(Editor’s note: This post was updated at 4:30 p.m. The original version identified the wrong city as Centene’s Kentucky headquarters.)

Just when you thought the Beshear Administration’s Medicaid managed care organization plan couldn’t be a bigger mess, it becomes a bigger mess.

The financial advice website RTT News is reporting St. Louis-based Centene Corp. not only is pulling out of its MCO contract with Kentucky, it’s seeking damages from the state.

From the website:

Centene Corp. (CNC: Quote) announced Wednesday that its subsidiary, Kentucky Spirit Health Plan, has notified the Cabinet for Health and Family Services that it is exercising a contractual right that it believes allows Kentucky Spirit to terminate its Medicaid managed care contract with the Commonwealth of Kentucky effective July 5, 2013. In addition, Kentucky Spirit has filed a formal dispute with the Cabinet for damages incurred under the contract. “Since the inception of the contract, we have been in discussions with the Cabinet about our concerns with the Medicaid managed care program but have been unable to resolve our differences. Consequently, we do not believe there is a viable path to a sustainable managed care program in Kentucky. As a result, we are in the unfortunate position of having to take steps to terminate the contract and exit the market,” said Jesse Hunter, Executive Vice President of Operations for Centene.

RTT also reports Centene execs anticipate losing between $60 million to $70 million in the Kentucky MCO contract through the expiration date of September, 2013.

Our sources are telling us the exit of low-bidder Centene would completely drain all the projected savings from the Beshear administration’s much touted switch to managed care from a fee-for-services system, which was supposed to save the state almost $400 million. Centene bid $330 per member, per month, according to confidential internal state documents submitted to Insider Louisville. WellCare bid was based on $400 per member per month, and Coventry bid $436 per member per month.

Centene is one of two MCOs – the other is Bethesda, Md.-based Coventry Cares –  being sued by providers including Appalachian Regional Healthcare in Lexington.

ARH is suing Centene Corp. claiming Kentucky Spirit delayed paying $5.9 million in unchallenged services as of March.

At the same time the insurer is dragging its feet paying, the ARH suit states, Kentucky Spirit is collecting millions monthly in capitated payment from Kentucky Medicaid Assistance Program.

ARH also is claiming that Kentucky Spirit underpays for services, as well as renewing charges that state Medicaid reimbursment methodology is “grossly inadequate.”

Here’s Bloomberg BusinessWeek’s version of events in their post titled, “Medicaid provider to terminate contract with Ky.”

The Bloomberg post makes it clear Centene executives are serious, or at least seriously bluffing, talking about trying to transfer their 200 employees in Kentucky, most of whom work in Lexington, and handing over to another MCO their 140,000 Medicaid members.

The back story on Kentucky’s Medicaid Managed Care Meltdown:

In April, 2011, state officials asked health insurers to submit managed-care proposals for the $6 billion worth of care 800,000 poor and elderly Kentuckians receive annually under the federal/state Medicaid program. At the time, Gov. Steve Beshear touted the switch to managed care from fee-for-services as saving the state $375 million over the life of the initial three-year contracts. Insiders said officials in other states such as Georgia took as long as 18 months to make the change while Kentucky tried to do it in less than six months.

The three companies receiving MCO contracts were Centene, WellCare and Coventry Cares, all publicly traded companies. (Passport Health Plan, a Louisville-based non-profit controlled by providers, is the managed care insurer for Jefferson County and 17 surrounding counties.)

Each bid for the Kentucky MCO business was based on per-member, per-month health care costs projections. Low-bidder Centene bid $330 per member, per month, according to documents submitted to Insider Louisville. WellCare bid was based on $400 per member per month, and Coventry bid $436 per member per month.

The algorithm state officials used to choose the winners favored the low-cost plans, obviously, because therein lies the savings.

The state methodology initially assigned members to a plan, with the two lowest cost plans getting more members than the highest.

If Centene’s manged care system actually got each member to spend less than $330 per month, they’d make a profit. But crucial to getting costs that low would mean cutting reimbursements to health care providers such as doctors and pharmacies, which meant losing some.

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