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State Of Texas Awards Contract Extension To Scandal-Plagued ACS

Under a two-year extension to a deal originally signed in 2004, ACS will handle Medicaid claims processing, operations support, and primary care case management through August 2009.

Texas' Medicaid program on Monday handed outsourcer Affiliated Computer Services a $230 million contract extension despite the fact that the company was forced to oust its CEO and CFO last week because of improprieties surrounding its stock option plan.

Under a two-year extension to a deal originally signed in 2004, ACS will handle Medicaid claims processing, operations support, and primary care case management for the Texas Health and Human Services Commission through August 2009. A spokesman for the commission said legal troubles at ACS, which is based in Texas, "were not a consideration" in the decision to award the contract extension. "They've done a good job for us in the past," said the spokesman.

Last week, ACS said CEO Mark King and CFO Warren Edwards improperly backdated the price of options grants during a period from 1994 to 2005. During that time, ACS said the executives deliberately chose days on which ACS's stock took a dip as the effective date for the options, making them more valuable when exercised. ACS said King and Edwards would resign their positions.

ACS said the SEC and the U.S. Attorney's Office in New York are continuing their investigations of the company's stock options practices. ACS said it estimates the backdating cost the company $51 million in unrecorded expenses.

While ACS has retained its contract with the Texas Health and Human Services Commission, other deals could be in jeopardy as a result of the stock options scandal. Some city officials in Edmonton, Alberta, are calling for the cancellation of the city's contract with ACS for photo radar enforcement services. "I just think it's not very palatable to hear of a company that's having all these problems holding a contract with our city," Edmonton city councilor Ron Hayter said in an interview last week with the Edmonton Sun.

Experts say Texas Medicaid administrators may have felt bound to extend ACS's contract despite the options scandal, given the complexity of handing off the work to a new vendor. Said Doug Brown, a consultant and co-author of The Black Book Of Outsourcing, "The real impact will be felt by ACS via a likely halt in new business signings, not renegotiations."

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