The WasteWatcher: The Staff Blog of Citizens Against Government Waste

The Cover Oregon Debacle

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


On September 15, 2016, and with little hubbub beyond the state’s borders, Oregon and Oracle, the prime vendor for the state’s Obamacare’s online marketplace exchange “Cover Oregon,” announced they had reached a settlement in a lawsuit.  The dispute revolved around who was at fault for the website’s colossal failure.  While the state had been asking more than $6 billion in damages, it will receive $100 million in goods, services, and cash.

A September 15,2016, Oregon Live article reported, the settlement “includes cash payments to Oregon as well as a six-year license agreement for products and services that [Governor Kate] Brown said can be used to ‘significantly modernize state government's IT systems.’”  In addition, the article noted that $25 million will come in the form of cash, which will be used to pay for the state's legal fees and other costs.  Oracle also agreed to contribute $10 million to a state technology education program.

The settlement raises more questions than answers.  Presuming the state should receive and keep the money, is it being used appropriately considering the state was supposed to create a functioning marketplace exchange with a $305 million federal grant?  Since this was federal money, shouldn’t everything be turned over to the federal government?

By way of background, Citizens Against Government Waste’s (CAGW) August 2015 Waste Watcher, “A Billion Here – A Billion There,” discussed how more than $4.6 billion was handed out in the form of federal grants to plan and establish state-based marketplace exchanges under the Affordable Care Act (ACA), more often referred to as Obamacare.  Hundreds of millions of dollars have been squandered due to government incompetence and hubris.  To date, four of the 17 original state-based exchanges, including Washington, have failed: Hawaii, Nevada, New Mexico, and Oregon.  The state of Kentucky is expected to close its exchange by the end of 2017.

The Oregon exchange was often cited as the worst online marketplace in the nation.  The state received conditional approval from the Department of Health and Human Services (DHHS) in December 2012, and received $305 million to build its marketplace.  Yet, when Cover Oregon was scheduled to begin operating in October 2013, it was unusable.  Instead, applications had to be processed manually by the state’s call center staff.

The website’s problems continued into 2014, causing re-election year woes for then-Governor John Kitzhaber.  The governor and his administration blamed Oracle, which had received $240 million to build Cover Oregon, for the website’s collapse, and Oracle was fired in March 2014. On April 25, 2014, the state officially shut down the exchange and moved to adopt the federal HealthCare.gov platform for health insurance enrollment.

Lawsuits and counter lawsuits soon followed between the state and Oracle.  Oracle sought unpaid fees, while also claiming defamation and copyright infringement.  The state accused the contractor of substandard performance, fraud, and racketeering under the state’s RICO statute, an unusual claim in a contract dispute.

Perhaps the state was motivated to settle the case with Oracle because Gov. Brown did not want to dredge up in court what happened with her predecessor behind the scenes in regard to Cover Oregon’s demise.  Governor Kitzhaber and his fiancée, Cylvia Hayes, became the center of attention in October 2014 when Hayes was accused of using her position with the governor to promote and develop her private energy consulting business.  The state Republican Party called for the Oregon Ethics Commission to investigate her activities, both as a consultant and her role as the “First Lady.”

After Governor Kitzhaber won re-election in November 2014, CAGW noted in an April 17, 2015 blog in The Hill that evidence soon emerged that politics may have played a major role in Cover Oregon’s failure.  According to Oregon-based news reports in February, 2015, as investigations were under way into influence-peddling involving Hayes, the governor tried to have his personal emails removed from the state's servers, but state officials refused to do so.  It was later discovered that the emails showed the governor had surreptitiously hired his chief campaign consultant, Patricia McCaig, the self-described “Princess of Darkness,” to oversee Cover Oregon operations a year earlier.  The emails show that McCaig and other campaign consultants were deeply involved in shaping state policy around Cover Oregon and discussed about whether to settle a dispute with Oracle or sue the company.  The influencing-peddling scandal led to Kitzhaber’s resignation on February 18, 2015.

By February, 2015, the House Committee on Oversight and Government Reform (OGR) was investigating the problems with Cover Oregon.  Chairman Jason Chaffetz (R-Utah); Health Care, Benefits and Administrative Rules Subcommittee Chairman Jim Jordan (R-Ohio); Government Operations Subcommittee Chairman Mark Meadows (R-N.C.), and Information Technology Subcommittee Chairman Will Hurd (R-Texas) sent a letter on February 13, 2015 to Governor Kitzhaber demanding that he turn over all records regarding the decision to shut down Cover Oregon in 2014 because it “may have been based on politics, not policy.”  They asked for “all communications to or from any current or former employee of the Governor’s Office referring or relating to Cover Oregon, HealthCare.gov, or the Patient Protection and Affordable Care Act. [ACA].”

On May 26, 2016, the OGR Committee released its report, “Cover Oregon: How Mismanagement and Political Interference Squandered $305 Million Federal Taxpayer Dollars.”  The year-long investigation included reviewing more than 170,000 pages of documents from the state of Oregon; the Centers for Medicare and Medicaid Services (CMS), the agency that oversees Obamacare; Oracle; and other sources.  The committee also undertook four depositions and one transcribed interview.

The committee found that there was widespread political interference by former Governor John Kitzhaber’s campaign staffers in official government business and that CMS had failed in its oversight of the project.  For example:

  • Although Cover Oregon was scheduled to launch on October 1, 2013 and in spite of warnings about the project’s shaky development, the governor’s office released numerous “unrealistic public assurances about the viability of the project and the ability of individuals to enroll through the Cover Oregon website.”
  • Although warned it was a high-risk strategy, Oregon attempted to build a highly complex system that would have integrated the state’s entire healthcare technology system and would have provided “one-stop-shopping” for Obamacare-compliant plans, and other state-based programs, such as Medicaid.The system was far more complicated than federal law required to build a state-based exchange and worse, the state acted as its own systems integrator, even though according to current Oregon Chief Information Officer Alex Pettit, the state did not have the capacity to serve in this role.
  • The law’s aggressive timelines, and CMS delays in issuing regulations, also contributed to Cover Oregon’s failure.CMS was also lax in its oversight of Cover Oregon, both in its project development and handling of federal funds.For example, Cover Oregon sought funding from various federal sources such as Medicaid and the Children’s Health Insurance Program.Documents from Cover Oregon show that the “Executive Director of Cover Oregon did not believe the Oregon Health Authority was properly tracking the use of federal funds,” raising questions about how these funds were being allocated.
  • The state also contracted with primary vendor Oracle on a “time and materials” basis, rather than using contracts that linked payment to specific deliverables.
  • In spite of its initial failure, documents show that Cover Oregon was close to being fully operational by April, 2014 due to an Oracle tech surge to repair the system.In fact, the website was being used by community partners and insurance brokers to successfully enroll individuals through the agent portal.The Oregon Technology Options Workgroup had completed its initial assessment on March 27, 2014 and “recommended that Cover Oregon should continue development and deployment of the current technology solution with a new vendor” while maintaining the ability to migrate to HealthCare.gov if certain milestones were not reached within a limited time period.
  • In spite of fact that Cover Oregon was on its way to becoming fully functional, documents and testimony showed that the decision by Cover Oregon’s board of directors to switch from the state-based information technology platform to the federal HealthCare.gov system was “driven largely by political considerations and steered by Governor Kitzhaber’s staff and campaign advisors.”Furthermore, the involvement of Kitzhaber’s staff and campaign advisors “was inconsistent with the intent of Oregon law and the Cover Oregon governance model.”
  • Documents also show “Kitzhaber’s staff and campaign advisors looked for ways to control the media and minimize the negative publicity for Kitzhaber as Cover Oregon floundered,” and looked for ways to shift press coverage away from the governor’s role in the project over to Oracle, such as having the state attorney general initiate legal action against the company.

While the full details of the $100 million settlement remain confidential, the published information notes the funds will be used for purposes entirely unrelated to what the original grant was provided for, such as software, IT services, and educational funding.

But there are the hidden costs on top of the settlement agreement.  According to a September 20, 2016 article in the Portland Tribune, the settlement includes “hundreds of millions in likely spending for new IT projects.”  The article points out that the goods of software and tech support can only be utilized if the state spends additional money.  According to KPMG, the state would need to “spend between $490-551 million to implement a fraction of the software contained in the Oracle deal.”

Oregon officials failed miserably in designing and implementing an online marketplace exchange and demonstrated their incompetence and arrogance by not hiring an experienced system integrator to oversee the entire process, while wasting precious federal tax dollars in the process.  Their actions beg the question:  should not most, if not all, of the 305 million dollars in grant money be returned to federal taxpayers?

Unfortunately, the Obama administration seems to be in no hurry to take such action.  A March 27, 2015 article in The Hill discussed an investigative report released the day before by the DHHS Office of the Inspector General (HHS-OIG), which asserted that the state of Maryland misspent $28.4 million on its exchange due to two major accounting problems.  The IG recommend that the state return the money to CMS.  Unfortunately, neither Maryland or CMS agreed with the IG’s findings.  Disturbingly, CMS has taken no action to recoup the misspent money.  According to a September 13, 2016 House Energy and Commerce Committee report, “Implementing Obamacare: A Review of CMS’s Management of the State-Base Exchanges,” CMS has failed to recover any misspent state exchange dollars identified by the HHS-IG.

On June 7, 2016, House Oversight and Government Reform Committee Chairman Jason Chaffetz (R-Utah) wrote a letter to HHS Inspector General Daniel Levinson asking his office to investigate CMS’s failed oversight of the development of Oregon’s state-based marketplace health insurance exchange and how Oregon used federal grant funds for the overly ambitious project.

The  IG should follow through on the chairman’s request and undertake a detailed investigation, as it is important to have any malfeasance on the record.  Taxpayers should also demand that CMS require all misused and wasted state exchange grant funds be returned to the federal taxpayers.

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