Health Net to buy some Sierra assets

Hiring expected but fate of most workers uncertain

March 04, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Ending its attempt to win back a Pentagon contract, Sierra Military Health Services Inc. has agreed to sell assets to its rival - though the fate of its employees, including 534 in the Baltimore headquarters, is still uncertain.

All 744 were sent layoff notices two weeks ago. Health Net Federal Services Inc., the California company soon to take over Tricare military health services in the region, said it intends to hire some Sierra employees but is setting up its regional headquarters in Arlington, Va.

Under an agreement announced yesterday, Health Net will acquire 2 percent of Sierra Military's assets. The transaction includes 11 commercial leases and all furnishings at military treatment centers, plus contracts with more than 26,000 network providers.

Neither company would disclose the price.

"It's a bittersweet kind of story," said David R. Nelson, president of Sierra Military. "Clearly we would have preferred to win the contract and expand the operation. That wasn't in the cards. Now the challenge becomes, how do we ensure the smoothest transition?"

He added: "At the end of the day I think what we've determined is that striking this agreement with Health Net is truly in the best interest of our customer - the customer being the Department of Defense - our patients in the Tricare program and, as importantly, our employees."

A subsidiary of Sierra Health Services Inc., Sierra Military was formed and based in Baltimore in 1998. It won a Pentagon contract that year to provide health care to 1.1 million active military, retirees and their dependents in a 13-state area through a program called Tricare.

But Health Net, a Tricare contractor in the West, came out on top when the Defense Department rebid the contract with a new, 21-state region.

Sierra's appeal to the General Accounting Office was rejected in December. Company officials pondered a court challenge but recently decided against the move. Its parent company is evaluating opportunities for the "reconstitution" of the health care provider's assets into an alternative business line, Nelson said.

But "in the context of Sierra Military," he said, "the end is assured."

Its contract runs out Aug. 31.

"We want to make this as seamless as possible ... to ensure that beneficiaries don't even notice the difference," said Lisa Haines, a Health Net spokeswoman.

Haines said it's unclear how many Sierra employees Health Net will hire, but the company has been visiting the service centers to collect resumes.

"Certainly these folks have experience in administrating the Tricare contract, and they're valuable resources," she said.

Employees aren't the only ones who will be affected by the change. Sierra is one of the largest tenants in the Candler Building at Market Place and Pratt Street, with 83,000 square feet. Including other offices at 8 Market Place and 750 E. Pratt St., it leases nearly 120,000 square feet in Baltimore - none of which Health Net will be assuming.

"We are in the process of evaluating tenants to sublease space as we speak," Nelson said.

Mark Deering, vice president of the commercial brokerage firm MacKenzie/Cushman & Wakefield in Lutherville, noted that Sierra's space is almost 1 percent of the downtown market. That's bad news for Baltimore's central business district, which already has a nearly 15 percent vacancy rate.

"It's a pretty good time to be a tenant," said J. William Miller, senior vice president at NAI KLNB, another commercial real estate firm.

The Candler Building's unusually large floor plan is a silver lining, Deering said. "That makes it unique and potentially appealing," he said.

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