That’s a 68.9 percent increase in what it cost to run that hospital in the private sector at
the Lady of Lake versus what we were running before.”
BOGALUSA & BIRTH CONTROL. No birth control services or abortions will be done at LSU’s
hospital in Bogalusa after its takeover by a Catholic-affiliated group. State Rep. Roy Burrell, DShreveport said the agreement seems to allow the Franciscan Missionaries of Our Lady to refuse to
provide an abortion even if it’s a life-threatening situation and there’s no time to get the woman to another
hospital facility.
Office of Group Benefits
The Office of Group Benefits (OGB) which administers state workers’ health
insurance, was privatized in 2013 by a vote from the Legislature. Initially the Jindal
administration sought to sign the contract without the input of legislators, but that
was blocked by an opinion from the Attorney General's Office saying state budget
committees would have to sign off on the move. Commissioner of Administration,
Kristy Nichols said the contract with Blue Cross will save $20 million annually. The Legislative Fiscal
Office instead pegged the savings at some $11 million to $18 million.
From January through the end of November, the Office of Group Benefits reserve account
dropped from $438.9 million to $257.1 million, according to the agency’s most recent financial reports.
The money was set aside to help pay insurance claims. The reserves stood at more than $500 million
about two years ago.
Since OGB tapped nearly 40 percent of its cash reserves last year, some fear this could lead to
double-digit increases in monthly insurance premiums. Frank Jobert, executive director of the Retired
State Employees Association says retirees, many of whom live on fixed incomes, could be facing
premium increases of 25 percent or reductions in benefits, or both. The Jindal administration, however,
says those concerns are exaggerated and that monthly payments are going up only 5 percent for members
of state government’s insurance plans.
Medicaid Privatization
The Jindal administration embarked on the privatization of health
care for two-thirds of its Medicaid population in 2012. Last spring, after
spending several million dollars towards implementation costs on a
contract with Client Network Services Inc. to handle the state’s Medicaid
administration, the state yanked it when it became aware of both state and
federal investigations into how the contract was awarded. Allegedly,
relationships between former Health and Hospitals Secretary Bruce
Greenstein and other state employees with CNSI helped get it awarded the
contract. While this move allowed the state the ability to recoup a
performance bond and to move ahead with the previous vendor substituting in, it also brought a suit by
CNSI for wrongful termination. Thus, the state better be confident the evidence presented to it by
authorities about probes in CNSI are correct, or there will be pretty penny to pay in damages.”
Former DHH Secretary David Hood thinks privatization only adds another layer to an already
complex system. A 2012 Robert Wood Johnson Foundation study found that private managed care has
had mixed results at improving access to care nationally, and that few states have had success in
achieving savings. The states that do see savings tend to be wealthier states, which have more flexibility
when it comes to paying administrative costs and paying providers. Hood said that is not the case in
Louisiana. "We’re a low payer and trying to lower those costs, as low as they already are, risks having
providers quit," said Hood.
In January, the five private firms managing health care for about 900,000 Louisiana Medicaid
recipients got high marks in an independent review required by federal officials. The companies were in
full or substantial compliance with state and federal requirements of the Bayou Health program nearly
100 percent of the time, according to IPRO, the firm based in Lake Success, N.Y. that conducted the
review.
Eastern La. Mental Health System food contract
The Eastern Louisiana Mental Health System is an institution in Jackson run by the state that
houses mentally handicapped individuals. A Pennsylvania-based nutritional services company
hired to serve ELMHS ran out of food, so they ordered 400 hamburgers from McDonald’s to
feed the hospital patients.
Rep. Havard, whose district includes ELMHS, said that a portion of the contract also covers a nursing
home facility that is run by the state. He notes that the nutritional services company ran out of food 93
times, putting some of the patients’ health at risk. “Now these are old people that are taking medicine so,
it’s very, very important that they have the right nutrition to make their medicines work.” Havard told
LPB, “To this day they have not met the performance requirements and we’re still paying them for a
service that we were doing better before.” Havard says state workers now must come daily to oversee and
review “what a private contractor was supposed to do to begin with.”
A legislative audit found that for January and February meals to patients were sometimes
delivered late, often without vegetables, frequently without meat, and occasionally with spoiled milk.
Southeast La Mental Hospital
Facing reductions in federal money for Medicaid, DHH announced in July
of 2012 that it would close The Southeast Louisiana Mental Hospital in
Mandeville. Local legislators, many of whom are close allies of Gov.
Bobby Jindal, began a push for privatization as a way of saving the
services and jobs provided by the hospital. Under an agreement signed in
early December of 2012, Meridian Behaviorial Health Systems, a Florida
company, assumed control of Southeast Louisiana Hospital near Mandeville, which now operates under
the name Northlake Behavioral Health System, with oversight from DHH. The projected cost of
privatizing the program is $2.4 million annually based on the rate that DHH is paying for the services.
The annual cost of the southeast based program before privatization was $2.6 million.
Seven months after privatization the facility faced losing its Medicare eligibility after Centers for
Medicare and Medicaid Services inspectors found deficiencies. Among the complaints, the report noted
42 shifts from March 15 to May 30 when mental health technicians working in the Developmental
Neuropsychiatric Program were assigned more than five patients — and sometimes as many as eight —
despite hospital policy that called for a 1:4 ratio with the ability to increase to 1:5. DHH worked with
Meridian to correct the deficiencies and retain the Medicare eligibility for the facility.
Lack of oversight of Magellan
In December, the Legislative Auditor’s Office criticized the Jindal administration’s lack of
oversight of a $363 million contract that ensures thousands of people in Louisiana receive treatment for
mental health problems and substance abuse issues.
An 11-page audit warned DHH that it could wind up renewing Magellan’s contract without ever
determining whether Gov. Bobby Jindal’s idea of privatizing the management of 151,000 people’s health
care needs worked as planned. The danger, the auditor said, is that Magellan is making mistakes in the
handling of Medicaid claims that will require repayment to the federal treasury.
Privatization Legislation
Spurred by privatization contracts that excluded the state legislature from the process,
Rep. Kenneth Havard, R-Jackson, is sponsoring HB128, the Privatization Review Act. The
bill would allow for a comprehensive review by the legislature before the approval of
contracts worth more than $5 million.
Secondly it requires the Legislative Auditor certify contract numbers to make sure the state
is saving money and to catch any tax implications of the agreement.
Havard says, “Ultimately at the end of the day the legislature is responsible for the
budget so when we are allowing boards and commissions; like the Board of Supervisors for
LSU to where millions of dollars are going to be spent in this sate; we should have some type of review
process.” Havard says that while Magellan; Blue Cross, Blue Shield; Bayou Health; and similar private
companies have teams of lobbyists working on their behalf; “I was elected and 104 other ones in the
House was elected to be people’s lobbyists. We’re responsible for their money; at the end of the day; and
we should have a say in these contracts.” A similar bill by Havard was spiked during the last session by
supporters of Gov. Jindal who has touted his transparency efforts.
HB437 sponsored by Rep. Jim Fannin, R-Jonesboro, would invalidate any professional, personal,
consulting, or social service contract with a total maximum compensation of $100 million entered into
after Aug. 1, 2014, unless it has been reviewed and approved by the Joint Legislative Committee on the
Budget (JLCB).
HB662 by Rep. Steve Pylant, R-Winnsboro would require legislative authorization for proposed
contracts between private prison contractors and the Dept. of Public Safety and Corrections or a local
PAR president Scott supports the idea of getting the legislature more involved in the approval
of privatization contracts. Scott recently told LPB, “I think it’s a great idea for the
administration to be able to prove its case and to be able to give the legislature the information
it needs to understand and play the watchdog role in that; and they certainly ought to have the
Legislative Auditor play a role in that before a decision is made.” Scott says, “However, I don’t
think the legislature should have final say on all contracts…I think that’s a step too far.”
Streamlining Government
Gov. Bobby Jindal's administration is paying a private firm, Alvarez & Marsal, $4 million to identify
ways to streamline Louisiana's state government. When state legislators balked at the consultants’
multimillion dollar fee, Jindal officials announced the firm would only get paid if they found $500 million
worth of government savings. The $500 million benchmark will have to be written into the consultants'
existing contract with the state though.
This is the same firm that recommended the Orleans Parish School Board fire 7,500 teachers following
Hurricane Katrina; a decision negated by the 4th Circuit Court of Appeals leaving OPSB and the state
liable for $1.5 billion in damages
While Treasurer Kennedy feels that Alvaris and Marsal “is a fine company” he points to the
Streamlining Government Commission which was established by the state legislature in 2008 and
released a list of 238 recommendations in 2009. “We need to start with the Streamlining Government
Report.” Kennedy says, “We’re not going to pay 4 or 5 million dollars for that, I can tell you.” A 2011
report by the Commission which was disbanded in 2012, indicated that while the majority of the group’s
238 recommendations had been acted upon, 62 had not.
Watch “State Contracts 101”
Wednesday, April 23, 2014
at 7 p.m. on LPB.
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at www.lpb.org/publicsquare.