VOL. 111 | NO. 164 | Thursday, September 4, 1997
The State of Tennessee, on behalf of the thousands it employs, contracts for health insurance benefits to provide coverage for some 200,000 plus employees.
Insurance for state employees: fairness or favoritism
Legal battle ensues over process state uses to award insurance contracts
By SUZANE THOMPSON
The Daily News
The legality of the process by which Tennessee contracts for health insurance benefits for its more than 77,000 employees and their families recently was challenged by the Nashville office of the local law firm Baker, Donelson, Bearman & Caldwell.
Law firm partner Lyn Baker said when negotiating contracts on behalf of the state, the law mandates two basic types of procedures. One, the request for proposal process (RFP) generally applies to the services of people while the competitive bid method is used in contracts dealing with tangible items.
The exception to this general rule, Baker said, applies to the contracting of insurance for the states employees, which is located in Tennessee Code Annotated Section 8-27-102.
In 1976, when the state switched to self-insured providers, the legislature formed three committees made up of 15 individuals to represent the interest of state employees, state teachers and local governmental employees, respectively.
Some committee members include state treasurer Steve Adams; state comptroller Bill Snodgrass; John Ferguson, state commissioner of finance and administration; and Doug Sizemore, commissioner of commerce and insurance, Baker said.
Before the creation of these committees, Baker said, the executive branch of the state government provided a fully insured product for state employees and their families.
The state did not bear much of the expense of insurance. Most of the expense was passed on to the employees.
Also in 1976, the insurance committees put out a so-called competitive bidding process for insurance, and in 1978, the contract for state employees health care coverage was let to Blue Cross Blue Shield (BCBS).
Since that time, Baker said, he has only been able to document one occasion on which a competitive bidding process actually occurred.
"We discovered that finance and administration, which keeps up the states insurance, had slipped into a pattern of not taking competitive bids and had used BCBS exclusively since 1976," Baker said.
Bakers firm represents USA Managed Care Organization. The Austin, Texas-based firm is the largest privately held preferred provider organization (PPO) in the United States and administers workers compensation insurance for the states employees.
In 1993, a new contract with BCBS was instituted. Baker said it was basically a three-year contract with a one-year renewal option. At that time, state employees each paid about $4.43 per month for insurance coverage, but scheduled escalators were included in the contract.
"What I discovered when I got into it was that the contract was given to BCBS under a statute found in TCA 12-4-109, rather than the competitive bid statute," Baker said, explaining that the section of code applied to the request for proposal process ordinarily used for negotiating service contracts, not the exemption stated in TCA 8-27-102.
At the end of 1996, the one-year renewal period was instituted, but Baker said instead of a renewal, the contract is basically a new one, since several of the terms changed.
In December, Baker said, the state issued a request for proposals and asked interested proposers to submit on point of service (POS) and preferred provider organizations (PPOs). The submission period was open until February, and evaluation was based on a 100-point scale. The evaluation process assigned 50 points to technical proficiency, 10 points to background and the remaining 40 points to cost effectiveness.
Technically, Baker said, a company with the highest cost could be chosen on the basis of the technical and background scores under the evaluation scale.
Further investigation revealed to Baker that a large number of state employees received service outside the network, for which BCBS is paid $15 per claim for every claim processed outside the network in Tennessee under the terms of the "renewed" contract. Additionally, BCBS gets another 10 percent of the savings on claims paid outside the network, with a high-end cap of $2,000 per claim. This has raised concern over the amount of taxpayer dollars going to fund the stateís portion of these fees.
Baker said it was not proper for the state to decide to enter into the new contract with BCBS without notifying state employees as to the change. When the contract renewal began, the $4.43 administrative fee state employees used to pay for coverage jumped to $10.
"They didnt ask anybody. They didnt tell anybody. They just did it," Baker said. "It was the height of bureaucratic arrogance."
The year-long extension was supposedly used to offer state employees a new vehicle for insurance services, the POS option, which is more restrictive than a PPO but less restrictive than a health management organization.
But the states listed minimum requirements for consideration as a POS made it obvious they were formulated for the purpose of narrowing the field to include only BCBS not enhancing competition, Baker said.
Although the state did consider three other companies, USA Managed Care Organization, Tennessee Managed Care and PHP, ultimately BCBS received a three-year contract with two one-year renewal options.
On April 12, 1996, 12th District state Rep. Anna Belle OBrien wrote a memorandum to Richard Chapman at the State Insurance Program, inquiring as to the contract with BCBS.
"Why is the state bidding the Health Maintenance Organization contract and not bidding the Blue Cross contract?" OBriens memo stated.
Chapman wrote OBrien a response in which he listed such factors as increased competition, better product, continuity and linking POS and PPO products.
Competitive bidding is not defined in statute, but through case law, which states that a competitive bid involves an advertisement of bidding, an opportunity to bid and selection based primarily on cost. This case law ensures that all bidding is on an equal basis.
USA then hired Baker, Donelson, who researched the issue and in May, filed a protest with the state over the way in which the contract was awarded.
Suit was filed with the Chancery Court of Davidson County on July 3, and Baker said there since have been several expedited hearings before Chancellor Ellen Hobbs Lyle.
Lyle entered a preliminary injunction which stopped the state from entering into the five-year contract with BCBS and allowed a contract of not more than 12 months for the purpose of continuing coverage for the states employees.
Lyle then issued a memorandum and order stating there was a high degree of likelihood that USA had demonstrated that it would be successful on the merits of the case, which was entered on Aug. 22.
BCBS entered an appeal.
On Thursday, the committee met once again and awarded the contract to BSBC. On Tuesday, Baker said USA made the decision not to proceed with the appeals process.
"We decided we would let the state take the risk of entering into an illegal contract if it wants to, and apparently it does," Baker said.
Calvin Anderson, vice president of community and government relations for BCBS, said, "Last night, the judge did vacate the injunction. Our view is that this is a victory for the process."
Baker said they have filed a motion for summary judgment, which requests that the court make a decision based on the legal issues of record. Its not over yet, he said.
"We will continue to litigate the primary issue, which was the request for proposal a competitive bid," Baker said.
Anderson said in response, "Thats obviously an option. Our position is that the state has consistently used the request for proposal process concerning services."