Medco Behavioral Care Corp. of Iowa v. State, Dept. of Human Services
| Decision Date | 24 July 1996 |
| Docket Number | No. 94-1875,94-1875 |
| Citation | 553 N.W.2d 556 |
| Parties | MEDCO BEHAVIORAL CARE CORPORATION OF IOWA, Appellee, v. STATE of Iowa DEPARTMENT OF HUMAN SERVICES, Appellee, Value Behavioral Health, Inc., Intervenor-Appellant. VALUE BEHAVIORAL HEALTH, INC., Appellant, v. STATE of Iowa DEPARTMENT OF HUMAN SERVICES, Appellee, Medco Behavioral Care Corporation of Iowa, Intervenor. |
| Court | Iowa Supreme Court |
W. Don Brittin, Jr. and John F. Lorentzen of Nyemaster, Goode, McLaughlin, Voigts, West, Hansell & O'Brien, P.C., Des Moines, for appellant Value Behavioral Health, Inc.
Brent R. Appel of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, and James W. Carney of Carney, Williams, Blackburn, Grask & Appleby, Des Moines, for appellee Medco Behavioral Care Corporation of Iowa.
Thomas J. Miller, Attorney General, and Richard E. Ramsay, Assistant Attorney General, for appellee State of Iowa Department of Human Services.
Considered by HARRIS, P.J., and LARSON, LAVORATO, NEUMAN, and TERNUS, JJ.
The Iowa department of human services (DHS) awarded a valuable contract ($200 million) to provide managed mental health care to Iowa's Medicaid program to Value Behavioral Health, Inc. (Value). The award was challenged through the administrative process and on judicial review by Medco Behavioral Care Corporation of Iowa (Medco). On judicial review, as permitted by Iowa Code section 17A.19(7) (1991), the district court heard additional evidence to expand and explain the record.
The additional record revealed matters the court considered an organizational conflict of interest on the part of Value. The court found, under applicable federal law, that the conflict was so serious as to disqualify Value from the bidding process. The court therefore remanded the matter back to the agency for further proceedings consistent with that determination.
On remand the agency complied with the court's order disqualifying Value, and then awarded the contract to Medco. Although numerous challenges are at issue in this appeal--from an order following a second judicial review--we think the core one is whether the court was correct in finding disqualification as a matter of law. Such questions are routinely answered by an agency, and only reviewed by a court which, while doing so, accords due deference to agency action. We nevertheless think, because of the unique facts and the question's strange and convoluted posture, the district court acted appropriately. Therefore, after rejecting the other challenges to the district court's various holdings, we affirm.
Due to the rising cost of health care in recent years, Medicaid has consumed an ever increasing portion of the state budget. This development presented DHS with a perplexing dilemma: how to contain spiraling health care costs while ensuring quality care. In accordance with the advice of many experts, DHS concluded managed care was the most viable solution, and it explored this alternative on a small scale--individual county--basis through negotiated contracts.
On the basis of this experience, DHS became satisfied with this approach and in January 1993 it sought a contractor to perform the following tasks: to maintain existing Medicaid managed health care systems (which did not include mental health care services) and expand these systems to additional counties; to assess the feasibility of alternative managed health care systems or other forms of cost containment and implement those systems as appropriate; and to conduct policy analysis concerning the expansion of Medicaid managed care. The contract was awarded to the Unisys Corporation (formerly known as Paramax Systems Corporation) in April 1993. Unisys immediately subcontracted some of its duties under the contract, particularly policy analysis regarding the implementation of a managed program for the mental health care of Medicaid recipients, to Lewin-VHI (Lewin). Lewin is a subsidiary of Value Health, Inc. This relationship is at the heart of the present controversy.
Lewin proceeded with the policy analysis, and by November 1993 DHS determined it desirable to contract with a private company to provide managed mental health care for Iowa Medicaid recipients. A decision was made to utilize a competitive bidding process to award the contract. 1 This procurement process requires the preparation of a document referred to as a "request for proposals" (RFP). As the name suggests, a RFP details the services and duties to be performed under the contract, describes the criteria for evaluating proposals, and solicits proposals from qualified bidders.
Conflict of interest questions arose regarding Lewin's participation in the policy analysis pertaining to the RFP because Value [Behavioral Health, Inc.], another subsidiary of Value Health, Inc., was interested in bidding on the contract. Furthermore Unisys expressed a potential desire to bid in partnership with Lewin or Value. Because of this potential conflict, Lewin did not prepare the RFP, but it did work on other items of the policy analysis for the implementation of the program--including the capitation rates (the per person rate to be paid for managed care services). At that time Lewin also voluntarily imposed an "embargo" on communications with Value with regard to all Iowa matters, and later instituted a similar embargo with Unisys.
On the recommendation of Lewin, Health Management Associates (HMA) prepared the RFP for the managed mental health care contract. Unbeknownst to DHS, Lewin had business relationships with HMA in other states including Connecticut and Montana regarding health care programs. 2 HMA's final draft of the RFP strongly favored the technical criteria of the bids over the cost criteria. The bids were required to be within a range of eighty-six to eighty-eight percent of the projected cost for an unmanaged health care system. This narrow two-percent range effectively eliminated the role of price in the bidding process. Rather the RFP required a proposal to meet a 340 point threshold score--out of a possible 400 points--regarding technical criteria before a vendor's bid could receive further consideration (i.e., before its cost bid would be reviewed). The requirements apparently were developed because of the department's desire for quality care in a managed system and the belief that any bid below the eighty-six percent floor necessarily sacrificed quality for cost savings. In the opinion of one expert, this de-emphasis on cost incidentally benefited less experienced vendors of Medicaid managed health care systems in the bidding process (such as Value) over those vendors with more expertise in the area (such as Medco).
After the RFP was issued to the public in March 1994, eight proposals were received. Seven professionals were then selected, based on their various knowledge and expertise in the area of mental health services, to evaluate the eight proposals.
The two bids with the highest technical scores were proposals submitted by Value and Medco. The evaluators determined (a finding later discredited) that only Value's proposal met the 340 point technical threshold for receiving further consideration. The evaluators then examined Value's cost bid, and it fell within the range required by the department. Medco's cost proposal was not opened, but it also met the cost requirements for the bid and was under Value's bid. The evaluators, relying on the finding that only one bidder met the requirements of the RFP, recommended that Value be selected as the contractor.
On June 14, 1994, DHS announced its selection of Value as the successful bidder. Pursuant to the terms of a provision in the RFP, Medco filed an appeal with DHS. Although the initial notice did not specifically allege any conflicts of interest, Medco subsequently filed a request for a hearing and waiver of time requirements seeking production of documents regarding the evaluation of the bids and Lewin's or Unisys' participation in the development of the cost requirements or other provisions involving the RFP. DHS denied this request and entered a final decision denying Medco's appeal. The director determined the procedures for--and scoring of--the proposals were not arbitrary and capricious. The director also found no conflict of interest, believing the information provided by Lewin regarding costs was shared with all potential bidders, and that the information could not have been utilized favorably by any single bidder.
Not satisfied, Medco filed a petition for judicial review generally raising conflict of interest issues and irregularities in the bidding process. Medco also sought a stay of any action to implement the contract, which the district court granted.
Intensive discovery uncovered several unsettling matters. First the evaluators had miscalculated the technical score on Medco's proposal and Medco had indeed also met the threshold for considering its cost bid. Second there were indications that the evaluators had improperly considered information outside of the bidding process. Finally DHS discovered that substantial conflict of interest questions existed regarding the various relationships between Lewin, Value, Unisys, and HMA.
On the basis of this new information, Medco and DHS filed a joint application to adjudicate law points asking the district court to determine whether there was a conflict of interest that required disqualification of Value from receiving the contract. Value subsequently filed a petition for intervention. The district court responded by entering an order overruling the application to adjudicate law points. Value was allowed to intervene and filed an answer to Medco's petition, asserting that, for a number of jurisdictional and procedural reasons, Medco was barred from proceeding.
At a hearing on the matter, over objections by DHS and Value, the court received evidence regarding Value's alleged organizational...
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