State Health Plan members set to use Aetna after judge rules against Blue Cross NC

A state court ruled Monday that the State Health Plan acted "fairly" in granting the 2025 contract to administer its health plan to Aetna over Blue Cross NC.

"The preponderance of the evidence showed that the Plan conducted the procurement carefully and thoughtfully, fairly and in good faith, and that its decisions were properly within its discretion. It also showed that the vendors' proposals were evaluated and scored carefully, accurately, and fairly," wrote Administrative Law Judge Melissa Owens Lassiter, who reviewed the complaint by Blue Cross NC.

The decision puts an end to a yearlong legal battle -- unless Blue Cross NC, which filed the case in the North Carolina Office of Administrative Hearings, takes further action.

Blue Cross NC did not reply Monday to a question on whether it would appeal the decision, but said in a written statement through spokesperson Laura Eberhard that "while we are disappointed in the court's ruling, we are gratified that the court reviewed the serious questions we raised about the State Health Plan's 2022 RFP process."

In proposed rulings filed with Lassiter, Blue Cross requested she require the State Health Plan to either award the contract to Blue Cross or put it out for bid again. The State Health Plan asked Lassiter to affirm its decision to award the contract to Aetna.

According to state law, the decision of the judge can be appealed by either party in the case to the state's superior courts. Any decision there could also be appealed.

Blue Cross already filed a petition for judicial review in Durham County Superior Court in February, but that was put on hold while Lassiter considered the case as part of a process in the North Carolina Office of Administrative Hearings.

Aetna, which has been arranging to take over the State Health Plan, can continue with its preparations.

Regardless of whether further appeals are made, Sam Watts, the SHP director, told The News & Observer prior to the ruling that "there's a zero percent change that State Health Plan members are going to go to their doctor on January 1 -- no matter what the judge says -- and not have access to their health care."

"We've got enough contingency plans and fallback positions and abilities to fix it that members do not have to worry," he said.

"The claims are going to continue to be paid," State Treasurer Dale Folwell told The N&O. But "unfortunately, we've had to spend millions of dollars in legal fees to defend a process that our board voted for unanimously."

According to SHP spokesperson Dan Way, as of late May, the SHP has spent about $1.9 million on the OAH case.

Jim Bostian, North Carolina market president for Aetna, said in a written statement Monday that the company is "thrilled to begin serving those who teach, protect and otherwise serve North Carolina."

"Since the contract decision was first announced in December 2022, we have been working on the impending, seamless transition at full speed all while demonstrating in court that the transition to Aetna is in the best interests of the State Health Plan and its members," Bostian said in a statement shared by spokesperson Pat Ryan.

Bostian said that to date more than 800 Aetna employees have contributed nearly 60,000 work hours to implementation and that Aetna was on schedule to begin serving the State Health Plan on Jan. 1, 2025.

Overarching debate

In January 2023, Folwell announced that Aetna would replace Blue Cross Blue Shield of North Carolina as the administrator for the state's health insurance plan.

Blue Cross NC, which had been the state's third-party administrator for more than 40 years, fought back against this decision, filing in mid-February a complaint with the Office of Administrative Hearings.

The company hired to be the third-party administrator takes care of administrative tasks associated with health insurance, and sends claims to the state, which is on the hook for covering health care costs.

This year, there have been multiple days of hearings, involving witnesses and hours of debate. During the last hearing in late February, attorneys for the parties involved presented closing arguments.

Blue Cross argued that the health plan violated the terms of its own request for proposal, a document that solicits proposals during a bidding process. It also argued that the plan exceeded it authority and took actions that were "arbitrary and capricious" in deciding who would get the contract, in particular in terms of its scoring system for bidders.

The State Health Plan defended its own work and that of actuarial services contractor Segal, saying they acted meticulously and within their discretion. Aetna, also a defendant in the case, echoed the state's arguments.

Documents released by State Health Plan last year to The N&O also showed that prior to the State Heatlh Plan issuing a new RFP, Blue Cross NC had gone live with a new computerized claims processing system.

Issues with this system prompted the State Health Plan to put the high-dollar contract out to bid, instead of renewing Blue Cross' contract for the optional one-year renewal periods in 2025 and 2026.

Network access

The State Health Plan covers about 740,000 teachers, state employees and retirees and their dependents. Billions of state funds are involved with the contract, said Matt Sawchak, attorney for Blue Cross NC.

"With high stakes comes high responsibility," he said. "Blue Cross was the lowest bidder on this RFP and it offered the most robust network of providers, especially in rural areas, and yet it was not chosen."

In hearings, Blue Cross NC has cited research it commissioned by Gregory Russo, the managing director in the Health Analytics practice of Berkeley Research Group, LLC, an international consulting firm.

According to his research -- which looked at numbers of providers -- in 2021 over 37,000 plan members received services from providers that are in-network with Blue Cross but are out-of-network with Aetna.

Lee Whitman, attorney for Aetna, countered that according to Segal, which looked at how providers were used, 99% of Aetna's claims would have been paid in-network. "That 1% disruption is effectively no disruption," he said.

Throughout the hearings, the state and Aetna cast doubt on the expertise of Russo, highlighting his receipt of $1.6 million to conduct the research.

Scoring of costs

Another dispute was on how the state decided to rank cost proposals by the plans. Documents released by the SHP show that bidders for the contract received points and rankings for cost proposals and technical proposals, both weighted equally.

The cost proposal portion included a network pricing component, an administrative fee component and a network pricing guarantee component:

On the network pricing component -- or the projection of claims costs -- Blue Cross and Aetna tied.

On the administrative fee component -- the fee the third party administrator receives for the services it provides to the state -- Blue Cross NC had the lowest overall bid.

Under a three-year contract, on the administrative fee, all bidders came in at about $17.5 billion, with BCBS coming in lower by $17 million or less than a tenth of a percent, as previously reported by The N&O.

But Aetna was found to have stronger network pricing guarantees -- or guardrails should the company fail to meet savings -- which led to Blue Cross NC and Aetna tying in terms of their overall cost proposals.

Pricing guarantee proposals were scored based on guaranteed targets and the amount of the administrative fee the bidders placed at risk should savings targets not be hit.

The SHP's attorney, Marcus Hewitt, said during closing arguments that "the pricing guarantee scoring was not improper procedure. It was based directly on the competitiveness of guarantee targets and the amounts the bidder put at risk, just like the RFP said." Blue Cross lost on pricing because of its low at-risk amounts, he said.

But Sawchack said the SHP and Segal rushed the RFP process, leading to errors. He argued that Segal did not properly score the pricing guarantees and used subjective measures. Blue Cross also argued that the state misread the administrative fees at risk on its discount guarantees, which is a part of the pricing guarantee section.

Blue Cross said it put 15% of its administrative fee at risk while the state misread that figure as 5%, Segal said.

This happened because it did not add together the three discount guarantees labeled with 5% and instead understood it to mean 5% across the board, argued Blue Cross NC. The State Health Plan said that if Blue Cross NC meant to put a total of 15% it could have written this out on the form explicitly.

Timeline of the contract

According to legal filings and a timeline published by the treasurer's office:

The RFP was drafted over five months and then issued in late August 2022.

Bidding closed in early November 2022 and proposals were evaluated between Nov. 8 and 16.

Bidders were then called on to submit their final offers, and the contract was awarded Dec. 14.

Technical scoring

On the technical questions, a series of yes-or-no questions regarding the services they could provide, Aetna achieved the maximum score of 310 points. Blue Cross obtained 303.

This led to Aetna receiving three points, while Blue Cross NC received 1.

Blue Cross also argued against the technical scoring system. In previous RFPs, the plan required bidders to provide narrative responses explaining their ability to meet technical requirements. This year's RFP did not allow narrative responses.

Blue Cross NC argued the seven-point difference on the technical proposal is not enough to justify awarding the contract to Aetna.

The final score, including cost and technical components, had Aetna at 6 points and Blue Cross NC at 4 points.

Aetna, as of late May, had so far spent $39 million on the transition, according to Ryan.

The majority of this money has been spent developing IT infrastructure specific to the plan's needs, including needs required in the technical scoring component of the bid, Ryan wrote in an email.

Ryan also said that Aetna has hired about 385 employees dedicated to the State Health Plan so far and in the time since the contract award, has contracted with 4,734 additional providers who are now active or in the process of being on-boarded.

Following inquiries in late May, neither Aetna or Blue Cross provided how much the OAH case had cost them.

The open-enrollment period to enroll in the State Health Plan for 2025 begins in late September.

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