Indiana cancels $1.3 billion welfare contract

INDIANAPOLIS — Indiana has ended its $1.34 billion deal with IBM Corp. to automate the application process for food stamps, Medicaid and other benefits, Gov. Mitch Daniels announced Thursday.

Daniels said he canceled the contract with Armonk, N.Y.-based IBM because the company did not make satisfactory progress to improve services as required by a corrective action plan ordered last spring.

IBM was notified Thursday that its contract would be terminated in 60 days. During that time, the state’s Family and Social Services Administration will develop a detailed plan for a “hybrid system” that Daniels said will incorporate successful elements of the old system along with parts of the so-called modernized system run by IBM.

The new system will involve companies that had worked with IBM, including Affiliated Computer Services Inc. of Dallas. Those companies now will work directly for FSSA, the project’s new leader, FSSA spokesman Marcus Barlow said.

IBM spokesman John Buscemi said the company believed it was making progress under the corrective action plan submitted July 1. The recession and high unemployment led to more demands on the welfare system, making the changes more difficult, he said.

“IBM rejects the state’s claims and believes the state’s actions are unjustified,” Buscemi said.

ACS spokesman Ken Ericson said Thursday the company remained “fully committed to the success of this project.”

The Indiana project was one of the most ambitious efforts by a state to automate welfare systems and move away from cost-intensive, hands-on work by government case workers. Daniels has said repeatedly that he inherited one of the nation’s worst welfare systems, which was troubled by fraud, high error rates, long customer wait times and slow progress in moving people from welfare to work.

He said Thursday some of the changes worked.

“The fraud appears to have stopped, and we’re still on track to save taxpayers hundreds of millions of dollars, but the intended service improvements have not been delivered and that’s not acceptable,” Daniels said.

“This was a daunting thing all along. It still is,” he added.

The government services industry, federal officials and some members of Congress have scrutinized Indiana’s effort after a similar one run by Accenture in Texas failed in 2007.

Indiana’s project has come under intense criticism since the state turned over 1,500 state welfare case workers to ACS in March 2007 and began rolling out automation with telephone call centers, a Web site and document imaging.

The system was introduced in 59 counties representing about a third of the state’s 1.2-million person caseload, but complaints of lost documents, delays in approving benefits, lengthy call hold times and severed eligibility for Medicaid and food stamps prompted the state to halt further expansion until IBM fixed the problems.

Family and Social Services Administration Secretary Anne Murphy asked IBM to prepare a corrective action plan as part of a process that could result in canceling the 10-year deal if improvements didn’t occur by the end of September.

IBM’s Buscemi said the team’s efforts have improved the state’s welfare system.

The cost of the contract, initially at $1.16 billion, had risen 15 percent, to $1.34 billion, under changes made to the agreement.

An Associated Press contract review found one amendment to the contract gave the IBM group an additional $47.3 million — some of which was to be used to correct problems with the project.

Associated Press Writers Mike Smith and Deanna Martin contributed to this report.