Like so many other health care entrepreneurs these days, Dr. James Barnes sees inner-city poverty as not so much a scourge as a business opportunity. So when the D.C. government announced in 1996 that it was preparing to transfer 40,000 Medicaid patients to HMOs, the president and CEO of American Preferred Providers Plan Inc. got to work.

Barnes followed a strategy that had produced results for legions of firms angling for contracts with the city: He stacked the company’s board of trustees with well-connected District heavies, including Jeffrey Humber, a former finance director for Mayor Marion Barry, Emily Vetter, president of the D.C. Hotel Association, and Michele Hagans, a developer and Barry loyalist.

“Dr. Barnes called me up and asked me to join,” recalls Vetter. “I tried to tell him no….I didn’t think I had enough knowledge of the industry. But he said that didn’t matter—they were looking for a variety of businesspeople.”

Vetter’s misgivings notwithstanding, American Preferred looked pretty qualified to D.C.’s Medicaid managers: Along with three other HMOs, the company was awarded contracts with the city worth $214 million to provide health care for Medicaid recipients.

American Preferred was to be part of a plan to save the city up to $1 million per month by ending its pricey fee-for-service Medicaid plan. HMOs, the thinking went, are not only cheaper but also better for patients, who are encouraged to lead healthier lives and head off illness before they end up in the emergency room.

But the savings are on hold—along with the contracts. Last Wednesday, D.C. Superior Court Judge Russell F. Canan halted the Medicaid Managed Care Program until the city reaches an agreement with three HMOs that were passed over for the contract. In his ruling, Canan declared that the contract process “failed to meet the standards of reasonableness and rationality required by law.” The ruling was just the sort of contracting embarrassment the financial control board was called in to stop. Instead, it bore the board’s signature.

Along with its imperiousness and secrecy, the control board has gained renown for its haste in slicing up the District government. Its reliance on quick-and-easy solutions to the city’s fiscal crisis was on display last July, when the Health Care Finance Commission (HCFC) passed along the HMO contracts. The board approved them unanimously without so much as a hearing, or even much discussion.

What the board rubber-stamped was a Medicaid fix that was rife with mismanagement and cronyism. One of the contractors approved by the board was Chartered Health Plan Inc., an HMO that had been providing primary-care physicians for D.C. Medicaid recipients. In March, Chief Financial Officer Tony Williams blocked an $18.9-million city payment to Chartered for expenses that exceeded its contractual lump-sum payment. HCFC Commissioner Paul Offner insisted that the city owed Chartered only $6.2 million, but then-City Administrator Michael Rogers ordered that the company receive the full $18.9 million that it had requested. Chartered President Robert Bowles, the Washington Post later reported, was a generous Barry contributor who had co-chaired a major committee on the mayor’s 1994 transition team.

If the board had looked deeper, it would have found other problems. For example, the D.C. Council balked at approving the contracts on three separate votes. Councilmembers raised concerns that the HMOs—especially American Preferred—were merely Barry administration cronies dressed in scrub suits. Still, after the usual wringing of hands, the council approved the contracts days after the control board’s approval.

But the council’s objections proved prescient. Citing a flawed selection process, the three losers in the HMO contracting game challenged the awards before the D.C. Contract Appeals Board. They argued that the criteria used to rank HMO fitness were largely ambiguous and arbitrary. For example, they wondered, if a top criterion for selection was experience with Medicaid managed care in the District, how could American Preferred, a New Jersey firm with no history in the District, get higher overall ratings than George Washington University Health Plan? Also, HMOs received no extra points for supporting D.C. General Hospital, a criterion contained in the original proposal.

The managed care plan went into action on Nov. 1 and flamed out on Nov. 18 after Canan’s injunction. “On paper, it’s going to save us money,” says Offner. “But we haven’t experienced any savings up to now because we’ve got four or five different lawsuits to deal with….One thing for certain is that a bunch of lawyers will end up getting rich.”

Ward 8 Councilmember Sandy Allen, the newly installed chair of the Committee on Human Services, says no one should be surprised that the Medicaid fix ended in a tangle of lawyers. “While Medicaid managed care may benefit the District of Columbia, the commissioner and the Department of Health Office of Procurement have been extremely sketchy with providing the Council of the District of Columbia with facts about the program,” Allen wrote in a report issued Nov. 3.

Allen continued, “It is unfortunate that preventive action by the [control board] to resolve this matter did not occur.” The councilmember then went a step beyond the Contract Appeals Board decision and advocated scrapping the procurement process altogether and starting anew.

A council observer suggests that Allen’s high-and-mightiness around the contracting fiasco may have a more prosaic underpining. She may want the city to ditch the deal so that other HMOs such as Prime Health, which was 20 minutes late in getting in its original proposal and therefore shut out of original consideration, can get a second shot at the Medicaid contract.

But as District politicos and business types count the losers in the HMO fiasco, they should reserve the most honorable mention for the control board. After all, the anticipated $1 million in monthly savings had been figured into the 1998 budget. CP