A high-profile lawsuit challenging the state's award of $1.5 billion of contracts to two Mainland companies was tossed out by Federal Judge Susan Oki Mollway yesterday.

Honolulu-based AlohaCare, which had filed the lawsuit last month against the state Department of Human Services, said it disagreed with Mollway's decision and planned to appeal it. Charles Miller, an attorney for the state, said AlohaCare has now lost in attempts to overturn the contract award by appealing to the director of the Department of Human Services, the state Procurement Office and now U.S. District Court.

"We have a three-time loser that if you believe their press releases have never lost a case," said Miller, an attorney hired by the state to defend it in the federal case.

The controversy revolves around the awarding of contracts providing healthcare to 37,250 low-income seniors, blind and disabled persons who currently receive treatment through a fee-for-service program. In February, the Department of Human Services awarded the three-year contracts for the new QUEST Expanded Access Medicaid program to units of UnitedHealth Group Inc. and WellCare Health Plans Inc., both of which have headquarters on the Mainland.

AlohaCare appealed to Lillian Koller, head of the department, to overturn the awards, which she denied. In March, AlohaCare took its campaign public, saying it was seeking an appeal of the contracts through the state Procurement Office and that it believed the bidding process was flawed. That appeal also failed. It has since enlisted other groups to express their concerns about the contract award and also begun running television commercials about the situation.

In the federal suit filed in May, AlohaCare alleged the request for proposals was skewed in favor of for-profit health plans from the Mainland and that the state would be making an illegal rebate of the state's 4.265 percent premium tax. It said the two plans didn't have a network of physicians and medical service providers for the work and that lapses in medical care could occur when the contract went into effect on Nov. 1.

AlohaCare also called attention to UnitedHealth units being accused of claims processing failures in California and fraudulent rate-setting in New York, while Wellcare possibly being under investigation by the FBI and Florida officials for possible government overpayments.

Yesterday Mollway heard arguments from the state to dismiss the case and from AlohaCare for a temporary restraining order or preliminary injunction on the contracts. AlohaCare attorney Ed Kemper released a statement after Mollway's ruling, saying that flaws in the procurement process need to be examined.

"It is important to understand that today's decision has nothing to do with the substance of our allegations, which were never considered and are still being pursued by other parties in the remaining case against the state," Kemper said.

A separate lawsuit filed June 10 in federal court by the Hawaii Coalition for Health is supposed to be heard on July 21.

Koller issued a statement saying she was pleased with Mollway's decision and that the claims were "clearly without factual or legal merit, and it is unfortunate that AlohaCare — a disappointed bidder — has disparaged the winning bidders, frightened our Medicaid clients and confused the physicians who care for them."

Miller said it's been apparent through the appeals and lawsuit that the state went through a thorough bid process and that UnitedHealth and WellCare, while painted as Mainland healthcare plans, have held licenses in the state for years.

He said other issues, such as the tax and provider network, were frivolous since the Centers for Medicaid and Medicare Services had approved the tax arrangement and that UnitedHealth's and Wellcare's legal issues were examined by people who worked on the bid process.

Koller said both UnitedHealth and Wellcare have started signing up service providers and that physicians will be reimbursed at a higher rate than they are now. She said nonetheless, the state has applied to the Centers for Medicaid and Medicare Services to postpone implementation of the contract by three months until Feb. 1 so that clients, physicians, state quality assurance personnel and others are all prepared for the start of the managed care system.

Kemper said in addition to pursuing an appeal of Mollway's decision, AlohaCare would be cooperating on the lawsuit filed by the Hawaii Coalition for Health. That lawsuit alleges the state overlooked its own and federal requirements designed to ensure continuity of quality care for the Medicaid patients.

It also raises the same questions asked by AlohaCare whether the contract winners are properly licensed in the state and whether the state has the right to include disabled children under the managed care contracts.