TriWest on Brink as Contract Loss Shows Peril of Government Bets

TriWest Healthcare Alliance Corp. (1893Q) and its 1,800 employees may learn today whether the company has a chance to survive.

The U.S. military’s health program, called Tricare, stunned company executives last week when it announced a $20.5 billion contract would go to UnitedHealth Group Inc. (UNH), the nation’s largest health insurer by revenue. UnitedHealth will manage care for active-duty military, retirees and their families in 21 states, mostly in the West, starting April 1, 2013.

The work has been TriWest’s lifeline for 16 years, generating more than $20 billion in awards for the closely held company since fiscal 2000, according to data compiled by Bloomberg Government. The probable loss of that revenue stream holds a lesson for businesses dependent on federal contracts as the government cuts back, said Charles Tiefer, a former member of the Commission on Wartime Contracting.

“Contractors may feel that they have hit the jackpot when they get a lucrative defense contract, but their feast can turn into a famine,” Tiefer, a professor at the University of Baltimore Law School, said in an interview.

“Their profits can shrink or disappear shortly if the defense program is ended or they are canceled, and their capability may be too specialized for them to fill the gap by selling their product commercially,” Tiefer said.

Source: U.S. Navy

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Source: U.S. Navy

Petty Officer Christen Bloom gives a flu shot in the Internal Medicine clinic at Naval Medical Center San Diego.

‘Only Business’

TriWest, based in Phoenix, was founded in 1996 by David J. McIntyre Jr., the company’s chief executive officer and a former aide to Republican Senator John McCain of Arizona. The Tricare work has been described by McIntyre as TriWest’s “only business.”

“We’ve been acutely aware of the risks during all the twists and turns down this path,” Scott Celley, a TriWest spokesman, said in an interview.

At today’s meeting in Colorado, where the military health program has offices, TriWest and Pentagon officials will discuss the reasons behind the award to Minnetonka, Minnesota-based UnitedHealth. The discussions will help TriWest executives decide whether to protest the award, Celley said.

Companies that depend on federal contracts are well aware of the perils, said Robert Harvey, chief executive officer of Oakridge Holdings Inc. (OKRG), a Chicago-based company that sells aircraft equipment such as motorized staircases to the military.

“It’s a real challenge because our orders go up and down,” Harvey said in an interview. “We can have 100 guys working for us one day, and the next day we can have 50 guys. It’s a tough business.”

Health Staff

The U.S. government accounts for about 60 percent of the company’s estimated $15 million in annual revenue, Harvey said. Oakridge has two or three federal contracts, he said.

TeamStaff Inc. (TSTF) relies on federal contracts for almost all its revenue. The company provides health-care staffing and technical services to the U.S. military and the Department of Veterans Affairs.

Zach Parker, TeamStaff’s president and chief executive officer, said the company lost about 150 employees in 2009 when the government decided those jobs should be done by federal employees.

The company, based in Atlanta, managed to “weather that storm,” he said in an interview. At the same time, Parker said he knows it’s difficult for a company like TriWest to count on the U.S. government.

“As a customer, you like to have an organization supporting you that you know is 100 percent committed to your nature of the work,” he said. “The downside is, in this competitive environment, particularly in a difficult budgetary environment, loyalty from the government’s standpoint does not exist.”

Tricare Focus

TriWest never diversified, though the company has a few smaller federal contracts, including a March award to operate mental health call centers for the Marine Corps.

There have been informal, “more theoretical than practical,” conversations in the past about whether the company should expand its services, said Celley, the company’s spokesman.

TriWest always has opted to stay focused on Tricare, he said. The company also tries to employ former members of the military, as well as spouses or other family members of active members of the military, Celley said.

“At any one time we probably have 30 to 40 people whose spouses are deployed and a handful of our own employees have been deployed as well,” he said.

Federal Lawsuit

The Department of Defense occasionally steps in to protect suppliers when it’s concerned about preserving critical weapons and other products. For example, it awarded an $8.61 million contract last year to Camel Manufacturing Co. of Pioneer, Tennessee, because it was one of a handful of vendors capable of producing military tents.

TriWest is unlikely to receive the same treatment, because the Pentagon has plenty of choices in the health-insurance industry, said Dan Jacobs, the chief executive officer of The Federal Market Group, a Warrenton, Virginia-based consulting firm.

The military health program considered factors including price and past performance when weighing the proposals from both companies, Austin Camacho, a Tricare spokesman, said after last week’s decision. A $10 million federal settlement that TriWest agreed to pay last year was part of the “past performance information” reviewed, he said. In the suit, four former employees accused the company of failing to give the government discounts negotiated with health providers.

Blue Cross

UnitedHealth’s original bid for the contract awarded in 2009 was lower than TriWest’s, according to an agency memo.

“TriWest may protest the decision, but if there’s a valid reason for throwing them out and awarding it to UnitedHealth, well, they’re toast,” said Mark Amtower, who owns a Highland, Maryland, company that advises federal contractors on how to win government business.

TriWest owes its existence to Tricare. Company founder McIntyre had been directed to build a company capable of serving the military community’s health needs while he was vice president of strategic planning for Blue Cross Blue Shield of Arizona. TriWest is owned by a holding company made up of a group of nonprofit Blue Cross Blue Shield plans and university hospital systems.

The health-care provider got its first Tricare contract in June 1996, a one-year deal with a value of $32.4 million. Later that month, the Pentagon awarded TriWest a contract to manage care for more than 740,000 patients in 16 states. The company has won more than $21 billion in contract awards, almost all related to its work for Tricare.

Tricare Regions

Tricare awarded three contracts in 2009 for the north, south and west regions of the U.S., with a combined value of $55.5 billion. All three awards were protested and eventually overturned before the work had started.

The Pentagon gave the West region to UnitedHealth on March 16, almost a year after the company persuaded it to reconsider the 2009 award to TriWest. Military health program officials also rescinded an Aetna Inc. (AET) award for the North and gave it to Woodland Hills, California-based Health Net Inc. (HNT) in May 2010.

The South region, initially awarded to UnitedHealth, was given to Louisville, Kentucky-based Humana Inc. (HUM) in February 2011.

“I don’t believe we made any mistakes, but obviously the decisions we made, we felt were worth reconsidering,” Michael Fischetti, the chief of acquisitions for Tricare, said in an interview with Bloomberg last July.

To contact the reporter on this story: Kathleen Miller in Washington at Kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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