November 1, 2012

VIA HAND DELIVERY Ms. Lori Flanery Office of the Secretary Finance and Administration Cabinet Room 383, Capitol Annex Frankfort, KY 40601 Re: RFP Number 758 1200000552 - Medicaid Health Care Contractor Contract between the Commonwealth of Kentucky Department for Medicaid Services and University Health Care, Inc. d/b/a Passport Health Plan dated as of October 4, 2012 Dear Secretary Flanery: The delivery of this letter shall constitute the filing of a written protest pursuant to KRS 45A.285(2) by University Health Care, Inc. d/b/a Passport Health Plan (“Passport”) with regard to the award by the Finance and Administration Cabinet (the “Cabinet”) to Passport of the subject contract (the “Passport Contract”), as well as the simultaneous award by the Cabinet of similar Medicaid Health Care Contractor Contracts to Coventry Health and Life Insurance Co., Humana, Inc. and Wellcare of Kentucky, Inc. (the “Other MCO Contracts”). Passport is an aggrieved person under KRS 45A.285(2) in connection with the solicitation and selection for award of both the Passport Contract and the Other MCO Contracts. This protest is timely under KRS 45A.285(2) because it is filed within two calendar weeks after Passport knew of the facts giving rise to this protest. The Passport Contract and the Other MCO Contracts were awarded as a result of a request for procurement (“RFP”) that was commenced by the Cabinet in June 2012 on behalf of the Kentucky Department for Medicaid Services (“DMS”) within the Cabinet for Health and Family Services (“CHFS”). The purpose of the RFP was to introduce competition among Medicaid managed care organizations (“MCOs”) beginning on January 1, 2013 within Region 3, the area of the Commonwealth for which Passport currently is, and has been since 1997, the sole contractor with DMS for the provision of managed care services to Medicaid recipients. During the RFP process, Passport had many discussions with representatives of the Cabinet, CHFS and DMS about the terms on which competitive contracts would be issued, and in particular the process under which the Medicaid recipients that are currently being served by Passport would be assigned among the competing MCOs effective January 1, 2013. The RFP documents issued by the Cabinet did not set forth specific terms and conditions for the assignment process, and Passport identified the assignment process as a key concern of Passport in discussions with

representatives of the Commonwealth, including discussions that took place even before Passport received notification on August 30, 2012 that it was one of the successful bidders for a Region 3 contract. Initially, Passport believed that the terms and conditions for the assignment process would be a negotiable contract term, once the successful bidders had been selected. However, Passport was advised in early September 2012 that it would not have an opportunity to conduct negotiations with regard to the assignment process, as the Cabinet had already decided to use the same assignment algorithm that had been used to assign Medicaid recipients to MCOs in the other regions of the state when DMS entered into Medicaid managed care contracts in those regions. Passport believed that decision to be both unwise from the state’s perspective and unfair to Passport, given the obvious difference when comparing Region 3 to the other regions. However, Passport chose at that time to not file a protest, because Passport was led to believe that the ultimate outcome of the assignment process would be fair to Passport. Instead, Passport stated its concerns in a letter sent to Don Speer at the Cabinet on September 17, 2012, a copy of which is attached for your information. Acting on the belief that the assignment process would be fair, Passport signed the Passport Contract on October 4, 2012. Passport continued to hold that belief after signing the contract. In fact, during last week’s Primary Care Technical Advisory Committee meeting attended by the Chairperson of Passport’s Board of Directors, Commissioner Kissner of DMS stated that he believed that the assignment algorithm would result in Passport receiving the maximum of 41% of the Region 3 Medicaid recipients. At a meeting between Passport staff members and representatives of DMS held on October 31, 2012, the Passport staff members were told that the assignment algorithm had been run by DMS, and that Passport’s initial assignment under the algorithm was about 27% of the Region 3 Medicaid recipients. Although Passport does not yet fully understand the reasons for this outcome, we believe that one factor may be that DMS has decided to treat a letter of intent (“LOI”) between a provider and an MCO as if it were a binding contract, a decision that Passport believes to be contrary to the terms of the RFP documents. Pursuant to the RFP documents, Section 26.2 of the Passport Contract provides that “only MCOs which have an adequate provider network and have successfully completed the readiness review assessment as defined by the Department will be considered for the mass enrollment process.” Passport, based on its long history as a Medicaid contractor in Region 3, clearly has an adequate network. However, Passport believes that the Commonwealth’s reliance on LOIs instead of binding contracts in the case of the other MCOs does not satisfy the requirement that they have an adequate network. Moreover, to Passport’s knowledge, nothing has been done by the Commonwealth to assess whether the other MCO’s are ready to provide services in Region 3. Passport, based on its long history as a Medicaid contractor in the region, is clearly ready. I believe that you are well aware that the implementation by the Commonwealth of Medicaid managed care contracts in the other regions of the state has been extremely

disruptive to the continuity of care to Medicaid recipients in those regions. Continuity of care was identified by the Commonwealth in the RFP documents as a key concern, as it indeed should have been, and it is identified as a key factor in Section 26.2 of the Passport Contract. During the RFP process, Passport suggested that continuity of care would be well served by an assignment process that would initially assign all of Passport’s existing members to Passport, while providing the members full opportunity to choose to be served by one of the competing MCOs if they desired. Passport provided examples of one state in which such an assignment process had been used successfully. The alternative that has been chosen by the Commonwealth, which will be initially disruptive to about 73% of the approximately 175,000 Medicaid recipients in Region 3, will not result in continuity of care in the region. During the RFP process, Passport understood that the impact on the state budget of providing Medicaid services was a key concern of the Cabinet. Passport does not disagree with that concern. However, Passport cannot understand how the initial assignment to Passport of only 27% of Region 3’s Medicaid recipients will address that concern. Passport’s final bid for providing Medicaid services in Region 3 was an average of $457 per member per month (“PMPM”). This bid was actually increased during the negotiation process from Passport’s initial bid of $433 average PMPM, based on discussions with the Commonwealth’s representatives. In fact, Passport told the Commonwealth’s representatives during the negotiation process that Passport would have been willing to enter into a contract with DMS at $423 average PMPM, if the outcome of the assignment process were the assignment to Passport of about 80% of Region 3’s Medicaid recipients. Passport understands that the Other MCO Contracts provide for average PMPM amounts of $473 to Coventry, $446 to Wellcare, and $473 to Humana. Passport believes that, based on those rates, the Commonwealth will spend annually in Region 3 about $80 million more than it would have been required to spend if DMS had entered into a contract with Passport at $423 average PMPM for 80% of Region 3’s Medicaid recipients. In summary, Passport believes that the assignment algorithm used by the Commonwealth in Region 3 is contrary to the terms of the RFP documents and the Passport Contract with respect to the treatment of LOIs as binding contracts, will be unnecessarily disruptive to the continuity of care of Medicaid recipients in the region, and will result in excessive spending of taxpayer dollars that could be avoided by a different initial assignment process. As you know, KRS 45A.290 provides that in the event of a timely protest filed under KRS 45A.285(2), the Commonwealth shall not proceed further with the solicitation or award involved, unless you or your designee makes a written and adequately supported determination that continuation of the procurement is necessary to protect substantial interests of the Commonwealth. Passport respectfully suggests that it would not be possible for you to make an adequately supported determination that the continued implementation of the Passport Contract and the Other MCO Contracts on the terms described above is necessary to protect substantial interests of the Commonwealth. Indeed, Passport believes that any such a determination on your part would be arbitrary and capricious or contrary

to law, as those terms have been defined by the Kentucky courts. Instead, it is clear to Passport that the fulfillment of your duty as Secretary to protect the financial interests of the Commonwealth, as well as the duty of CHFS to provide quality healthcare and related services to the Commonwealth’s Medicaid recipients, requires you to determine that the implementation of these contracts on the terms described above must be halted, and that the Cabinet and CHFS must make different decisions that will protect both the state budget and the Medicaid recipients. Passport has consistently told the representatives of the Cabinet, CHFS and DMS throughout the RFP process that Passport desires to work with the Commonwealth in an amicable manner as a responsible partner to find a solution that will be in the best interests of the Medicaid recipients in Region 3, the Commonwealth and Passport. Further, throughout the RFP process, Passport has been fully transparent with the Cabinet with regard to Passport’s financial and strategic issues. Passport continues to be willing to meet with you, or other representatives of the Cabinet, CHFS and DMS to discuss alternatives to the Commonwealth’s current approach. However, in the interest of continued transparency, I must tell you that if this bid protest is denied, Passport will consider all other available legal options, including the filing of litigation against the Commonwealth. Sincerely yours,

Mark B. Carter Chief Executive Officer University Health Care, Inc. d/b/a Passport Health Plan 5100 Commerce Crossings Drive Louisville, KY 40229 Telephone: (502) 585-8351 Facsimile: (502) 585-7985 Email:


copies to: Ms. Audrey Tayse Haynes Office of the Secretary Cabinet for Health and Family Services 275 East Main Street Frankfort, KY 40621

Lawrence Kissner Office of the Commissioner Department for Medicaid Services 275 East Main Street Frankfort, KY 40621

September 17, 2012

Don Speer Executive Director Finance and Administration Cabinet Office of Procurement Services 702 Capitol Avenue Room 96 Capitol Annex Frankfort, KY 40601 Subject: Confidential Contract Negotiation Issues (KRS 45A.370)

Dear Mr. Speer, The decisions that the Cabinet will make in the coming days will have a dramatic and long-term impact on Medicaid recipients residing in Region 3 and perhaps throughout the Commonwealth. The critical decision is the assignment of members during the transition from the 1115 to the 1915 Waiver. This decision may, either by intention or through unintended consequences, materially reduce or eliminate Passport as a coordinator of care in this region. This could have catastrophic consequences for Medicaid recipients and the Commonwealth. For this reason, I requested an opportunity to provide input on this critical issue, before the final decision is made. Passport Health Plan is in essence the creation of the Commonwealth which has achieved positive national recognition for the Cabinet for Health and Family Services during the many years that it has been servicing Medicaid beneficiaries in Region 3. Passport’s mission is consistent with the health care mission of the Cabinet. Like the Cabinet, it has no profit motive. The Executive Management, Board of Directors and Members of the Partnership Council of Passport include many experts from nearly every discipline who are intimately familiar with the health care needs within this Region and throughout Kentucky. And, Passport’s singular focus is on improving the health and quality of life of its members…a mission that, when fully achieved will address many of Kentucky’s economic challenges. In summary, the missions, the stated objectives and the success of the Cabinet and Passport are very closely aligned. During our discussions we took note of the stated objectives around the member assignment process you outlined in your contract matrix. Those were generally an adequate provider network, keeping the family together, continuity of care and robust MCO competition. We proposed a process under which the current Medicaid beneficiaries in Region 3 would be initially assigned to Passport, and then given the opportunity to switch to another MCO during an open enrollment period (“Opt Out”). We provided you with an example of how this

has worked in one other state. In essence, members would be allowed to continue with Passport through the initial assignment and would have two periods within which they could “opt out.” The first would be the open enrollment period during late 2012 and the second would be during the first three months of 2013. Clearly, such an approach meets three of the four stated criteria in your document, while clearly protecting the member’s right to choose a health plan. Passport has contracts, not just letters of intent, with 91% of the primary care providers in Region 3. Families are currently together, or assigned to the PCP of their choice, and continuity of care at the provider level is assured. Our goal is to continue to serve our members, which we believe supports the Cabinet’s goal of insuring the members do not suffer needlessly in this transition. With respect to MCO competition, there are already three MCOs competing in the rest of the state. Those MCOs share over 500,000 members. By comparison Region 3 has 170,000 members. Each of the other MCOs, which we assume are bidders for Region 3, have established infrastructure here in Kentucky with revenues ranging from $6 billion to $13 billion and are quite sophisticated in marketing to Medicaid beneficiaries. We would find it hard to believe that any of the three would turn down incremental business in Region 3 absent some other concern about the operation of the program overall. Additionally, we suspect, based upon its public statements, that a large multiline insurer is also bidding. While that bidder has little experience, and probably will have to rely on an affiliated out-of-state non-profit plan, it dwarfs the other plans in terms of capabilities and resources. They likewise can well afford developing their business incrementally. In any event, initial assignment to Passport with an Opt Out process would provide each competing MCO with membership between 145,000 and 235,000 members throughout the state and the opportunity to gain even more through marketing. Passport has about 170,000 members currently but that number will plummet under the current transition assignment leaving the company at a significant disadvantage. In addition to the foregoing, Passport has taken our responsibility to address the issue of rising costs very seriously. Over the last three years, Passport’s average per member per month reimbursement increased 1.4%, and that increase has been realized only because we received a default increase of 3% with the most recent six-month contract extension. In contrast, during the same period costs increased across the rest of the state by nearly 7% annually. Our cost proposal in the current RFP process, which we know we may have to revise, continues these efforts and is cost effective and is actuarially sound. Finally, no one would disagree that the implementation of Medicaid managed care in the other regions of the state was rife with challenges and problems, for all concerned. While others are studying the implementation and will soon issue a report, the root cause will very likely be the speed with which the change was implemented. The Opt Out approach we proposed would allow a more measured implementation that would transition the region to robust MCO competition over a period of time. The benefits are obvious to both the recipients and the Commonwealth. There would be fewer issues with continuity of care and less opportunity for

harm, fewer complaints to legislators and public advocates, fewer issues of payment delay for providers and a lesser burden on the Cabinet and Department for Medicaid Services. The potential disruption of services under the Cabinet’s existing assignment plan is equally obvious. My vision for Passport is that we would engage with the Cabinet over the coming years to address the significant and debilitating health issues in the region and reverse the financial drain that our poor health status places on the Commonwealth and our regional economy. That opportunity exists in this region. For that reason and the others described above, I sincerely hope the foregoing is given due consideration by those individuals making the transition assignment decision. Respectfully,

Mark B. Carter, CEO