Honolulu-based AlohaCare health plan has filed a federal lawsuit against the state and seeks to overturn the $1.5 billion Medicaid contract that was awarded in February to two Mainland companies.

The lawsuit was filed late yesterday afternoon in U.S. District Court by attorney Ed Kemper on behalf of AlohaCare, a nonprofit health plan that serves the state's Medicaid and Medicare population. Named as defendants are the state Department of Human Services and its director, Lillian Koller, who in February awarded the three-year contract to UnitedHealth Group Inc. and WellCare Health Plans Inc.

AlohaCare, the state's third-largest health plan, was one of five entities that submitted bids for the contract that covers services for 37,250 Medicaid beneficiaries in the state who are blind, disabled or aged.

UnitedHealth Group and WellCare Health Plans were the two lowest bidders and the state split the Quest Expanded Access contract between the two firms. UnitedHealth will do business here as Evercare; Ohana Health Plan is the Hawai'i subsidiary of WellCare, according to the suit.

In addition to the lawsuit, AlohaCare has filed an appeal of the contract, alleging that the deal will illegally exempt the two for-profit companies from paying the state's 4.265 percent premium tax. AlohaCare estimates this could total $65 million over the life of the contract.

The appeal is being considered by the state's Procurement Office. The contract is effective Nov. 1, pending the outcome of the appeal and lawsuit.

In its lawsuit, AlohaCare further alleges that the contract award is illegal because Florida-based WellCare Health Plans and Minnesota-based UnitedHealth Group are not properly licensed to do business in Hawai'i. AlohaCare also alleges that the awarding of the contract violates federal Medicaid law because neither company has an existing network of providers here to serve the relevant population.

The lawsuit also alleges that the contract would force recipients younger than 19 into a Medicaid Health Maintenance Organization, or HMO, which AlohaCare said is a violation of the Medicaid law.

"Through this federal lawsuit we will have access to state documents and e-mail exchanges that will reveal exactly what level of due diligence went into the preparation of this (request for proposal) and the legality of selecting these two Mainland companies with little experience in Hawai'i to provide Medicaid services to some of Hawai'i's most vulnerable populations," Kemper said in a statement.

Koller declined comment on specifics of the case yesterday.

The Legislature adopted a resolution this past session that asks the state auditor to conduct a financial and management audit of the Quest Expanded Access program.