International Business Machines (IBM) and the State of Indiana have been suing each other in an Indianapolis courthouse over a terminated outsourcing deal, under which IBM was to overhaul and modernize Indiana’s outdated and ineffective welfare eligibility system.
The State of Indiana sued its former welfare privatization partner, IBM, alleging a breach of contract, which includes intentional denial of Medicaid (the United States health program for eligible individuals and families with low incomes and resources) to a dying cancer patient and a nun.
The State is looking to recover a payment of $437.6 million to IBM (which it paid over the past three years) in lieu of costs incurred for third-party lawsuits, federal penalties and state employee overtime incurred as a result of the deal. Moreover, the State is seeking triple damages of more than $1.3 billion under the state law, citing intentional denial of welfare benefits. The Family and Social Services Administration (FSSA) is also looking to set aside IBM’s claim of $83.4 million in cancellation penalties claiming that this clause in the agreement is unenforceable under state laws.
IBM then countersued the State of Indiana, claiming recovery of fees and expenses of $52.8 million due under a 10-year contract signed with the FSSA in 2006. IBM also wants cancellation penalties of $83.4 million. In October 2009, the State terminated the contract and removed IBM from the position of lead contractor for the deal.
IBM’s program failed repeatedly, delaying the updating of data, leading to denial of Medicaid and ultimately resulting in the cancellation of the deal.
However, all may not be lost because although IBM is no longer a lead contractor, the company’s technology, infrastructure, applications and processes have helped the FSSA to develop a hybrid system that it claims is working very well. This could be the reason IBM is not contesting the termination, but instead looking for recovery of expenses incurred.
The cancellation of the agreement may not have a visible impact on IBM’s revenue, since recognition would have been over a period of 10 years. However, it could damage IBM’s image and discourage other states from entering into similar contracts with the company going forward.
We have a Neutral rating on IBM shares.
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