Perseverance Can Result in New Business

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(Reprinted from September 8, 2009 issue of HealthLeaders Media)

In the most recent article in this series, we discussed federal healthcare contracting opportunities and issues of particular interest to small businesses. With the announcement in July of the Department of Defense (DoD) TRICARE contract awards, we turn to the opposite end of the spectrum and discuss issues affecting some of the largest healthcare contracts—not only in the federal marketplace, but in the entire domestic U.S. healthcare industry.

For over 20 years now, DoD has awarded contracts to manage the healthcare of non-active duty beneficiaries (e.g., dependents of active duty members; retirees, their spouses and children, etc.). Evolving from the Civilian Health and Medical Program for the Unformed Services (CHAMPUS), DoD moved to a managed care model in 1988 with the implementation of the CHAMPUS Reform Initiative (CRI). CRI converted the former CHAMPUS Program into a triple-option plan that added an enrollment option and a PPO option to a variation of the standard fee-for-service option that had been CHAMPUS. At the time, the government sought to create three geographical regions and place one contractor at risk for managing all of the care of military beneficiaries residing in each region. CRI eventually transitioned into TRICARE. TRICARE contracts were among the largest managed care contracts of any kind, and among the most highly sought after opportunities in the industry. The three regional contracts recently put up for bid were reportedly worth approximately $55 billion collectively.

The contracts have typically come up for competitive bid every five to seven years, but two of the three incumbents, Health Net and Humana, successfully defended their contracts for approximately 21 and 13 years, respectively. In what must be considered one of the most stunning upsets in recent federal contracting history, both Health Net and Humana were passed over in July for the most recent contract awards and were succeeded by Aetna and United Health Care.

Foundation Health, a predecessor to Health Net, was awarded the first contract under CRI in 1988 and Humana was awarded its first contract in 1996. Federal contracting rules call for most ongoing contracts to be competitively re-bid, generally every five years, and both Health Net and Humana have successfully defended their contracts in the past. Given the complexity of such contracts and the expertise contractors typically develop, incumbents in circumstances like this become increasingly difficult to dislodge. Over time, they develop unique past performance expertise that is critically important in subsequent competitions. The contracts become so complex that the risk of giving the business to the proverbial “new kid on the block” actually becomes a very significant factor in evaluating proposals.

Award of the TRICARE contracts is similar to the dynamics that emerge with other military procurement initiatives that are highly complex and possess unique requirements (e.g., sophisticated weapons programs, fighter jets, etc.), where the barriers to market entry are so significant that only the largest, most well-capitalized organizations can even consider submitting a proposal. Once awarded, the experience often helps reinforce the contractors’ status as untouchable, and competitors are often discouraged from bidding, especially when the cost of proposal preparation and negotiation alone can easily reach of tens of millions of dollars. Collectively, these factors create an aura of unassailability, particularly when coupled with inevitable rumors of the contract being “wired.” The combination of these factors often helps ensure that incumbents remain in place, as erstwhile competitors carefully consider the full implications of what it takes to dislodge incumbents of the status, expertise, and financial resources of a Health Net or Humana.

So the announcement last month that two of the three incumbent TRICARE contractors did not retain their contracts must be considered a highly unexpected development in military health circles. Since both contract awards have been formally protested, there is a possibility that the award decisions may be reversed. Until the jury is in, however, final judgment must be reserved, but there are several important lessons learned. The first is that no organization has a permanent “lock” on a federal contract, no matter how large, how complex, or how well-connected politically. Conventional wisdom about the power of incumbency, or rumors that the contract was wired from the start notwithstanding, the reality is that no one is always unassailable, and that while an extended track record by an incumbent contractor clearly works to its competitive advantage, it is not a guarantee in perpetuity.

While organizations are always well-advised to respect the power of the incumbency, the decision to walk away should not be based on the intimidation factor that goes along with an incumbent’s track record, of, say, 10 or even 20 years. Test your assumptions; walk away if necessary . . . but walk away for the right reasons. This is a valuable lesson for hospitals or physicians that have long coveted a small, but prestigious contract with a local VA or military hospital. While a local provider who’s held the contract for years may appear to have the business “locked-up”, that assumption may be inaccurate. Time and time again, we see evidence where a longstanding, apparently entrenched contractor is unseated by another competitor that was not dissuaded by the challenge and put together a more attractive proposal.

Adding a fascinating element of intrigue to the TRICARE situation are reports that at least one of the reasons Health Net protested the award of its contract is because DoD posted some of Health Net’s pricing information on a public website, an allegation which has actually been confirmed by DoD. Even if true, that does not guarantee a reversal of the decision. Requirements to uphold a protest of a federal contract are complex, and key among the issues likely to be considered include the timing of the release of the information and the extent to which the information can be shown to have had prejudicial impact. Since most of the details of the protests will remain proprietary until a decision is reached, it is really impossible for the general public to know what really took place at this point. Given the magnitude and significance of these contracts, we will continue to follow developments and offer commentary in subsequent articles as information emerges.

Perseverance Can Result in New Business

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