TriWest Fights to Survive After Losing UnitedHealth Protest

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

TriWest Healthcare Alliance Corp., the closely held company built on providing military medical services, is weighing its next move after unsuccessfully challenging a $20.5 billion UnitedHealth Group Inc. contract.

The Government Accountability Office, which arbitrates contract disputes, denied a protest from Phoenix-based TriWest yesterday over the Pentagon’s March decision to give the contract to UnitedHealth.

TriWest, which has about 1,700 employees, must now decide whether to file additional challenges to the contract awarded to the nation’s largest health insurer, or sacrifice the source of almost all its revenue.

“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.”

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

Tricare Dependence

TriWest owes its existence to Tricare, the Pentagon’s health program. The company has helped manage military medical services for the past 16 years, after being founded in 1996 by David McIntyre Jr., the company’s chief executive officer and a former aide to Republican Senator John McCain. It is owned by a holding company made up of a group of nonprofit Blue Cross Blue Shield plans and university hospital systems.

The military health work has generated more than $20 billion in contracts for the company since fiscal 2000, according to data compiled by Bloomberg.

Without the contract, “it is likely” the company would shut down, McIntyre has previously said.

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

Ad Attacks

More than a dozen U.S. lawmakers, including some from Arizona, Colorado and Washington state, sent letters to Defense Secretary Leon Panetta seeking an explanation of why the Pentagon picked UnitedHealth over TriWest.

TriWest has blanketed the Washington area in recent weeks with ads attacking UnitedHealth and saying that “Military families deserve better.”

The ads usually highlight UnitedHealth’s prior legal woes, including a $350 million settlement the insurer paid after the American Medical Association alleged it had manipulated payments to doctors. The agreement was announced in January 2009.

Some ads also point to negative comments about UnitedHealth by Consumer Reports magazine, which the Minnetonka, Minnesota-based UnitedHealth has tried to deflect with positive reviews from similar sources.

The GAO decision “expresses no view as to the merits of these firms’ respective proposals,” the GAO’s White said in his statement yesterday.

No Obligation

White’s office is under no obligation to consider issues such as a vendor’s prior legal settlements or Consumer Reports ratings in its review unless the Pentagon specifically said such items would play a factor in its decision-making, said Daniel Gordon, who stepped down in December as President Barack Obama’s top procurement official.

“I’d be surprised to see GAO sustain a protest about that topic without a clear commitment by the agency in the solicitation,” Gordon said in an e-mail. He is now the associate dean for government procurement law at George Washington University Law School.

The Pentagon gave UnitedHealth the contract on March 16, almost a year after the company had persuaded it to reconsider its initial award of the same contract to TriWest in 2009. UnitedHealth’s bid was lower during the original competition, according to an agency memo. TriWest officials have said Pentagon officials told them their bid was lower this time around during a March debriefing.

UnitedHealth shares fell 1.3 percent to $55.50 at 11:46 a.m. in New York Stock Exchange Composite trading. The shares yesterday slipped 3.8 percent, the biggest decline since October.

Revenue Boost

Its stock has dropped because there are continuing worries about how last week’s Supreme Court ruling, which upholds U.S. health-care reform legislation, will affect insurers, CRT Capital’s Skolnick said in a phone interview yesterday.

“Things are a little bit in turmoil in health-care land,” she said.

UnitedHealth said in March that the $20.5 billion contract, which includes pass-through costs for medical providers such as hospitals and doctors’ offices, will generate $1.4 billion in revenue for the company over five years. That’s about 1.4 percent of the $101.9 billion in revenue UnitedHealth had last year.

The GAO decision bodes well for UnitedHealth, said Ana Gupte, an analyst with Sanford C. Bernstein & Co. in New York.

“It now places them firmly in every government program,” she said.

TriWest Discussing

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

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.

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.

“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,” TriWest’s McIntyre said in an e-mailed statement yesterday.

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