Sierra Military Health Services Inc. of Baltimore said yesterday that it will pay $8 million to settle a dispute over a $1.2 billion contract that threatened to leave the managed care firm -- and its 550 employees -- without any business.
The U.S. Department of Defense awarded Sierra a contract last year to handle managed health care for about 1 million military dependents and retirees in a 13-state region reaching from Virginia to Maine under the government's Tricare program.
Foundation Health Federal Services Inc., a competing bidder in California, had disputed the award and filed a protest with the General Accounting Office. The GAO then ordered a new round of bids, prompting Sierra and the Defense Department to file their own protest against the GAO's decision.
The settlement announced yesterday allows Sierra to keep its five-year contract, which began in June and stayed in place during the dispute.
"We've continued to hire employees and set up offices here," said Elizabeth Heid, a spokeswoman for Sierra. "The protest was not a looming force, but it's great to put it behind us and focus on beneficiaries."
Sierra Military Health Services, which was lured to Baltimore by the city's $500,000 incentive package, employs about 400 at its offices in the Candler Building and another 150 throughout the region, Heid said. The company, a subsidiary of Sierra Health Services Inc. of Las Vegas, was formed solely to acquire the Tricare contract.
Sierra will pay $8 million to Foundation Health Federal Services, and the Defense Department is kicking in another $4 million, Heid said.
Jim Turner, a Defense Department spokesman, said the Pentagon decided to settle to "avoid the delay, expense, inconvenience and uncertainty of further protracted litigation." He said he could not speak to the specifics of the case, and that all Tricare managers were on vacation.
Putting together a contract proposal is expensive -- it cost Sierra $12 million to $15 million -- and the losing companies often put up a fight.
"It's very common," said Lisa Haines, a spokeswoman for Foundation Health Federal Services. "You're really putting a significant amount of time and expense into getting a contract, and if there is a clear reason why an award process should be looked at, a procedure is in place to protest the award."
Haines declined to discuss how much Foundation spent on the bid process, but said the settle- ment will cover the cost. Foundation is involved in a separate dispute over a $3.2 billion Tricare contract, which does not involve Sierra, and company officials decided to focus solely on the larger contract, she said.
Foundation had accused the Defense Department of weighing certain bid criteria in a different manner than it had originally stated, Haines said, and of giving Sierra points it did not deserve.
Doug Meyer, a fixed income analyst at Duff & Phelps Credit Rating in Chicago who covers Sierra Health Services, said the settlement made sense.
"In terms of the size of the program and the earnings projections that the company should realize from the operations, $8 million isn't that material," he said.
The Tricare program replaces the Civilian Health and Medical Program of the uniformed services, which was phased out in favor of a managed care format. The Northeast region was the last to be converted.
Sierra Health Services stock closed at $20.125 a share yesterday, up 50 cents.
Pub Date: 12/29/98