State cancels long-term, no-bid contract to run Alaska Psychiatric Institute

State health officials announced Monday that a controversial contract that turned over the long-term management of the Alaska Psychiatric Institute to a private company without a competitive bidding process will be cancelled.

The state will keep the Nashville, Tenn.-based Wellpath in charge of API until the end of the year but will put the long-term privatization of the psychiatric hospital out for a competitive bidding process, according to the Alaska Department of Health and Social Services.

“With the controversy surrounding this project — we want to make sure everybody sees we’re trying to do this the right way,” Department of Health and Social Services Commissioner Adam Crum said at a hastily convened press conference in Anchorage Monday.

In a written statement, the department said it wasn’t reversing course “due to any violations of the procurement process but rather so Alaskans have trust in their government.”

The state and Wellpath “mutually agreed” on the cancellation of the second phase of the contract, Crum said. Wellpath said in a statement that it “welcomed” the announcement.

“We look forward to bidding via the competitive process outlined by the state,” said company vice president Jeremy Barr.

The deal between Wellpath and the State of Alaska had been contentious from the start.

In February, the state announced the contract with Wellpath under sole-source procurement rules that allowed the department to circumvent the usual bidding process. At the time, officials said the move was necessary because the hospital was close to losing crucial accreditation from the federal government because of widespread dysfunction that put patients and staff in danger.

“It was a dire situation we were in,” Crum repeated Monday.

The contract announced in February had two phases: The first phase paid Wellpath $1 million per month to stabilize API on an emergency basis, and was supposed to end on July 1. The second, long-term phase would have paid Wellpath roughly $43 million per year to operate the state’s only public psychiatric hospital at its full 80-bed capacity.

The decision attracted intense scrutiny and criticism, Crum acknowledged.

Lawmakers such as state Rep. Ivy Spohnholz, an Anchorage Democrat, questioned whether the state broke procurement rules by awarding the long-term contact to Wellpath without soliciting other bids. Spohnholz and other lawmakers also asked why the state didn’t consider local providers for the job. Some asserted that Wellpath, a private equity firm-owned company known for running psychiatric institutions, sex offender lockups and other detention centers for state and local governments, was an inappropriate choice to operate API.

The troubles compounded when the Alaska State Employees Association, the union representing many workers at API, sued to block the privatization deal. The union charged that the state had skipped doing a feasibility study required before it could consider privatization and had asked a judge for a restraining order to halt further progress on the deal.

The decision to cancel phase two of the contract had been under serious consideration for a few weeks, Crum said. The department decided to make it public on Monday after it was disclosed in court by attorneys representing the state in the ASEA union lawsuit, he said.

“It came out during testimony today, and we decided to move it into public view,” he said.

The union needs to review the amended contract before it can decide what happens next with the lawsuit, said Alaska State Employees Association business agent Doug Carson.

Lawmakers critical of the process, including Spohnholz and Rep. Zack Fields, an Anchorage Democrat, called Monday’s decision an “important first step" in deciding the future of API.

“This is now being done the way it should have been done in the first place,” Spohnholz said in a statement.

The state will now undertake a privatization study expected to cost about $50,000, Crum said. A previous feasibility study recommended against full privatization, but state officials didn’t address that possibility Monday.

The department plans to put the long-term management of API out for bid soon after the results of that study come in, he said. At least one other group, Providence Alaska Medical Center, has expressed interest in running the hospital.

“Any interested bidders, we’re looking forward to hearing what they have to say,” Crum said.

The state also announced on Monday that API has a new CEO. Matt Dammeyer, a longtime executive at Central Peninsula Hospital in Soldotna, will replace Gavin Carmichael who will become chief operating officer.

Wellpath will continue to be paid $1 million per month until the first phase of the contract expires on Dec. 31, 2019. The hospital has a total of 33 patient beds available as of Monday, out of 80.

Correction: This story has been updated to clarify that the original deal between Wellpath and the state was under a sole-source contract provision, rather than the separate procurement process for emergencies.