Montreal-based CGI Group loses important Obamacare contract

CGI founder and executive chairman Serge Godin arrives at a news conference to confirm an offer to acquire Logica Thursday, May 31, 2012 in Montreal. THE CANADIAN PRESS/Paul Chiasson

MONTREAL -CGI Group's role in President Barack Obama's defining political achievement is ending prematurely after the U.S. administration decided not to renew the Montreal-based IT firm's contract for the government's problem-plagued health insurance website.

Obama administration lead contractor CGI Federal said Friday that it and the administration had mutually agreed to part ways on HealthCare.gov.

The Washington Post and Bloomberg, citing unnamed sources, said Friday that the U.S. government was preparing to make the change and would sign a 12-month contract, worth about US$90 million, with Accenture.

Accenture declined to comment on the reports.

The Centers for Medicare and Medicaid Services referred to impending changes, saying: "We are working with our contract partners to make a mutually agreed upon transition."

CGI Federal's contract is slated to expire in February but could have been renewed for one or two years. It was selected in September 2011 as the lead contractor and was awarded a US$93.7-million contract over two years to design and build the government's health insurance website, HealthCare.gov.

CGI spokeswoman Linda Odorisio said in a statement that the company played a key role in turning the website around and that it remains a federal contractor on other health-care projects.

"We are proud that more than 400 CGI employees worked around the clock from October through December to deliver a consumer experience that works for a vast majority of Americans," she said.

After initial technical problems with the October launch of the website that delayed or prevented people from enrolling in private health insurance plans, the U.S. administration said last month that many of the problems had been fixed, with more than two million people signed up.

But the reports say the website is not yet able to automatically register people eligible for Medicaid in state programs, compute exact amounts to be sent to insurers for their customers' federal subsidies and tabulate precisely how many consumers have paid for their insurance premiums and are therefore actually covered.

The Post said the government concluded that CGI had not been effective in fixing the problems, and leaders of the Centers for Medicare and Medicaid Services "became frustrated with the pace and quality of CGI's work on the repairs."

Obama's political support has taken a beating over what he described in a year-end interview as "fumbles" with the website while Health and Human Services Secretary Kathleen Sebelius called it a "debacle."

A Canadian industry analyst said CGI (TSX:GIB.A) is a convenient political fall guy for an administration eager to put the issue behind it.

"This was an easy case where the contract was up, so you didn't have to rock the boat and yet, from a political standpoint, you could say that you were taking action," said the analyst, who spoke on condition of not being named.

The analyst said CGI is probably happy to get rid of the contract, given the negative media attention it has generated.

"Ultimately you'd like to have a functioning product and everybody be happy," he said. "But I think they'd be more than happy given that it's not a big impact on their business, and yet it's become a pretty big impact just perceptually, . . . to just put it behind them."

The rollout disaster saw people struggling to load web pages and enter their personal information.

Obama's allies feared that it would be more than a simple temporary glitch and might torpedo his legacy achievement. The president's health reform depends on young, healthy people signing onto the insurance exchanges. Their involvement is key to keeping insurance prices low.

With the website down for extended periods and the target of political foes and late-night comedians, they were worried that the young and healthy might simply take a pass.

The value of the contract is minuscule for CGI, which takes in more than $10 billion a year in revenues. Of potential concern, however, is whether the administration's decision could hamper CGI Federal's other business, which accounts for about 14 per cent of the parent company's annual revenues.

The analyst doubts there will be any impact.

"I think this is enough of a unique situation and a unique contract that everybody knew was especially complex, that I don't think it should have any impact on a broader sense."

In November, CGI said that its customers haven't been spooked by media reports linking the company to the troubled launch of the program.

CEO Michael Roach told analysts that clients "clearly understand" the complexity and uniqueness of the project, which is a key part of the president's health insurance strategy.

"This is not a simple website but rather a very complex integrated technology platform that, for the first time, combines the process of selecting, enrolling in insurance and determining insurance eligibility for government subsidies all in one place and in real time," he said.

Industry analysts have said CGI's reputation has taken a hit, but the information technology company's long-term outlook is strong because of its blockbuster acquisition in 2012 of Logica, a multinational IT and management consultancy company based in the U.K.

A senior vice-president of CGI Federal testified before Congress that it was the government's responsibility -- not the contractor's -- to test the website and make sure it worked.

CGI shares closed down 2.5 per cent, losing 88 cents to $34.37 in Friday trading on the Toronto Stock Exchange.

On Thursday CGI announced that it had won a $19.5 million contract to provide services to the government of Sweden.

-- With files from The Associated Press