Legislature(2005 - 2006)SENATE FINANCE 532
03/23/2006 02:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
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| Start | |
| Premera Blue Cross: Overview of State Insurance Contract Award Process | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE LABOR AND COMMERCE STANDING COMMITTEE
March 23, 2006
2:34 p.m.
MEMBERS PRESENT
Senator Con Bunde, Chair
Senator Johnny Ellis
Senator Bettye Davis
MEMBERS ABSENT
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
OTHER LEGISLATORS PRESENT
Representative Peggy Wilson
Representative David Guttenberg
COMMITTEE CALENDAR
Premera Blue Cross: Overview of State Insurance Contract Award
Process
PREVIOUS COMMITTEE ACTION
None to report
WITNESS REGISTER
Scott Nordstrand, Commissioner
Department of Administration
PO Box 110200
Juneau, AK 99811-0200
POSITION STATEMENT: Delivered overview and answered questions
regarding the state insurance contract award process
Vern Jones, Chief Procurement Officer
Department of Administration
PO Box 110200
Juneau, AK 99811-0200
POSITION STATEMENT: Responded to questions regarding the state
insurance contract award process
ACTION NARRATIVE
CHAIR CON BUNDE called the Senate Labor and Commerce Standing
Committee meeting to order at 2:34:20 PM. Present were Senators
Bettye Davis, Johnny Ellis and Chair Con Bunde.
^Premera Blue Cross: Overview of State Insurance Contract Award
Process
2:35:25 PM
CHAIR CON BUNDE announced that the committee would hear an
overview of the recent contract award process of the state's
healthcare provider to Premera Blue Cross. There have been many
questions regarding what might have been unusual procedures in
the awarding of the contract, he said.
SCOTT NORDSTRAND, Commissioner, Department of Administration
(DOA), and VERN JONES, Chief Procurement Officer, Department of
Administration, introduced themselves for the record.
CHAIR BUNDE noted that the award was under protest and that Mr.
Nordstrand would be limited in some of the things he was allowed
to disclose.
MR. NORDSTRAND explained to the committee that the state has two
health plans that the DOA administers directly, one is the
active employee plan and the other is the retiree plan. The two
plans cover approximately 68,000 people. The state is self-
insured and they pay claims out of both the retiree health trust
plan and the active health trust plan. The state hires a third
party administrator to process, pay and work those claims.
Periodically the DOA requests proposals from vendors to let
contracts in a competitive way. The current contract with Aetna
was up for expiration on June 30, 2006 and all options to renew
had expired. The DOA began the process at the end of the 2005
calendar year to obtain proposals for a third party
administrator.
2:38:35 PM
CHAIR BUNDE asked Mr. Nordstrand the length of time since Aetna
had been awarded the most recent contract.
COMMISSIONER NORDSTRAND said approximately five years. However,
Aetna has been either the insurance provider or the third party
administrator for the State of Alaska since the early 1990s.
There was a time when the contract went to another party but
then Aetna purchased that organization so became the third party
administrator. Aetna has been the administrator in one form or
another for approximately 24 years.
CHAIR BUNDE asked the bidding cycle for the contracts.
COMMISSIONER NORDSTRAND deferred the question to Mr. Jones.
MR. JONES responded there is no set amount of time for a
contract; it depends on what the RFP (request for proposal)
calls for each time. The contract that the state is currently
entering into is a three-year contract with four 1-year renewals
for a total of seven years.
CHAIR BUNDE asked the occasion of the current RFP.
COMMISSIONER NORDSTRAND said the contract on its very terms ran
out of options and concluded. He referred the committee to a
cheat sheet in the packet highlighting the chain of events. The
DOA's position on the issue is accurately represented by his
protest response in the committee packets.
2:41:30 PM
COMMISSIONER NORDSTRAND described the chain of events and said
the chief procurement officer (Mr. Jones) advised him that four
proposals were submitted and reviewed. Two were for pharmacy-
only and two were submitted for the entire healthcare plan. Mr.
Jones expressed concern that Aetna's proposal had been deemed to
be incomplete. At that time the procurement officer looked for
the missing materials and did not find them and so it was
determined that the bid was non-responsive. The regulations
don't allow the state to accept supplemental materials.
The regulations then state that if there is one responsive
bidder they can do one of three things. They can:
1. Decide to hold the entire bid process over
2. Do a limited procurement and invite only those who were
deemed likely to be responsive
3. Enter into discussions with the one successful bidder
The DOA decided to enter into discussions with Premera Blue
Cross to determine whether or not a contract could be reached.
2:43:49 PM
CHAIR BUNDE interrupted Mr. Nordstrand to ask whether incomplete
bids occur frequently.
MR. NORDSTRAND deferred the question to Mr. Jones.
MR. JONES could not recall it ever happening before.
CHAIR BUNDE pointed out that the situation was an anomaly. He
asked whether it occurred to anyone to call Aetna and question
the incomplete bid.
MR. JONES said the process does not allow for that type of
communication. The statutes allow for discussion only with those
that are deemed responsive.
SENATOR BETTYE DAVIS asked Mr. Jones to clarify.
MR. JONES responded the statute allows for discussions with
those that are responsive and with responsible offers. There is
no provision for any other type of communication. There are
allowances for communications for clarification, however it
appeared at that time that Aetna was non-responsive.
SENATOR DAVIS maintained that there is nothing in the statutes
to prohibit the DOA from calling Aetna.
MR. JONES said there is not an explicit prohibition but it is
not common practice.
CHAIR BUNDE asked the name of the person who made the decision
that Aetna was non-responsive.
MR. JONES said at the time there were two procurement officers.
The original one was Victor Leamer and the other was Walter
Harvey.
CHAIR BUNDE asked whether it was Mr. Leamer that determined
Aetna to be non-responsive.
MR. JONES said that is correct.
2:47:22 PM
REPRESENTATIVE DAVID GUTTENBERG joined the committee meeting.
CHAIR BUNDE asked the procedures that the DOA has put into place
to prevent the same thing from occurring again.
MR. JONES responded they have not addressed the issue yet.
CHAIR BUNDE asked whether a $30 million dollar RFP was of
average size.
MR. JONES advised it was one of the bigger RFPs that the DOA
handles.
CHAIR BUNDE expressed concern over the lack of oversight and
procedures involved with such a large RFP and suggested there
was a measure of incompetence involved.
2:49:23 PM
COMMISSIONER NORDSTRAND said it was no question there was a
screw-up in not locating the fourth notebook at the appropriate
time.
REPRESENTATIVE WILSON said she understood Mr. Jones to say there
is normally only one procurement officer working on an RFP but
due to his extensive workload the department added a new person
on board and the new person was given one of the bigger RFPs
that the state deals with.
COMMISSIONER NORDSTRAND stated the second procurement officer
was one of the most experienced procurement officers in the
state.
REPRESENTATIVE WILSON asked for clarification of how the mix-up
happened.
MR. JONES advised the procurement officer at the time, Mr.
Leamer, had numerous other projects and was reviewing two major
RFPs for the Division of Finance. Recognizing that his workload
was unusually heavy, the DOA offered the services of Mr. Harvey,
who is one of the most experienced contracting officers in
Alaska. He manages the contracting officers in the central
procurement section.
CHAIR BUNDE asked the name of the person who physically
receives, files and retrieves the materials for the RFPs.
MR. JONES responded the RFP is submitted to the attention of the
procurement officer. The procurement officer is responsible for
receiving them and storing them in a secured area.
CHAIR BUNDE noted in this case, the original procurement officer
would have received the binders from Aetna, stored them, and
then made the decision that Aetna was non-responsive.
2:52:30 PM
MR. JONES said in this case the bid sent by Aetna was so
voluminous that it had to be stored in another area of the
building. Unfortunately when the procurement officer retrieved
it to present to the proposal evaluation committee (PEC), he
simply overlooked one box. Essentially the evaluation committee
was given three of the four binders.
CHAIR BUNDE interjected the procurement officer must have signed
for the four boxes. He asked Mr. Nordstrand to continue with his
explanation of the chain of events.
COMMISSIONER NORDSTRAND advised the next step was that the
procurement officer entered into discussions with Premera Blue
Cross with the normal process of flushing out the details and
ensuring that it met all the state's criteria. Ultimately it was
the decision of the procurement officer in consultation with the
PEC.
CHAIR BUNDE asked who the individuals were on the committee.
COMMISSIONER NORDSTRAND did not know. He said they were named in
the committee packet. The statute provides that RFPs can be
reviewed and scored by either a procurement officer alone or a
PEC consisting of not less than three people.
CHAIR BUNDE asked whether the Premera Blue Cross bid came in
binders similar to Aetna's.
COMMISSIONER NORDSTRAND did not know. He said he has never seen
the bids in their original form.
MR. JONES advised the Premera proposals were contained in 1
four-inch binder.
CHAIR BUNDE said he understood that in complex RFPs that there
have been occasions where the department hires experts to assist
in evaluating proposals. He asked whether that happened in this
instance.
MR. JONES said it did not.
CHAIR BUNDE asked the reason they did not hire an expert.
COMMISSIONER NORDSTRAND responded that the administrative code
requires that a PEC consists of three state employees or public
officials. In terms of the content of the PEC itself he said he
did not know that an expert could be a member of the PEC.
2:56:13 PM
MR. JONES said occasionally they have hired consultants to serve
in an advisory role but in this instance there didn't seem to be
a need.
COMMISSIONER NORDSTRAND returned to the chain of events and said
it was ultimately determined by the second procurement officer
(Walter Harvey) that it was in the state's best interest to
issue a notice of intent to award the contract to Premera Blue
Cross. He then went into discussions with Premera and asked them
to make a best and final offer. Premera did that on February 15,
2006 and at that time Aetna learned they had been deemed non-
responsive. Aetna contacted the Mr. Harvey and was adamant that
they submitted a complete bid. Aetna suggested that the DOA
research and find the missing notebook.
2:59:12 PM
COMMISSIONER NORDSTRAND said at that point, Mr. Jones advised
him of the situation and the two of them began to research how
to resolve the issue fairly. The two of them asked to have a
teleconference between representatives of both companies where
they explained the problem. Backing up a step, Mr. Nordstrand
noted, when Aetna contacted the procurement officer about the
incomplete bid, they also asked to know the price that Premera
bid. The procurement officer advised them of Premera's
approximate bid, which at that point was public information.
They realized that Aetna did submit a responsive bid and could
be acceptable to award based on their best and final offer. The
problem was that Aetna now knew Premera's best and final number
and so the competitive nature of the process was lost. He
suggested to the parties that they could go through the process
to determine whether or not Aetna's proposal was responsive and
susceptible to award. If so, they could enter into discussions
with Aetna and then have both parties do another best and final
offer so that the number would be secret again.
One other caveat was that the Department would tell Premera what
Aetna's original number was so that they would be on a fairly
level playing field. Ultimately the parties agreed to the
modified process.
3:03:28 PM
REPRESENTATIVE WILSON referred to the last two paragraphs on
page 10 of Mr. Nordstrand's response to Aetna's Protest and
Request for Stay of Award of RFP 2007-0200-5946. Since Aetna
submitted four times the volume of material than Premera there
should have been as much, if not more, discussion with Aetna
than Premera yet that wasn't the case. She said it was hard to
understand the reason for such an apparent difference in the
handling of the two bids.
CHAIR BUNDE said many people think that the process was flawed
and that it will be a great inconvenience to possibly 68,000
people.
REPRESENTATIVE WILSON noted many people across the state have
recently been through a "Medicaid D fiasco", which caused much
frustration. She did not want to see another healthcare hassle.
3:06:14 PM
MR. JONES referred to the topic regarding the amount of
discussion with Aetna and Premera and said was not fair to
suggest a discrepancy in the process. It stands to reason that
the PEC would have different questions for the different
companies based on the difference in their proposals. The
process is intended to clarify things and to get the best and
final offer submitted to the state.
CHAIR BUNDE said he had some empathy over the complexity of the
situation. He asked what the bottom line number in the best and
final offer indicates.
COMMISSIONER NORDSTRAND said the request for proposals is
designed to elicit a per-member, per-month charge. There are
other financial elements, such as the pharmacy rebate guarantee.
3:10:36 PM
CHAIR BUNDE said in previous conversations Mr. Nordstrand
mentioned that 40 percent of the evaluation was based on price
while the other 60 percent was based on a variety of other
things. He asked Mr. Nordstrand to expand on what the 60 percent
is based on.
COMMISSIONER NORDSTRAND said the elements were on page 4 of his
response.
CHAIR BUNDE noted part of the bid includes a pharmacy rebate and
some pharmacies have expressed concern that it would either cost
them money or be difficult to administer. He asked Mr.
Nordstrand whether he has had inquiries from any pharmacies.
COMMISSIONER NORDSTRAND said no. The fundamental process would
not be any different, he claimed.
3:14:18 PM
CHAIR BUNDE asked for clarification whether the best and final
numbers included the pharmacy rebate.
COMMISSIONER NORDSTRAND indicated no. The best and final was
based on a per-member, per-month healthcare charge. The pharmacy
rebate is considered a technical component, which is another
aspect of the evaluation.
REPRESENTATIVE DAVID GUTTENBERG asked whether the DOA considered
the base prices of pharmaceuticals. He said prices at one plant
could be much higher than another and the company with the
smaller rebate number could still end up being the greater
savings.
COMMISSIONER NORDSTRAND said he did not evaluate the proposals
and neither did the chief procurement officer and so he did not
know whether that was an aspect of the evaluation.
SENATOR BUNDE asked Mr. Nordstrand to explain the component
"network savings share."
3:17:36 PM
COMMISSIONER NORDSTRAND said large insurance companies and third
party administrators, in order to achieve cost savings, enter
into agreements with other healthcare providers around the
country where there is a deal to obtain a lower price than
retail for various services. Both companies have that network.
CHAIR BUNDE said he saw numbers that indicated there would be
$1.5 million dollars in network savings for Aetna and $12
million for Premera. He asked whether that meant Premera would
provide more "discount doctors."
COMMISSIONER NORDSTRAND said he did not know. When he met with
Premera they were confident that they could equal the kind of
savings that Aetna had been providing.
CHAIR BUNDE asked whether the PEC contacted the new Alaska
Retirement Management Board (ARM) to discuss the changes with
the proposals.
COMMISSIONER NORDSTRAND said the Board knew about the process
but nothing substantive regarding the issue at hand.
CHAIR BUNDE said the reason he was asking is that in the past
the Board has been consulted, yet this time they were not.
COMMISSIONER NORDSTRAND said the ARM Board is new. SB 141
changed a number of things. He said the ARM Board's role is
simply to manage the assets of the retirement plans to maximize
their ability to deal with the liabilities.
3:20:27 PM
CHAIR BUNDE referred to a letter from Tom Englehart of Magellan
Health Services. He pointed out that they are an Alaska company
and are very concerned about a loss of business that the change
in providers will bring them. In the letter they identified
three areas of concern regarding the process used to determine
who was awarded the contract. He asked Mr. Nordstrand to address
those concerns.
COMMISSIONER NORDSTRAND said he already responded to those
concerns in his brief.
SENATOR JOHNNY ELLIS expressed concern over the transition. He
asked the timeline and mechanics of the switchover.
COMMISSIONER NORDSTRAND said he did not know the exact details.
People in the Department of Retirement and Benefits are actively
pursuing the transition now. Premera Blue Cross has successfully
transitioned major companies from another plan administrator.
The transition will happen July 1, 2006 and there will be a
period of time to run the remaining claims for Aetna.
CHAIR BUNDE asked him to speculate what would happen if the
appeal by Aetna is successful.
COMMISSIONER NORDSTRAND explained the protest process is under
way currently and a response was done yesterday. There is now an
opportunity to appeal the decision of the procurement officer to
the commissioner of the DOA, which he acknowledged is he. There
is a process of evaluation wherein he would delegate the final
determination to the Office of Administrative Hearings. The case
would be assigned to the Office of Administrative Hearings where
they have a period of 120 days to reach a decision. There could
be a hearing or it could be decided on the briefs. At the time
of their final decision there is a 30-day timeline to appeal
that opinion to the Superior Court. That could take up to a year
depending on the complexity of the case and on the Superior
Court caseload. After that, there could be an appeal to the
Alaska Supreme Court, which could take two years or more.
3:27:40 PM
CHAIR BUNDE noted the new contract was for three years. He asked
whether there was an automatic renewal.
COMMISSIONER NORDSTRAND said no, there are four 1-year options.
CHAIR BUNDE said by the time the appeals process runs its
course; the contract could be up for renewal.
COMMISSIONER NORDSTRAND agreed.
CHAIR BUNDE asked whether he considered extending Aetna's
current contract until the DOA could issue a new RFP.
COMMISSIONER NORDSTRAND said they are not allowed to.
CHAIR BUNDE advised Mr. Nordstrand that awarding Premera the
contract now gives them an 80 percent share of the healthcare
insurance market in Alaska. The Division of Insurance has been
working diligently to expand the competitive market and this
situation works against that goal. He asked the Commissioner
whether any of that was considered.
3:29:31 PM
COMMISSIONER NORDSTRAND said he did not know. The only matters
that should be evaluated are those that are listed in the
proposal itself.
CHAIR BUNDE said he expected changes in the Department's
procedures and advised the Commissioner and the committee that
he would work to revoke the contract and start the process over.
There being no further business to come before the committee,
Chair Bunde adjourned the meeting at 3:31:25 PM.
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