IG: Health care contractor benefited from sham veteran-owned businesses


Allegations relate to re-pricing VA health claims, a practice investigators said didn’t save money and benefited former insiders.

Health Net Inc., a large company with revenues of $11.9 billion in 2011, encouraged a Veterans Affairs Department employee to set up a service-disabled veteran-owned small business in 2006 so Health Net could increase its own business with the department that involved re-pricing health care claims, a VA inspector general review found.

The veteran-owned business, Enterprise Technology Solutions, performed little work under its contracts with VA and instead subcontracted the work to Health Net in violation of contracting rules, according to an investigation by the VA inspector general released Monday.

The IG staff reviewed five contracts held by Enterprise Technology Solutions valued at $82 million over a two-year period.

Health Net provides managed health care services for private companies and Medicare beneficiaries. In May 2010, its federal division, Health Net Federal Services, won a $17.2 billion five-year TRICARE contract to provide health insurance coverage to 3 million active-duty and retired military personnel in the Northeast, North Carolina and Wisconsin.

To ensure that it pays the lowest possible rate for health care services, VA uses a technique called claims re-pricing, in which a health services contractor compares VA allowable rates, based on fees charged by non-VA health care providers, to rates for providers in the contractor’s own network. “If the network rates are lower than the VA allowable rates, the contractor re-prices the claim and calculates the potential savings.” the IG wrote. The re-pricing contractor receives a percentage of the potential savings as a fee. Health Net has provided re-pricing services to the VA in California since 1999.

In 2006, the VA Health Administration Center decided to consolidate and centralize health claims re-pricing for five contracts. The IG said Health Net “encouraged” Donald Neilson, a former VA senior official, to establish a service-disabled veteran-owned small business to pursue the re-pricing contracts.

Neilson, who had served as director of VA Information Management Services, set up Enterprise Technology Solutions LLC in October 2006 and won three re-pricing contracts. Frank Kelly, Health Net's former director of VA Programs, established another service-disabled veteran-owned small business, Primeaux, which won two re-pricing contracts. ETS acquired Primeaux in April 2009.

VA regulations require a prime contractor to perform 51 percent of the work on any deal, but the IG found that the company “did not perform any work under the contracts, much less a minimum of 51 percent of the tasks required by the contracts.”

“We concluded that ETS did not process any of the claims nor did they have the expertise or capability of re-pricing claims and never intended to perform the work despite the terms and conditions of the contracts,” wrote Mark Myers, director of the Healthcare Resources Division in the IG’s Office of Contract Review.

What’s more, “VA personnel responsible for administering the contracts were fully aware that ETS was subcontracting all of the work to Health Net,” Myers wrote.

According to the review, the Veterans Health Administration sent all claims directly to Health Net, not ETS or Primeaux. ETS and Primeaux “were paid a significant fee just for using their [service-disabled veteran-owned small business] status to obtain the contract awards on behalf of Health Net,” the IG report alleged.

ETS earned fees from the Veterans Affairs Department based on the amount of savings it generated from claims re-pricing. The IG said the company’s revenue from those fees amounted to $82 million from January 2009 to December 2011.

Health Net, which also operates VA community-based outpatient clinics in eight states, reported in its annual filing with the Securities and Exchange Commission in December 2011 that revenue from all its work for VA, including claims re-pricing, totaled $34 million in 2010.

Not only did ETS fail to perform the re-pricing work on the contracts it received from VA, but both companies -- ETS and Health Net -- failed to deliver savings from claims re-pricing, the IG found. “Our review of fee claims for four patients for a one-month period at Perry Point, Md., found no instances where ETS’ rate was less than the Medicare rate; in fact, it was substantially higher than the Medicare rate,” the report said.

The IG recommended terminating the ETS contracts and said VA needs to determine whether claims re-pricing results in actual cost-savings. The IG did not recommend any actions against Health Net but said VA needs to ensure that former employees do not benefit unfairly from future procurements.

ETS did not return a call from Nextgov seeking comment; the company’s website was offline Tuesday.

Molly Tuttle, a spokeswoman for Health Net Federal Services said in an emailed statement, “Health Net Federal Services (LLC) believes that the findings of the Department of Veterans Affairs Office of Inspector General released Monday afternoon are inaccurate. Health Net will continue to cooperate with the VA’s review of this matter.”

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