INDIANAPOLIS — Indiana can’t have back some of the $437 million it paid to IBM Corp.before firing the company that was leading the state’s much-maligned effort to modernize its welfare delivery system, a judge ruled Wednesday.
Instead, the state owes IBM another $12.1 million for equipment it kept, on top of $40 million in subcontracting fees it already owed the technology giant, Marion Superior Judge David Dreyer ruled in a decision that criticized both parties.
“Neither party deserves to win this case,” Dreyer wrote in the first paragraph of his 65-page 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.”
Indiana hired the Armonk, N.Y. based IBM in 2006 on a 10-year, $1.37 billion deal to lead the transition away from the paper-based method of processing Medicaid and food stamps applicants at the county level and to a statewide system with a call center and online document processing.
Less than three years in, Gov. Mitch Daniels fired the company after a series of complaints of errors, long delays and a lack of human contact. Indiana kept IBM’s subcontractors, and the Indiana Family and Social Services Administration started launching a “hybrid” version.
Meanwhile, Indiana and IBM feuded. The two sides squared off in a six-week trial earlier this year, as Indiana demanded back the money it had paid IBM, and IBM said Indiana owed another $100 million.
IBM officials lauded the decision.
“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.”
Gov. Mitch Daniels immediately signaled that Indiana will appeal the ruling, and said regardless, the savings Indiana has realized as a result of the effort are much greater than what Indiana stands to lose in the lawsuit.
“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,” he said in a statement.
“That was always the goal, and changing vendors was essential to achieving it. 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.”
His administration moved quickly to demonstrate that the losses through the lawsuit are a drop in the bucket compared to what the state saved by abandoning the old system and launching the modernization effort in late 2006.
FSSA Secretary Michael Gargano said the old paper-based system with decisions made in county offices would have cost the state $61 million more than the new one did over the last year.
Meanwhile, Adam Horst, the director of the Indiana Office of Management and Budget, said the money won’t come out of the state surplus that Daniels recently announced would be used to fund income tax credits worth at least $100 per Hoosier filer.
“Even if this ruling stands, it will have zero impact on the state surplus,” he said. “The state sets aside funds for exactly this type of lawsuit contingency. Taxpayers are way ahead because of the decision to modernize our eligibility system.”
Indiana Democratic Party Chairman Dan Parker said Hoosier taxpayers are “big losers” in the case.
“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,” he said.
“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.”