In $58 billion health care deal, Pentagon balanced cost, performance

The Defense Department has cited lower health care costs as one of the benefits of the $58 billion in contract awards it issued in July to manage its TRICARE health care system. But in at least one of the two contracts, price wasn’t the driving factor: officials were willing to pay a bit more to a vendor it deemed to have a better track record and management approach.

In what’s soon to become the TRICARE East region, DoD was choosing among four bidders, the lowest two of which were Humana and Health Net, the incumbents for the North and South regions that are merging together in the contract round known as T-2017. Humana’s $40.5 billion proposal won, even though it was $347 million higher than Health Net’s.

The dollar figures for each of the proposals came to light because of a Government Accountability Office bid protest decision, parts of which were redacted, that upheld the department’s contracts and denied nine separate industry protests.

But the GAO decision does show that the Defense Health Agency concluded Humana’s past performance was “far superior” to any of the bidders in either region and that Health Net’s was “substantially inferior” to Humana’s, and the independent arbiter said it could find no reason to quibble with the agency’s decision or any of the others DHA made in awarding the contracts.

However, DoD stipulated that no one company could win the contracts for both regions. Health Net won the smaller West region contract, where both that firm and Humana were also the two lowest bidders. Health Net’s bid, or “total evaluated price,” was $17.7 billion, about $159 million below Humana’s; DHA graded its confidence in Health Net’s past performance as “satisfactory,” compared to the “substantial” rating it gave Humana.

The dispute also shows that the agency believed a third bidder deemed to be satisfactory in the West region, UnitedHealth Military and Veterans, actually had a slightly better offer than Health Net’s, but that the improvement “simply does not merit the additional $1,079,801,207 price” of United’s proposal.

But the decision also shows that DoD thought that each of the bidders would do a competent job of performing the work at hand, which includes managing sprawling networks of independent health care providers, handling claims processing, referring beneficiaries for specialty treatment and numerous other complex functions.

The two winners, plus UnitedHealth Military and Veterans and Wellpoint, all received at least “satisfactory” past performance ratings. And among seven different subareas that rated their technical and management proposals, each had marks of either “Acceptable,” “Good” or “Outstanding.”

Along with the high dollar value of the contracts, the small and arguably subjective differences in DHA’s ratings helps to explain why the four firms involved decided to file nine separate bid protests.

But in the end, GAO yielded to the Defense Health Agency’s discretion in awarding the contracts, saying the agency had explicitly laid out the criteria it would use in determining the winners — with price as one factor, but not the only factor — and had documented its rationale for the decisions it made.

“An agency’s evaluation of past performance is a matter of agency discretion which we will not disturb absent evidence that the agency’s assessments were unreasonable, inconsistent with the solicitation criteria, or contrary to applicable statutes and regulations,” wrote Susan Poling, GAO’s general counsel. “A protester’s disagreement with the procuring agency’s judgment, without more, does not establish that an evaluation was improper.”

The disagreements were many.

For example, United Health — the highest bidder in both regions — argued its past performance rating was unfairly dinged by DHA because of the severe problems that company had when it took over the TRICARE West contract in 2013. Company attorneys argued that its competitor, Health Net, earned a “satisfactory” confidence rating from the agency mostly because it’s the incumbent in the North region and has managed to avoid similar trouble because it “[has not had to] transition into a new region in over a decade.”

Losing vendors in each of the contracts also said DoD should have had second thoughts about hiring companies that are in the midst of being bought by or merging with other large health insurers, because those corporate acquisitions might affect their performance during the five-year course of the T-2017 contracts.

Health Net became a fully-owned subsidiary of Centene in March, but GAO found that wasn’t a good reason to overturn the award since Health Net’s new parent company fully disclosed the acquisition to DHA at the time and promised that the staffing and resources Health Net would dedicate to the contract would not change while it continued to run as a wholly-owned subsidiary.

Protesters also said DHA should have been reticent to award a contract to Humana because of its proposed acquisition by Aetna. But that merger hasn’t yet happened — indeed, the Justice Department has already filed an antitrust suit to block it — so GAO agreed DoD was within its rights to ignore the merger in the TRICARE awards.

“Specifically, we find nothing unreasonable in the agency’s position that the potential risks flowing from that possible transaction did not rise to a level of sufficient certainty to affect the agency’s award determination,” GAO adjudicators concluded.

Defense health officials have previously said they expect the new contracts to officially begin in late fiscal year 2017 following a nine-month transition period, but that they will not turn responsibility over to the new contractors until all of their systems have been successfully tested to work properly in the regions for which they’re now responsible.

Aside from the fact that the North and South TRICARE regions are merging into one and many of the system’s 9.4 million beneficiaries will be served by a new contractor, officials don’t expect patients’ experience with the managed care system to change markedly, though they’re likely to notice better health information sharing between military treatment facilities and private sector clinicians, officials have said.

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