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(Editor’s note: This post was updated at 3 p.m. An extended power outage led to the original version being posted with multiple errors.)

Insider Louisville has recieved an explosive letter, a pivotal document in a major health care showdown that threatens to become the defining moment of the Beshear Administration.

The letter written by Timothy Nolan, Coventry Cares executive vice president, to Jerry Haynes, CEO of Appalachian Regional Healthcare, charges that Kentucky’s mounting Medicaid services crisis only happened because of the Beshear Administrations’ ineptitude and conniving.

Unusual for its blunt language and serious allegations, the letter also is  unprecedented because ARH is suing Coventry Cares, claiming Coventry Cares failed to pay promptly undisputed Medicaid bills.

Lexington-based ARH, which operates nine hospitals in Kentucky’s poorest counties, also is suing the state of Kentucky, charging the state Medicaid reimbursement rates are below federally mandated minimums.

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Kentucky officials say, “Problem? What problem?”

Jill Midkiff, Kentucky’s Cabinet for Health and  Family Services director of communications,  told the Herald-Leader last week that cabinet officials don’t feel “this represents a problem with the managed care model.”

(See Insider Louisville’s Monday Business Brief today for more details.)

Midkiff did not return calls for comment.

The most damning point in Nolan’s letter is his allegation that state officials manipulated the transition to a Medicaid  managed care system from fee-for-services:
Coventry was explicity told that ARH was essential to meet the Commonwealth’s network adequacy standards, and we sat down with ARH in good faith and ultmately agreed to terms that paid your organization well above the Commonwealth’s Medicaid rate. Subsequently, we have learned that the Commonwealth held another managed care organization (MCO) to a different standard by allowing them to exclude ARH from its newtowrk. This disparity resulted in an unprecedented movement by higher-risk members from the other MCO to Coventry. To make matters worse, the contract between the MCOs and the Commonwealth requires the implementation of tha risk adjustment program to compesate MCOs for taking on members with more complex, high-cost and high-risk medical conditions. Yet, almost six full months in to managed Medicaid, the Commonwealth has not met its contractural obligation to carry out a risk adjustment program.

Translated, Beshear officials allowed Centene to exclude ARH, the biggest healthcare provider in the poorest part of of Kentucky. A mass of the most expensive to treat patients fled to Coventry, assuring the company can’t make a profit in the MCO system, forcing Coventry declare AHR “out of network.”

Nolan’s letter manages to be both a “don’t mess with us” letter and a concilliartory reach across the divide, with a core message of, “We both got played by the Beshear administation.”

ARH’s legal targets are Coventry and Centene for poor performance AND the cabinet for low payment AND for failing to meet a federal requirement (perhaps intentionally) of having an adequate network of providers BEFORE beginning the program.

(Kentucky officials were required to certify the adequacy of the networks to the Feds, who contribute 85 percent of Medicaid reimbursement.)

But Coventry’s Nolan clearly suspects a hand behind the curtain working for … well, no one knows.

So, the legal question for state and federal courts, Attorney General Jack Conway and State Auditor Adam Edelen is not just, “How did the MCO situation get so screwed up?” but “Why did Kentucky officials do what they did?’

More as we know more.

About Appalachian Regional Healthcare:  Appalachian Regional Healthcare is a not-for-profit health system serving 350,000 residents across Eastern Kentucky and Southern West Virginia. Operating ten hospitals, multi-specialty physician practices, home health agencies, HomeCare Stores and retail pharmacies, ARH is the largest provider of care and single largest employer in southeastern Kentucky and the third largest private employer in southern West Virginia. The ARH system employs nearly 5,000 employees and has a network of more than 600 active and courtesy medical staff members representing various specialties.

The back story on Medicaid changes in Kentucky: 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, 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.