State officials hired a new contractor to process payments to behavioral health providers, ditching a troubled system that wreaked havoc in the treatment community at a time when the coronavirus pandemic was increasing demand for mental health and addiction services.

A state spending board approved the new contract Wednesday for up to nearly $340 million with Boston-based Carelon Behavioral Health Inc. replacing one with Minnesota-based Optum Inc., a subsidiary of the managed care giant UnitedHealth Group.

The current vendor “has just failed to deliver” the level of service that Marylanders deserve, said Gov. Wes Moore, one of three members of the Board of Public Works that approved the contract.

Carelon was formerly known as Beacon Health Options, the contractor the state used prior to Optum.

Providers said the Optum system was troubled from the launch in 2020. They couldn’t file claims for reimbursements for treating new or existing patients using Medicaid, the federal-state health plan for low-income residents.

Eventually, the state ordered Optum to pay out $1 billion using estimates based on previous provider claims, leading to accounting issues and overpayments that some providers still are struggling to repay.

A scathing 2022 audit found the state overpaid providers by $223.5 million, underpaid others and lost millions more in federal matching dollars. Officials also declined to pursue $20.5 million in damages and withhold payment as allowed by the contract, saying it could jeopardize its relationship with Optum and lead to litigation.

Forgoing the damages particularly frustrated lawmakers who had been assured there had been proper vetting of Optum, which had won a $198.2 million, 5-year contract beginning in 2020.

The audit also found the state failed to vet Optum’s subcontractors, ignored warnings about the vendor from a current customer and failed to test the system used to process providers’ claims prior to launch.

In a January letter to Dr. Laura Herrera Scott, Maryland health secretary, legislative auditor Gregory A. Hook said his office had asked for a status report on audit findings by the end of 2023. The letter said the health department responded by saying issues “still had not been substantially corrected and that these recommendations would be implemented in calendar year 2024.”

Auditors were slated to conduct another review in the third quarter of the year.

“Before they [the state] hired the last contractor, things were working relatively well,” said Josh Adler, assistant director of the Office of Legislative Audits, who was responsible for the audit. An unsatisfactory audit is rare and most findings are resolved within six months. But these findings remained unsettled for more than a year.

”I don’t remember ever issuing a letter like this,” he said.

In the meantime, Ryan Moran, deputy secretary of health care financing, who oversees the state’s Medicaid program, submitted the Carelon contract for approval.

Moran said Optum’s claims processing system had “significant” malfunctions, that have “continued to cause strain on provider operations while the state also grapples with the long term behavioral health implications of the pandemic.”

He said nearly all of the more than 300,0000 public behavioral health and substance abuse patients are Medicaid recipients.

Moran said his department will be “laser focused” on facilitating a successful transition between Optum and Carelon over the next 10 months.

Two days after the Carelon contract was approved, Optum issued a statement: “Optum is grateful for the opportunity to partner with the Maryland Department of Health to help Marylanders access the quality mental health and substance use services they need. We remain committed to providing the highest level of service to the state, and to the providers that deliver these critical services, until our contract ends, and will work closely with MDH to ensure a smooth transition to the new vendor.”

Providers were hopeful that a new system would be properly tested and functioning prior to launch this time, said Shannon Hall, executive director of the Community Behavioral Health Association of Maryland, which represents over 100 mental health and addiction treatment providers who treat about 90,000 Medicaid patients.

Providers are still dealing with functionality issues in the system, which she said involves a lot of labor-intensive manual work that should be automated. That burden has left the behavioral health capacity diminished, meaning there are likely people who can’t get appointments in a time of need, though she had no data.

Hall said each time there is a new system, rollout comes with bumps. She noted Carelon was the lowest of two bidders on the large contract, and that’s left her with some concern about “the vendor’s capacity to do the job when the stakes are so high.”

But, she said, ”We are committed to make the transition as smooth as possibility. We will work with Carelon team.”

Carelon will begin a design and development phase of their contract on March 1, which company officials have assured the state will be operational by the start of 2025, according to a state report. The initial $233 million contract is for 5 years, with one two-year renewal option for $99.7 million.