[Federal Register Volume 64, Number 128 (Tuesday, July 6, 1999)]
[Rules and Regulations]
[Pages 36271-36274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16913]


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OFFICE OF PERSONNEL MANAGEMENT

48 CFR Parts 1615, 1632, and 1652

RIN 3206 AI67


Federal Employees Health Benefits (FEHB) Program and Department 
of Defense (DoD) Demonstration Project; and Other Miscellaneous Changes

AGENCY: Office of Personnel Management.

ACTION: Interim regulation.

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SUMMARY: OPM is issuing an interim regulation to implement the portion 
of the Defense Authorization Act for 1999 that establishes authority 
for a demonstration project under which certain Medicare and other 
eligible DoD beneficiaries can enroll in health benefit plans in 
certain geographic areas under the Federal Employees Health Benefits 
(FEHB) Program. The demonstration project will run for a period of 
three years from January 1, 2000, through December 31, 2002. This 
regulation specifies only the requirements that differ from existing 
FEHB Program regulations because of unique aspects of the demonstration 
project.

DATES: The effective date of this regulation is July 6, 1999. Comments 
must be received on or before September 7, 1999.

ADDRESSES: Comments must be sent to Abby L. Block, Chief, Insurance 
Policy and Information Division, OPM, Room 3425, 1900 E Street, NW., 
Washington, DC 20415-0001.

FOR FURTHER INFORMATION CONTACT: Michael W. Kaszynski, (202) 606-0004. 
You may submit comments and data by sending electronic mail (E-mail) 
to: [email protected].

SUPPLEMENTARY INFORMATION: The purpose of this regulation is to 
implement the portion of the Defense Authorization Act for 1999, Public 
Law 105-261, that amended chapter 55 of title 10, United States Code, 
and chapter 89 of title 5, United States Code, to establish a 
demonstration project under which certain Medicare and other eligible 
DoD beneficiaries can enroll in health benefit plans under the FEHB 
Program. The legislation was signed into law on October 17, 1998. The 
demonstration project will run for a period of three years from January 
1, 2000, through December 31, 2002. DoD, with OPM concurrence, has 
selected eight geographic areas to serve as demonstration project 
areas. The legislation requires that between 6 and 10 geographic areas 
be selected. No more than 66,000 individuals can participate in the 
demonstration project at any one time. Beneficiaries who are provided 
coverage under the demonstration project will not be eligible to 
receive care at a military medical treatment facility or to enroll in a 
health care plan under DoD's TRICARE program. Individuals who disenroll 
or cancel enrollment from the demonstration project are not eligible to 
reenroll in the demonstration project. OPM will establish separate risk 
pools for developing demonstration project enrollee premium rates. The 
Government contribution for demonstration enrollees will be paid by DoD 
and cannot exceed the percentage that the Government would have 
contributed had the enrollee been enrolled as a regular FEHB enrollee 
in the same health benefits plan and level of benefits.
    The legislation requires OPM and DoD to jointly produce and submit 
two reports to Congress designed to assess the viability of expanding 
access to the FEHB Program to certain Medicare and other eligible DoD 
beneficiaries permanently. The first report is due by April 1, 2001; 
the second is due by December 31, 2002. The reports will focus on 
enrollee participation levels, impact on Medicare Part B enrollment, 
impact on premium rates and costs as compared to regular FEHB 
enrollees, impact on accessibility of care in military treatment 
facilities, impact on medical readiness and training in military 
treatment facilities, impact on the cost, accessibility, and 
availability of prescription drugs for DoD beneficiaries, and 
recommendations on eligibility and enrollment.
    OPM has determined it necessary to specify certain differences from 
existing FEHB Program regulations because of the unique features of the 
demonstration project. This regulation amends chapter 16 of title 48, 
Code of Federal Regulations (CFR) to enumerate these differences.
    When developing premium rates for demonstration project community-
rated carriers, OPM will not use similarly sized subscriber group 
(SSSG) rating methodologies to determine the reasonableness of the 
carrier's demonstration project premium rates. We are not using SSSG's 
because we have learned from our consultations with community-rated 
carriers that

[[Page 36272]]

there are no similar employer sponsored groups with which to compare. 
Instead we are benchmarking premiums against adjusted community-rates 
if available, Medigap offerings, or other similar products to determine 
reasonableness. We believe that these data will result in competitively 
developed premium rates.
    We have determined the most cost effective and administratively 
efficient way for the federal government to track expenditures is to 
allow experience-rated carriers participating in the demonstration 
project to draw funds from their existing FEHB Letter of Credit (LOC) 
account to pay demonstration project benefits costs in the same manner 
as they do for benefits costs incurred by regular FEHB members. 
However, experience-rated carriers must account separately for health 
benefits charges paid using demonstration project funds and regular 
FEHB funds. Direct administrative costs attributable solely to the 
demonstration project will be fully chargeable to the demonstration 
project. Indirect administrative costs associated with the 
demonstration project will be allocated to the demonstration project 
based on the percentage obtained by dividing the dollar amount of 
claims processed under the demonstration project by the total claims 
processed for FEHB Program activity. This same percentage will also be 
used to determine the amount of the Carrier's service charge that will 
be allocated to the demonstration project.
    Because of the way premiums are collected from enrollees and 
annuitants and the way the government distributes them to carriers, 
there will be a period between the effective date of demonstration 
project enrollees' coverage and the first payment of premium into 
experience-rated carriers' LOC accounts. DoD enrollments will become 
effective on January 1, 2000, and the first demonstration project 
premiums will be withheld from annuities on February 1, 2000. The 
enrollees' and Government's share of the premiums are due to OPM from 
DoD on the first day of each month thereafter through the conclusion of 
the demonstration project. However, since enrollees will be entitled to 
coverage for at least a month before the first premium payment, there 
won't be an opportunity for carriers to build a sufficient cash flow to 
cover the costs of the demonstration project group during this period. 
By allowing experience-rated carriers to draw on their existing LOC 
accounts in the same manner as for regular FEHB claims, this problem is 
addressed.
    Since this is a start-up program with no specific experience, we 
have determined that experience-rated carrier risk must be mitigated in 
order to keep premiums as low as possible. Experience rated-carriers 
will report on demonstration project revenues, health benefits charges, 
and administrative expenses as directed by OPM and they will perform a 
final reconciliation of revenue and costs for the demonstration group 
at the end of the demonstration project. Experience-rated carrier costs 
in excess of the premiums will be reimbursed first from the carrier's 
demonstration project Contingency Reserve and then from OPM's 
Administrative Reserve. Any surplus after the final accounting will be 
paid by carriers to OPM's Administrative Reserve. Should the program be 
extended beyond the three year demonstration project period, we will 
regulate to address any necessary changes to these provisions.
    We also have made minor editorial changes to clarify title 48, CFR.

Waiver of Notice of Proposed Rule Making

    Pursuant to section 553(b)(3)(B) of title 5 of the United States 
Code, I find that good cause exists for waiving the general notice of 
proposed rulemaking. The notice is being waived because FEHB Program 
carriers need the information contained in these regulations now in 
order to have sufficient time to develop reserve accounts and premiums 
for enrollments to be effective January 1, 2000, as required by Public 
Law 105-261.

Regulatory Flexibility Act

    I certify that this regulation will not have a significant economic 
impact on a substantial number of small entities because the regulation 
will only affect health insurance carriers under the Federal Employees 
Health Benefits Program.

Executive Order 12866, Regulatory Review

    This rule has been reviewed by the Office of Management and Budget 
in accordance with Executive Order 12866.

List of Subjects in 48 CFR Parts 1615, 1632, and 1652

    Government employees, Government procurement, Health insurance.

Office of Personnel Management.
Janice R. Lachance,
Director.

    For the reasons set forth in the preamble, OPM is amending chapter 
16 of title 48, CFR as follows:

CHAPTER 16--OFFICE OF PERSONNEL MANAGEMENT FEDERAL EMPLOYEES HEALTH 
BENEFITS ACQUISITION REGULATIONS

    1. The authority citation for 48 CFR Parts 1615, 1632, and 1652 
continues to read as follows:

    Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c); 48 CFR 1.301.

PART 1615--CONTRACTING BY NEGOTIATION

Subpart 1615.8--Price Negotiation

    2. In Sec. 1615.802 paragraph (e) is added to read as follows:


1615.802  Policy.

* * * * *
    (e) Exceptions for the 3-Year DoD Demonstration Project (10 U.S.C. 
1108).
    (1) Similarly sized subscriber group (SSSG) rating methodologies 
will not be used to determine the reasonableness of a community-rated 
carrier's demonstration project premium rates. Carrier premium rates 
will not be adjusted for equivalency with SSSG rating methodologies. 
Carriers will benchmark premiums against adjusted community rates if 
available, Medigap offerings, or other similar products.
    (2) Community-rated carriers must propose premium rates with cost 
or pricing data and rating methodology, and experience-rated carriers 
must propose premium rates with cost data and rating methodology 
regardless of group size or annual premiums.

PART 1632--CONTRACT FINANCING

Subpart 1632.1--General

    3. In Sec. 1632.170 paragraph (c) is added to read as follows:


1632.170  Recurring premium payments to carriers.

* * * * *
    (c) Exceptions for the 3-Year DoD Demonstration Project (10 U.S.C. 
1108).
    (1) Carriers will create and maintain separate risk pools for 
demonstration project experience and regular FEHB experience for the 
purpose of establishing separate premium rates.
    (2) OPM will create and maintain a demonstration project 
Contingency Reserve separate from the regular FEHB Contingency Reserve 
for each carrier participating in the demonstration project.
    (3) Experience-rated carriers participating in the demonstration 
project will draw funds from their Letter of Credit (LOC) account to 
pay demonstration project benefits costs in the same manner as they do 
for benefits

[[Page 36273]]

costs incurred by regular FEHB members. Experience-rated carriers will 
account separately for health benefits charges paid using demonstration 
project funds and regular FEHB funds. Direct administrative costs 
attributable solely to the demonstration project will be fully 
chargeable to the demonstration project. Indirect administrative costs 
associated with the demonstration project will be allocated to the 
demonstration project based on the percentage obtained by dividing the 
dollar amount of claims processed under the demonstration project by 
the total claims processed for FEHB Program activity. This same 
percentage will also be used to determine the amount of the experience-
rated carrier's service charge that will be allocated to the 
demonstration project.
    (4) Carriers will report on demonstration project revenues, health 
benefits charges, and administrative expenses as directed by OPM. 
Experience-rated carriers will perform a final reconciliation of 
revenue and costs for the demonstration group at the end of the 
demonstration project. Experience-rated carrier costs in excess of the 
premiums will be reimbursed first from the carrier's demonstration 
project Contingency Reserve and then from OPM's Administrative Reserve. 
Any surplus after the final accounting will be paid by experience-rated 
carriers to OPM's Administrative Reserve.

PART 1652--CONTRACT CLAUSES

Subpart 1652.2--Texts of FEHBP Clauses

    4. Section 1652.215-70 is amended by removing ``(JAN 1998)'' from 
the clause heading and adding in its place ``(JAN 2000)'' and by adding 
a new paragraph (d) to read as follows:


1652.215-70  Rate Reduction for Defective Pricing or Defective Cost or 
Pricing Data.

* * * * *
    (d) Exception for the 3-Year DoD Demonstration Project (10 U.S.C. 
1108).
    Similarly sized subscriber group (SSSG) rating methodologies shall 
not be used to determine the reasonableness of the carrier's 
demonstration project premium rates. The Carrier's rates shall not be 
adjusted for equivalency with SSSG rating methodologies. The Carrier 
shall benchmark premiums against adjusted community rates if available, 
Medigap offerings, or other similar products.
    5. Section 1652.216-70 is amended by removing ``(JAN 1998)'' from 
the clause heading and adding in its place ``(JAN 2000)'' and by adding 
a new paragraph (c) to read as follows:


1652.216-70  Accounting and price adjustment.

* * * * *
    (c) Exception for the 3-Year DoD Demonstration Project (10 U.S.C. 
1108).
    Similarly sized subscriber group (SSSG) rating methodologies shall 
not be used to determine the reasonableness of the Carrier's 
demonstration project premium rates. The Carrier's rates shall not be 
adjusted for equivalency with SSSG rating methodologies. The Carrier 
shall benchmark premiums against adjusted community rates if available, 
Medigap offerings, or other similar products.
    6. Section 1652.216-71 is amended by revising the clause to read as 
follows:


1652.216-71  Accounting and allowable cost.

* * * * *

Accounting and Allowable Cost (FEHBAR 1652.216-71) (JAN 2000)

    (a) Annual Accounting Statements. (1) The Carrier shall furnish 
to OPM an accounting of its operations under the contract. In 
preparing the accounting, the Carrier shall follow the reporting 
requirements and statement formats prescribed by OPM in the FEHBP 
Experience-Rated Carrier and Service Organization Audit Guide 
(Guide).
    (2) The Carrier shall have its Annual Accounting Statements and 
that of its underwriter, if any, audited in accordance with the 
Guide. The Carrier shall submit the audit report and the Annual 
Accounting Statements to OPM in accordance with the requirements of 
the Guide.
    (3) Based on the results of the independent audit prescribed by 
the Guide and/or a Government audit, the Carrier shall adjust its 
annual accounting statements (i) By amounts found not to constitute 
actual, reasonable, allowable, or allocable costs; and/or (ii) to 
reflect prior overpayments or underpayments.
    (4) The Carrier shall develop corrective action plans, in 
accordance with and as defined by the Guide, to resolve all audit 
findings.
    (b) Definition of costs. (1) The Carrier may charge a cost to 
the contract for a contract term if the cost is actual, allowable, 
allocable, and reasonable. In addition, the Carrier must:
    (i) On request, document and provide accounting support for the 
cost and justify that the cost is reasonable and necessary; and
    (ii) Determine the cost in accordance with: (A) The terms of 
this contract, and (B) Subpart 31.2 of the Federal Acquisition 
Regulation (FAR) and Subpart 1631.2 of the Federal Employees Health 
Benefits Program Acquisition Regulation (FEHBAR) applicable on the 
first day of the contract period.
    (2) In the absence of specific contract terms to the contrary, 
the Carrier shall classify contract costs in accordance with the 
following criteria:
    (i) Benefits. Benefit costs consist of payments made and 
liabilities incurred for covered health care services on behalf of 
FEHBP subscribers less any refunds, rebates, allowances or other 
credits received.
    (ii) Administrative expenses. Administrative expenses consist of 
all actual, allocable, allowable and reasonable expenses incurred in 
the adjudication of subscriber benefit claims or incurred in the 
Carrier's overall operation of the business. Unless otherwise stated 
in the contract, administrative expenses include, in part: all taxes 
(excluding premium taxes, as provided in section 1631.205-41), 
insurance and reinsurance premiums, medical and dental consultants 
used in the adjudication process, concurrent or managed care review 
when not billed by a health care provider and other forms of 
utilization review, the cost of maintaining eligibility files, legal 
expenses incurred in the litigation of benefit payments and bank 
charges for letters of credit. Administrative expenses exclude the 
cost of Carrier personnel, equipment, and facilities directly used 
in the delivery of health care services, which are benefit costs, 
and the expense of managing the FEHBP investment program which is a 
reduction of investment income earned.
    (iii) Investment income. The Carrier shall invest and reinvest 
all funds on hand, including any in the Special Reserve or any 
attributable to the reserve for incurred but unpaid claims, which 
are in excess of the funds needed to discharge promptly the 
obligations incurred under the contract. Investment income 
represents the net amount earned by the Carrier after deducting 
investment expenses. Investment expenses are those actual, 
allowable, allocable, and reasonable contract costs which are 
attributable to the investment of FEHBP funds, such as consultant or 
management fees.
    (iv) Other charges. (A) Mandatory statutory reserve. Charges for 
mandatory statutory reserves are not allowable unless specifically 
provided for in the contract. When the term ``mandatory statutory 
reserve'' is specifically identified as an allowable contract charge 
without further definition or explanation, it means a requirement 
imposed by State law upon the Carrier to set aside a specific amount 
or rate of funds into a restricted reserve that is accounted for 
separately from all other reserves and surpluses of the Carrier and 
which may be used only with the specific approval of the State 
official designated by law to make such approvals. The amount 
chargeable to the contract may not exceed an allocable portion of 
the amount actually set aside. If the statutory reserve is no longer 
required for the purpose for which it was created, and these funds 
become available for the general use of the Carrier, the Carrier 
shall return to the FEHBP a pro rata share based upon FEHBP's 
contribution to the total Carrier's set aside in accordance with FAR 
31.201-5.
    (B) Premium taxes. When the term ``premium taxes'' is used in 
this contract without further definition or explanation, it means a 
tax, fee, or other monetary payment directly or indirectly imposed 
on FEHB premiums by any State, the District of Columbia, or the 
Commonwealth of Puerto Rico or by any political subdivision or other 
governmental authority of those entities, with the sole exception of 
a tax on net income or profit, if that tax, fee, or payment is

[[Page 36274]]

applicable to a broad range of business activity.
    (c) Certification of Accounting Statement Accuracy. (1) The 
Carrier shall certify the annual accounting statement in the form 
set forth in paragraph (c)(3) of this clause. The Carrier's chief 
executive officer and the chief financial officer shall sign the 
certificate.
    (2) The Carrier shall require an authorized agent of its 
underwriter, if any, also to certify the annual accounting 
statement.
    (3) The certificate required shall be in the following form:

Certification of Accounting Statement Accuracy

    This is to certify that I have reviewed this accounting 
statement and to the best of my knowledge and belief:
    1. The statement was prepared in conformity with the guidelines 
issued by the Office of Personnel Management and fairly presents the 
financial results of this reporting period in conformity with those 
guidelines.
    2. The costs included in the statement are actual, allowable, 
allocable, and reasonable in accordance with the terms of the 
contract and with the cost principles of the Federal Employees 
Health Benefits Acquisition Regulation and the Federal Acquisition 
Regulation.
    3. Income, rebates, allowances, refunds and other credits made 
or owed in accordance with the terms of the contract and applicable 
cost principles have been included in the statement.
    4. If applicable, the letter of credit account was managed in 
accordance with 5 CFR part 890, 48 CFR chapter 16, and OPM 
guidelines.
Carrier Name:----------------------------------------------------------
----------------------------------------------------------------------

Name of Chief Executive Officer:
(Type or Print)
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Name of Chief Financial Officer:
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Signature of Chief Executive Officer:
----------------------------------------------------------------------

Signature of Chief Financial Officer:
----------------------------------------------------------------------

Date Signed:
----------------------------------------------------------------------

Date Signed:
----------------------------------------------------------------------

Underwriter:-----------------------------------------------------------
Name and Title of Responsible Corporate Official:
(Type or Print:)-------------------------------------------------------
Signature of Responsible Corporate Official:
----------------------------------------------------------------------

Date Signed:-----------------------------------------------------------

(End of Certificate)

    (d) Exceptions for the 3-Year DoD Demonstration Project (10 
U.S.C. 1108).
    (1) The Carrier shall draw funds from its Letter of Credit (LOC) 
account to pay demonstration project benefits costs in the same 
manner as it does for benefits costs incurred by regular FEHB 
members. The Carrier shall account separately for health benefits 
charges paid using demonstration project funds and regular FEHB 
funds. Direct administrative costs attributable solely to the 
demonstration project shall be fully chargeable to the demonstration 
project. Indirect administrative costs associated with the 
demonstration project will be allocated to the demonstration project 
based on the percentage obtained by dividing the dollar amount of 
claims processed under the demonstration project by the total claims 
processed for FEHB Program activity. This same percentage will also 
be used to determine the amount of the Carrier's service charge that 
will be allocated to the demonstration project.
    (2) The Carrier shall submit a separate annual accounting 
statement and monthly incurred claims report for demonstration 
project experience.

(End of Clause)

    7. Section 1652.232-71 is amended by removing ``(Jan. 1999)'' from 
the clause heading and adding in its place ``(JAN 2000),'' and adding a 
new paragraph (f) to read as follows:


1652.232-71  Payments--experience-rated contracts.

* * * * *
    (f) Exception for the 3-Year DoD Demonstration Project (10 U.S.C. 
1108).
    The Carrier will perform a final reconciliation of revenue and 
costs for the demonstration project group at the end of the 
demonstration project. Costs in excess of the premiums will be 
reimbursed first from the Carrier's demonstration project Contingency 
Reserve and then from OPM's Administrative Reserve. Any surplus after 
the final accounting will be paid by the Carrier to OPM's 
Administrative Reserve.

(End of Clause)

[FR Doc. 99-16913 Filed 7-2-99; 8:45 am]
BILLING CODE 6325-01-U