The Centers for Medicare and Medicaid Services inspector general has issued a new report on what went wrong with the federal health insurance exchanges. Or rather, one thing that went wrong: how the agency mismanaged the contracts so that they experienced significant cost overruns.
You can take this report as a searing indictment of the agency and its contracting personnel. I took something rather different away from reading it:
1. The architects of the law were incredibly naïve.
2. Federal contracting rules are crazy.
Why do I say the architects were naïve? First of all, because it seems clear that no one -- neither legislators nor administrators -- had any idea that the exchange they wanted was a very hard technical problem. They specified a site that would do real-time verification of identities and subsidies, price search, and handle payments to insurers.
This system had to be built in three years, and moreover, it could not be built the way Silicon Valley would do it: start small, roll something out, see what works and what doesn't, then experiment until you finally arrive at the site you wanted to build. No, this site had to work on Day One, in every state in the nation that declined to build its own exchange. That was a very tall order, and no one seems to have given it much thought. Even when a manager in CMS tried to get the administration to scale things back, officials refused, and apparently simply failed to consider the possibility that trying to do too much would mean they ended up with nothing at all.
There were also big holes in the mandating bill itself -- for example, there wasn't actually any money to build the federal exchanges, or adequate time to put the contract out for open bid under the usual process. This was an artifact of how it was passed. When Scott Brown won Ted Kennedy's seat and supporters no longer had the votes to bypass a Republican filibuster, they went ahead and passed a draft law anyway, on the assumption that they could fix any problems later. They couldn't, because they still lacked the votes to break a filibuster, and in 2012, Obamacare cost them the House of Representatives.
To get around these problems, and Republican opposition, they used an expedited bidding process restricted to firms already under contract to CMS, and fragmented the management of the project, running policy out of one place, technology out of another. That meant they had only a handful of contractors bidding, and the worst sort of management structure to manage them: the sort that almost guarantees the ideas folks will generate wish lists that the implementation people can't deliver in the time and budget specified.
The contract people that CMS put in charge also seem to have had no idea what they were doing. Deliverables were not delivered, or were delivered after deadline, and the contractors don't even seem to have known who to update about all of this until well after the work had started. The inspector faults CMS for this, and thinks the agency should have managed the paperwork better. But badly managed projects don't generally suffer from a lack of paper. They suffer from a lack of good managers who know what is supposed to happen, and who closely monitor whether it actually is.
Which brings me to: The federal government contracting process is insane. Over and over, the inspector faults people for not having gotten the paperwork that might have allowed them to detect some problem. For example, on one contract folks at CMS who were not authorized to modify the contract added budget- blowing work before they got authorization to spend the extra money, and the contract folks don't even seem to have realized this was happening, because the contractor was only reporting billings in its monthly report, not forecasted total cost.
Wow. I'm not saying that private-sector contracting relationships never go wrong -- they do, all the time -- but this is crazy. As an IT consultant back in the day, I never added work without making it clear that this would add cost, and making sure the person in charge of the budget had signed off on the extra cost. No one had to force me to do this, or even ask; it was simple self-preservation. Adding work hours and then handing your client a surprise bill for more than your contract specified is a good way to ensure that client never hires you again, and also badmouths you to all their friends in the industry. A client is a long-term relationship; you want to preserve that.
But the federal contracting system specifically discourages these sorts of relationships, because relationships might lead to something unfair happening. (In fact, the report specifically faults CMS for not documenting that one of the people involved in the process had previously worked for a firm that was bidding.) Instead the process tries to use rules and paperwork to substitute for reputation and trust. There's a reason that private companies do not try to make this substitution, which is that it's doomed.
Yes, you end up with some self-dealing; people with the authority to spend money on outside vendors dine very well, can count on a nice fruit basket or bottle of liquor at Christmas, and sometimes abuse their power in other less savory ways. But the alternative is worse, because relying entirely on rules kills trust, and trust is what helps you get the best out of your vendors.
Trust is open-ended: You do your best for me, I do my best for you. That means that people will go above and beyond when necessary, because they hope you'll be grateful and reciprocate in the future. Rules, by contrast, are both a floor and a ceiling; people do the minimum, which is also the maximum, because what do they get out of doing more? The federal contracting system is of course also incredibly slow and unwieldy. It's designed to be, the better to frustrate anyone trying to slip a fast one by the American taxpayer. But if you have a three-year deadline to deliver a complicated technology project, then a system that slows everything down, while encouraging clock-punching, is really not the system you would expect to produce it.
The report is very useful in its way. But ultimately, it focuses on side issues. Neither inadequate paperwork nor disclosure problems are why the exchange contracts went wrong. They went wrong because they could not do anything else: The task was too large, and the law's architects didn't understand how big it was. The holes in the legislation created an impossible management structure. And the federal contracting system was optimized to prevent corruption rather than deliver working systems on time and on budget.
It's hard to see how spending more hours creating and reading reports would have fixed any of these problems. At best, it would just have provided slightly better documentation of the disaster in progress.
Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy.