August 2, 2004

New Revelation on CHIP Contract
Raises Specter of Legal Challenge

By Mike Hailey
Capitol Inside Editor

The Children's Health Insurance Program in Texas could find itself in more hot water if companies that lost out in a bidding war for the rural services contract decide to challenge the state in court for possibly allowing the winning bidder to alter its original proposal after the competition had ended.

The potential new point of contention hinges on whether the state has allowed Banker's Reserve Insurance Company of Wisconsin, which is doing business as Superior HealthPlan Inc., to boost the amount of funding it plans to use to bolster the financial stability of the program in Texas. Responding to concerns about Superior's ability to ensure that the rural CHIP system will be financially sound when it takes over September 1, Texas Insurance Commissioner Jose Montemayor indicated last week that the new contractor had agreed to a cash infusion that would triple its capital and surplus to $15 million. The news was contained near the end of a letter that the insurance chief sent to Republican State Rep. Larry Taylor, a Friendswood insurance agent who had raised questions about Superior's relatively low financial rating and how that might impact the future health of the CHIP system in rural areas of the state.

The revelation sparked speculation about whether Superior's two major competitors will seek to have the new contract nullified by the Health and Human Services Commission or a court on the grounds that the winning company would in effect be submiting a second bid when its rivals have already been shut out of the process. One of the losing firms is the rural program's current contractor, Clarendon National Insurance Company, which the state began paying four years ago to provide health coverage to children in low-income working families who do not qualify for Medicaid but can't afford private coverage. The HHS decided last year to end the contract with Clarendon in order to try to get a better deal in what appeared to be a more competitive market. Clarendon sought to reclaim the contract despite questions that had been raised about companies it was subcontracting to manage most of the day-to-day services. A third firm, MEGA Life and Health Insurance Company, also responded to an HHS request for proposals for the contract to provide health coverage to children in 170 rural areas of the state.

The state agency passed over MEGA Life and the current contractor Clarendon in May in favor of Superior despite the winning bidder's inferior financial rating compared to its two chief competitors. Clarendon, still staggered by the loss of the contract, suffered another setback last month when State Auditor Lawrence Alwin determined that HHS had paid the company $20 million in fees that it did not owe. The state auditor's yearlong examination of the rural CHIP contractor found that the HHS had been lax in its management and oversight of CHIP funds and that the contractor Clarendon had misrepresented the way it was paying subcontractors and the amounts they were making. The auditor's scathing assessment prompted Governor Rick Perry to ask Attorney General Greg Abbott to initiate proceedings to try to recover the money that the auditor said the state had spent needlessly for services it never appeared to receive.

But the auditor's report did not cover the process that unfolded over a six-month period after the HHS decided to reopen the bidding process for the Exclusive Provider Organization contract. Taylor, a first-term lawmaker who's played a key role on the House Insurance Committee, entered the picture last week with a letter to Montemayor requesting an investigation into Banker's Reserve - or Superior - to determine if the firm was financially capable of assuming liabilities under the rural contract. Taylor pointed out that Banker's Reserve is listed as "not rated" by insurance analysts and that the parent holding company, Centene Corporation, has no members rated higher than C++ by the industry's blue book, A.M. Best. The Centene subsidiary Superior Health Plan Inc. has a C rating, which is defined as "weak."

After looking into Taylor's concerns, Montemayor responded by saying that he felt like "adequate oversight" was in place - and he expressed confidence that "additional safeguards" would be provided by a continuing review of Centene and its subsidiaries. While the insurance commissioner appeared to be putting the issue to rest in his concluding remarks, two sentences above that caught the attention of the winning bidder's competitors.

"Nonetheless, my financial staff indicated to the company in a recent meeting that an additional cash infusion may be necessary in order to achieve an even greater measure of soundness for this important program," Montemayor wrote. "The company agreed to add additional funding and bring their capital and surplus to $15 million."

That, according to some of the players involved in the CHIP contract competition, makes it appear that the Centene subsidiary was effectively being granted permission to revise the proposal for which the contract was awarded while the competitors were not allowed to submit amended bids.

In its examination of the CHIP rural contracting process, the state auditor's office noted that Clarendon had been allowed to change the terms of its initial contract after it had been awarded. The latest development prompted concerns that the HHSC would be following the same path with the new contractor if it is going to let the company revise the parameters set within its initial bid.

Taylor said Monday that his concerns had been reinforced by the revelation that additional funding was needed to ensure the program's financial stability. But he said he was disappointed that the Department of Insurance's review had not been undertaken until well after the new contractor was chosen.

"While I am pleased that Banker's Life is being asked to strengthen their cash reserves, the company doing so in no way diminishes my concern" that the HHSC has turned over the management of a critical state program to a company with a low financial rating, Taylor said.

Representatives for Banker's Reserve - aka Superior - have suggested that the complaints about their clients' finanical strength are merely sour grapes by companies that were outbid in a fair competition.

The lawmaker indicated that he will consider sponsoring legislation next year to require Department of Insurance reviews of all insurance-related state contracts before they are awarded to outside concerns.

The House Appropriations Committee has two separate subcommittees led by Republican State Reps. John Davis of Houston and Carl Isett of Lubbock monitoring the developments with the CHIP contract and the overall state contracting process as well.