• OFCCP Wins Again: Health Care Providers May Be "Subcontractors" with Affirmative Action Obligations
  • April 6, 2013
  • Law Firm: Holland Hart LLP - Denver Office
  • In the latest decision in the ongoing battle between the Office of Federal Contract Compliance Programs (OFCCP) and health care providers, a U.S. district court ruled that certain health care providers may be "subcontractors" covered by federal affirmative action laws and regulations. UPMC Braddock v. Harris. In that case, UPMC Health Plan, a health maintenance organization (HMO), contracted with the U.S. Office of Personnel Management (OPM) to provide insurance coverage and HMO services to federal employees participating in the Federal Employees Health Benefits Program (FEHBP). The HMO Health Plan then contracted with UPMC Braddock and two other hospitals to provide HMO medical services to covered federal employees.

    Two Key Findings

    Key to the court's decision were two findings: (1) the provision of medical services by the hospitals is a "nonpersonal service" within the definition of "subcontract" found in the affirmative action regulations; and (2) the HMO Health Plan's contract with the federal government (OPM) obligated it to provide medical services, as opposed to only insurance coverage, which it provided through the hospitals. Accordingly, the hospitals in the case qualified as "subcontractors" under both prongs of the definition:

    Subcontract means any agreement or arrangement between a contractor and any person... :

    (1) For the purchase, sale or use of personal property or nonpersonal services which, in whole or in part, is necessary to the performance of any one or more contracts; or

    (2) Under which any portion of the contractor's obligation under any one or more contracts is performed, undertaken or assumed.

    Although the Braddock case may be appealed, as it currently stands health care providers and insurers may have affirmative action obligations arising out of:

    • Any direct contracts with the federal government of $50,000 or more, such as contracts with the Veterans Administration, Health and Human Services (including Centers for Medicare and Medicaid Services), Department of Justice, and under the FEHBP;
    • Subcontracts of $50,000 or more as defined above, including those under FEHBP; or
    • Direct contracts and subcontracts under Medicare Parts C (Medicare Advantage) or D (prescription drug plans). OFCCP concedes that Medicare reimbursements under Parts A and B are financial assistance rather than government contracts and thus are not subject to affirmative action obligations.

    Currently, healthcare providers who are network providers in TRICARE—a U.S. Department of Defense healthcare program for military personnel and their families - are not "subcontractors" pursuant to a 2012 amendment to the TRICARE program. That could also change.

    As stated in OFCCP's Directive 301, OFCCP takes a case-by-case approach to determining health care provider and insurer coverage. However, OFCCP's Directive 293 (although rescinded by Directive 301), still provides some useful insight into the OFCCP's analysis. The bottom line is OFCCP remains very interested in health care providers and insurers who therefore, must carefully analyze and understand their federal government contacts with the foregoing in mind.

    Court Rejects Hospitals' Arguments to Avoid Subcontractor Status

    In Braddock, the UPMC hospitals made four arguments to counter their alleged status as "subcontractors" subject to affirmative action obligations. First, they argued that the contract between OPM and the HMO Health Plan specifically excluded medical providers from the contract's definition of "subcontractor," and therefore, they were not "subcontractors" under the regulations. To the contrary, the court found that because the parties had "no authority to define the contours of the equal opportunity laws governing federal procurement by devising their own meaning for the word 'subcontractor,' the definition of that word in the OPM/Health Plan contract has no effect on whether the hospitals lawfully may be regarded as government subcontractors and subject to the attendant legal obligations."

    The hospitals next argued that because the medical services they provided to federal employees are very personal in nature, rather than "nonpersonal services," the first prong of the "subcontractor" definition was not met. Because affirmative action regulations do not define the term "nonpersonal services," the court turned to the definition found in the Federal Acquisition Regulations (which also apply to federal contractors and subcontractors), and which contain a "materially identical definition of 'subcontract.'" That regulation provides that a non-personal services contract focuses on the fact that the employees performing the contract are not subject to the "supervision and control usually prevailing in relationships between the Government and its employees." It also explains that "[a] personal services contract is characterized by the employer-employee relationship it creates between the Government and the contractor's personnel." Under this generally-applicable standard, the court found that the hospitals' services were non-personal because the employees performing them were not controlled by the government.

    The hospitals also argued that they were not "subcontractors" under either prong of the definition because: (1) the medical services performed were not "necessary to the performance" of the HMO Health Plan's contract with OPM; and (2) they had not "performed, undertaken or assumed" any of the HMO Health Plan's obligations under the OPM contract. These arguments turned on whether the OPM contract obligated the HMO Health Plan to provide only insurance coverage, medical services or both. It was also based on the administrative ruling in OFCCP v. Bridgeport Hospital. There it was held that because Blue Cross/Blue Shield (not an HMO) was obligated under its contract with OPM to provide only insurance coverage, the health care providers to which it provided reimbursement for services rendered to federal employees were not "subcontractors" because they provided nothing necessary to the performance of the OPM contract and likewise undertook no obligation of the Blue Cross OPM contract. In contrast, in Braddock, the HMO Health Plan's contract with OPM required it to put an HMO into operation, and otherwise provide specified medical services, which it accomplished via the hospitals. Thus, unlike Blue Cross in the Bridgeport case, it was both an insurer and a medical services provider. Thus, the UPMC hospitals both performed a service necessary to the OPM contract and undertook at least one of its obligations.

    Finally, the hospitals made a contractual argument that because affirmative action obligations had not been incorporated into the hospitals' contracts with the HMO Health Plan, they were not binding on the hospitals. The court rejected that argument finding that such obligations were nonetheless incorporated into the contracts by operation of law because they express "a significant or deeply ingrained strand of public procurement policy."

    Unless the UPMC hospitals are successful in an appeal, it appears likely that OFCCP will pursue compliance audits of health care providers as outlined above.