Health Groups Wrangle Over Rich Contract : Insurance: $3.5-billion Champus pact ignites nasty fight between Aetna and Foundation.

The competition for a huge military health care contract in California and Hawaii has devolved into a gut-punching melee between rival health plans.

Experts say the fight over the $3.5-billion contract--the biggest of its kind in America--is but an early glimpse of the corporate warfare that will spread across the country when giant new health purchasing alliances put even richer purses up for grabs.

“This is just a warm-up fight,” Dr. Jacque J. Sokolov, a Los Angeles health care consultant, said Friday.

Aetna Life & Casualty Co. in July was awarded the five-year contract under the Civilian Health and Medical Program of the Uniformed Services (Champus), serving 800,000 military retirees and their dependents in California and Hawaii.

It is the Defense Department’s largest such program and its most visible because it is the showcase for managed care techniques that have proved so effective in controlling costs. The strategy is so popular with beneficiaries that the Pentagon plans to adopt it nationwide.

But Sacramento-based Foundation Health Corp., which has run the program since its inception five years ago, cried foul over the bidding and has fought bitterly ever since to keep Aetna from taking it over Feb. 1 as scheduled.

Foundation and another losing bidder convinced the Pentagon that there were problems with the bid evaluations, and the contract will be rebid this spring and awarded anew in July. But in the interim, the Defense Department ordered Aetna to assume the contract for the first year.

Foundation has twice failed to reverse that decision in court.

The antagonism is intensified by the fact that Aetna is Foundation’s key subcontractor on the existing Champus contract.

Aetna runs the network of health care providers that serve Champus in Southern California, where three-fifths of the beneficiaries live. Foundation runs the Northern California and Hawaii panel and handles overall administration.

As Aetna scrambles to replicate Foundation’s Northern California network by the Tuesday deadline, many doctors and hospitals are resisting its efforts to cut their fees and have refused to join.

“There’s still a lot in our group who aren’t signing,” said Dr. Philip J. Reilly, president of Sacramento Physicians Network, a group with more than 150 primary care physicians and 600 specialists.

Reilly personally agreed to join the panel, but he said the attitude on the part of some of his colleagues is that it’s a seller’s market for our services, so why sell cheap?

The result is that at least 13,000 Champus beneficiaries by Aetna’s estimate--more than 20,000 by Foundation’s--are faced with having to switch physicians.

The stakes are especially high for Foundation, for which the Champus contract has provided 40% of all revenue. Losing the contract forces it to lay off 500 to 700 claims processing employees in Sacramento--15% of the company’s work force. Layoffs will begin Tuesday unless a last-minute court appeal is successful, Foundation spokesman Kurt Davis said.

Aetna, for its part, says that all major contract transitions are turbulent.

“We are confident that the beneficiaries will be very satisfied,” Vice President Robert Kaplan said. For beneficiaries whose physicians have not joined the panel, Aetna is granting them a 60-day grace period before they must switch. In the meantime, Aetna will try to recruit such physicians.

But many may not sign.

“We’ve been squeezed enough,” Monterey pediatrician Pierre LaMothe said. Foundation paid his practice group $40 per office visit five years ago and has since pushed the fee down to $36.50.

Aetna offered $27. It later raised its bid to $34, but when LaMothe and his colleagues held fast, Aetna threatened to bring new doctors to nearby Ft. Ord and set them up in direct competition for LaMothe’s patients, he said.