The nation's largest manager of mental health programs stands to lose a $100 million Medicaid contract in Iowa because its subsidiary, Lewin-VHI, helped to develop the Medicaid managed-care program for the state.
Last month, Polk County District Judge Arthur Gamble nullified a contract between the state and Value Behavioral Health to manage psychiatric services for 190,000 Iowa Medicaid patients.
Although the judge said no actual wrongdoing had been proved, he noted in a 43-page decision that the "appearance of impropriety" was enough to cancel the contract.
Avon, Conn.-based Value said it expected to file an appeal by this week and might sue the state if the contract is awarded to one of seven other bidders. The suit contesting the award to Value was filed by Medco Behavioral Care Corp., Park Ridge, N.J., which also bid on the Iowa contract and is Value's largest competitor (See chart).
At-risk contracting with state Medicaid programs for mental health and substance abuse services is a booming business for companies such as Value and Medco. Typically, their customers have been large employers interested in reducing costs. However, as more states attempt to control their Medicaid budgets, they're turning to private companies such as Value for capitated mental health contracts.
However, as the Iowa case shows, government contracting has pitfalls.
As more companies compete for government contracts, they're "running into highly politicized situations that no parties involved may be used to dealing with," said Ann Logue, analyst with Volpe, Welty & Co., a San Francisco-based investment banking firm.
As Value competes for more state contracts, however, it could bump into its small but prolific subsidiary, Lewin-VHI, whose name has become ubiquitous among healthcare research studies. Value contends it "put into place extensive procedural safeguards" that had been reviewed by Iowa state officials to avoid any conflict of interest.
Even so, "the corporate word on high is that Lewin is to step out if mental health or prescription drug" programs are vying for a state contract, Ms. Logue said. Value Rx, another Value subsidiary, provides managed prescription drug plans. "Although Lewin is highly profitable, it's not as profitable (for Value) as mental health," she noted.
Mental health accounts for about $200 million of Value's $973 million in projected 1994 revenues.