UnitedHealth’s $20.5 Billion Pentagon Award Upheld by Agency

UnitedHealth’s $20.5 Billion Pentagon Award Upheld by Agency
UnitedHealth is scheduled to take over the contract in April 1, 2013, managing care for active-duty military, retirees and their families in 21 states, mostly in the West. Source: U.S. Marines via Bloomberg

A U.S. government agency upheld the Pentagon’s $20.5 billion contract award to UnitedHealth Group Inc., dashing incumbent TriWest Healthcare Alliance Corp.’s hopes of persuading the Defense Department to reconsider.

TriWest executives had protested the Pentagon’s March decision with the Government Accountability Office, which arbitrates contract disputes, saying Defense department officials told them during a post-award briefing that their company had made a lower bid for the work. The GAO ruled in UnitedHealth’s favor today.

The GAO found that the Defense Department’s “evaluation was reasonable, and denied TriWest’s protest on all counts,” Ralph O. White, the GAO’s managing associate general counsel for procurement law, said in an e-mailed statement.

UnitedHealth shares fell 3.8 percent to $56.26 in New York Stock Exchange Composite trading, the biggest decline since October. The shares were down 4 percent before the GAO announcement.

The stock is down because of last week’s Supreme Court decision that found U.S. health-care reform legislation is constitutional, and “may rebound a bit,” Ana Gupte, an analyst with Sanford C. Bernstein & Co. in New York, said in a phone interview.

“This is very good for UnitedHealth,” she said. “It now places them firmly in every government program.”

Considering Options

UnitedHealth looks forward to working with the Pentagon and TriWest “to ensure a smooth transition for service members, retirees and their families,” said Lori C. McDougal, chief executive officer of the unit of the company that will handle the contract.

“We are committed to working with the Department of Defense to ensure beneficiaries have access to cost-effective, quality and innovative care,” she said in an e-mailed statement.

Closely held TriWest has helped manage the military’s health services for the past 16 years. The work has generated more than $20 billion in contracts for the Phoenix-based company since fiscal 2000, according to data compiled by Bloomberg.

“There are options that remain,” Scott Celley, a TriWest spokesman, said in a phone interview. He declined to comment on the company’s next moves, saying TriWest officials have yet to see the details of the decision. Companies may file suit in the U.S. Court of Federal Claims over contract disputes.

Shutdown ‘Likely’

“We will be discussing this decision with our company’s owners and the counsel who represent us, and will, in turn, be making a decision on what, if any, action we will take,” David McIntyre Jr., TriWest’s chief executive officer, said in an e-mailed statement.

Without the contract, “it is likely” the company would shut down, McIntyre previously said. TriWest in recent weeks blanketed the Washington area with ads attacking UnitedHealth and saying that “Military families deserve better.”

TriWest was ranked No. 21 on the Bloomberg Government top 200 federal contractor list released last month. It received $3.1 billion in awards during the fiscal year that ended Sept. 30.

The military’s health program, called Tricare, on March 16 gave UnitedHealth the contract after initially choosing TriWest in 2009. Minnetonka, Minnesota-based UnitedHealth had persuaded the Pentagon to reconsider last year.

Lead Contractor

UnitedHealth is scheduled to take over the contract in April 1, 2013, managing care for active-duty military, retirees and their families in 21 states, mostly in the West. It would become one of Tricare’s lead contractors for the first time.

The GAO, Congress’s investigative arm, issues decisions that provide guidance to government agencies during contract disputes. It can’t compel agencies to follow its recommendations, though its guidance is rarely ignored.

“There’s an awful lot at stake for TriWest, so they may want to go down fighting and they may win,” said Sheryl Skolnick, an analyst with CRT Capital Group LLC in Stamford, Connecticut. “Until the last possible avenue of protest is exhausted, I have a feeling this contract won’t be finally awarded.”

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