Healthcare Contracting News

August 1999 • ISSUE THREE • VOLUME ONE

(Published by the National Contract Management Association)
 

TRICARE Management Authority Readies Next Round of Managed-Care Support Contracts

Joseph J. Petrillo
Petrillo & Powell, P.L.L.C.

A Huge Market Comes Up for Bid

The Department of Defense (DOD) runs one of the largest healthcare systems in the country. One part of it meets the needs of
the dependents of active duty personnel, military retirees, and their dependents. This system is known as CHAMPUS, the
civilian health and medical program of the uniformed services, and five million people are eligible for its benefits. CHAMPUS is
now a component of a larger system called TRICARE, which attempts to integrate the separate medical systems of the army,
navy, and air force.

The U.S. CHAMPUS population is served in two ways: by military treatment facilities and through a system of seven regional
contracts for coordinated healthcare services. These contracts, known by the acronym MCS for managed care support, are the
jewel in the crown of federal healthcare contracting. In both scope and dollars, they are among the largest DOD contracts.
Indeed, DOD spends $3 billion each year under the seven contracts, paying more than 200,000 civilian providers servicing the
CHAMPUS population.

The TRICARE Management Authority (TMA), which administers this process, is now in the process of awarding the last of the
MCS contracts, for CHAMPUS Regions 2 and 5. (CHAMPUS divides the United States into 12 regions.) The initial award of
this contract was overturned in a bid protest1 and the recompetition is in its final stages. When that is complete, TMA intends to
solicit and award the next round of MCS contracts, which it calls "3.0."

What to Expect in the Next Round

Although the first of the new MCS 3.0 solicitations may not be issued until the fall, prospective contractors are already making
preparations. A draft request for proposal (RFP) posted on the TMA Web site on June 8, 1999, indicates that there will be
some important changes in this round of contract competition.2

TMA intends that MCS 3.0 will be an important departure from past solicitations. Instead of having prescriptive and detailed
specifications, the new contracts will be less closely regulated and will have more performance-based specifications. In prior
competitions, extensive and detailed provisions in the statement of work (SOW) and its attachments, supplemented by hundreds
of pages of manuals, dictated virtually every aspect of performance. Offerors had to assimilate all of this information and
incorporate it into their proposals, which were enormous, spanning multiple volumes.

One prospective contractor chafed against these restrictions enough to protest some of them to the General Accounting Office
(GAO). The specification in question required a two-tier method of conducting utilization reviews. One prospective contractor,
however, used a one-tier system, which it believed was superior, for its commercial operations. When the government refused
to relax the specifications to also permit a one-tier system, the offeror protested. GAO denied the protest on the grounds that
the agency had broad discretion to determine its needs.3

The new MCS 3.0 draft solicitation is much less restrictive, however. The SOW contains a broad list of goals supplemented by
a longer list of minimum program requirements. TMA invites offerors to propose how they intend to meet the designated
program goals while adhering to specific requirements of the TRICARE system.

The greater latitude of the new specification should make it possible for offerors to propose different methods of performance.
For example, systems of utilization review that were prohibited in the past might now be permissible. Indeed, TMA expects that
"there are a wide variety of valid approaches that can contribute to meeting [the contract] objectives," within program
limitations. If TMA is successful, then the new round of competition could yield several very different, and perhaps innovative,
approaches to the delivery and administration of healthcare. However, this new format also will present some special challenges
to both the government evaluators and the responding offerors.

For one thing, an effective statement of goals may be less voluminous than a detailed specification, but drafting it still takes much
forethought. TMA lists six specific goals in the draft RFP, but are these exhaustive? Has TMA omitted some important but
more elusive program requirement?

The six goals are to (1) optimize the military’s own healthcare resources, (2) improve the health of the covered population, (3)
satisfy beneficiaries, (4) employ cost-effective techniques to provide services, (5) ease the transition and start-up process, and
(6) have ready access to data for DOD purposes.

Several of these goals are at least potentially conflicting. For instance, beneficiary satisfaction implies a large and well-populated
network of providers, but expanding the network might clash with the goal of cost-efficiency. Lower reimbursement rates could
discourage some providers from participating.

The flexibility granted offerors has important limits, however. The CHAMPUS program is still subject to important statutory and
regulatory restrictions. For instance, both sound policy and congressional fiat mandate a uniform system of benefits.
CHAMPUS beneficiaries need to have a predictable set of rules for the basics of healthcare delivery upon which they can rely
no matter where they happen to live or travel. Thus, the statement of work contains a 15-page list of these and other
requirements, with frequent cross-references to regulations and manuals.

Some of these mandatory specifications can conflict with the six articulated program goals. For instance, prompt and accurate
claims processing is listed as part of the goal of beneficiary satisfaction. And the specifications section has detailed deadlines for
processing claims. However, the specifications also make clear that the contractor is at-risk for any inappropriate or
noncovered care. The goal of prompt payment can conflict with the need to ensure valid claims and detect possible fraud.

Ideally, the statement of goals should give offerors some indication of how to deal with potential conflicts and inconsistencies.
For instance, the solicitation could provide a hierarchy of goals, but it does not.

Interestingly, the six goals, plus the overarching area of "program management" constitute the seven subfactors for evaluation of
technical proposals. But the selection criteria also state that each of these subfactors is equally important. Again, this provides
little guidance on how to trade off between inconsistent goals.

The added flexibility of the new 3.0 solicitation poses both problems and opportunities for the government. It is likely that
various offerors will propose very different methods of meeting the declared program goals. If so, government evaluators will
have to consider and evaluate these different methods. This involves making judgments about which of these approaches seems
most likely to succeed and documenting the reasons that support these conclusions.

The offerors, on the other hand, have the task of deciding whether and to what extent they should depart from their usual
commercial practices to achieve the right balance of government goals. When the offeror is already the contractor in the region,
it will have to consider whether it should continue business as usual, or use its new freedom to propose something different.

Companies competing for the new contracts not only must select the right approach, they then have to write a proposal that
convinces the government evaluators. Persuasion will have to be short and to the point. TMA is imposing a 1,000-page
restriction on technical proposals, including all exhibits, attachments, charts, and so forth.

One new procurement technique that the draft MCS 3.0 solicitation does not broach is oral presentations. TMA representatives
had stated that they would use these for past performance data and marketing information, partly so there could be verbal
give-and-take between the parties. The draft solicitation, however, does not mention oral presentations and seems to anticipate
only the evaluation of written material.

One challenge for offerors that will not change in the new round is that they must show that they grasp the programmatic needs
of the government. Similarly, they will have to show an understanding of the regions included in the contract and how local
conditions present particular opportunities and risks.

Finally, the draft solicitation includes a change in the pricing mechanism for MCS contracts. In the past, price proposals were
been based on the application of a 10- (later 12-) factor formula applied to the government’s actual healthcare costs for the 12
months preceding the start of the MCS contract.

The draft solicitation provides two alternatives for pricing healthcare. One is a capitated payment, adjusted by a nine-factor
formula and subject to partial risk-sharing. The factors are not identical to those used in the past, and, indeed, offerors can
propose additional factors.

Particularly bold offerors can choose the alternate pricing mechanism—guaranteed capitation. This alternative not only simplifies
contract administration and accounting, it also makes the process of price evaluation more predictable. When offerors propose
using the multifactor price adjustment formula, the government undertakes a complex evaluation process in which it assesses the
likely payments, given its own assumptions and judgments, under several scenarios. For guaranteed capitation, however, the
government basically accepts and uses the offeror’s proposed prices.

More or Less Competition?

One important question is the degree of competition that DOD can achieve in the new round of proposals. Submitting a
proposal good enough to win is a multimillion-dollar project. Before investing this much money, a potential offeror will want to
know about the competitive landscape.

Right now, five of the seven regional contracts are held either by a Blue Cross-Blue Shield affiliate or by a single company that
won three contracts. Several large national managed-care organizations have shown little interest in bidding for these large
contracts. Conceivably, the government could have only one or two bidders for some contracts.

To be sure, the incumbent contractor will have some important advantages. Not the least of these is that it already has a
complete provider network in place. A new entrant will almost certainly have to engage in significant network development.
Another presumptive advantage of the incumbent is that it has a good understanding of program needs and regional conditions.
A nonincumbent offeror will have to conduct market research and use other methods to gain this knowledge.

Another factor with competitive implications is the evaluation of past performance. In keeping with changes to the procurement
regulations, TMA has made clear that this will be a significant evaluation factor—equal to both the technical and cost factors.
However, the competitive effect of past performance can cut either way. A well-regarded incumbent contractor will have a
clear, perhaps decisive, advantage. However, if the current regional contractor is not doing a good job, the past performance
factor will make it vulnerable to a new entrant with credibility, fresh ideas, and a good price.

The wild card in the competitive picture is the effect of the shift from a prescriptive environment to a solicitation that invites a
variety of approaches. If TMA is open to new ideas, an incumbent may actually be at a disadvantage if it clings to the
tried-and-true. However, if risk aversion or other factors makes the evaluators conservative, then an offeror proposing a familiar
approach could have the edge.

Finally, it is probable that these changes in the MCS 3.0 solicitation will be tested in the crucible of the bid protest process. At
some point, every one of the current contracts was protested to GAO. And protesters of MCS contracts succeeded much
more frequently than those objecting to other procurements. Often, successful protests led to a recompetition of the contract,
and even then, the subsequent award might be protested. There is every reason to expect that this pattern will continue. The
changes to the next round of solicitations will increase uncertainty, which tends to encourage legal challenges. Participants in the
MCS 3.0 contracting process can expect that it, and they, will be subject to close scrutiny.

Endnotes

1. Foundation Health Federal Services, Inc., et al., B-278189.3 et al., Feb. 4, 1998, 98-2 CPD ¶51.
2. Information about the MCS 3.0 contracting process is posted on the Internet at: http://ww3.tricare.osd.mil/contracting/.
3. Qual-Med, Inc., B-254397.13 et al., July 20, 1994, 94-2 CPD ¶ 33.