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Xerox Services Margins Take Big Hit: Problems at Nevada the Main Culprit

Let's start with some positive takeaways about the performance of Xerox Services in Q1:

  • The commercial healthcare BPO business experienced “strong” revenue growth and margin improvement
  • ITO revenue was up 4.4% y/y and also saw margin improvement
  • Document outsourcing was up 0.8%.

Overall BPO revenue declined 1.9%, impacted by the runoff of the student loan contract, lower volumes in customer care and transportation, also less inorganic contribution. This level of decline was to be expected.

(Full details of the performance of Xerox Services in Q1 2014 are available here.

But the real issue with the performance of Xerox Service this quarter is the 76 bps y/y decline in segment margin to 8.6%, driven by additional costs related to MMIS and Health Insurance Exchange (HIX) implementations, in particular in efforts to resolve problems at Nevada Health Link. Not only has Xerox missed Services segment margin guidance for the quarter by some way (the target was 9.3%), but it has also had to revise Services margin guidance for full year 2014 downwards from the initial target of ~10.3% (a 50 bps improvement on 2013), to between 9.4% and 9.8%. This represents ~$80m in terms of overall operating profit.

So what’s happening at Nevada? Xerox was awarded a $72m Business Operations Solutions (BOS) contract in May 2012 to provide the technology and services to design and build the state's HIX. While Xerox is providing BPO services in other state exchanges, at Nevada it was also given responsible for building the platform. With a very short timeframe before the October 1, 2013 enrolment start, it was always going to be a very demanding project. As Jon Hager, then executive director of the Silver State Health Insurance Exchange (he resigned last month) said at the time "There is very little margin for error in getting an exchange fully operational by 2014 and self-sustainable by 2015”.

There has been a lot of media coverage about failures with Nevada Health Link: computer errors, very poor call center service, and premiums that have been paid but not reached carriers.

  • Nevada has brought in Deloitte Consulting (who competed against Xerox in 2012) in a short consulting project to analyze the system and recommend fixes
  • Not just the board of the Silver State Insurance Exchange, which runs Nevada Health Link, but also Governor Sandoval is now kicking up a fuss. Gov. Sandoval has met with Xerox CEO Burns, stating that she has said that fixing the problems with the Nevada HIX is the top priority for the company
  • A report from an independent auditor, Health Claim Auditors Inc., has said nine categories qualify for penalties to be levied by Nevada, mostly around billing errors
  • And last week a class-action lawsuit was filed against Xerox and Nevada's HIX about Nevadans who have sent premium payments but remain uninsured because of problems with the system, typically because their premiums have not reached their selected insurance provider,

But it has been evident since at least last summer that there were big problems with the platform build. The BOS semi-monthly status reports show a lot of red status alerts around development and testing. Although the federal Operational Readiness Review (ORR) found in September that the Nevada HIX was at an “average status” of implementation, Gov Sandoval’s office had been informed in August that the project was at high risk status.

Systems integration testing kept slipping, and final UAT, for a variety of reasons (some of which outside Xerox’s control) was delayed to the last minute. And when the system did launch on Oct.1, it did so without EDI 834 (for transmitting health enrollment information to the insurance carrier) being in place. This meant that Nevada Health Link started up with Xerox having to manually process completed applications, printing them and then physically delivering them to the insurance carriers, until EDI 834 functionality was in place. So did Xerox put in place enough extra resources to do this well? It has, after all, extensive experience in document management BPO services. It would appear not.

And data on call center performance between December 1, 2013 and February 9, 2014 show average waiting times throughout December and much of January that beggar belief. On December 8, for example, AWT was 1:13:16 - that is one hour, thirteen minutes and sixteen seconds, just to be clear. That is the average: some people were waiting much longer than this. Unsurprisingly, the number of calls dipped that day. And had Xerox geared up, by training additional agents, knowing there were problems with the site? Not in a timely manner. As late as January 5, (number of calls up over 70% on Dec 8, AWT down to one hour, two minutes and sixteen seconds) there were still only around 40 call center agents in place - though by this time Xerox had over 200 more in training. Call center response times now appear to be good (AWT under a minute) now that many more agents have been recruited and trained (around 250 in place now). It does beg the question, however, could Xerox not have foreseen some of this? Particularly given its experience in providing call center services around Medicaid. As BPO provider as well as system developer at Nevada, could Xerox have done more to ameliorate the problems that it must have known would happen when the HIX launched?

What else has Xerox been doing specifically in Nevada? Recently, a lot.To give just a few examples:

  • To resolve payment and invoicing, for example, it has taken on bank account and responsibility for executing financial transactions from partner Choice Administrators, and continues to work on making changes to the system to reduce the time it takes to produce recurring statements, also the amount of rework and manual statement processing
  • It has set up a dedicated team to resolve carrier issues
  • It has brought in a team from is Buck Consulting to do an assessment of the exchange
  • And we believe, from a BOS status report, that a sizeable team from Cognizant has been brought in to assist in development and bug fixing.

In February, Nevada Health Link cut its enrollment target from 118k to just 50k by March 31. In fact, only around 18k people had paid enrollments through the exchange, another 13k had selected plans but not yet made payments, and a further 54k had shopped on the site but not selected a carrier. Xerox is sending out emails, letters and also calling them to encourage them to sign up.

In the Q1 earnings call this week, Ursula Burns highlighted some of the other actions taken to address issues in Xerox's government healthcare business:

  • A new leadership team of the business
  • Moving some technical resources from the Technology business into the Nevada project – again, should this not have been done earlier?
  • Enhancing program management under a single point of accountability: should also help in sharing learnings across different implementations of the same MMIS platform.

During the quarterly call, Burns highlighted Xerox’s long experience in Medicaid. Yet here too, implementations of its recent Health Enterprise MMIS have not been without their challenges: Xerox is also dealing with issues at Alaska and Montana – and if we look back in time, there were long delays at New Hampshire, to give just three examples. And things at Texas are far from well.

The statement from Burns was clear: “We know it's going to take us longer and will cost us more to get these implementations right”.

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