Minnetonka-based Medica said it has filed a lawsuit against the state Department of Human Services that alleges competing health plans were offered better deals by the state to serve as HMOs in public health insurance programs.

Late last year, Medica said it could not continue as a managed care organization for most in the public programs due to low payment rates, and it gave notice that it would stop doing so for about 300,000 enrollees on May 1.

In February, the Department of Human Services (DHS) announced it had found substitute HMOs for those with benefits currently managed by Medica who must switch to a new plan this spring.

In the lawsuit, Medica argues that DHS did not comply with state procurement laws when hiring these other vendors, according to a filing provided by Medica to the Star Tribune.

Among other things, the state boosted payment rates to competing managed care organizations (MCOs) through a "transition factor" that was never offered to Medica, according to the lawsuit.

"We believe the state violated state procurement law by refusing to include Medica in negotiations that resulted in higher 2017 payments and other favorable terms to other health plans for this business," said Geoff Bartsh, vice president and general manager at Medica for state public programs, in a statement posted Tuesday for company employees.

In a statement, DHS said it negotiated with Medica in good faith and is aware of its responsibilities to taxpayers under current law.

"We have an obligation to ensure continued coverage for the more than 300,000 people affected by Medica's decision last fall to terminate its contract with the state," DHS said. "The Minnesota Department of Human Services is dually responsible for good stewardship of taxpayer dollars and providing access to quality health care for the 1.2 million Minnesotans who rely on our public health care programs."

Medica said it filed the lawsuit Monday in Ramsey County District Court. It marks the second time since 2015 that an HMO has taken the state to court over managed care contracts that collectively are worth billions of dollars in revenue each year for health plans.

DHS started awarding the contracts via competitive bidding in 2012 following concerns at the State Capitol that HMOs were generating too much profit from the agreements. For decades, Minnesota has hired HMOs to manage care for people in the Medicaid and MinnesotaCare programs, which provide coverage for low- and moderate-income Minnesotans.

For 2016, DHS conducted its first statewide bid for the "families and children" contract in the public programs, which is where most people in the programs get coverage.

Minneapolis-based UCare was dramatically downsized as a vendor in that portion of the programs as a result of the bid, with Medica picking up many of UCare's enrollees.

In November, both Medica and the HMO at Blue Cross and Blue Shield of Minnesota reported significant financial losses through the first three quarters of 2016 under the new contracts. Medica cited the financial performance when explaining its decision to not renew the contract.

DHS said in February the state would spend an extra $34 million to fill health plan gaps due to the Medica pullback. UCare is just one of the plans adding enrollees as a result.

Back in 2015, UCare sued DHS over the results of the competitive bid for 2016.

In the new lawsuit, Medica says it does not want to interrupt the upcoming transition of enrollees in May to other health plans. But the HMO is seeking a preliminary injunction because the 2017 agreements with other health plans give those HMOs an "inside track on performance of future years of the contract," the lawsuit states.

"DHS refused to honor its commitment to negotiate new actuarially sound 2017 rates," the lawsuit states. "DHS then began to clandestinely and informally re-procure the man­aged-care services by soliciting offers from competing MCOs."

The lawsuit adds: "DHS's end-run around the rules has frozen Medica out of the competitive-bid proc­ess not just for 2017, but for years to come."

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