Las Vegas insurer loses military contract

Michelle Swafford

Friday, Aug. 22, 2003 | 11:46 a.m.

Las Vegas-based Sierra Health Services lost a contract bid Thursday afternoon worth nearly $11 billion over five years with the Department of Defense to provide medical services to 1.7 million military personnel and their families in the East. Its stock fell 21 percent on the news this morning.

Sierra Military Health Services, a subsidiary of Sierra Health Services, currently provides services such as scheduling medical appointments, making doctor referrals and offering and maintaining health-care plans to active and retired military personnel and their families in 13 eastern states.

The lost contract would have included those 13 states and expanded coverage to 10 additional states. The military deal is part of the TRICARE program, which represents all branches of military.

"We are very shocked and disappointed by this decision," said Peter O'Neill, spokesman for Sierra Health Services. "It's not over yet. We are still in this business for another year."

The company gained the 13-state contract in 1998 and will phase out the contract in September 2004 if the decision is upheld. Sierra Military Health Services is expected to contribute about $350 million in revenue in 2004.

Sierra Military Health Services contributed approximately $450 million to Sierra's revenue and about $11 million to its operating income in 2002. For the first six months of 2003, the military contract contributed $220.7 million to Sierra's revenue and $5.5 million to its operating income. There are about 750 Baltimore-based employees who will be affected.

"The full impact to earnings won't happen until to 2005," O'Neill said.

Sierra Health Services' stock dropped 21 percent, or $3.18 per share, to $19.80 this morning on the New York Stock Exchange.

Sierra Military Health Services officials will meet with the Department of Defense in the coming days to discuss the decision process before deciding whether to protest, which is similar to an appeal.

The Defense Department is consolidating seven contracts in 12 regions to three contracts in the North, South and West regions. Each contract includes a nine-month transition period and has five one-year option periods. Defense officials could not be reached for comment on the decision this morning.

Health Net's subsidiary, Health Net Federal Services, was awarded the North region contract worth $2.2 billion in each of five years. The company currently holds contracts for nine western and central states, plus portions of Arizona and Idaho.

"Health Net has a strong commercial presence in the Northeast on which we build," James Woys, president of Health Net Federal Services, said in a statement. "We will work closely with Sierra and Humana, the two health care companies that currently cover states in the North region, to ensure continuity of care and as little disruption as possible."

The Nevada contract is held by Phoenix-based TriWest Alliance, a consortium of insurers and medical groups. TriWest Alliance was awarded a contract worth $2.1 billion in each of five years for 20 states and western Texas in the West region. Its contract was a renewal of 16 central states and an expansion into the others.

Sierra was originally part of the TriWest Alliance, but pulled out three years ago to avoid conflicts of interest when bidding on contracts in the Northeast, O'Neill said.

The company already had infrastructure in place in the East and thought it would be efficient to stay there versus expanding to serve the military in the West.

Humana Military Healthcare Services, based in Louisville, Ky., won a contract worth $2 billion in each of five years for the South region, which includes nine states and eastern Texas.