Regence BlueCross BlueShield of Oregon has sued the state of Oregon after losing the state employee health plan business to a key competitor.

In a lawsuit filed in July in Multnomah County Circuit Court, Regence accused a state benefits oversight board of violating its own bid procedures in awarding a $30 million administration contract in April to Providence Health System. Regence also said the state based its choice on incorrect cost comparisons and unfair conclusions. "There's a lot of money involved here that somebody's going to have to pay if we're right, and it's going to be the state," said J. Bart McMullan Jr., Regence's president at the time, who is now working on special projects.

State officials say Regence found the process appropriate, until it bid and lost. Despite the lawsuit, the state is preparing to enroll workers in the new plan, a state attorney said.

"We don't see any reason to go backwards," said Keith Dubanevich , special counsel to state Attorney General John Kroger.

The lawsuit follows a swift cost-cutting move by the board that oversees employee benefits in response to the state's budget crisis.

Regence had provided a fully insured preferred provider plan for 101,000 state employees and dependents. But the Oregon Public Employees' Benefit Board decided in February to switch to a self-insured plan after Regence proposed a 16.4 percent rate increase. It adopted a temporary rule allowing it to renew the contract without formally requesting proposals.

Both Regence and Providence submitted proposals to administer the plan beginning in 2010. The board on April 21 picked Providence after finding the insurer's bid $2 million cheaper. The state's consultant also said Providence's "technologically superior" claims processing system would lead to fewer headaches for members.

Regence protested the board's decision on May 1. But the board refused to reconsider, in part because Regence did not complain about the state's selection process until it lost.

"Regence cannot now complain about having placed second in a race that it set in motion and in which it participated voluntarily every step of the way," board administrator Joan M. Kapowich wrote in her May 20 response to Regence's protest.

She also said that fielding two competing renewal offers allowed (the board) to negotiate a much better deal. "...Regence fell short in its ability to accommodate the new budgetary environment in which (the board) must operate," she wrote.

The state has not filed a formal response to the suit, but Providence has intervened in the case. Board spokeswoman Ingrid Norberg said the switch to self-insurance could save the state about $50 million a year.

McMullan said the state's fully insured plan generated about $380 million in claims for Regence in 2008. He said the switch would disrupt members' health services and not cover visits to Legacy Health System hospitals and Adventist Medical Center.

"We've been handling accounts this size for 20 or 30 years," he said. "We're pretty effective at it."

Brent Hunsberger,

brenthunsberger@news.oregonian.com