In February, rainstorms inundated southern California, sending rivers of water and mud through the canyons around Los Angeles, and more than 1,200 homeowners filed damage claims with the National Flood Insurance Program. The claims were processed not by the agency, but at the Bethesda office of a Dallas-based computer company, Electronic Data Systems Corp.
A retired West Virginia coal miner goes to the doctor for treatment. His claim for repayment under the federal black lung program does not go to the Labor Department, but to the same computer firm.
A surgeon in Chicago performs heart surgery on an elderly patient covered by the federal Medicare health program. The patient's request for repayment is processed by an EDS employe in the company's Des Plaines, Ill., offic who calls up the patient's medical files on the screen of a terminal connected with EDS central computer in Dallas.
In July, EDS expects to sign a contract with the District to put the city's welfare and food stamp files on a computerized data bank, permitting a fast, close check on fraud and abuse.
For years, H. Ross Perot, founder of EDS, has been telling the government he could run their assistance programs better than they can. Now, his company and other hard-nosed profit-motivated data processing firms are getting the chance.
Flood insurance . . . welfare aid . . . Medicare . . . Medicaid . . .black lung benefits . . federal workmen's compensation . . .food stamps . . . EDS has won contracts in each of these programs to screen the claims, pay the checks and rule on disputes, becoming the middleman between the government and millions of Americans who receive federal assistance.
"It's the wave of the future," says Frederick Senior, project director for the District's "automated client eligibility program."
Although not the largest data processing contractor for the federal government, EDS is regarded as the leader in fast-growing field of computerized management of government human resources programs.
The image of the social worker in the seedy welfare office thumbing through a case file may be durable, but it is far out of date. What EDS offers the government is a system that not only inspects each claim for assistance, but can also screen millions of claims, looking for "suspicious" transactions and flagging them for investigation.
Although not the largest data processing contractor for the federal government, EDS is regarded as a leader in the fast growing field of computerized management of government human resources programs.
Business is booming, as the Carter administration tries to bring the $300 billion in annual social services spending under tighter control. In just over two years, EDS has won more than 100 federal contracts, acquiring an existing firm, Potomac Research Inc. in Alexandria, then extablishing its own operations centers in Bethesda with more than 1,000 employes.
Starting from scratch in 1978, its government services division expects to earn more than $50 million this year, 20 percent of the company's total, said division vice president Gary J. Fernandes.
To its admirers, EDS is something of a miracle worker. It took over a federal flood insurance program that was strangling in its own paperwork, brought in waves of workers, including some top managements trainees from Dallas headquarters, and restored order.
"They brought some of their best people to the project and handled it.I was very pleased with their response," said Gloria M. Jiminez, federal insurance administrator.
To its detractors, who have watched EDS uneasily since its began to scoop up highly profitable state contracts for processing Medicare and Medicaid claims a decade ago, EDS is a cold, automaton whose single-minded drive for growth and profits clashes with the needs of its "customers" -- the poor, aged and sick who received government assistance.
Since its beginnings 18 years ago in the restless mind of Ross Perot, then a young IBM computer salesman, EDS has never been just another computer service firm. Perot, a unique figure in American business, has stamped the company with his personality. On Feb. 11, Perot is in Istanbul, directing a private undercover operation to free two EDS official from a Tehran prison, with a script borrowed from "Mission Impossible." The two had directed a multi-million dollar program to automate Iran's social security and health insurance plans, on a contract with the former shah. When EDS began to withdraw its people, the Ayatollah Khomeini's supporters seized the EDS supervisors, demanding a $12 million ransom.
A mob storms the prison -- Perot said it was stirred up by his commandos -- and in the turmoil, the EDS men escape, join with the rescue team, and slip out of Iran into Turkey and freedom.
"I don't know of any other company in the world that would attempt something like this," said retired Army Col. Arthur D. (bull) Simmons, the Vietnam commando who led Perot's expedition. Although the account of the escapade raises some skeptical eyebrows in the government, EDS officials say it happened just that way. "The point is, Ross takes care of his own," said an EDS official.
The imprint of Perot on his company is glimpsed on entering EDS headquarters north of Dallas, on a former 177-acre golf course that still has a few holes for employes to play. In front of the headquarters building stand 50 flagpoles, one for each state. Recently, they have been flying 50 American flags, which will be presented to the hostages when they return, an EDS official explains.
In the lobby is a bust of John Paul Jones -- the symbol to Perot of a leader who took a loyal, handpicked crew and won by risking everything for a cause he believed in.
"What we sell is our people," says Fernandes. "We spend a great deal of time to assure we acquire the right people, who are interested in achieving results rather than putting in eight hours a day, people who by their back-ground are winners."
There are great differences between government workers and EDS people, from it managerss, who are expected to get results, to computer operators whose work output is measured against company standards, Fernandes suggests: "We work harder."
This is the message the government wants to hear, as it struggles to control costs of its assistance programs.
Beginning in Maine and Illinois, the Department of Health and Human Services (formerly Health, Education and Welfare), is sponsoring an experiment to see how profit-making computer firms, working with fixed price contracs, handle the Medicare health program for the elderly. When it created the Medicare program, Congress intended that non-profit health insurance firms like the Blue Shield organizations would administer the program, receiving reimbursement for their costs, plus a fee, from Washington. p
The contract for the Illinois Medicare program was won in 1979 by EDS over Blue Shield of Illinois and CNA Finance Corp., the two companies that had run the program for years in the state, plus several other competitor
The EDS bid was $41.8 million for five years, well under the other offers and enough to make up the edge in experience held by Blue Shield and CNA. The amount was the maximum the government would pay EDS, no matter how high the administrative costs grew, a very different system than the customary cost reimbursment approach.
The Illinois experiment blew up in EDS' face.
Patients who sent their medical bills in to EDS, the government's claims agent, found themselves waiting twice as long for reimbursement. More troubling to patients and their physicians, EDS appeared to take a tougher line on repayments, rejecting some claims for reimbursement and cutting back payments for other medical services.
By the end of October, the backlog in claims had ballooned to 442,000, twice the customary rate in Illinois.
Dr. T. William Cook of Rockford is president of the Illinois Association of Opthamology. "My charge for removing a cataract is $750," he explained. Since Medicare repays 85 percent of the "normal and customary" charge by physicians for each eligible medical service, his patients could expect a government check for $637.50.
EDS, however, determined that a cataract removal was worth only $600, reducing the patient's Medicare check to $510. The difference came out of the patient's pocket.
"They're using fee schedules that are two and three years old," Cook contends. "It's a monumental problem.We have a tremendous backlog of accounts due from EDS." He tells patients not to pay him until their Medicare checks arrive -- a practice many physicians do not follow. As a result, his file of unpaid bills has doubled.
"Now they've started paying off claims faster, but the sad part is, they're not paying them correctly."
Dr. Cook says he sometimes thinks the backlog has been deliberate. "The only thing I can think of is they're trying to show the government they can save money running the program," he said.
Rep. Paul Simon (D-Ill.), who has become a sharp critic of EDS Illinois operations, agrees: "It's a way of keeping spending down and postponing federal expenditures. That's a politically desirable thing today." p
EDS denies it is making policy for the government, imposing its own interpretations on medical bills. But the Medicare rules are loose enough to give EDS and other contractors substantial leeway to set fees and policies.
David Shaw, an HHS official in Chicago, says its more likely that EDS underestimated the program's difficulties and was overwhelmed. EDS located its computer center in Des Plains, Ill., an area of low unemployment where skilled computer operators were hard to find. "I think they were paying at the low end of the wage scale. They had very, very high turnover," he said.
As the backlog and the complaints piled up, EDS responded, opening two new offices elsewhere in the state and doubling its work force. EDS had established toll-free numbers for use by patients calling in claims and when then independent telephone company in Des Plains couldn't handle the heavy traffic, EDS purchased a $350,000 switching system to cure the problem, Shaw, said.
"I'm sure EDS is spending a lot more than they figured" when their low bid was submitted, Shaw said. "But that's their problem.
EDS' problems includes a series of fines levied by the government because the computer firm failed to meet performance standards set by HHS. The fines total $156,000 and are expected to climb to $364,000. HHS is tolerant, however.
"Anybody who took over the entire Medicare business in Illinois would have had problems," Shaw added. The state generates 4 million Medicare claims a year and many of them lack proper documentation.
"EDS put in tremendous resources," Shaw said. "Whether a non-profit organization like Blue Shield could have done it is a serious question." He said he doubts that state health regulators would permit a non-profit organization to use subscribers' funds for the kind of bailout EDS was forced to mount in Illinois.
"I think they're over the hump," Shaw said. Critics such as Cook and Simon say that while EDS is obviously trying, they aren't yet convinced that the problems are solved.
Meanwhile, investigators from the General Office are in Chicago studying the EDS operation and the entire question of fixed contracting with profit-making firms such as EDS. A House Ways and Means sub-committee headed by Rep. Charles Rangel (D-N.Y.) has scheduled a hearing on the controversy for April 29 in Chicago.
In particular, GAO is concerned that the pressures for high productivity that are generated in an operation like EDS lead to just the sort of errors and backlog that have plagued the EDS opperation, said Gregory J. Ahart, director of Gao's human resources division, in a letter to Simon.
The administration clearly is not ready to abandon the experiment. Patricia Roberts Harris, Secretary of HHS wrote to Simon in January that the fixed-price experiments in Ilinois and other states "will help improve our ability to manage Medicare contractor activities while significantly reducing administrative costs. I believe that we can achieve this goal with a minimum of disruption."
Ramparts Magazine once mocked Ross Perot as "America's first welfare billionaire." "First and only" would be more accurate, because there's never been a get-rich-quick story quite like Perot's.
In 1962, he was a supersalesman for IBM who had achieved his annual sales quota that year by January 19, foreclosing hopes for any further commissions that year. He formed his own computer systems company that June.
In 1965, Congress created the Medicare legislation and Perot did some part-time work for Texas Blue Shield, which had the contract to manage the state's program. That association led to a subcontract from Blue Shield, giving EDS the Medicare data processing business in Texas, and Perot was launched. Contracts to administer Medicare and Medicaid in 11 states followed, and investment groups began to flock to see Perot, urging him to take his company public.
The deal Perot made with the brokerage firm of R. W. Pressprich in 1968 was a classic in Wall Street annals. Perot sold 325,000 shares of EDS stock, the company sold another 325,000 and the rest was kept -- 1.5 million shares held by EDS employes and 9.5 million shares that beonged to Perot.
Perot's apparent inside track on Medicare processing seemed like a sure thing and investors snapped up his stock. Each dollar's gain on the over-the-counter market made Perot $9.5 million richer. By the spring of 1970 EDS stock had soared from $16.50 a share to $160 and Perot was worth $1.5 billion.
At that inflated price, the stock was hanging by a thread. It snapped one April day in 1970 when some leavy selling began, picked up momentum, and didn't stop. At the day's end Perot had lost $450 million.
At first, it was Perot's sudden rise and fall as a crew-cut, flag-waving billionaire that caught attention (he remains many times a millionaire). Then, EDS' rapid accumulation of Medicare and Medicaid contracts roused concern among some members of Congress that it was gaining a monopoly on the date processing of health insurance claims.
Today, that particular concern is not heard much. Federal spending for private data processing services is rising rapidly. It reached $2.7 billion in fiscal 1979 and is expected to reach $3.6 billion next year. The growth continues to attract competition.
Computer Sciences Corp., for example has $250 million in federal contracts, five times EDS' current total. To years ago, CSC beat out EDS for the $129.6 million contract for handling California's Medicaid program. Planning Research Corp. of Washington, and computer subsidiaries of aerospace firms are also in the market.
But its competitors recognize that EDS, in its clean-cut, patriotic way, plays hardball for federal contracts, unafraid to low-bid other rivals, as in the Illinois Medicare case, and using its large base of contracts in the human resources area to full advantage.
"The government's focus initially was on an enhanced ability to process claims," said Fernandes. "More recently, it is in developing computer systems that allow better control, to address the potential for fraud and abuse and to make sure people get the full benefits they're entitled to."
The EDS system is going to tell bureaucrats a lot about their programs that they might prefer not to know, Fernandes said. "Ignorance is bliss. There's a lot of truth in that."