Summary

In April 1975, North Carolina entered into a 2-year, $376 million insurance agreement with Health Application Systems, Inc. (HAS), which made it responsible for paying for claims and assuming most of the administrative duties for the State's Medicaid program. GAO reviewed the North Carolina insurance contract as the first stage of a broader review of the Department of Health, Education, and Welfare's (HEW) and various States' policies and procedures for award of insurance-type contracts.

Out of 33 firms solicited, only HAS submitted a proposal for an insurance agreement. Competition was limited as a result of the innovative nature of and risks involved in the procurement. Competition was further limited because: (1) many firms could not do the required work; (2) data in the request for proposals (RFP) was insufficient for developing valid premium rates; (3) some firms believed the RFP was biased toward a preselected contractor; (4) at the time of the request, the legality of a Medicaid insurance contract under State laws was questionable; and (5) the State insurance laws placed bona fide insurance companies at a competitive disadvantage because of requirements that money be kept in a contingency reserve. The State's conclusion that performance under the contract period showed a cost reduction of $8.2 million compared to the State's prior experience is not supported. The State failed to take into account two factors which materially affected the program's costs: the use by HAS of advance payments to providers; and suspended claims which were not included in the analysis.