May 22 (Bloomberg) -- Hewlett-Packard Co. and Xerox Corp. are vying for an estimated $500 million contract to replace New York’s Medicaid management system, the biggest in the U.S., according to two people familiar with the bids.
The companies are seeking the five-year pact as they battle for dominance in the market for Medicaid, the joint state- federal health insurance program for the poor, said the people, who requested anonymity because they aren’t cleared to publicly discuss the competition. Computer Sciences Corp., which runs the current system, didn’t bid.
The company chosen to develop a new program to process claims for New York’s $52 billion Medicaid program may be positioned to win similar deals with other states. New York is shifting to a managed-care approach for Medicaid that’s aligned with the goals of President Barack Obama’s signature health- insurance program, and other states are likely to follow.
“The industry has been waiting for a state that will go forward and sponsor a more efficient way that’s adapted to the new regulatory regime,” said Peter Bendor-Samuel, chief executive officer for Everest Group, a Dallas-based consulting firm that focuses on technology. “The benefits are very significant for New York, the recipients of the services and very big for the winning vendor because if they figure out how to do it, there’s going to be every other state looking to do it, too.”
Over the last decade, with the help of acquisitions, HP and Xerox have expanded their business and government-services operations to offset losses and slower growth in their core segments: personal computers for HP, document printing for Xerox. Last year, services sales made up 55 percent of Xerox’s company’s $21.4 billion in revenue.
The companies have already clashed from California to New Hampshire as states seek to update Medicaid payment systems, with as much as 90 percent of the cost funded by the federal government.
Obamacare is expected to expand Medicaid enrollment by more than 9 million while it pushes states to move recipients from programs that pay for each service to managed-care plans with costs set for each patient. The shift is meant to generate savings because providers will profit only if they spend less on each patient than the reimbursement they receive. Under the current system, providers can inflate bills by, for example, ordering tests a patient might not need.
To make the shift to managed care work, new computer administrative systems must be developed, said Paul Keckley, managing director of the Navigant Center for Healthcare Research and Policy Analysis in Chicago.
“A platform that’s even nine or 10 years old is probably not adequate for what they have to do,” Keckley said.
Governor Andrew Cuomo began moving New York’s Medicaid recipients into managed care in 2011, the year he took office. The state issued a request for proposals in June for a new system, asking companies to provide plans that would help implement the shift, according to Jason Helgerson, New York’s Medicaid director. The winner was supposed to have been decided by Jan. 20.
“It’s a big decision, and we want to make sure we make the right one,” Helgerson said in an interview. “This is a decade’s leap forward in terms of the use of technology. It’s one of the largest contracts in state government and is another step in the direction toward managed care.”
The contract, which includes three one-year options to renew, will probably pay slightly less annually than a two-year, $211 million extension granted in February to Falls Church, Virginia-based CSC, Helgerson said.
William Ritz, a spokesman for Palo Alto, California-based HP, which is the fiscal agent or principal internal technology provider for Medicaid in 19 states, declined to comment on a pending procurement.
Bill McKee, a spokesman for Norwalk, Connecticut-based Xerox, which does Medicaid-related work for 12 states, the District of Columbia and the U.S. Labor Department, declined to comment because he said Xerox doesn’t discuss pending business opportunities.
Once the contract is awarded, the companies will have 18 months to implement the system, according to the proposal request. Helgerson said the timeline is “ aggressive” and that the state will seek to protect itself in the final accord from cost overruns if it’s delivered late. Because the contract award is already more than four months past due, it’s probable that CSC will be get another extension to keep the current system running while the new one is set up, he said.
CSC didn’t bid on the project because it believed 18 months wasn’t enough time, said Richard Adamonis, a spokesman.
CSC was 33 months late when it implemented the eMedNY program in 2005 and 47 percent over budget, according to a 2010 report by Comptroller Thomas DiNapoli. It has been cited for losing more than $500 million through fraud, waste and abuse in audits by the comptroller and attorney general.
Xerox was more than five years late when Affiliated Computer Services -- a company it bought in 2010 -- implemented a new system for New Hampshire last year. The previous system there was run by Electronic Data Systems Corp., which Hewlett Packard purchased for $13.2 billion in 2008. Xerox was sued this month by Texas for what the state said was improper approval of “a substantial percentage” of $1.1 billion in Medicaid dental claims that turned out to be for cosmetic work.
It’s also projected to be about a year late on delivering a new system for California, where it’s replacing one run by EDS since 1987, Anthony Cava, a spokesman for California’s Health Care Services Department, said by e-mail.
--With assistance from Laurel Calkins in Houston.