The Alaska Department of Health and Social Services has filed a claim against the private company responsible for rolling out a Medicaid payment system that the state says is riddled with defects.

In the claim filed Monday, the health department said Xerox State Healthcare LLC breached its contract after it failed to implement the multimillion-dollar software system within the timeframe agreed upon. Once the system did go live in October 2013, it failed to issue timely and accurate payments to Alaska health care providers, the claim said. Xerox State Healthcare is a subsidiary of Xerox Corp.

According to Health and Social Services Commissioner William Streur, the system is paying some providers too much, some too little and some not at all. He said the depth and breadth of the problem is not yet fully realized, describing it as his "greatest challenge in over 40 years of working in health care."

In its claim filed with the Alaska Department of Administration, the state health department has demanded that Xerox produce an extensive corrective action plan to remedy the broken system. The state and Xerox have already attempted unsuccessful mediation.

Streur said the state is seeking $46.7 million in liquidated damages.

Jennifer Wasmer, a spokesperson for Xerox, wrote in a statement that Alaska's Medicaid payment system continues to improve and where concerns exist, the company "has been working diligently with the state to address them."

"Medicaid systems are some of the most complex projects undertaken by a state or by a health IT vendor," she wrote. "As with any major technological implementation, they have settling-in periods. In the first year or so, it is normal and expected for there to be defects revealed in the system's million lines of code."

Xerox's web-based Medicaid Management Information System is used in both Alaska and New Hampshire "and is rolling out in other states now," Wasmer wrote.

In New Hampshire, agencies complained in September 2013 that the Xerox system had resulted in $10 million in payment backlog. Texas filed a lawsuit against Xerox in May to reclaim hundreds of millions of dollars it said the company erroneously gave out in Medicaid claims, according to local news reports.

Alaska’s contract

The Alaska project dates back to 2007, when Affiliated Computer Services won the bid to replace the state's 27-year-old Medicaid payment system, which covers the bills for eligible, low-income Alaskans. The system no longer met government standards, and the federal Centers for Medicare and Medicaid Services agreed to fund 90 percent of the cost to upgrade it, Streur said.

Under the contract, the state health department would pay ACS about $32 million in federal and state money to complete eight "milestones," which began with "project initiation" and ended with "implementation." Each milestone was tied to a payment amount and completion date, according to the claim.

ACS had two years and eight months to design, develop and implement the new system under the contract, but it did not meet that deadline, the claim said.

In February 2010, Xerox acquired the company, Wasmer wrote.

While the old system continued to handle providers' Medicaid claims, scheduled completion dates for the new system kept passing with little progress. The state health department set a "go live" date for June 1, 2010, then extended it several times, eventually approving a revised date of Oct. 1, 2012, according to the claim.

Without state approval, Xerox then "unilaterally and on more than one occasion extended the 'go live' date," the claim said.

By Oct. 1, 2013, Xerox had identified 44 defects with the system but said there were "workarounds" for all of them. On that day, the new system went online and within weeks the number of defects grew to 546. Today, there are still 460 defects, the claim said.

"Everything started to implode and providers started to call, saying, 'Not only didn't they pay my claim but they took back money from last year,' " said Streur. "It was a challenge."

The state has withheld about $14.5 million in funding from Xerox for three uncompleted milestones including testing, acceptance test and implementation, the claim said.

Still, the new system is currently handling all Medicaid and Denali KidCare claims in Alaska both online and in paper. Each week, on average, the system has to process 215,000 Medicaid claims and pays about $27 million to health care providers, Streur said.

Over the past year, however, the new system has not operated at maximum efficiency, creating a backlog. On July 29, the state recorded 89,421 suspended Medicaid claims. A state employee went to Xerox's mailroom in Anchorage and found "hundreds of thousands of neatly stacked paper claims," according to the claim.

Wasmer wrote that the claims backlog has dropped by more than 63 percent since the beginning of June and referred to the state questions about specific numbers of claims pending. Streur disputed that percentage.

"We really don't know the extent of the problem yet, and that's what's concerning to me," he said.

Provider effects

Charlie Franz, administrator of Heritage Place in Soldotna, said the nursing facility has seen its daily revenues drop significantly since the new system went into use. At the 60-bed facility, about 85 percent of patients are covered by Medicaid, he said.

Before the new system went live the facility's books were short $570,000 in August 2013. By July of the following year, that amount jumped to more than $1 million. When the facility filed Medicaid claims, Franz said, it would get lengthy billing messages from the system, some 75 to 80 pages long.

"These things were impossible, and I've been doing this for 42 years," he said.

He said payments have gotten better. In August, the facility received a lump of $574,000 in Medicaid money. But glitches persist in other types of claims.

"Foolishly, they turned off the old system, and that was a major mistake," he said. "I can't believe that whoever was in charge of doing that made that stupid decision. They should have run the systems parallel until they had it working."

At LaTouche Pediatrics in Anchorage, business manager Angi Titus said the medical group's unpaid Medicaid and Denali KidCare claims amount to tens of thousands of dollars. She said much of the burden has fallen on administrative employees who must file Medicaid paperwork over and over again.

"They got pretty far behind in processing claims and handling appeals. It really slows down the revenue dramatically for quite a long period of time," she said.

Cori Mills, a Department of Law spokesperson, said the state's claim will be referred to an administrative law judge. A hearing date has yet to be set.