CHICAGO (AP) — A new audit finds serious problems with the way Illinois awarded $7 billion in contracts last year for state employees’ health insurance.

In a report released Wednesday, Auditor General William Holland said Illinois awarded Blue Cross Blue Shield of Illinois, a unit of Health Care Service Corp., Chicago, contracts in 24 counties which the company had no primary care doctors.

Illinois Blue was the biggest winner in the contracts awarded last year, getting a 5-year contract totaling $6.6 billion.

The audit cited other problems, including that the state’s Department of Healthcare and Family Services overlooked a potential conflict of interest by using a consulting firm with business ties to insurers, including Illinois Blue.

“These are serious problems given that this involved over 400,000 enrollees and eligible dependents and $7 billion in taxpayer monies,” Holland wrote.

Department Director Julie Hamos defended the contracting in a letter to the auditor, saying the overall process was “executed in a fair and competitive manner.” Hamos said the audit report would be “a useful blueprint to our agency and others to strengthen the internal procedures that are necessary.”

The audit comes as the state is settling a lawsuit by insurers who lost in the bidding for the contracts. Officials at one of those companies, Health Alliance, Urbana, Ill., said they weren’t surprised by the auditor’s findings because “many were pointed out in our original protest of the procurement.”

Health Alliance spokeswoman Jocelyn Browning said the company is focused on submitting a bid in a new request for proposals that’s part of the settlement being worked out. Health Alliance insures about 90,000 state employees and their dependents.

“We want to remain a strong presence and partner for state of Illinois employees and their families for years to come,” Browning said in an email.

Among the auditor’s findings:

  • The Department of Healthcare and Family Services failed to identify potential conflicts of interest when it hired the benefits consulting company Mercer to help develop a request for proposals and to evaluate bidders. Mercer had business relationships with all the bidders, including with Blue Cross Blue Shield, which paid Mercer to evaluate some programs in 2009. ”Mercer helps a wide range of clients conduct searches for health insurance carriers,” said Mercer spokeswoman Stephanie Poe. “The work we performed for the (state of Illinois) was conducted in a fair, objective and professional manner. Mercer stands behind that work.”
  • Illinois Blue was awarded contracts for 20 counties it didn’t bid on. In 24 of the counties awarded to Illinois Blue, the company’s network didn’t have primary care physicians.

“We just received the report and are looking in to it,” said Illinois Blue representative Mary Ann Schultz.

During the evaluation of bids, Illinois Blue’s proposal got the fewest technical points, but its prices were lower. The audit said the prices in the bid were based on pricing the insurer receives in the highly competitive Chicago area.

“It was unclear whether the Blue Cross Blue Shield prices could be offered in other parts of the state,” the audit said.

-alb