When State Senate President John Greene gaveled the death of a bill extending government health benefits to at least 150,000 poor Arizonans, debate did not end. If anything, it intensified.

Opponents remained convinced the bill was nothing more than an expansion of the welfare state, exactly the kind of big-government entitlement program voters of the 1990s don't want.

But Governor J. Fife Symington III, the bill's biggest booster, said expanding the Arizona Health Care Cost Containment System to cover everyone below the federal poverty line would actually save the state $500 million over five years by bringing in huge federal subsidies. He called the measure's demise his most stinging defeat of the session--and insiders say he is seriously considering a special legislative session to reopen the issue.

Symington wasn't the only one disappointed by the bill's failure.
For months, health-care providers all over the state had been salivating at the prospect of hundreds of millions of additional dollars flowing from the federal government, through AHCCCS and into their corporate pockets. One legislator said that during debate over the bill, he could have fired a pistol shot down the hall outside his office and hit ten lobbyists for AHCCCS-related medical firms.

And make no mistake: AHCCCS is big money.
Leaving AHCCCS (usually and semiphonetically pronounced "access") aside, the entire 1995 general operating budget of the State of Arizona is about $3.8 billion.

The total operating budget of AHCCCS--which includes $500 million the state kicks in--is about $1.8 billion, making it far and away the largest single program in the state government. A few years ago, one state representative quipped that at the turn of the century, there would be only two state programs left in Arizona: the Department of Corrections and AHCCCS.

AHCCCS was the first statewide managed-care system of its kind. The system is often held up as a model for the rest of the country, a textbook example of how to run a managed-care health system. When Newt Gingrich talks about freeing states from the yoke of federal bureaucracy--giving them federal money and the leeway to find their own solutions to pressing social problems--AHCCCS is exactly the kind of program he is talking about.

And to some degree, AHCCCS has been successful in containing the rise of health-care costs.

It is entirely unclear, however, that AHCCCS should be used as a model for anybody's health-care system. In fact, Arizona's indigent medical system illustrates many of the problems that the "devolution" of federal programs to the state and local level is likely to cause all over the country.

Although it is 13 years old, AHCCCS is still considered an experimental program. Based on the concept of managed care, it is truly an innovation on standard federal practices for delivering health care to the poor. What parts of that experiment have worked--or failed--should be of intense interest to state and federal policymakers, given the continuing debate about health care at the national level.

Yet there has been remarkably little oversight of key AHCCCS functions by any segment of government.

Ignored rather than scrutinized, large parts of the program's management have never solidified; they still rely to a huge extent on private consultants who soak up as much as 60 percent of the operating budgets of some departments.

Use of those consultants, and the relationships they have with past and present AHCCCS managers, has created at the least the appearance of significant conflicts of interest.

Management practices are confused enough that the system spent hundreds of thousands of dollars on computer equipment federal authorities had not approved. Then, both AHCCCS and the feds agreed the equipment was unnecessary to begin with.

Inadequate recordkeeping at AHCCCS has also led to some curious benefit procedures.

Almost since the system was created, AHCCCS has been giving health-care firms money to provide treatment for patients who don't even live in Arizona--and are, therefore, ineligible for such benefits.

And for a good part of the last decade, the Arizona Health Care Cost Containment System has been paying HMOs and other providers to give medical care to people who have been absolutely, stone-cold dead--in some cases, for years.

It was 1974 when the Arizona Legislature approved the state's participation in Medicaid, the national subsidized health-care program for the medically indigent. That approval was more of a token than anything else, though; the legislature had neglected to make any state money available for the program.

In fact, for years leading up to 1982, Arizona was the only state in the nation without a Medicaid program. Medical care for poor people was funded by county governments. As health-care costs spiraled upward and the state was flooded with new residents, counties found themselves unable to meet the budgetary demands indigent care placed upon them.

The debate over whether the state should have a Medicaid program was framed by discussions about cost control. The state needed to implement either a standard program that paid doctors, clinics and hospitals for services after the fact--what is known in health-care lingo as "fee for service"--or find a new approach.

Health-policy experts didn't like the idea of fee-for-service. Because they pay after treatment is provided, such programs cannot coordinate or control the care provided to Medicaid recipients. The state was also concerned about the tendency of Medicaid recipients to run up huge bills at emergency rooms, rather than using doctors' offices or clinics for basic health care.

After a long, often bitter debate, the legislature implemented the first statewide, Medicaid-funded, managed-care system of its kind in the country. Under that system, the state would pay health providers a set amount each month to provide a qualifying poor person with medical service. Such a "capitated" program could not receive federal funding without a waiver from the Health Care Financing Administration. The waiver was granted in 1982, and AHCCCS was born.

The AHCCCS birthing process was not without headaches. The state received approval from HCFA to run the system just three months before it was scheduled to start; there was no time to develop an organization that could administer such a large program. AHCCCS also had trouble finding financially solid HMOs and other health plans to participate.

In 1984, things got even worse. Initially, the state intended to hire a private contractor that would assume most of the administrative responsibilities for the program. The contractor AHCCCS hired, however, had never administered a managed-care system. The firm terminated its agreement with the state, giving only a month's notice.

The state quickly hired 150 of the contractor's employees and began operating the system itself.

Other problems followed. Financial insolvency and mismanagement became apparent in several AHCCCS-contracted health plans. The state terminated some contracts. Other health plans went bankrupt or were sold.

AHCCCS eventually made it through the teething stage, though. Today, the system shells out $1.8 billion a year to 15 providers, giving long- and short-term health and mental care to just over 450,000 people.

Last year, when AHCCCS went looking for health-plan bids, it was deluged with unprecedented numbers of offers from hopeful firms looking to get into the system. It was a far cry from just a few years ago, when the state went begging for bidders. There are reasons for this rise in popularity.

Yes, there are dead people on the AHCCCS rolls, still generating government payments to their health plans months or even years after they stopped needing health care for good.

A 1992 memorandum written by an AHCCCS analyst details a study of the eligibility of several dozen members randomly chosen from the AHCCCS rolls. The analyst found that fewer than 20 percent--that is, fewer than one in five--of the recipients studied were eligible for benefits. Yet their health plans had been receiving payments for those ineligible citizens--to the tune of $400,000.

Some of the people were ineligible because they no longer lived in Arizona.

Others were--well--dead. One member the analyst found had actually died in August of 1982, two months before AHCCCS was even created. A health plan had been receiving payments for the dead woman's care for nearly ten years.

The 1992 memorandum saying that dead people were in AHCCCS drew a truly unusual response.

A system executive wrote to the analyst who performed the study of ineligible AHCCCS clients. The executive's memo explains exactly why AHCCCS would not ask health providers to repay the money they had received to treat people who no longer live in Arizona.

That reason: Demanding the money's return would have an "adverse" effect on the participating health providers. Then again, getting the money back could stir up the federal government, which presumably looks unkindly on payments to heal the dead.

In interviews last week, AHCCCS officials insisted that dead members are always taken out of the state medical system. Occasionally, the officials said, that process takes time, but it is never more than a month or two.

But AHCCCS staff circulated at least one earlier memo detailing long-term problems with paying benefits for the dead and out-of-state.

And AHCCCS employees searched some AHCCCS files in recent weeks and provided the results to New Times. AHCCCS documents show that although members identified in the 1992 memo have been taken off the rolls, the system definitely is still making "capitation" payments for at least some dead people.

Although relatively few files were searched, AHCCCS records show people on the benefit rolls who have been dead for as long as a year.

Those records indicate that it is not uncommon for the news of a member's demise to take months to work its way backward through the system. Even if a health plan returns the money AHCCCS has paid it, or has AHCCCS payments cut by a like amount the next year, the net result is (at the very least) an interest-free loan of government funds to a private health plan.

Verifying the eligibility of each of the hundreds of thousands of people who receive AHCCCS funds is not a task for which the program is wholly responsible. Depending on the specifics of individual cases, eligibility for AHCCCS will be determined by either the Social Security Administration or the Arizona Department of Economic Security.

Even AHCCCS officials acknowledge, however, that their agreements with health plans require those providers to notify the state whenever they learn of the death of an AHCCCS member.

And it would seem likely for doctors to know, in most cases, when their patients die.

AHCCCS higher-ups are used to answering charges that their programs are too dependent on outside contractors. A 1992 audit of the program performed by Project SLIM, the state's cost-cutting program, complained that state employees and contract consultants were assigned to duplicate tasks. The audit also revealed that half the state employees working in the AHCCCS data services department were inadequately trained, fostering that department's dependence on outside help.

Such outside help is expensive. The scale ranged between $8 per hour for clerical support staff and $150 per hour for a project manager. Most consultants in the division were paid between $45 and $70 per hour.

SLIM also said the data services operation had:
Unclear lines of authority, meaning that some employees and supervisors were not sure whether their boss or bosses were contractors or state employees.

High turnover among the workers who were state employees. The audit said many of those employees had often been hired even though they clearly lacked the qualifications for their jobs.

Animosity between state employees and outside consultants because of huge disparities in pay.

SLIM suggested the obvious solution: Get rid of the consultants, and quickly. The audit recommended that the dependence on outside consultants be eliminated in 12 to 18 months, because state personnel could be trained to do the same jobs. SLIM said such moves could create savings of $5.5 million a year--while reducing turnover and increasing productivity.

Nearly three years later, not much seems to have changed at AHCCCS.
Despite what AHCCCS officials term "an expansive effort to develop, acquire and maintain state employees," only six consultants left the division in 1994. There are 24 remaining. AHCCCS officials say they expect more consultants to leave as time goes on, but there will probably always be at least 15 under contract to the program.

AHCCCS claims it has been unable to attract qualified personnel for these jobs because skilled data management employees are in high demand in the health-care field. The state, AHCCCS executives say, simply cannot compete with the salaries available in the private sector.

Longtime employees of the data services division, however, say the dependence on consultants is far from accidental. They point to relationships among contractors, management and others in the division as the reason that reliance on consultants remains high.

Relationships among consultants and division higher-ups have indeed been cozy over the years. Here's how cozy: A former assistant director in the division directly supervised work that was being performed by consultants. The consultants worked for a company she owned.

According to AHCCCS documents, in April 1989, Barbera Bridgewater formed a consulting firm called FourThought Group, Inc. That firm was formed to do business with AHCCCS. (Bridgewater had worked at AHCCCS previously as a consultant for another company.)

Bridgewater spent the next two years working on AHCCCS' data system as a consultant, helping to modernize it and guiding it through the federal certification process. In 1992, the director of the project resigned. AHCCCS asked Bridgewater to take the job.

There was one problem with that idea: The division of AHCCCS Bridgewater would oversee was filled with subcontractors employed by her own company. The state was essentially asking her to supervise her own employees as a public, rather than private, employee.

AHCCCS management sought a legal opinion on the hiring from its attorney; the opinion said Bridgewater could be hired, if certain conditions were met. Bridgewater and AHCCCS subsequently inked a written agreement, which stipulated: 1) She would come to work for the state; 2) She would not designate or assign the work that the FourThought Group would be allowed to do; 3) She could remain a shareholder and an officer of FourThought Group but would not be allowed to vote on any AHCCCS-related matters; and 4) She would not be entitled to any FourThought Group earnings that were related to AHCCCS.

Bridgewater did not return numerous calls from New Times seeking comment on the FourThought arrangements. But current and former AHCCCS employees say the agreement was useless in preventing what appeared to be blatant conflicts of interest.

For one thing, employees of FourThought made up about 25 percent of the department Bridgewater was to oversee. If she followed the agreement to the letter, AHCCCS employees claim, she could not do anything relating to a fourth of her staff and resources.

Current and former division employees say that despite Bridgewater's agreement not to issue orders to employees of her company, she did so regularly. Those employees also allege that she made managerial decisions that, by definition, had a financial impact on her private firm.

One ex-employee, hired to supervise consultants by Bridgewater's company, says he was repeatedly caught in political crossfire related to the apparent conflict of interest.

In 1992, G. Michael Smith says he was directed to terminate a project that a FourThought consultant had been working on.

Smith says his manager, a state employee, told him to cancel the project without telling the FourThought consultant. When Smith expressed concerns about terminating the project behind the consultant's back, he says he was told that the consultant had a "special relationship" with Bridgewater, his employer.

Smith says he asked his supervisor if he was talking about conflict of interest. Smith says he was told that "conflict of interest" was an unwelcome phrase in the department--one that Smith should not bring up again if he wanted to survive as an AHCCCS employee.

The AHCCCS manager in question did not return calls from New Times. Other AHCCCS spokespeople, however, insist that Bridgewater stayed true to the terms of her agreement. They say that if she had been seen giving direction to her own company's employees, as some AHCCCS employees have alleged, it was only because she was relaying orders from higher-ups.

Ultimately, Smith says, his curiosity and candor earned him a reputation for being uncooperative. After four years with AHCCCS, he was terminated in August of last year. He says leaving was not easy.

He thinks AHCCCS is, overall, a worthwhile program.
AHCCCS officials have always claimed that the seemingly incestuous relationships between contractors, state employees and providers is a by-product of the relatively small pool of skilled data managers in the health-care field. AHCCCS claims, essentially, that such relationships cannot be avoided.

They certainly are continuing. Bridgewater left AHCCCS in November. Her replacement, LeAnn Dale, is an ex-FourThought employee who has also worked for Mercy Care Plan, the second largest of the 15 health plans that have AHCCCS contracts.

At times, AHCCCS has suffered for being perhaps too far ahead of the curve of national health-care policy. Since most of the other states don't have managed-care systems, national Medicaid regulations about the administration of federal money often fail to fit with AHCCCS' goals and methods.

Examples of vague federal rules, a lack of oversight of important processes and wasted money are not hard to come by.

AHCCCS has been warned on several occasions that it needs prior approval for certain large expenditures on data-processing software, equipment and personnel. In 1992, AHCCCS was hard at work developing a plan to expand program services to cover mental health and needed the data-processing equipment to meet those needs. AHCCCS had been spending money on products it would need for months--but Health Care Financing Administration balked when asked to make the federal contribution to those purchases.

In October of that year, the federal government approved plans for the mental health services equipment, but indicated it would not reimburse the several hundred thousand dollars AHCCCS spent between April 1992 and February 1993. The feds said that AHCCCS had spent the money without necessary approval; for a time, it looked as if the state would have to eat those costs. Ultimately, HCFA agreed to repay those funds--but not before a lot of panicky phone calls between AHCCCS and HCFA offices in San Francisco.

It wasn't the only time it would happen.
In 1993, AHCCCS needed to purchase software design equipment for a federally mandated system which would streamline claims processes and cut down on paperwork.

Again, AHCCCS records show, the program had to ask HCFA for retroactive approval of the funds to cover purchases it had already made.

HCFA personnel told AHCCCS officials that money was being spent on the $8 million project before it had been approved. Discussions continued for several months, but in June 1994, HCFA finally told AHCCCS that all federal money for the project would be cut off. It would not flow again until the state stopped spending money the feds hadn't allocated.

AHCCCS officials say that as a managed-care system, Arizona's program doesn't fit into the traditional Medicaid scheme of things. Often, they claim, HCFA forces them to jump through regulatory and procedural hoops they otherwise would not have to deal with. The aforementioned project, for instance, was essentially designed to streamline the fee-for-service process. As a managed-care system, AHCCCS never had the problems the new project was designed to alleviate.

There is, in fact, remarkably little oversight of key AHCCCS functions, especially considering the scope of the program and the amount of money involved. State financial audits are performed regularly, checking out the program on strictly monetary lines. But the state Auditor General's Office says AHCCCS is not scheduled for a full-blown performance audit (which might reveal costly functional problems, such as keeping dead people on the benefit rolls) until the year 2002. HCFA does not do the types of audits on AHCCCS that might reveal such problems, either.

Linda Minamoto, a computer systems analyst at HCFA's San Francisco office, says AHCCCS is regarded as a good program, that it receives no more or less oversight than any other state's Medicaid program. Federal regulations regarding prior approval of expenditures, she says, are vague. Often, those regulations could be interpreted inconsistently by different federal officials at different times.

HCFA did eventually approve the funding for the AHCCCS data-interchange project. Formal confirmation came after two and a half years of discussion--and just days after New Times inquired about the project.

Although federal funding has been approved, one last problem remains. After spending years of staff time and millions of dollars getting the computer project rolling, the state and federal governments have reconsidered. They have decided the system, actually, is not necessary.

AHCCCS now says the project has been put on hold. Indefinitely.

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Dave Plank