Padding the School Policies?

A lawsuit accuses HISD insurance consultants of conning the district

Editor's Note, May 2014: On April 22, 2003, the presiding judge in this case ordered that all allegations and claims against defendant Rupa Mathur be dismissed without prejudice after receiving a notice of partial non-suit from Richardson-Eagle Inc. In fact, by August 2004 Judge Grant Dorfman had dismissed all the claims against William M. Mercer as well.

In 2003, HISD officials hailed the latest successes of its human resources outsourcing as a "commitment to excellence and innovation" that would provide workers with "maximum choice at the lowest possible cost, especially in today's expensive health-care market."

That glowing assessment came from the Informed Source newsletter of the Houston school superintendent's office. It quoted then-board member Dianne Johnson -- currently the HISD board president -- as commending the "creative approach" to an employee benefit package that was "nothing short of phenomenal."

More praise was heaped upon the chief architect of this change, Mercer Human Resource Consulting. Since it has gained the district's outsourced contract for insurance coverage responsibilities, the firm anticipates receiving about $25 million through this year in fees on its stated savings for HISD.

Former HISD educator Kimball says he's supporting 
other employees through the legal action.
Daniel Kramer
Former HISD educator Kimball says he's supporting other employees through the legal action.

However, a recent lawsuit offers up another explanation for Mercer's supposed successes for the school district:

• While touting its services as an "independent consultant," the company's decisions -- and profits -- have been influenced by "commissions" paid to it from HISD vendors that Mercer did not disclose to the district.

• The company claims significant savings for the district, but those have resulted from little more than inferior or reduced insurance coverage. Rather than lowering costs of commissions and fees paid to agents, those payments went to Mercer itself in several instances.

• In at least some cases, Mercer is accused of rigging the bidding process to make it appear that it had substantially reduced costs. Companies participating in those supposedly competitive bid processes would be rewarded with other business, the suit alleges.

Defendants in the suit are Mercer, Human Resource Consulting Inc., Mercer Human Resource Consulting of Texas, Inc. and their parent company, Marsh & McLennan Companies Inc. The Marsh insurance-consulting giant is based in New York City.

The suit seeks class-action status among the covered workers of HISD's 28,000 employees, as well as other districts involved in pooled coverage with Houston. If certified to become class action, the suit could expand the plaintiffs to include employees of Dallas ISD, Katy ISD and some other school districts in the state.

"Defendants have fraudulently obtained millions of dollars from Texas school districts in consultant fees," the suit states. It seeks to have Mercer's revenues forfeited and triple damages awarded to those covered under Mercer-influenced contracts.

Marsh & McLennan and Mercer are accused of racketeering, fraud, abusing the financial trust with school districts, bid-rigging, deceptive trade practices and violations of the state's insurance code.

Allegations mirror many of those arising from an intensive investigation by New York state Attorney General Eliot Spitzer into other Marsh & McLennan business activities. A civil suit by Spitzer accused the company of misleading clients, fraudulent bid procedures and gaining kickbacks from insurance firms that increased the costs of coverage for those insured.

Last month, Marsh & McLennan agreed to pay $850 million to settle the civil litigation with the AG's Office. The company admitted no wrongdoing. And later in February, a senior official of Marsh pleaded guilty to two criminal charges of bid-rigging involving coverage for corporations. Other executives are reported to be under investigation in the expanding probe.

There is no indication that HISD contracts are part of that investigation, although the local suit refers to the New York AG's action in making its own accusations.

Other questions arise about the oversight by the HISD administration and board on the massive changeover to privatizing human resources operations of the district. It began in the final year of Rod Paige's reign as superintendent, before he became Secretary of Education under President George W. Bush.

The federal suit here says that in 2000, Mercer Consulting helped draft the district's Request for Proposals that "helped Mercer land its lucrative entry into the Texas school district business."

The Houston district virtually turned over its entire insurance coverage responsibilities to the firm to be its exclusive agent, the suit says. That included handling everything from analyzing insurers' proposals, recommending coverage packages, negotiating with vendors, finalizing contracts and acting as HISD's trusted agent in securing the best plans for the least cost.

No individuals are named as defendants in the suit, although the allegations extend to some current or former HISD officials and consultants.

The suit states that Rupa Mathur was both an insurance agent and consultant as well as benefits manager with HISD. While with the district, the suit alleges, she received about $250,000 from insurers, including about $24,000 from a Marsh insurance firm.

Mercer offered her $1.18 monthly for each employee in coverage pools from other school districts, according to the suit. That bounty, for example, would amount to $11,800 a month for a district of 10,000 employees.

"While not tied directly toward her approval of Mercer at HISD, she had every motivation to get the program started at HISD so she could help sell it to other Texas school districts," the suit says.

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