UNH loses $23.5 billion Pentagon contract

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: March 2, 2011 - 9:23 PM

Defense Department reversed course and awarded a multibillion-dollar military contract to Humana.

UnitedHealth Group Inc. has been dealt a blow in a bid to secure a multibillion-dollar military benefits contract after a lengthy fight with Humana.

After awarding the contract to UnitedHealth in June 2009, the U.S. Department of Defense reversed course on Friday and gave it instead to Humana, the government's current vendor.

The contract, which provides health care benefits to soldiers and family members in 10 southern states, is worth an estimated $23.5 billion over five years. About 93 percent of that goes to hospitals, clinics and doctors who provide the care. The insurer collects fees for processing claims, managing provider networks and providing customer service.

Minnetonka-based UnitedHealth said the contract fight isn't over.

"The Department of Defense had it right nearly two years ago when it awarded this contract to our company," UnitedHealth said in a statement. "We disagree with this change in course, which resulted from a flawed, uneven and extensive appeals process. We will aggressively pursue all options available to us."

The Defense Department said its decision was made "for convenience of the government" and was based on a review that resulted in a "different 'best value' selection," according to a news release.

The military's health care program, known as TRICARE, has been administered by Humana Military Healthcare Services Inc. in the southern region since 1996.

About 2.9 million of the more than 9.6 million military members, veterans and their dependents covered under TRICARE live in the southern region of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee and most of Texas.

UnitedHealth, the nation's biggest health insurer by revenue, estimated the contract would generate $1.5 billion in fees and create about 500 jobs in Minnesota.

In a research note, Wells Fargo analyst Peter Costa said he believes the negative impact of the decision on UnitedHealth's earnings would be "minimal."

Louisville-based Humana, meanwhile, raised its guidance by a quarter after expecting to lose the contract when it expires March 31, 2012.

Humana lodged a protest when the military first awarded the program to UnitedHealth Military & Veteran Services, arguing that the Defense Department used different criteria to select its contractor than what was spelled out in its request for proposals.

In October 2009, the General Accounting Office sided with Humana, putting the outcome in limbo.

Winning the contract would expand UnitedHealth's membership and revenue from government programs. About a third of the company's 37.5 million members are enrolled in government programs, including Medicare and Medicaid.

About $46 billion in revenue comes from the government, while $41 billion comes through benefit plans for employers and individuals.

Jackie Crosby • 612-673-7335

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