Health insurer sues KPMG over failed IT project

US health insurer Highmark Inc. is suing KPMG Consulting Inc. for what is likely to be tens of millions of dollars over what it says was the consultancy's failure to create a "critical" electronic billing and accounts receivable system. Highmark said KPMG abandoned the two-year, US$15 million project this summer after it missed deadlines and created cost overruns through mistakes.

The $5 billion insurance company brought six charges against McLean, Va.-based KPMG Consulting, including malpractice, fraud and breach of contract.

In its complaint, filed last Friday in U.S. District Court in Alexandria, Va., Highmark said KPMG Consulting ran over schedule by more than a year and attempted to charge the insurer an additional $8 million to compete the first phase of the project.

"We're still calculating what we're going to need should we move forward on the project," said Highmark spokesman Bill Miller. "What we're telling people at this point is that Highmark is alleging it suffered tens of millions [in losses] as a result of this." The amount of damages being sought wasn't specified in the lawsuit.

Highmark claims that KPMG completed less than 20 percent of the project and in an unsatisfactory manner, "despite receiving $12 million," and abandoned the project, leaving Highmark to complete it.

"We're looking to see if any of the work done by KPMG is salvageable as we move forward. We're obviously dedicated to consolidating our billing system," Miller said.

KPMG responded to the charges yesterday by placing at least half the blame on Highmark.

"Most of our engagements are collaborative between us and our clients. Each of us bares an equal responsibility to help the project succeed or fail," said KPMG spokesman John Schneidawind . "If either party fails to deliver, it can break down.

"We've been able to deliver on our part of the project, but through much of the engagement, Highmark hasn't done its part to ensure a successful implementation of the payment system on time and on budget," the spokesman said.

Pittsburgh-based Highmark was created in 1996 by the consolidation of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield. The company is now among the top 10 health insurers in the U.S.

Highmark chose KPMG to do the project in May 1999. The four-stage project, known as HighBAR, was supposed to be completed in the first quarter of 2002 but never went beyond the second stage.

Highmark said KPMG began the first phase of the project in July 1999 and completed the planning but not the construction portion of that phase, keeping Highmark in the dark about the costs and labor hours associated with the project and missing key deadlines along the way.

Highmark said that because KPMG failed to "satisfactorily" complete several aspects of the project, including database design, software design specifications and a detailed application architecture, many developers were forced to begin coding at a point when the detailed design was in flux.

Highmark claims that in January, KPMG began reneging on its promises to complete the work on time. In February, KPMG stopped working on Stage 2 of the project to make better progress on Stage 1, Highmark said.

Later, KPMG admitted that "much of the coding work performed during the summer of 2000 was useless and would have to be redone," the complaint states, which would about 1,000 days or 8,000 hours of additional detailed design and coding work to complete the first stage.

"[KPMG] did not commit to complete stages two through four, and did not disclose what amount it would require to complete these stages," the complaint reads. "As a result, Highmark will incur millions of dollars in costs to operate and maintain its existing or 'legacy' systems."

Highmark said KPMG informed it in April for the first time that it would need another $8 million to complete Stage 1 of the project.

Highmark refused to pay the additional fees, and KPMG stopped work on the project in mid-June, the most "disruptive point" they could have chosen to stop, because Highmark was attempting move into the "production portion of the system [KPMG] allegedly completed," Highmark said.

Schneidawind said that because KPMG only received the complaint yesterday, it would not be able to elaborate on its position, saying only that "lawsuits are a part of doing business. We still hope to rectify the problem and stand ready to work with them if they want us to."

Join the newsletter!

Error: Please check your email address.

More about HighmarkKPMG

Show Comments