IWIF to buy its care provider

Major insurer rejects contract bids in favor of unprecedented deal

May 14, 1999|By Walter F. Roche Jr. | Walter F. Roche Jr.,SUN STAFF

Seven months ago, the state agency that provides workers' compensation insurance to thousands of Maryland businesses was engulfed in controversy when it attempted to extend for yet another year a $21 million no-bid managed care contract with a private firm.

Yesterday, the state Injured Workers Insurance Fund tried to end that controversy by buying the company.

Under the apparently unprecedented agreement disclosed yesterday, IWIF officials said the fund will pay $6.5 million to purchase the assets of Statutory Benefits Management Corp. of Baltimore. The primary business of SBMC is a $7 million a year contract with IWIF that expires June 30. The sale becomes final the same day.

In buying the company, IWIF threw out bids that had been submitted by 27 firms seeking to provide managed care services for injured workers across the state. The winner in that bidding process had been scheduled to be disclosed this month.

Late last year, a similar plan for IWIF to buy SBMC was on track until news became public and the plan was withdrawn.

IWIF Board Chairman Daniel McKew said yesterday the purchase decision was not a reversal of direction but a logical conclusion to a systematic review process. The reverse privatization occurs at a time when many government agencies are turning over the management of programs to the private sector.

McKew said the IWIF analysis showed the costs for an outside contractor would be "astronomical. It made all the sense in the world to do what we did," McKew added, saying he had carefully reviewed the data backing up the $6.5 million price tag.

"Would I have liked to see it lower? Sure, but I'm satisfied it's a fair price," McKew said.

Paul M. Rose, the head of IWIF, said that under the purchase agreement about 80 SBMC employees will become IWIF workers and the managed care operation will be taken in-house. IWIF also will assume the lease SBMC holds on office space on Loch Raven Boulevard in Towson, across the street from IWIF headquarters.

Asked for comment on the sale, Joseph Harlan, an SBMC vice president and attorney, said he was barred from making statements under the terms of the agreement, which was completed Wednesday. Rose said a payment of about half the purchase price was made then. The balance will be paid when the sale is final.

Rose said the agency decided to buy SBMC after closely reviewing the bids of the finalists for a new contract and determining that it would be cheaper to take over the operation. The review process, he said, was "very involved, impartial, fair and objective."

According to IWIF officials, the estimated annual cost of providing the same services in-house is $7 million, compared with "a significantly" higher figure under the bids that were under review.

Rose said the purchase was reviewed by attorneys and a private accounting firm, Arthur Andersen, which studied SBMC's financial and other records. He said members of the IWIF board, who have clashed recently with him on some issues, were kept "fully informed" of the process and approved the decision.

Doreen A. Horvath, IWIF executive vice president, said another factor in purchasing SBMC was the advantage of maintaining the existing system instead of switching to a new contractor.

SBMC "has processes and systems in place that already are servicing IWIF customers," she said, adding that the purchase would bring "substantial long-term cost savings" and "more integrated service to our policyholders and their employees."

Rose acknowledged yesterday that the computer software systems being used by SBMC were based on IWIF's system and were developed and upgraded under an IWIF contract with a private firm. But, Rose said, SBMC paid "a substantial portion" of those development costs.

An independent agency created some 75 years ago, IWIF is run by a board appointed by the governor. The agency competes directly with private insurance carriers to provide workers compensation coverage to thousands of Maryland employers, many of them government agencies.

In November, the IWIF board voted 5-1 to reject a proposal from Rose and his staff to extend the contract with SBMC for another year at an estimated cost of $7 million.

Before that vote, board member McKew, who has since become the chairman said, "There's been a black cloud over this contract. It seems to me the prudent thing to do would be to remove it and put some integrity back into the agency."

The original three-year SBMC contract was awarded in 1996 after Rose said he was throwing out the bids submitted by a dozen firms because none provided the precise services the agency needed. Instead he negotiated a "customized" contract with SBMC.

In a subsequent review, a private accounting firm concluded that the justification for throwing out the bids was "deficient, almost nonexistent."

The plan to buy SBMC surfaced in the fall when IWIF quietly requested consulting firms to submit proposals to evaluate an unnamed private firm IWIF was considering purchasing. Later, IWIF officials identified the company as SBMC.

Then Rose said the purchase plan had been placed on the back burner. He proposed the one-year contract extension. The IWIF board rebuffed that proposal and ordered that the contract be put out to bid. A formal invitation to bidders was issued in January.

Horvath said a transition team has been assigned to oversee the takeover of SBMC's personnel and operations.

Pub Date: 5/14/99

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