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Xerox Corporation (XRX - Analyst Report) secured an estimated $500 million worth contract to reinstate New York's Medicaid management system, according to a Bloomberg report. Xerox was allegedly contending against Hewlett-Packard Co. (HPQ - Analyst Report) for the contract, in a bid to increase foothold in the Medicaid market. The current Medicaid provider for New York, Computer Sciences Corp. (CSC - Analyst Report) did not bid for the contract.

Bill Schwarz, a spokesman for the New York Health Department, said that the five-year deal is subject to approval by the state Comptroller as well as other state agencies including the state Attorney General’s Office.
    
The Medicaid Contract

New York is the first state to attempt to align its claims processing system with the objectives of President Obama’s signature health insurance program. The massive contract calls for modification of the existing claims processing system to a more efficient managed-care approach for Medicaid, which is the joint state-federal health insurance program for the poor.

The contract involves development of new computer administrative systems, wherein there would be cost ceilings set for program recipients individually, unlike the current system where payments are made for each service separately.

The paradigm move is expected to generate cost savings as providers will be able to make profits only by spending less than the reimbursement they receive on each patient. The current system allows them to order unnecessary tests and inflate medical bills.

Xerox’s Position

New York’s Medicaid program, worth $52 billion, is the biggest in the nation. Xerox’s selection as the vendor for the state may open doors to more lucrative opportunities for the document imaging giant, once the other states follow New York’s footsteps and revamp their Medicaid payment systems.

Xerox ventured into the health insurance field to counteract losses and slower growth pace in its core document-printing segment. It presently provides Medicaid services to at least 12 states, the District of Columbia and the U.S. Labor Department.

The contract gain came at a seemingly opportune time, as Xerox faced a high-profile contract termination by Nevada’s health insurance exchange just a week ago. The state board cited underperformance as the primary reason for the cancellation.

Xerox also encounters legal action in Texas, where state officials decided to prematurely abort its five-year claims administration contract, reportedly worth about $759 million. Texas filed a lawsuit against the company on May 9, seeking reimbursement for hundreds of millions of dollars that Xerox allegedly spent for unnecessary Medicaid claims.

Xerox currently holds a Zacks Rank #4 (Sell). A better-ranked stock in the industry worth a look is Pitney Bowes Inc (PBI - Analyst Report), carrying a Zacks Rank #2 (Buy).

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