One of the key planks to President Barack Obama’s health care reform plan is already being held up by an Inspector General investigation into whether leaked internal government emails might have been used to sway influence for a government contract, according to Congressional and Defense Department sources.

In April, the White House and the U.S. Department of Defense and the Veterans Administration announced plans for a pilot program many in the White House and on Capitol Hill believed would lead to a national model for “virtual” medical records. A number of respected health care experts believe such “paperless” records would reduce medical errors, as well as cut health care expenses annually be tens of billions of dollars, two reasons the Obama Administration took an interest in the DOD project.

The DOD Joint Virtual Lifetime Electronic Records System (JVLERS) would have ensured that health care records for military personnel would be available to health care professionals — whether on the battlefield or in a VA treatment facility — throughout the patients’ lifetime in a secure and private database. The program to develop this interoperable system had been funded to the tune of over $10 billion over the past 10 years, most of the money going to Northrop Grumman and SAIC, but the program had stalled out.

But earlier this year, a small firm called Adara Networks was asked to do a presentation at the Pentagon on how it had built a similar database system in nine months and for about $10 million. “Given that other contractors we’d had extensive experience with had tried to do the same thing over the past decade at a cost of about $10 billion, we were shocked,” says a Pentagon source.

Rear Admiral Gregory Timberlake, the officer in the Office of the Secretary of Defense who was tasked with overseeing the effort, briefed the Secretaries of Defense and Veterans Affairs on the system, specifically referencing Adara’s system by name in the written presentation. In a March 24 email to the government team, Timberlake wrote: “I am very pleased to tell you that both Secretaries accepted, approved and endorsed the contents of the brief and the way ahead we proposed…I cannot tell you how proud I am to be the facilitator of this exceptional DoD/VA effort.” (UPDATE: The DoD/VA Interagency Program Office’s communications director disputes this account: See her letter and the Prowler’s reply in Monday’s Reader Mail, available here.)

DOD requested that a bidding process be opened to build the JVLERS system, with one of the requirements being that the bid be made as a small business set-aside. This would have ensured that Adara and other small tech companies would be on equal footing with the larger, more traditional DOD contractors. “In fact, our larger contractors wouldn’t have been able to bid,” says the DOD source.

Within days of the bid request being formulated, an internal memo from a former Army nurse working in the Pentagon was leaked, accusing those involved in setting the contract terms of steering the contract to Adara, and accusing Sen. Thad Cochran (R-Miss.) of earmarking the project for Adara over the next two years for about $15 million. Adara, which is based in San Jose, Calif., has done work in Mississippi, but there is no evidence that Cochran was aware of Adara’s work there.

“On the face of it, the memo was absurd,” says the DOD source. “Everything was done by the book, we had a small tech company that came in here, showed they could do the work at about 1 percent of the cost others had done. You’d think that’s good for us and good for taxpayers.”

An IG investigation is now looking into the leaking of the internal memo that led to the scuttling of the bid process. “We think it was done to harm the Adara bid, embarrass our advocates on Capitol Hill, and get the project back into the good old boy network of bidders,” says the DOD source.

Perhaps. Sources in the White House now say that the Obama Administration wants the project to move ahead, and are looking at the firms that previously worked on the interoperability project to pick it up again — but more likely than not at a cost considerably higher than the $15 million appropriated for the DOD budget.