Anthem Blue Cross and Blue Shield won’t be administering the state’s controversial DirigoChoice health insurance program beginning Jan. 1, 2008, because the company and state could not agree on contract terms.

State officials emphasized Wednesday that the 15,000 Mainers currently enrolled in DirigoChoice will not experience any disruption in their coverage and said the program will go forward under a new administrative plan. However, they would not elaborate on the nature of the transition, beyond saying that more information will be released to the public soon.

In a joint statement Wednesday, Anthem and the Dirigo Health Agency announced they had been “unable to agree on acceptable financial terms to extend the contract for one year.”

DirigoChoice is the subsidized health insurance program created under Gov. John Baldacci’s Dirigo Health Reforms Act of 2003. The reforms were intended to curb health care costs, broaden access to coverage for thousands of Mainers who lack health insurance and promote health care quality.

About one third of the 15,000 covered by DirigoChoice are enrolled through their small-business employers and two thirds are enrolled as individuals.

Baldacci stressed in a statement Wednesday that coverage for DirigoChoice members “will continue without interruption” and that details of the transition are being finalized.

“DirigoChoice will continue as an affordable, high-quality health insurance product after the contract with Anthem ends next year,” said Baldacci. “My goal is to bring more competition to the health care market in Maine and to pass reforms that will make insurance more affordable.”

Private, for-profit Anthem was the only insurance company that bid on the initial contract and it has administered DirigoChoice since the program took effect in January 2005. The company has realized a profit from the Dirigo business – $3.6 million in 2005 and $6.5 million in 2006, according to Anthem spokesman Mark Ishkanian.

A premium increase that took effect in January 2007 has helped sustain those profits, but Ishkanian said the increase was needed to offset the high cost of paying for health services for people covered as individuals, whose costs have been significantly higher than those covered in small employer-based groups.

Still, he said, despite “good faith” negotiations this spring and summer with the quasi-state Dirigo Health Agency, the parties were ultimately unable to find financial common ground. He declined to be more specific.

“We respect the fact that they need to go in a different direction, and we wish them the best of luck,” Ishkanian said Wednesday afternoon. He said Anthem has “worked hard to make [DirigoChoice] a success” and that the company will work closely with the Dirigo Health Agency to ensure a smooth “hand-off” to whatever administrative entity replaces it.

Karynlee Harrington, executive director of the Dirigo Health Agency, said Wednesday that contract negotiations stalled around several issues, including Anthem’s determination to reinstate an extra financial cushion to protect it from higher-than-anticipated costs. This prepaid cushion, sometimes called an “experience modification payment,” was included in the first two years of Dirigo’s operations and absent in this, the third year. Anthem wanted the payment, which amounted to $8 million in 2005 and $15 million in 2006, reinstated – even though the company returned most of the cushion to the state both years.

Harrington said that, overall, Anthem has spent about 82 cents of every DirigoChoice premium dollar to pay health care providers, using the remaining 18 cents for overhead and profit. But while people enrolled in employer-based groups have cost less than that to insure, those enrolled as individuals have cost closer to 100 percent of premiums, making it harder for Anthem to generate the kind of profits its shareholders want to see, she said.

While she would not comment on how DirigoChoice will be administered in the future, Harrington noted that even a not-for-profit organization needs to make enough money to stay in business over time.

“The question is, should a state program that’s focused on providing subsidized health coverage for low-income people have the same profit needs as a for-profit company,” she said.

Consumers for Affordable Health Care, a leading consumer advocacy group based in Augusta, said Tuesday that Anthem’s involvement in DirigoChoice has been problematic from the beginning. Hilary Schneider, director of programs and policy, said Dirigo’s direct competition with Anthem’s own insurance plans has undermined the company’s interest in seeing the subsidized product succeed, despite having realized a significant profit from it. Schneider said the organization is optimistic that a change in administration will allow DirigoChoice to be offered at a lower price to more people.

“This is a successful program with 15,000 covered lives. That’s a lot of market share, and it will be a tremendous asset to any partner,” she said.

A provision approved during the last legislative session allows the Dirigo Health Agency to operate as a self-insured entity rather than through Anthem or some other insurance company in the same way that some large employers and industry groups in Maine are self-insured. But that option, said Trish Riley, director of the Governor’s Office of Health Policy and Finance, would require the agency to have access to cash reserves that currently don’t exist.

In fact, Riley noted, cash for the low-income subsidies that make DirigoChoice unique has been scarce enough that the agency has had to stop enrolling Mainers who qualify for subsidies until July 2008, when officials hope a new funding source will have been identified.

But even with a new funding source, she said, Baldacci has indicated his preference for the Dirigo Health Agency to partner with a private company to administer the insurance program.

Dirigo Health is funded in part through savings in the health care system generated by the program. In July, Dirigo’s board of directors determined that the program will save $78 million in its third year of operation.

The Maine Association of Health Plans, which represents the state’s major health insurers, disputed the figure, saying the savings estimate is excessive. Maine’s major health insurers include Anthem, Aetna, Cigna HealthCare of Maine and Harvard Pilgrim Health Care.

The savings offsets did not come up during the Dirigo-Anthem negotiations, which reached an impasse Aug. 30, said Riley.

Wednesday’s statement by Anthem and Dirigo Health said the two organizations “have worked diligently to make this program a success and feel very good about what has been accomplished over the three years.”

The Associated Press contributed to this report.