Value Behavioral Health v. Ohio Dept. of M.H., C2-97-395.

• Decision Date: 30 May 1997
• Docket Number: No. C2-97-395.,C2-97-395.
• Citation: 966 F.Supp. 557
• Parties: VALUE BEHAVIORAL HEALTH, INC., Plaintiff, v. OHIO DEPARTMENT OF MENTAL HEALTH, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

966 F.Supp. 557

VALUE BEHAVIORAL HEALTH, INC., Plaintiff, v. OHIO DEPARTMENT OF MENTAL HEALTH, et al., Defendants.

No. C2-97-395.

United States District Court, S.D. Ohio.

May 30, 1997.

COPYRIGHT MATERIAL OMITTED

Charles H. Walker, Elizabeth Squeglia, Bricker & Eckler, Columbus, OH, Marcia Madsen, David F. Dowd, Miller & Chevalier, Chartered, Washington, DC, Dot Powell-Woodson, House Counsel, Value Behavioral Health, Inc., for plaintiff.

Diane Weaver, John Williams, Assistant Attorneys General, Columbus, OH, Janice Franke, Staff Counsel, Dept. of Mental Health, Columbus, OH, for defendant Ohio Dept. of Mental Health.

Patrick Beatty, Assistant Attorney General, Columbus, OH, for defendant Ohio Dept. of Health and Human Services.

Suzanne Scrutton, Assistant Attorney General, Columbus, OH, for defendant Ohio Dept. of Alcohol and Drug Addiction Services.

James E. Arnold, Terry M. Miller, Douglas R. Matthews, Vorys, Sater, Seymour & Pease, Columbus, OH, for intervenor Ohio Behavioral Health Partnership, Inc.

OPINION AND ORDER

SARGUS, District Judge.

Plaintiff Value Behavioral Health, Inc. ["plaintiff VBH"] initiated this action on April 8, 1997, seeking injunctive and declaratory relief under, inter alia, 42 U.S.C. § 1983, alleging that officials of the State of Ohio unlawfully awarded a contract for management of certain Medicaid behavioral health services to Ohio Behavioral Health Partnership ["OBHP"]. The second amended complaint names as defendants Michael F. Hogan, director of the Ohio Department of Mental Health ["ODMH"]; and Luceille Fleming, director of the Ohio Department of Alcohol and Drug Addictive Services ["ODADAS"]. On May 2, 1997, the Court issued an Order temporarily restraining defendants Hogan and Fleming from submitting the contract for final approval to the Ohio Controlling Board. OBHP was thereafter given leave to join in this action as an intervening defendant. Following the issuance of the Temporary Restraining Order, this Court scheduled the case, with the consent of the parties, for an expedited, final trial on the merits of the Complaint. Trial to the Court was held on May 20 and 21, 1997.¹

The second amended complaint alleges that the State defendants violated VBH's rights under 42 U.S.C. § 1396, et seq., and its implementing regulations, 45 C.F.R. Part 74, by unlawfully disclosing VBH's proposed price breakdown to OBHP, by permitting OBHP thereafter to modify its proposal, by denying VBH the same opportunity, and by awarding the proposed contract to OBHP. The second amended complaint further alleges that the State defendants violated 45 C.F.R. § 74.43 by, inter alia, treating offerors unfairly and awarding the contract based upon a noncompliant proposal which did not respond to the terms of the state's solicitation to bidders.

I. Factual Background

Medicaid is a cooperative federal-state program set forth in Title XIX of the Social Security Act. 42 U.S.C. § 1396, et seq. The program is designed to provide federal monies to the various states so that, in turn, the states may furnish medical care to indigent individuals. While states are not required to participate in the Medicaid program, to qualify for federal Medicaid funding, each participating state must submit to the Secretary of Health and Human Services ("HHS") a "plan for medical assistance" as required by 42 U.S.C. § 1396a(a).

State plans for medical assistance must contain a number of provisions which are set forth in 42 U.S.C. § 1396a(a)(1) through (62). One of those provisions requires that the state plan provide for payment of medical treatment rendered to a Medicaid recipient by any qualified physician, hospital, or other medical provider. 42 U.S.C. § 1396a(a)(23). The State of Ohio applied for a waiver of this specific requirement and sought permission from the Health Care Financing Administration ("HCFA"), an agency that is part of HHS, to create a managed care system involving a limited number of preselected medical providers. Pursuant to its authority under 42 U.S.C. § 1315(a), HCFA granted a waiver to the State of Ohio authorizing it, under certain conditions, to enter into a managed care system for behavioral health services in which, inter alia, certain individuals or groups would become the only providers eligible for payment with Medicaid dollars.

On November 4, 1996, ODMH and ODADAS issued a Request for Proposal ("RFP") as to the proposed contract by which a single private entity would establish behavioral health provider service groups, implement a transfer of services to such groups, coordinate behavioral health services to participants, and administer the entire claims process. In addition to establishing a managed care system, the successful bidder under the terms of the RFP would also cause the consolidation and coordination of behavioral health services currently being provided by three state agencies (ODMH, ODADAS and the Ohio Department of Human Services) as well as a large number of county and community based public and non-profit agencies.

The RFP set forth a method by which interested bidders would submit proposals by January 2, 1997. The RFP set forth specific criteria that a bidder was required to meet before any proposal would be evaluated and considered.

Three companies responded to the RFP, including the plaintiff VBH and intervenor, OBHP. After the proposals were submitted on January 2, 1997, the state agencies created review teams whose members made an initial evaluation of each company's submission. Scoring of each proposal was made by reference to a set of eighty-one preestablished questions to be answered and graded by each evaluator. The questions were intended to incorporate the criteria set forth in Section 8.3 of the RFP as to relative weight and importance of various factors as proposed by each potential vendor.

After the completion of this initial stage (identified as Phase One and Two in the RFP), on January 13, 1997, the state agencies mailed to each of the responding bidders requests for clarification. The answers of the intervenor, OBHP, to such requests are the basis for significant portions of the plaintiff's complaint. The state agencies sought clarification of the intervenors proposed rate structure as to a charge under the category designated as "reinsurance."

The RFP instructed bidders to propose a rate structure which allocated certain costs of medical services by various categories and, further, specified the cost of administrative services to be provided by the potential vendor. The RFP specifically established the total amount that the state would pay to any vendor under the contract by using a fixed monthly fee of $11.91 payable to the vendor for each month for each person eligible for Medicaid coverage.²

The bidders were therefore not to compete as to total cost for providing the services sought by the state. The bidders were, however, required to list amounts to be spent under the pm/pm formula and allocate such funds as to various service categories and administrative costs.

The RFP also placed a cap on the potential profit available to the successful vendor. Under the category of Risk/Incentive Pool, a bidder was directed to set aside an amount not to exceed $1,500,000.³ If the successful bidder paid out at least 96% and not more than 100% of the amounts budgeted for health care services,⁴ the vendor could retain the $1.5 million as profit. If claims exceeded the contract amount, the $1.5 million was to be used as a risk pool and excess claims would be paid from these funds. Similarly, if penalties were payable in the event less than 96% of the budget for medical services was expended, the same $1.5 million would be used for penalty payments required to be paid by the terms of the RFP.

Significantly, any amounts allocated by a vendor under administrative costs which were not expended by the end of the year could be retained by the vendor. In contrast, any amounts budgeted for health care services not expended during the year would be refunded to the state.

In the original submission of OBHP, the company listed under "administrative costs" the sum of $.36 pm/pm for "reinsurance." This charge equaled the sum of $5,364,000 according to the state's estimate as to the number and duration of Medicaid eligible participants.

In the Request for Clarification, OBHP was asked to explain the mechanics of its reinsurance proposal. OBHP thereupon responded that it did not intend to seek reinsurance, but was instead intending to self-insure. (PX 20, 07789, 07790). During the trial of this matter, much testimony was offered as to the differences and similarities of reinsurance and self-insurance. While both are methods designed to minimize a bidder's potential financial risk, only the self-insurance method includes the possibility that unexpended funds could be recouped by the self-insured bidder. In contrast, under a reinsurance arrangement, premiums are paid to a third party with no refund available. OBHP's response of January 20, 1997, recognized this distinction and included the following:

As self-insurance, these funds will be treated in a manner similar to those we would have to obligate to a subcontracted insurer to cover the risk associated with the Transfer Benefit Program [sic], as such, we do not anticipate "refunding" those funds in the same way we would not be able to "refund" them had we expended them with a "third-party insurer." (PX 20, 07790).

OBHP clearly indicated to the state that it would not be purchasing reinsurance, but would instead self-insure to the extent of $5,364,000. If this amount were not actually expended, the sum would not be refunded to the state.

After receipt of the answers to Requests for Clarification, the state agencies reevaluated the clarified proposals and scheduled on-site interviews. After forwarding its answer to the Requests for Clarification, no further written submissions were provided by OBHP to the...