The Pentagon yesterday awarded a five-year, $3 billion contract to a California company to manage part of the health insurance program for military dependents and retirees.
Officials of the Defense Department described it as one of the largest health care contracts in history.
The contract with Sacramento-based Foundation Health Corp., which covers more than 800,000 people currently enrolled in the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) in California and Hawaii, is the first step in a plan to privatize the management of the CHAMPUS system.
"This contract is innovative and unprecedented, in both the Pentagon and civilian health care industry," William Mayer, the assistant secretary of defense for health affairs, said at a news conference.
"Its size and scope is somewhat startling, even by Pentagon standards, but no other approach we've heard of comes closer in its potential benefit to military families and the Department of Defense," he said.
Until now, CHAMPUS has been administered by the Pentagon. But after cost increases in recent years in excess of 15 percent and persistent complaints about inadequate service, the Pentagon asked for and received congressional approval in October 1986 to turn over parts of its health care program to private in dustry.
The contract award to Foundation Health, which will include five other health care groups as subcontractors, was described by Pentagon officials as a demonstration project to see if private companies can administer CHAMPUS at a lower cost than the government.
According to the Pentagon's preliminary estimates, the Foundation Health bid represents cost savings of 5 percent in the first year and 8 percent to 10 percent in subsequent years.
If the company manages to meet those cost targets, the Pentagon might extend the company's contract to Arizona, New Mexico and Nevada after three years, and open regional contract bids for all the health care programs of the 6.2 million CHAMPUS beneficiaries in the United States.
If Foundation Health cannot make the cost targets of the contract, however, it could mean a severe financial liability for the 10-year-old company, which already provides health care benefits for some 300,000 people in six states.
Under the terms of the contract, Foundation Health is responsible for the first 3 percent of cost overruns, and about 40 percent of cost overruns after that, up to 120 percent of the original contract level.
Those terms were criticized heavily by the health care industry when they were first were announced two years ago, and resulted in the withdrawal of a number of major health care organizations from the CHAMPUS bidding process.