Cashing in on CHIP

by Dave Mann

The story of how Michael Masters milked the State of Texas for several million dollars should offer hope to anyone floundering in this job-bereft economy. If you’re out of work, behind on your bills, wasting too many afternoons watching soaps, don’t fret. Simply reinvent yourself as a subcontractor for the state. You too could earn $200,000 a month seemingly just to make phone calls from your home. It’s easy, really. All you need, apparently, is a friend or two at a private company that contracts with the state, a home office, and the kind of pliable conscience necessary to pilfer public money earmarked for poor kids’ health care. It appears that’s what Masters did. And with virtually no state oversight, Masters has not only gotten away with it, he’s earning more money now than ever.

Here’s how the deal went down: In May 2000, the state contracted with a New York-based insurance company named Clarendon Insurance to run the fledgling Children’s Health Insurance Program in rural areas of Texas. CHIP is a joint state-federal venture that provides health insurance for low-income children whose parents can’t afford private health plans but earn too much money to qualify for Medicaid. Clarendon, in turn, subcontracted with Masters and his wife, Rhonda, ostensibly to help manage the program. But no one’s quite sure why Masters got this contract or exactly what services he provided, beyond a few administrative phone calls. Whatever he did, Masters was paid $200,000 a month in state money for 18 months, beginning in May 2001. That works out to about $3.6 million. In late 2001, the Masters moved from their modest Austin home into a newly built million-dollar mansion.

It appears Masters reinvested some of those state funds into his own business. Thanks to public seed money, Masters is now not just a state subcontractor, but the primary manager of Clarendon’s entire rural CHIP contract.

Several state government watchdogs have recently become suspicious. The House General Investigating Committee and the State Auditor’s Office are looking into the Masters’ contract. Specifically, they’re investigating why the Health and Human Services Commission played fast and loose with its money on the rural CHIP contract. The answer, according to numerous sources, is simple: HHSC maintains virtually no oversight of its subcontractors. Agency officials concede they don’t keep a close eye on subcontractors such as Masters. They contend that kind of regulation is unnecessary since HHSC holds primary contractors responsible for the actions of their subs.

But the forthcoming state auditor’s report may paint a different picture. The state auditor’s office is examining all of the agency’s CHIP contracts to determine whether lax oversight of CHIP subcontractors has cost the state millions in precious health care dollars3⁄4 a painful waste at a time when state funds are so scarce. Last session, legislators helped close a $10 billion budget gap by booting hundreds of thousands of poor Texans off CHIP and Medicaid. If lack of oversight of subcontractors is costing the state money, it may only get worse. With the Republican leadership in the Legislature hot to privatize every public health care program in sight, we could soon hear of many more cases like Michael Masters leaching from the public tap. As Janet Monteros, a state contract specialist with an Austin HMO, put it, “It’s like cockroaches. If you see one, you’ve probably got a lot more in the wall.”

Few people seem to know where Masters came from or how he got so intertwined with Clarendon. Masters didn’t return several calls from the Observer for this story. Much of what is known of his actions came to light earlier this year thanks to a civil suit filed against Masters by a former CHIP subcontractor named BCE Emergis. The suit claims Masters unfairly muscled the company out of its state contract. In a deposition with BCE Emergis attorneys in late December 2002, Masters partly revealed how he wiggled his way into a lucrative state contract.

In late 1999, according to the deposition, Masters was working as a broker for Clarendon Insurance. He was a deal-maker who shepherded business to the company, including a minor contract for Florida’s version of CHIP, the Healthy Kids Program. At the same time, the State of Texas was trying to get CHIP–authorized during the 75th Legislative Session–started. The state was contracting with HMOs to provide health care for low-income kids. Few companies, though, seemed willing to service the rural areas of Texas. Masters pounced on the opportunity.

According to the deposition, Masters broached the idea to Clarendon of taking the rural CHIP contract, with Masters helping to manage it. For its part, HHSC didn’t have much choice. State officials decided it would be too expensive to construct the administrative network needed to run the program themselves. Though a few companies expressed mild interest in running the rural CHIP contract, Clarendon was the only one to submit a proposal. This forced HHSC to deal with Clarendon, and gave the insurance company tremendous leverage to squeeze a profitable contract from the state.

So in May 2000, Clarendon, a company with no other Texas operations, dove into the rural CHIP program. The contract, which runs through next year, works this way: The state pays Clarendon millions in public money. After taking a 7 percent cut for itself, the insurance company passes the funds on to subcontractors and a third party administrator that actually processes the claims and pay the doctors who treat kids.

Once Clarendon secured the rural CHIP contract in May 2000, Michael and Rhonda Masters inked a deal with Clarendon to help manage the effort. They set themselves up as a company working out of their house. The firm was called Community Health Systems and, at the time, employed all of two people–Michael and Rhonda Masters.

Under the agreement, Clarendon paid Masters with money it received from the State of Texas. These payments were classified as administrative expenses. The Masters’ fee was $1.50 each month for every child in CHIP, according to Masters’ deposition. In May 2000, that earned them a mere $6. But they would soon pocket much more.

In May 2001, the year-old CHIP program was swelling with kids and Masters was getting rich. At that point, according to Masters’ deposition, Clarendon was paying him $200,000 a month in administrative fees. When asked in the deposition what he did for all that money, Masters replied, “herding cats,” a business term that’s shorthand for organizing and trouble-shooting among disparate parties. Masters said most of his time was spent making phone calls to other subcontractors, state officials, and Clarendon. “My day has been and still is, spent…basically trying to solve problems and develop more business for us,” Masters said. “That’s my role, business development.”

The “herding cats” remark elicited outrage from legislators when the deposition was circulated at the Capitol last April. Several state lawmakers, including Sen. Gonzalo Barrientos (D-Austin), and reps. Mike Krusee (R-Round Rock) and Garnet Coleman (D-Houston), called for an investigation into why Masters was paid so much state money for such minor administrative tasks. It seemed a particularly egregious waste of state funds since budget writers were about to axe several hundred thousand kids from CHIP and cut doctors’ Medicaid reimbursement rates. In April, the general investigating committee held its first hearings on the rural CHIP contract.

After the deposition went public, HHSC also became curious about the Masters contract3⁄4 almost three years after Masters began working for the state. Agency officials questioned Clarendon in February 2003 about its payments to Masters, according to internal HHSC documents obtained by the Observer through the Texas Open Records Act. In at least two lengthy memos, Clarendon Vice President Dominic Hagger strenuously defended his company’s payments to Masters. HHSC consultant David Wilkes summed up Clarendon’s position this way in a Feb. 26, 2003, memo, “In other words, [Hagger argues] although the payments [to Masters] may appear inappropriate, consider all these great things that we are accomplishing, i.e., the ends justify the means.”

Later in the memo, Wilkes discredited several of Hagger’s explanations, most notably that Clarendon and Masters receive the same administrative fee rate as other CHIP contractors. Wilkes pointed out that, in fact, HHSC pays Clarendon and Masters administrative fees almost 20 percent higher than it gives all other CHIP contractors. This is significant because when contractors grossly overcharge the state, it’s usually under the fuzzy heading of administrative fees.

Beyond working the phones, it’s not clear what else Masters did to earn his monthly windfall. But it appears the contract allowed Masters and his wife to significantly upgrade their lifestyle. In September 2001, Masters and his wife moved into a sprawling, custom-built mansion that, according to Travis County records, is valued at nearly $1 million. It sits at the end of a high-dollar subdivision with a sweeping view of the West Austin hills.

Over a period of 18 months, while earning his monthly $200,000 off the state, Masters took advantage of his cushy contract to build his company. According to the deposition and HHSC documents, he steadily grew his budget and staff. Eventually, the Masters moved their operation out of their house and into an office in West Austin. In September 2002, Masters ditched his first company and formed another corporation, known as Community Health Solutions of America Inc. (CHS), according to filings with the Texas Secretary of State’s office.

After founding CHS, Masters signed a second contract with Clarendon. This new deal gave Masters more responsibility for managing the rural CHIP contract, including oversight of Clarendon’s other subcontractors. People who follow the arcane realm of state contracts observe that having one subcontractor oversee all the others is unusual in the extreme.For Masters, it has paid off. He has slowly wrested complete control of the rural CHIP contract. His company, CHS, is now a multi-million dollar operation with projects in at least three states. And Masters is searching for new markets, advertising his successes in Florida and Texas to other states.

How did the state allow Masters to make a fortune from public health insurance for poor rural children? That’s a question for Jason Cooke, associate commissioner for Medicaid and CHIP at the Health and Human Services Commission. Cooke is a sharp, affable man who, as head of CHIP and several arms of Medicaid, has come under increasing pressure in recent months, partly because of the details that have emerged about contracts he approved. A recent state auditor’s report concluded the state’s drug rebate program, also under Cooke’s supervision, has failed to collect tens of millions of dollars in rebates from drug companies due to a “lack of basic controls…that leaves the program susceptible to fraud and abuse.”

Cooke may have a lot to answer for on the rural CHIP contract as well. Both the House General Investigation Committee and the state auditors are looking closely at how and why Cooke awarded the rural CHIP contract to Masters and Clarendon. The House committee held its latest hearing on Aug. 5, taking testimony from Rhonda Masters and a number of HHSC administrators. The committee and state auditors are combing through hundreds of pages of documents from HHSC, Masters, and Clarendon. Chair Kevin Bailey (D-Houston) plans to hold more hearings later this fall, when Cooke is expected to testify for the first time about the Masters contract.

During a recent interview in his Austin office, Cooke defended the Masters and Clarendon contracts. He employed the same “ends justify the means” argument that Clarendon’s Hagger used in his February memo. And both men have a point: Low-income children in the rural swaths of the state got the health care services they needed. “I’m not going to defend Mike Masters. That’s not my role,” Cooke says. “But the proof is in the pudding. If all he was doing was making phone calls and collecting a salary, that’s obviously a problem. But there’s absolutely no way the Clarendon product could have been put on the ground without a significant amount of effort on the management side. Somebody had to do all that.”

But Cooke can’t be certain Masters was the person who performed the work. It seems he isn’t sure exactly what Masters was doing. And in fact, he didn’t know Masters was earning so much money until the BCE Emergis deposition surfaced late last year.

The admission is further evidence of the hands-off approach the agency takes with subcontractors. On a large contract like Clarendon’s, HHSC receives monthly finance reports that offer vague, general descriptions of how a contractor spent the state’s money. Clarendon’s reports likely didn’t even list how much money went to Masters or other subcontractors. Instead, HHSC officials simply saw the total amount Clarendon spent on, for example, administration. Although HHSC must sign off on all subcontracts, the agency has almost no say in how a contractor divides state funds. And agency officials argue they don’t need more oversight, as long as low-income Texans get satisfactory services.

HHSC officials often compare their agency’s oversight of contractors to someone remodeling a home. As long as the house looks good, who wants to know what the painter or plumber is doing? That’s why one pays the general contractor. If something goes wrong, it’s the general contractor who is responsible. In the same vein, HHSC holds the prime contractor on a program like CHIP responsible for the actions of all its subs. “As long as kids get the health care services, what happens in the middle is what we’re paying Clarendon to figure out,” he said. “That having been said, now that I know what they were paying some of their subcontractors, my view of what we should be paying Clarendon may change.”

For people like Janet Monteros, that kind of oversight, or lack thereof, isn’t good enough. Monteros is a contract specialist with VISTA Health Plan, an Austin-based HMO that’s contracted with HHSC. She worked for the Attorney General’s office for eight years in the 1990s in the administrative law and open records divisions. She says HHSC subcontracts are sometimes a windfall for well-connected people such as Masters. It seems unconscionable for HHSC to simply hand money over for subcontractors, no questions asked. The end result is all well and good, but the state shouldn’t be wasting millions to achieve it. How many more kids, Monteros asks rhetorically, could have been served with the money HHSC paid Masters?

Even Cooke acknowledges after pressing that everything wasn’t copesetic with the Masters contract. “We have to be sure we’re spending money wisely, and I think we’re doing that. We’ve got a problem in this case. I think we’re trying to address it.”

After all, more privatization is on the way. Last session, lawmakers passed a massive overhaul of the state’s health care safety net. The legislation privatizes several core state functions, including all eligibility and enrollment services for CHIP, Medicaid, welfare, social security, and food stamps. If the Masters case is a snapshot of structural problems at HHSC, as critics insist, then Mike Masters may be just the first in a wave. HHSC officials say they will reexamine their oversight of subcontractors in the looming HHSC reorganization. But Monteros has a more straight-forward solution, “If you don’t have the personnel to adequately monitor a program, don’t privatize it.”

Dave Mann is a former editor of the Observer.

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