How one Texas official directed millions to Austin tech firm 21CT


During a March 2012 webinar, a top Texas health official said his office was implementing a revolutionary tool to help Medicaid fraud investigators find bad guys: graph pattern analysis.

“Graph pattern analysis is really the next line of defense for this office,” said Jack Stick, then-deputy inspector in the state health agency’s Office of Inspector General, speaking to the National Conference of State Legislatures.

Stick’s presentation touted technology developed by Austin data analytics company 21CT, which had no experience with Medicaid and at the time wasn’t eligible to compete for such a lucrative contract in Texas.

The Office of Inspector General had been courting two qualified vendors who did have experience in the field, but, just months after that presentation, 21CT completed the paperwork to become eligible and quickly got the job. Meanwhile, state Medicaid officials urged their federal counterparts to approve a $20 million contract with 21CT, which was awarded without any formal bidding process. A $90 million extension of that no-bid contract was set to be finalized until Friday, after questions raised by an American-Statesman investigation prompted officials to cancel it.

Stick resigned Friday as chief counsel for the Health and Human Services Commission amid the Statesman investigation, which found that Stick and other state officials have eagerly tried to get 21CT yet more work beyond the company’s experience, while both the company and state officials downplayed the partnership’s enormous challenges and misrepresented it as more successful than it actually is.

The newspaper reviewed dozens of state and federal records, which reveal inconsistencies and misrepresentations by officials handling deals with that company, as well as three presentations Stick gave to national conferences for state officials, which indicate a clear preference for 21CT over other vendors competing for state work.

The Statesman conducted more than a dozen interviews and spoke with current and former 21CT employees as well as former state employees who describe an unusually cozy relationship between 21CT and the Health and Human Services Commission’s inspector general office — the subject of a legislative inquiry for numerous missteps under Stick’s command.

Kyle Janek, executive commissioner of the Health and Human Services Commission, said Friday he canceled the state’s business with 21CT after his office, responding to questions from the Statesman, found the company had been held to lower standards than competitors during the contract procurement.

“I have not seen that anybody had done anything illegal. I just don’t like it,” Janek told the Statesman. “It’s not worth sacrificing the integrity of the agency so that we can get this done expeditiously.”

Stick, through an agency spokeswoman, declined interview requests. He was earning more than $200,000 a year after being promoted to the agency’s top lawyer job in February.

But in an email, Stick said he preferred 21CT technology because the company offered a better product than competitors, and he said the contract with the company followed the rules.

“21CT has been successful in meeting or exceeding the terms and conditions of its contract with the state,” he said. “No one has questioned that relationship except you, former employees who were fired for ethics violations, employees who did not want to be accountable to the strict performance measures the 21CT project brings, or competitors to 21CT.”

The company’s CEO, Irene Williams, on Friday defended its deals with Texas and said 21CT has fallen victim to efforts by bigger companies that wanted 21CT’s business.

“For two years, 21CT has used the normal state contracting process to win good work and earn the trust of our customer at HHSC. 21CT serves the state of Texas by targeting health care fraud in a way that benefits the state and our health care providers,” Williams said.

“What Texans are witnessing is a local startup business with patented anti-fraud technology being smeared by big, multinational corporations afraid of the competition,” she said.

What does $110 million buy?

In August, as the Statesman first asked about the initial $20 million contract, 21CT’s CEO declined an interview unless it included Douglas Wilson, who is the inspector general and Stick’s boss.

In that interview, both Williams and Wilson praised each other’s work. At one point, Williams deferred to Wilson to answer a question about how the deal came together.

Both Wilson and Williams described 21CT’s technology, a variant of 21CT’s principal LYNXeon software, called Torch, as a dashboard in which Medicaid fraud investigators can type in a name and, almost instantly, connections across myriad data sets would appear on the screen as webs and graphs. The tool could provide analytics in real-time, they said, and could potentially predict fraud before it happens.

“It allows us to find the unknown unknowns,” the inspector general told the Statesman.

But two people who have worked on the project said Torch isn’t nearly as effective as the company or the inspector general have said. Both individuals spoke on condition of anonymity, citing nondisclosure agreements they signed.

“I don’t think it’s where they represented it to be,” one of them said, adding that the company had never worked with Medicaid data before and people working on the project realized early on that LYNXeon wasn’t getting the job done.

The company’s success with LYNXeon as a cybersecurity tool is well documented, especially in providing social network analyses, as the company did for federal defense agencies looking for terrorist networks. But its application to Medicaid was untested and has been far from smooth.

Thus far 21CT has ingested only a small fraction of the total Medicaid data into its software, state records show.

A significant hurdle is the state’s transition from a traditional fee for service model — a provider serves a patient and bills Medicaid — to a model using managed care organizations, or MCOs. In that model, a group of providers bills Medicaid a set amount based on the volume of patients assigned to them.

Data coming in from MCOs is exceptionally problematic for 21CT’s technology to handle, state officials and company executives agree, because each cluster of physicians tracks, stores and reports data differently — and that’s if those organizations supply useful data at all.

In concept, it’s as if analysts gathered customer shopping data from H-E-B, Wal-Mart, Walgreens, Target and so on, lumped it all together and asked a program to find an individual’s shopping patterns and display them graphically. Tweaking those disparate data sets to identify potential fraud, 21CT executives conceded, is a Herculean and potentially quixotic challenge.

But one of the two people who spoke with the Statesman said, “I don’t know if or when we’ll be done with it, if we’ll ever be done with it. I can’t imagine an end in sight.”

With more than 20 MCOs in Texas, more than 80 percent of the state’s Medicaid data falls into this category, state records show, and that percentage is rising.

“The problem is that Torch as promised, as it is, they haven’t actually done the hard work of data integration,” one of the two people said. “It’s not even a market-ready product.”

Both sources said they believe there is value to Torch, but only if it had been developed before it was sold to Texas and there was reliable data streaming into it.

Meanwhile, state officials have confirmed that a team of 21CT analysts are crunching numbers the old-fashioned way from the company’s headquarters and sending leads to the inspector general, where despite the contract’s initial promise, investigators don’t have direct access to software.

“There’s a lot of really low-level SQL analysis going on,” one of the sources said, referring to Structured Query Language, the standard programming language for working with multiple data sets, which is a far cry from so-called graph pattern analysis.

Before its deal with 21CT, the inspector general’s office already had a team of analysts tasked with performing those sorts of queries — and it still does.

‘A unique relationship with Texas’

The contract between the inspector general and 21CT was criticized last month as “generic” and vague by a director at the Department of Information Resources, the state’s clearinghouse for agencies that want to buy everything from iPads to multimillion-dollar software.

The inspector general contracted with 21CT through that department, essentially an efficiency mechanism that allows state agencies to bypass strict purchasing rules and buy from preapproved vendors. But any contract that exceeds $10 million can’t be purchased through the program without either a competitive bid process or proof that the vendor is the only company that offers a certain product or service.

That agency was unaware that either the initial $20 million contract or the pending $90 million extension had been completed via the Department of Information Resources process until the Statesman provided the documents.

Stephanie Goodman, a spokeswoman for the Health and Human Services Commission, said 21CT avoided the usual competitive bid process because it was the only company that offered graph pattern analysis — the technology Stick had presented as the future of fraud investigations in March 2012.

Other companies courted by the agency in 2011 through fall 2012, however, offer products and services similar or comparable to 21CT’s. But they don’t call it “graph pattern” analysis.

Those companies — tech giants LexisNexis and SAS (pronounced “sass”) — offer “graph analysis” and “social network analysis” respectively, according to their websites, which both advertise their products as solutions for rooting out insurance fraud, waste and abuse.

Goodman earlier this month said LexisNexis, SAS and two other companies played with sample Medicaid claims data and provided proofs of concept to the commission, but were ultimately not chosen for the job.

But on Friday, in explaining why the 21CT contract was canceled, Goodman said 21CT hadn’t used Medicaid claims data when it auditioned for the job.

“In the case of 21CT they did a proof of concept, but in looking into that, they did not use Medicaid claims data,” Goodman said. “The fact that the process was not the same for everyone is of course the concern. While it is acceptable and legal to go through the (Department of Information Resources), we don’t consider that best practice.

“There were a number of things that were just raising alarms.”

Among the alarms was a presentation Stick gave in 2013 to the National Association for Medicaid Program Integrity in Baltimore, which the Statesman obtained and provided to state officials.

In that presentation, Stick criticizes the proofs of concept from 21CT’s competitors, saying, “POCs actually lost us money and cases,” while several slides feature 21CT’s technology.

When asked how the standard procurement process had lost cases and money, Goodman said that isn’t true, adding, “That presentation is inappropriate in both tone and content.”

Janek said it’s not uncommon for him or other members of the commission to discuss products or services purchased from vendors, but he said, “I’m usually conscious not to show their names. If it’s given as an example of what a company can do, that’s different than product endorsement.”

At 21CT, one of the two people who have worked on the project and spoke with the Statesman on condition of anonymity, said it’s common to hear executives be blasé about the Texas contract.

“They have been depending on the fact that the contract is very loosely written,” the source said. “There is nothing by the letter of the law that could hold them to this or that. We have a unique relationship with Texas. That’s been said before.”

‘A blank check’

Last spring, Stick nearly extended 21CT’s work beyond Medicaid fraud, according to a former investigator with the Office of Inspector General.

Joe Carrizal Jr., overseeing the vital statistics fraud unit at the time, said he was sent to 21CT’s office to see how its software could help with investigations

“One day my manager called me and said, ‘Hey, the deputy inspector general wants us to go to a meeting with 21CT,’” Carrizal said. “I asked, ‘So what is this company about?’ He said that Jack Stick was using the company to try to target Medicaid fraud.”

“He pretty much told me we have a blank check, man, if we want this, then all you have to do is say ‘yes,’ and it’s ours,” Carrizal said his supervisors told him.

“We showed up, and they rolled out the red carpet for us.”

After the presentation, Carrizal decided not to endorse spending taxpayer money on 21CT products.

“I really didn’t understand how it was going to work on the Medicaid side,” he said. “But I knew for sure on the vital statistics side that it wasn’t going to help us.”

Carrizal was fired July 16 and has filed a whistleblower suit against the Office of Inspector General. In his lawsuit, he claims supervisors retaliated against him because he protested an order to only superficially review the job performance of Child Protective Services caseworkers when children were killed.

Overblown fraud claims

Both 21CT and the inspector general have said about $200 million in suspicious transactions were identified through the anti-fraud initiative, but confidential correspondence obtained by the Statesman shows the state has been slow to open cases and has yet to recover anywhere near that amount.

At an industry conference in 2013, Stick, featuring 21CT’s technology prominently, said the program had found more than $200 million that it was highly confident were overpayments and $180 million in transactions highly probable to be fraudulent, all in its first six weeks.

In June correspondence with federal Medicaid managers, however, officials said the program had identified only $41 million in highly suspicious transactions and $138 million in transactions highly probable to be either waste or abuse.

The reason, state officials told the Centers for Medicare and Medicaid Services, is because 21CT has analyzed only small amounts of data and because the state is grappling with inconsistent, late and messy data from managed care organizations.

Those varying and inconsistent numbers are notable because the Office of Inspector General has been frequently criticized for overblown estimates of fraud while it recovers only pennies on the dollar from those claims.

That correspondence, signed by state Medicaid Director Kay Ghahremani, also credits 21CT with identifying fraud in several sectors to varying degrees, some of which are either old cases or cases the inspector general already knew about.

For instance, state officials claim that LYNXeon identified $8.4 million in unnecessary services billed by Houston-area ambulances “who billed for mental health services but actually provided spaghetti dinners and movies to weak and vulnerable people.”

But it appears the inspector general and 21CT were long ago scooped by the Houston Chronicle, which in October 2011 reported in a three-part series how ambulance companies there were billing the federal government for inappropriate transporting of the vulnerable and mentally ill, including for spaghetti dinners.



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