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Feds probe Maryland's disastrous Obamacare marketplace

Maryland Gov. Martin O'Malley speaking before President Barack Obama takes the stage at a Costco store in January 2014 in Lanham, Md.
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Maryland Gov. Martin O'Malley speaking before President Barack Obama takes the stage at a Costco store in January 2014 in Lanham, Md.

Maryland's badly botched Obamacare exchange is being investigated by a federal watchdog in connection with its use of federal funds to build that marketplace, a congressman from the state said Monday.

The probe by the inspector general's office of the U.S. Health and Human Services Department was disclosed just days after the Government Accountability Office said it would conduct an audit of state-run Obamacare marketplaces, several of which have had serious technical problems despite receiving hundreds of millions of dollars in federal grants. In addition to Maryland, those exchanges include ones in Oregon, Hawaii and Massachusetts.

HHS' investigation specifically of Maryland's exchange came at the behest of U.S. Rep. Andy Harris, R-Md., an Affordable Care Act opponent and anesthesiologist.

"Maryland officials ignored early warning signs and chose to waste and abuse federal taxpayer money by opening up what they knew was a flawed exchange to the public," Harris said in a prepared statement Monday. "I have confidence that the nonpartisan and independent HHS Inspector General will thoroughly investigate and bring to light how hundreds of millions of dollars were wasted on one of the worst exchange roll-outs in the country."

(Read more: Maryland Obamacare site eyes eHealth deal)

Harris on Feb. 12 had asked HHS' inspector general to probe Maryland Health Connection, the state's ACA marketplace, in a letter.

Harris said the probe should seek answers to several questions, including: "how federal dollars were spent on the exchange," "the procurement process, which may have included contractors with no expertise," whether federal funds can be recouped from the state "in light of their obvious lack of proper oversight" and "who specifically failed in their responsibilities to safeguard federal taxpayer money."

The exchange's now-fired contractor, Noridian Healthcare Solutions, had been paid nearly $65 million by Maryland, and had billed the state for $13 million more. Additional spending is projected to bring the exchange's total cost to a total of $261 million.

The bulk of Maryland's funds for its Obamacare exchange came from federal grants.

"By the end of this year, over $100 million [in] federal dollars will have been spent on a project that should have cost much less, and doesn't work," Harris wrote in his February letter, which was co-signed with Rep. Jack Kingston, R-Ga., chairman of the House's Appropriations Committee. "As a result of the fact that Maryland appears to be willing to waste tens of millions of dollars of more federal dollars ... we ask that the investigation start immediately."

(Read more: Oracle faces ouster from Oregon Obamacare website)

A spokeswoman for Maryland Health Connection, which is one of 14 state-run Obamacare exchanges, declined to comment on the probe. A spokeswoman for HHS' inspector general did not immediately respond to a request for comment.

The exchange, which sells private Obamacare insurance and enrolls low-income people in Medicaid, has performed abysmally since its Oct. 1 launch. As of March 1, the exchange had signed up just 38,000 in private plans, far short of original projections.

Its leadership now is contemplating junking its entire exchange model, and possibly relying on the federal government's Obamacare site after March.

On the heels of its launch, as the exchange tried to get its botched website working properly, the exchange's director, Rebecca Pearce, took a weeklong vacation in the Cayman Islands in late November. She resigned in December, after her ill-timed jaunt was disclosed.

Two weeks ago, the exchange fired Noridian Healthcare Solutions and replaced the company with Optum/QSSI as the main IT contractor on an interim basis.

Thomas Kim, deputy secretary of operations at the Maryland health department, told officials at the time that Noridian had "severely misrepresented the maturity" of the online system it was building for the exchange.

(Read more: Maryland fires Obamacare contractor)

Kim also reportedly said Noridian outsourced, without disclosing to state officials, its primary role to a subcontractor who was not authorized to do the work. Disputes between Noridian and the subcontractor allegedly led to work stoppages when the exchange site was supposed to have been built.

Late last week, CNBC revealed that Maryland is on the verge of becoming the first state-run exchange to partner with a Web-based health insurance broker, eHealth, to help the exchange sell the same health plans offered on the marketplace to people who qualify for federal subsidies to offset the costs of coverage.

By CNBC's Dan Mangan. Follow him on Twitter @_DanMangan.

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