[Federal Register Volume 68, Number 158 (Friday, August 15, 2003)]
[Proposed Rules]
[Pages 48851-48863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20857]


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OFFICE OF PERSONNEL MANAGEMENT

48 CFR Parts 1601, 1602, 1604, 1615, 1631, 1632, 1644, and 1652

RIN 3206-AJ20


Federal Employees Health Benefits; Acquisition Regulation: Large 
Provider Agreements, Subcontracts, and Miscellaneous Changes

AGENCY: Office of Personnel Management.

ACTION: Proposed regulation.

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SUMMARY: The Office of Personnel Management (OPM) is issuing a proposed 
regulation to amend the Federal Employees Health Benefits Acquisition 
Regulation (FEHBAR). We are proposing a new policy that establishes 
notification and information requirements, including audit, for Federal 
Employees Health Benefits (FEHB) Program experience rated carriers' 
large provider agreements. The proposed regulation also modifies the 
threshold for review of carrier subcontracts; revises the definitions 
of Cost or Pricing Data and Experience Rate to reflect mental health 
parity requirements effective with the 2001 contract year; updates the 
records retention period, updates the FEHB Program Clause Matrix, and 
conforms various subpart and paragraph references in the Federal 
Acquisition Regulation (FAR) revisions made since we last updated the 
FEHBAR.

DATES: Comments must be received on or before October 14, 2003.

ADDRESSES: Send written comments to Abby L. Block, Deputy Associate 
Director, Employee and Family Services, Strategic Human Resources 
Policy Division, Office of Personnel Management, Washington, DC 20415-
3601; or deliver to OPM, Room 3425, 1900 E Street NW., Washington, DC; 
or FAX to (202) 606-0633.

FOR FURTHER INFORMATION CONTACT: Michael W. Kaszynski, (202) 606-0004; 
or send email to [email protected].

SUPPLEMENTARY INFORMATION: The primary purpose of this rulemaking is to 
provide for additional OPM oversight of the FEHB Program carriers' 
contract costs that are charged to the Government. Since the beginning 
of the Program, we have maintained oversight of FEHB carriers' costs, 
including their subcontractor costs. We have specified standard 
contracting requirements for review and audit of those costs and have 
routinely updated our requirements as necessary. Historically, we did 
not consider providers of medical services or supplies to be 
subcontractors as the term is defined in the Federal Acquisition 
Regulation (FAR) because hundreds of thousands of such agreements 
between carriers and providers are in place, and until recently, the 
dollar value of each individual agreement was relatively small. 
However, the healthcare delivery system has changed over the years and 
new large healthcare delivery entities now play a significant role in 
the healthcare industry. FEHB carriers contract with those types of 
entities for the delivery of services that represent a significant 
portion of individual carriers total costs charged to the FEHB Program, 
and in the aggregate represent a sizeable portion of overall Program 
costs. Because of the impact of these costs on the FEHB Program, we are 
expanding our oversight in this area. Even though large providers of 
medical services or supplies are not defined as subcontractors under 
the FEHB Program, the proposed regulatory changes would bring them 
under the umbrella of the FEHBAR and subject them to audit requirements 
currently applicable to carriers and their subcontractors. Some but not 
all FEHB carriers' large provider agreements already provide for a 
limited right to audit. We believe the provision should be in 
regulation rather than in individual contracts to make the context 
clear, explicit and consistent for all experience-rated carriers by 
mirroring the regulatory requirements for subcontracting arrangements 
that are already in place. As is currently the case with audit findings 
in subcontract arrangements, any audit findings regarding large 
providers would be referred to the FEHB carriers holding the provider 
contract.
    For FAR audit purposes, we define a large provider agreement as an 
agreement between (1) an FEHB carrier, at least 25 percent of whose 
total contracts are comprised of FEHB enrollee contracts, and (2) a 
provider, where the total costs charged to the FEHB carrier for a 
contract term for FEHB members, including benefits and services, are 
reasonably expected to exceed 5 percent of the carrier's total FEHB 
benefits costs, or 5 percent of the carrier's total FEHB administrative 
costs (where the provider is not responsible for benefits costs under 
the agreement). We will use the FEHB Program Annual Accounting 
Statement for the prior contract year to determine the 5 percent 
threshold.
    The proposed regulation requires experience rated carriers to meet 
minimum notification and information requirements with respect to any 
new

[[Page 48852]]

procurement, renewal, significant modification, or option relating to 
such a provider agreement. Examples of information to be provided are a 
description of the supplies or services required, basis for 
reimbursement, reason the proposed provider was selected, method of 
contracting and competition obtained, methodology used to compute 
profit, and provider risk provisions. This new oversight initiative 
reflects OPM's need to be informed of the types of carrier large 
provider agreements and their terms and conditions, because of the 
value and cost of such agreements to the FEHB Program.
    The proposed regulation authorizes the contracting officer to 
request additional information after he or she receives the carrier's 
notification and required information and prior to award of a large 
provider agreement, and any time during the performance of the 
agreement. The contracting officer will give the carrier either written 
comments on the agreement, or will give written notice that there will 
be no comments. If the contracting officer provides comments, the 
carrier must tell the contracting officer how it intends to address the 
contracting officer's concerns.
    In the event the carrier awards the large provider agreement 
without providing notification and addressing each of the contracting 
officer's written concerns, the contracting officer may disallow the 
carrier's costs incurred under the agreement.
    Under the proposed regulation, large providers must retain and make 
available for Government inspection all records applicable to the 
carrier's provider contractual agreement. The Government will have 
audit rights with respect to large provider contractual agreements that 
are the same as for carriers. The contract clause at 1652.204-74, Large 
provider agreements, contains a flow-down provision that requires the 
carrier to insert the clause in all large provider agreements.
    We are updating our policy for FEHB Program subcontracting consent 
which currently requires advance approval of carrier subcontracts or 
modifications that exceed $100,000. The proposed regulation increases 
the threshold so that subcontracts and modifications will require 
advance approval only if they equal or exceed $550,000. The regulation 
also clarifies the cost components the carrier must consider in 
determining the $550,000 threshold. Under the Competition in 
Subcontracting Clause (FAR 52.244-5), however carriers must still 
comply with the competition requirements even when the subcontract does 
not require OPM approval.
    We have added a new section in part 1631, Contract Cost Principles 
and Procedures, concerning the inferred reasonableness of a 
subcontract's costs. If the carrier follows the notification and 
consent requirements of 1652.244-70, Subcontracts, and later obtains 
the contracting officer's consent or ratification of the subcontract's 
costs, then the reasonableness of the subcontract's costs will be 
inferred.
    The modified definitions of Cost or Pricing Data and Experience 
Rate incorporate mental health benefits capitation rates to reflect the 
new mental health parity requirements in the FEHB Program effective as 
of the 2001 contract year. Specifically, we are clarifying that mental 
health capitation rates are considered to be cost or pricing data and 
are included as actual paid claims and administrative expenses in 
experience rating.
    We are also updating the contractor records retention requirement 
for carrier rate submissions, patient claims, large provider 
agreements, and subcontracts to 6 years. Earlier in the history of the 
Program when virtually all records were maintained in paper format, we 
established a requirement for carriers to retain claims records for 
three years and financial records for five years. Since electronic data 
storage significantly reduces the maintenance burden and the Program 
can benefit from having records available for a slightly longer period, 
we are modifying and standardizing the records retention requirement. 
All carriers' records are subject to The Health Insurance Portability 
and Accountability Act (HIPAA) standards for privacy of individually 
identifiable health information.
    To conform with the current FAR sections, we have redesignated and/
or retitled certain sections and references in FEHBAR parts 1615, 1632, 
and 1652. No material changes were made to these three Parts. Old 
FEHBAR 1615.1, General Requirements for Negotiation, is retitled 
``Source Selection Processes and Techniques.'' Old FEHBAR 1615.170, 
Negotiation authority, is now section 1615.070. Old FEHBAR 1615.4, 
Solicitations and Receipt of Proposals and Quotations, is now 1615.2, 
Solicitations and Receipt of Proposals and Information. Old 1615.401, 
Applicability, is now 1615.270. Old FEHBAR 1615.6, Source Selection, is 
now 1615.3. Old FEHBAR 1615.602, Applicability, is now 1615.370. We 
moved the provisions in old FEHBAR Subparts 1615.8, Price Negotiation, 
and 1615.9, Profit, to Subpart 1615.4, Contract Pricing, to correspond 
with the FAR. We removed and reserved sections 1615.8 and 1615.9 
because there are no longer corresponding references in the FAR. Old 
Section 1615.802, Policy, is now 1615.402, Pricing policy. Old 
paragraph 1615.804-70, Certificate of accurate cost or pricing data for 
community rated carriers, is now 1615.406-2, Certificate of accurate 
cost or pricing data for community rated carriers. Old paragraph 
1615.804-72, Rate reduction for defective pricing or defective cost or 
pricing data, is now 1615.407-1. Old paragraph 1615.805-70, Carrier 
investment of FEHB funds, is now 1615.470. Old paragraph 1615.805-71, 
Investment income clause, is now 1615.470-1. Old Section 1615.902, 
Policy, is now 1615.404-4, Profit, and old Section 1615.905, Profit 
analysis factors, is now 1615.404-70.
    In 1632.170, Recurring premium payments to carriers, we removed 
paragraph (c) relating to the 3-Year DoD Demonstration Project (10 
U.S.C. 1108) because the term of the demonstration project expired 
December 31, 2002.
    In 1632.771, Non-commingling of FEHB Program funds, and 1632.772, 
Contract clause, we removed the incorrect reference to paragraph 
1652.232-70 and replaced it with the reference 1652.232-72.
    We removed the reference to ``1615.804-72'' in the introductory 
text of ``1652.215-70, Rate reduction for defective pricing or 
defective cost or pricing data,'' and replaced it with ``1615.407-1.'' 
In the same section, we removed the reference to ``15.804-2(a)(1)'' and 
replaced it with ``15.403-4(a)(1).'' We also replaced the clause date 
with ``2003.'' In paragraph (a) of the clause, we replaced ``1615.804-
70 ``with ``1615.406-2.'' Finally, we removed paragraph (d) relating to 
the 3-Year DoD Demonstration Project (10 U.S.C. 1108) because the term 
of the demonstration project expired December 31, 2002.
    In the introductory text of 1652.215-71, Investment income, we 
replaced ``1615.805-71'' with ``1615.470-1.''
    In 1652.216-70, Accounting and price adjustment, we changed the 
clause date to ``2003'' and removed paragraph (c) because the term of 
the 3-Year DoD Demonstration Project (10 U.S.C. 1108) expired December 
31, 2002.
    In 1652.216-71, Accounting and allowable cost, we changed the 
clause date to ``2003'' and removed paragraph (d) because the term of 
the 3-Year DoD Demonstration Project (10 U.S.C. 1108) expired December 
31, 2002.
    In 1652.222-70, Notice of significant events, we revised paragraph 
(d) of the clause to increase the threshold for

[[Page 48853]]

inserting the clause in the carrier's subcontracts and subcontract 
modifications.
    In 1652.232-70, Payments--Community-rated contracts, we changed the 
clause date to ``2003'' and removed paragraph (f) because the term of 
the 3-Year DoD Demonstration Project (10 U.S.C. 1108) expired December 
31, 2002.
    In 1652.232-71, Payments--Experience-rated contracts, we changed 
the clause date to ``2003'' and removed paragraph (f) because the term 
of the 3-Year DoD Demonstration Project (10 U.S.C. 1108) expired 
December 31, 2002.
    We have also updated the FEHB Clause Matrix by removing clauses 
that relate to the Cost Accounting Standards.

Collection of Information Requirement

    This rulemaking imposes additional oversight and audit requirements 
on individual Federal contractors. The requirements do not represent 
routine information collection. Carriers are required to provide the 
information on an individual case by case basis only when they are 
initiating a new large provider contract or renewing an existing 
contract. It does not impose information collection and recordkeeping 
requirements that meet the definition of the Paperwork Reduction Act of 
1995's term ``collection of information'' which means obtaining, 
causing to be obtained, soliciting, or requiring the disclosure to 
third parties or the public, of facts or opinions by or for an agency, 
regardless of form or format, calling for either answers to identical 
questions posed to, or identical reporting or recordkeeping 
requirements imposed on, ten or more persons, other than agencies, 
instrumentalities, or employees of the United States; or answers to 
questions posed to agencies, instrumentalities, or employees of the 
United States which are to be used for general statistical purposes * * 
* Consequently, it need not be reviewed by the Office of Management and 
Budget under the authority of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies with 
revenues of $11.5 million or less in any 1 year. This rulemaking 
primarily affects FEHB Program experience rated carriers and their 
large provider contractual arrangements which exceed that dollar 
threshold. Therefore, I certify that this regulation will not have a 
significant economic impact on a substantial number of small entities.

Regulatory Impact Analysis

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act (the Act), the 
Unfunded Mandates Reform Act of 1995 (UMRA), (Pub. L. 104-4), and 
Executive Order 13132. Executive Order 12866 (as amended by Executive 
Order 13258, which merely assigns responsibility of duties) directs 
agencies to assess all costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any 1 year). This proposed rule is not considered a major rule, as 
defined in Title 5, United States Code, section 804(2), because we 
estimate its impact will only affect FEHB carriers and their large 
provider agreements and would mirror current FEHB Program practice with 
regard to carriers' subcontract arrangements. Any economic impact 
resulting from oversight or audit efforts would not be expected to 
exceed the dollar threshold.

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 1601, 1602, 1604, 1615, 1631, 
1632, 1644, and 1652

    Government employees, Government procurement, Health insurance, 
Reporting & recordkeeping requirements.

Office of Personnel Management.
Kay Coles James,
Director.
    Accordingly, OPM proposes to amend chapter 16 of title 48, CFR as 
follows:

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

    1. The authority citation for 48 CFR parts 1601, 1602, 1604, 1615, 
1631, 1632, 1644, and 1652 continues to read as follows:

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

SUBCHAPTER A--GENERAL

PART 1601--FEDERAL ACQUISITION REGULATIONS SYSTEM

Subpart 1601.1--Purpose, Authority, Issuance.

    2. Section 1601.105 is redesignated as 1601.106.

PART 1602--DEFINITIONS OF WORDS AND TERMS

Subpart 1602.1--Definitions of FEHB Program Terms

    3. In 1602.170-5, paragraph (a) is revised to read as follows:


1602.170-5  Cost or pricing data.

    (a) Experience rated carriers. Cost or pricing data for experience 
rated carriers includes:
    (1) Information such as claims data;
    (2) Actual or negotiated benefits payments made to providers of 
medical services for the provision of healthcare, such as capitation 
not adjusted for specific groups, including mental health benefits 
capitation rates, per diems, and Diagnostic Related Group (DRG) 
payments;
    (3) Cost data;
    (4) Utilization data; and
    (5) Administrative expenses and retentions, including capitated 
administrative expenses and retentions.
* * * * *
    4. Section 1602.170-7 is revised to read as follows:


1602.170-7  Experience rate.

    Experience rate means a rate for a given group that is the result 
of that group's actual paid claims, administrative expenses (including 
capitated administrative expenses), retentions, and estimated claims 
incurred but not reported, adjusted for benefit modifications, 
utilization trends, and economic trends. Actual paid claims include any 
actual or negotiated benefits payments made to providers of medical 
services for the provision of healthcare such as capitation not 
adjusted for specific groups, including mental health benefits 
capitation rates, per diems, and Diagnostic Related Group (DRG) 
payments.
    5. Section 1602.170-15 is added to read as follows:


1602.170-15  Large provider agreement.

    (a) Large provider agreement means an agreement between--

[[Page 48854]]

    (1) An FEHB carrier, at least 25 percent of whose total contracts 
are comprised of FEHB enrollee contracts, and
    (2) A provider of services or supplies (including organizations 
that own or contract with direct providers, or organizations that 
process claims or manage patient care),
    (i) Where the total costs charged to the FEHB carrier for a 
contract term for FEHB members, including benefits and services, are 
reasonably expected to exceed 5 percent of the carrier's total FEHB 
benefits costs, or
    (ii) Where the total administrative costs charged to the FEHB 
carrier for the contract term for FEHB members are reasonably expected 
to exceed 5 percent of the carrier's total FEHB administrative costs 
(applicable to agreements where the provider is not responsible for 
FEHB benefits costs).
    (b) The FEHB Program Annual Accounting Statement for the prior 
contract year will be used to determine the 5 percent threshold under 
large provider agreements.
    (c) Large provider agreements are subject to the audit provisions 
of FAR 52.215-2, ``Audit and Records-Negotiation.''

PART 1604--ADMINISTRATIVE MATTERS

    6. Subpart 1604.72 is added to read as follows:
Subpart 1604.72--Large Provider Agreements
Sec.
1604.7201 FEHB Program large provider agreements.
1604.7202 Large provider agreement clause.

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

Subpart 1604.72--Large Provider Agreements


1604.7201  FEHB Program large provider agreements.

    The following provisions apply to all experience rated carriers 
participating in the FEHB Program:
    (a) Notification and information requirements. (1) All experience 
rated carriers must provide notice to the contracting officer of its 
intent to enter into or to make a significant modification of a large 
provider agreement:
    (i) Not less than 60 days before entering into any large provider 
agreement; and
    (ii) Not less than 60 days before exercising renewals or other 
options, or making a significant modification.
    (2) The carrier's notification to the contracting officer must be 
in writing and must, at a minimum:
    (i) Describe the supplies and/or services the proposed provider 
agreement will require;
    (ii) Identify the proposed basis for reimbursement;
    (iii) Identify the proposed provider agreement, explain why the 
carrier selected the proposed provider, and what contracting method it 
used, where applicable, including the kind of competition obtained;
    (iv) Describe the methodology the carrier used to compute the 
provider's profit; and,
    (v) Describe provider risk provisions.
    (3) The contracting officer may request from the carrier any 
additional information on a proposed provider agreement and its terms 
and conditions prior to a provider award and during the performance of 
the agreement.
    (4) Within 30 days of receiving the carrier's notification, the 
contracting officer will either give the carrier written comments or 
written notice that there will be no comments. If the contracting 
officer comments, the carrier must respond in writing within 10 
calendar days and explain how it intends to address any concerns.
    (5) The contracting officer may inform the carrier that if it 
awards the provider agreement before addressing OPM's concerns, it may 
not charge costs incurred under the agreement to the contract.
    (6) When computing the carrier's annual service charge, the 
contracting officer will consider how well the carrier complies with 
the provisions of this section, including the advance notification 
requirements, as an aspect of the carrier's performance factor.
    (7) The contracting officer's review of any provider agreement, 
option, renewal, or modification shall not constitute a determination 
of the acceptability of terms or conditions of any provider agreement 
or the allowability of any costs under the carrier's contract, nor 
shall it relieve the carrier of any responsibility for performing the 
contract.
    (b) Records and Inspection. The carrier must insert in all large 
provider agreements the requirement that the provider will retain and 
make available to the Government all records relating to the agreement 
as follows:
    (1) Records that support the annual statement of operations--Retain 
for 6 years after the agreement term ends.
    (2) Enrollee records, if applicable--Retain for 6 years after the 
agreement term ends.
    (c) Audit. The provisions of FAR 52.215-2, Audit and Records--
Negotiation, apply to all experience rated carriers' large provider 
agreements.


1604.7202  Large provider agreement clause.

    The Contracting Officer shall insert the clause set forth at 
section 1652.204-74 in all experience rated FEHB Program contracts.

SUBCHAPTER C--CONTRACTING METHODS AND CONTRACT TYPES

PART 1615--CONTRACTING BY NEGOTIATION

    7. A new Sec.  1615.070 is added to read as follows:


1615.070  Negotiation authority.

    The authority to negotiate FEHB contracts is conferred by 5 U.S.C. 
8902.
    8. Subpart 1615.1 is revised to read as follows:
Subpart 1615.1--Source Selection Processes and Techniques.
Sec.
1615.170 Applicability.

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


1615.170  Applicability.

    FAR subpart 15.1 has no practical application to the FEHB Program 
because prospective contractors (carriers) are considered for inclusion 
in the FEHB Program according to criteria in 5 U.S.C. chapter 89 and 5 
CFR part 890 rather than by competition between prospective carriers.
    9. Subpart 1615.2 is added to read as follows:
Subpart 1615.2--Solicitation and Receipt of Proposals and Information
Sec.
1615.270 Applicability.

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


1615.270  Applicability.

    FAR subpart 15.2 has no practical application to the FEHB Program 
because OPM does not issue formal procurement solicitations to health 
benefits carriers. Eligible contractors (i.e., qualified health 
benefits carriers) are identified in accordance with 5 U.S.C. 8903. 
Offerors voluntarily come forth in accordance with procedures provided 
in 5 CFR part 890.

Subpart 1615.6--[Amended]

    10. Subpart 1615.6 is redesignated as 1615.3 and Section 1615.602 
is redesignated as 1615.370. In newly redesignated 1615.370 remove 
``15.6'' and add in its place ``15.3''.

[[Page 48855]]

    11. Subpart 1615.4 is revised to read as follows:
Subpart 1615.4--Contract Pricing
Sec.
1615.402 Pricing policy.
1615.404-4 Profit.
1615.404-70 Profit analysis factors.
1615.406-2 Certificate of accurate cost or pricing data for 
community rated carriers.
1615.407-1 Rate reduction for defective pricing or defective cost or 
pricing data.
1615.470 Carrier investment of FEHB funds.
1615.470-1 Investment income clause.

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

Subpart 1615.4--Contract Pricing


1615.402  Pricing policy.

    Pricing of FEHB contracts is governed by 5 U.S.C. 8902(i), 5 U.S.C. 
8906, and other applicable law. FAR subpart 15.4 shall be implemented 
by applying its policies and procedures--to the extent practicable--as 
follows:
    (a) For both experience rated and community rated contracts for 
which the FEHB Program premiums for the contract term will be less than 
the threshold at FAR 15.403-4(a)(1), OPM shall not require the carrier 
to provide cost or pricing data in the rate proposal for the following 
contract term.
    (b) Cost analysis shall be used for contracts where premiums and 
subscription income are determined on the basis of experience rating.
    (c)(1) A combination of cost and price analysis shall be used for 
contracts where premiums and subscription income are based on community 
rates. For contracts for which the FEHB Program premiums for the 
contract term will be less than the threshold at FAR 15.403-4(a)(1), 
OPM shall not require the carrier to provide cost or pricing data. The 
carrier is required to submit only a rate proposal and abbreviated 
utilization data for the applicable contract year. OPM will evaluate 
the proposed rates by performing a basic reasonableness test on the 
information submitted. Rates failing this test will be subject to 
further review.
    (2) For contracts with fewer than 1,500 enrollee contracts for 
which the FEHB Program premiums for the contract term will be at or 
above the threshold at FAR 15.403-4(a)(1), OPM shall require the 
carrier to submit its rate proposal, utilization data, and the 
certificate of accurate cost or pricing data required in 1615.406-2. In 
addition, OPM shall require the carrier to complete the proposed rates 
form containing cost and pricing data, and the Community Rate 
Questionnaire, but shall not require the carrier to send these 
documents to OPM. The carrier shall keep the documents on file for 
periodic auditor and actuarial review in accordance with 1652.204-70. 
OPM shall perform a basic reasonableness test on the data submitted. 
Rates that do not pass this test shall be subject to further OPM 
review.
    (3) For contracts with 1,500 or more enrollee contracts for which 
the FEHB Program premiums for the contract term will be at or above the 
threshold at FAR 15.403-4(a)(1), OPM shall require the carrier to 
provide the data and methodology used to determine the FEHB Program 
rates. OPM shall also require the data and methodology used to 
determine the rates for the carrier's similarly sized subscriber 
groups. The carrier shall provide cost or pricing data required by OPM 
in its rate instructions for the applicable contract period. OPM shall 
evaluate the data to ensure that the rate is reasonable and consistent 
with the requirements in this chapter. If necessary, OPM may require 
the carrier to provide additional documentation.
    (4) Contracts shall be subject to a downward price adjustment if 
OPM determines that the Federal group was charged more than it would 
have been charged using a methodology consistent with that used for the 
SSSGs. Such adjustments shall be based on the lower of the two rates 
determined by using the methodology (including discounts) the Carrier 
used for the two SSSGs.
    (5) FEHB Program community rated carriers shall comply with SSSG 
criteria provided by OPM in the rate instructions for the applicable 
contract period.
    (d) The application of FAR 15.402(b)(2) should not be construed to 
prohibit the consideration of preceding year surpluses or deficits in 
carrier-held reserves in the rate adjustments for subsequent year 
renewals of contracts based, in whole or in part, on cost analysis.


1615.404-4  Profit.

    (a) When the pricing of FEHB Program contracts is determined by 
cost analysis, OPM will determine the profit or fee prenegotiation 
objective (service charge) portion of the contracts by use of a 
weighted guidelines structured approach. The service charge so 
determined shall be the total service charge that may be negotiated for 
the contract and shall encompass any service charge (whether entitled 
service charge, profit, fee, contribution to reserves or surpluses, or 
any other title) that may have been negotiated by the prime contractor 
with any subcontractor or underwriter.
    (b) OPM will not guarantee a minimum service charge.


1615.404-70  Profit analysis factors.

    (a) OPM contracting officers will apply a weighted guidelines 
method in developing the service charge prenegotiation objective for 
FEHB Program contracts. The following factors, as defined in FAR 
15.404-4(d), will be applied to projected incurred claims and allowable 
administrative expenses:
    (1) Contractor performance. OPM will consider such elements as the 
accurate and timely processing of benefit claims and the volume and 
validity of disputed claims as measures of economical and efficient 
contract performance. This factor will be judged apart from the 
contractor's basic responsibility for contract performance and will be 
a measure of the extent and nature of the contractor's contribution to 
the FEHB Program through the application of managerial expertise and 
effort. Evidence of effective contract performance will receive a plus 
weight, and poor performance or failure to comply with contract terms 
and conditions a negative weight. Innovations of benefit to the FEHB 
Program will generally result in a positive weight; documented 
inattention or indifference to cost control will generally result in a 
negative weight.
    (2) Contract cost risk. In assessing the degree of cost 
responsibility and associated risk assumed by the contractor as a 
factor to be considered in negotiating profit, OPM will consider such 
underwriting elements as the availability of margins, group size, 
enrollment demographics and fluctuation, and the probability of 
conversion and adverse selection, as well as the extent of financial 
assistance the carrier renders to the contract. However, the ``loss 
carry forward basis'' of experience rated group insurance practices, 
which mitigates contract risk, will likely serve to diminish this 
profit analysis factor in an overall determination of profit. This 
factor is intended to provide profit opportunities commensurate with 
the contractor's share of cost risks only, taking into account elements 
such as the adequacy and reliability of data for estimating costs.
    (3) Federal socioeconomic programs. OPM will consider documented 
evidence of successful, contractor-initiated efforts to support Federal 
socioeconomic programs such as drug and substance abuse deterrents and 
concerns of the type enumerated in FAR 15.404-4(d)(iii), as a factor in 
negotiating profit. This factor will be

[[Page 48856]]

assessed by considering the quality of the contractor's policies and 
procedures and the extent of unusual effort or achievement 
demonstrated. Evidence of effective support of Federal socioeconomic 
programs will receive a positive weight; poor support will receive a 
negative weight.
    (4) Capital investments. This factor is generally not applicable to 
FEHB Program contracts because facilities capital cost of money may be 
an allowable administrative expense. Generally, this factor shall be 
given a weight of zero. However, special purpose facilities or 
investment costs of direct benefit to the FEHB Program that are not 
recoverable as allowable or allocable administrative expenses may be 
taken into account in assigning a positive weight.
    (5) Cost control. OPM will consider contractor-initiated efforts 
such as improved benefit design, cost-sharing features, innovative peer 
review, or other professional cost containment efforts as a factor in 
negotiating profit. OPM shall use this factor to reward contractors 
with additional profit opportunities for self-initiated efforts to 
control contract costs.
    (6) Independent development. OPM will consider any profit 
opportunities that may be directly related to relevant independent 
efforts such as the development of a unique and enhanced customer 
support system that is of demonstrated value to the FEHB Program and 
for which developmental costs have not been recovered directly or 
indirectly through allowable administrative expenses. OPM will use this 
factor to provide additional profit opportunities based upon an 
assessment of the contractor's investment and risk in developing 
techniques, methods, and practices having viability to the program at 
large. OPM will not consider improvements and innovations recognized 
and rewarded under any of the other profit factors.
    (b) The weight ranges for each factor to be used in the weighted 
guidelines approach are set forth as follows:

------------------------------------------------------------------------
               Profit factor                  Weight ranges  (percent)
------------------------------------------------------------------------
1. Contractor performance.................  -.2 to + .45
2. Contract cost risk*....................  +.02 to + .2
3. Federal socioeconomic programs.........  -.05 to + .05
4. Capital investments....................  0 to +.02
5. Cost control...........................  0 to +.35
6. Independent development................  0 to +.03
------------------------------------------------------------------------
*The contract cost risk factor is subdivided into two parts: group size
  (.02 to .10) and other risk elements (0 to .10). With respect to the
  group size element, subweights should be assigned as follows:


------------------------------------------------------------------------
                Enrollment                        Weight (percent)
------------------------------------------------------------------------
10,000 or less............................  .06 to .10
10,001-50,000.............................  .05 to .09
50,001-200,000............................  .04 to .07
200,001-500,000...........................  .03 to .06
500,001 and over..........................  .02 to .04
------------------------------------------------------------------------

1615.406-2  Certificate of accurate cost or pricing data for community 
rated carriers.

    The contracting officer shall require a carrier with a contract 
meeting the requirements in 1615.402(c)(2) or 1615.402(c)(3) to execute 
the Certificate of Accurate Cost or Pricing Data contained in this 
section. A carrier with a contract meeting the requirements in 
1615.402(c)(2) shall complete the Certificate and keep it on file at 
the carrier's place of business in accordance with 1652.204-70. A 
carrier with a contract meeting the requirements in 1615.402(c)(3) 
shall submit the Certificate to OPM along with its rate reconciliation, 
which is submitted during the first quarter of the applicable contract 
year.

Certificate of Accurate Cost or Pricing Data for Community Rated 
Carriers

    This is to certify that, to the best of my knowledge and belief: 
(1) The cost or pricing data submitted (or, if not submitted, 
maintained and identified by the carrier as supporting 
documentation) to the Contracting Officer or the Contracting 
Officer's representative or designee, in support of the --------* 
FEHB Program rates were developed in accordance with the 
requirements of 48 CFR Chapter 16 and the FEHB Program contract and 
are accurate, complete, and current as of the date this certificate 
is executed; and (2) the methodology used to determine the FEHB 
Program rates is consistent with the methodology used to determine 
the rates for the carrier's Similarly Sized Subscriber Groups.
Firm:------------
Name: ------------
Signature: ------------
Date of Execution: ------------

*Insert the year for which the rates apply. Normally, this will be 
the year for which the rates are being reconciled.
(End of Certificate)


1615.407-1  Rate reduction for defective pricing or defective cost or 
pricing data.

    The clause set forth in section 1652.215-70 shall be inserted in 
FEHB Program contracts, at or above the threshold in FAR 15.403-
4(a)(1), that are based on a combination of cost and price analysis 
(community rated).


1615.470  Carrier investment of FEHB funds.

    (a) Except for contracts based on a combination of cost and price 
analysis (community rated), the carrier is required to invest and 
reinvest all funds on hand, including any attributable to the special 
reserve or the reserve for incurred but unpaid claims, exceeding the 
funds needed to discharge promptly the obligations incurred under the 
contract.
    (b) The carrier is required to credit income earned from its 
investment of FEHB funds to the special reserve on behalf of the FEHB 
Program. If a carrier, for any reason, fails to invest excess FEHB 
funds or to credit any income due to the contract, it shall return or 
credit any investment income lost to OPM or the special reserve.
    (c) Investment income. Investment income is the net amount earned 
by the carrier after deducting investment expenses.


1615.470-1  Investment income clause.

    The clause set forth in 1652.215-71 shall be inserted in all FEHB 
contracts based on cost analysis.

Subpart 1615.8 [Reserved]

    12. Subpart 1615.8 is removed and reserved.

Subpart 1615.9 [Reserved]

    13. Subpart 1615.9 is removed and reserved.

Subpart 1615.70--Audit and Records--Negotiation

    14. Section 1615.7001 is added to read as follows:


1615.7001  Audit and records.

    The Contracting Officer shall modify 52.215-2 in all FEHB Program 
experience rated contracts by amending paragraph (g) of that section to 
replace the words ``exceed the simplified acquisition threshold'' with 
``equals or exceeds $550,000.''

SUBCHAPTER E--GENERAL CONTRACTING REQUIREMENTS

PART 1631--CONTRACT COST PRINCIPLES AND PROCEDURES

Subpart 1631.2--Contracts With Commercial Organizations

    15. A new 1631.205-81, is added to read as follows:

[[Page 48857]]

1631.205-81  Inferred Reasonableness.

    If the Carrier follows the notification and consent requirements of 
paragraphs (a), (b) and (c) of 1652.244-70, and subsequently obtains 
the Contracting Officer's consent or ratification, then the 
reasonableness of the subcontract's costs will be inferred.

PART 1632--CONTRACT FINANCING

Subpart 1632.1--General


1632.170  [Amended]

    16. In 1632.170, remove paragraph (c).

Subpart 1632.7--Contract Funding


1632.771  [Amended]

    17. In 1632.771 paragraph (d), remove ``1652.232-70'' and add in 
its place ``1652.232-72.''


1632.772  [Amended]

    18. In 1632.772, remove ``1652.232-70'' and add in its place 
``1652.232-72.''

SUBCHAPTER G--CONTRACT MANAGEMENT

PART 1644--SUBCONTRACTING POLICIES AND PROCEDURES

Subpart 1644.1--General

    19. Section 1644.170 is revised to read as follows:


1644.170  Policy for FEHB Program subcontracting consent.

    For all experience rated contracts, the Carriers shall notify the 
Contracting Officer in writing at least 60 days in advance of entering 
into any subcontract or subcontract modification, or as otherwise 
specified by the contract, if the amount of the subcontract or 
modification charged to the FEHB Program equals or exceeds $550,000. 
Failure to provide advance notice may result in the Contracting 
Officer's disallowance of the costs. In determining whether the amount 
chargeable to the FEHB Program contract for a given subcontract or 
modification equals or exceeds the $550,000 threshold, the following 
rules apply:
    (a) For initial advance notification, the Carrier shall add the 
total price for the base year and all options, including quantity or 
service options and option periods, and
    (b) The Carrier shall give advance notification of modifications 
not accounted for in paragraph (a) of this section that cause the total 
price to equal or exceed the threshold. Carriers shall follow 
appropriate procurement procedures that comply with the Federal 
Acquisition Regulation's (FAR) policies and procedures relating to 
competition and contract pricing for the acquisition of both commercial 
and non-commercial items. All subcontracts or subcontract modifications 
that equal or exceed the threshold are subject to audit under FAR 
52.215-2 Audit and Records--Negotiation.

SUBCHAPTER H--CLAUSES AND FORMS

PART 1652--CONTRACT CLAUSES

Subpart 1652.2--Texts of FEHB Program Clauses

    20. Section 1652.204-70 is revised to read as follows:


1652.204-70  Contractor Records Retention.

    As prescribed in 1604.705 the following clause shall be inserted in 
all FEHB Program contracts.

Contractor Records Retention (Jan 2003)

    Notwithstanding the provisions of Section 5.7 (FAR 52.215-2(f)) 
Audit and Records--Negotiation, the Carrier shall retain and make 
available all records applicable to a contract term that support the 
annual statement of operations and, for contracts that equal or 
exceed the threshold at FAR 15.403-4(a)(1), the rate submission for 
that contract term for a period of 6 years after the end of the 
contract term to which the records relate. This includes all records 
of large provider agreements and subcontracts that equal or exceed 
the threshold requirements. In addition, individual enrollee and/or 
patient claim records shall be maintained for 6 years after the end 
of the contract term to which the claim records relate.
(End Clause)

    21. Section 1652.204-74 is added to read as follows:


1652.204-74  Large provider agreements.

    As prescribed by 1604.7202, the contracting officer shall insert 
the following clause in all FEHB Program contracts based on cost 
analysis (experience rated):

Large Provider Agreements (JAN 2003)

    (a) Notification and Information Requirements. (1) The 
experience rated Carrier must provide notice to the contracting 
officer of its intent to enter into or to make a significant 
modification of a large provider agreement:
    (i) Not less than 60 days before entering into any large 
provider agreement; and
    (ii) Not less than 60 days before exercising a renewal or other 
option, or significant modification to a large provider agreement.
    (2) The Carrier's notification to the contracting officer must 
be in writing and must, at a minimum:
    (i) Describe the supplies and/or services the proposed provider 
agreement will require;
    (ii) Identify the proposed basis for reimbursement;
    (iii) Identify the proposed provider agreement, explain why the 
Carrier selected the proposed provider, and what contracting method 
it used, where applicable, including the kind of competition 
obtained;
    (iv) Describe the methodology the carrier used to compute the 
provider's profit; and,
    (v) Describe provider risk provisions.
    (3) The Contracting Officer may request from the Carrier any 
additional information on a proposed provider agreement and its 
terms and conditions prior to a provider award and during the 
performance of the agreement.
    (4) Within 30 days of receiving the Carrier's notification, the 
Contracting Officer will give the Carrier either written comments or 
written notice that there will be no comments. If the Contracting 
Officer comments, the Carrier must respond in writing within 10 
calendar days, and explain how it intends to address any concerns.
    (5) The Contracting Officer may inform the Carrier that if it 
awards the provider agreement before addressing OPM's concerns, it 
may not charge costs incurred under the agreement to the contract.
    (6) When computing the carrier's service charge, the Contracting 
Officer will consider how well the Carrier complies with the 
provisions of this section, including the advance notification 
requirements, as an aspect of the Carrier's performance factor.
    (7) The Contracting Officer's review of any provider agreement, 
option, renewal, or modification shall not constitute a 
determination of the acceptability of the terms and conditions of 
any provider agreement or of the allowability of any costs under the 
Carrier's contract, nor shall it relieve the Carrier of any 
responsibility for performing the contract.
    (b) Records and Inspection. The Carrier must insert in all large 
provider agreements the requirement that the provider will retain 
and make available to the Government all records relating to the 
agreement that support the annual statement of operations and 
enrollee records--Retain for 6 years after the agreement term ends.
    (c) Audit. The provisions of FAR 52.215-2, Audit and Records--
Negotiation, apply to all experience rated Carriers' large provider 
agreements. The Carrier shall insert the clause, 52.215-2, in all 
large provider agreements and shall substitute
    (1) The term ``provider'' for the term ``Contractor'' throughout 
the clause, and
    (2) The term ``large provider contracts'' for the term 
``Subcontracts'' in paragraph (g) of FAR 52.215-2. The term 
``Contracting Officer'' shall mean the FEHB Program Contracting 
Officer at OPM. The Carrier shall be responsible for ensuring the 
large provider complies with the provisions set forth in the clause.
    (d) Prohibited Agreements. No provider agreement made under this 
contract shall provide for payment on a cost-plus-a-percentage-of-
cost basis.
    (e) The Carrier shall insert this clause, 1652.204-74, in all 
large provider agreements.
(End of Clause)

[[Page 48858]]

1652.215-70  (Amended)

    22. In the introductory text of section 1652.215-70, remove 
``1615.804.72'' and add in its place ``1615.407-1,'' remove ``15.804-
2(a)(1)'' and add in its place ``15.403-4(a)(1),'' in the clause title, 
remove ``JAN 2000'' and add in its place ``JAN 2003,'' in paragraph 
(a)(1) of the clause remove ``1615.804.70'' and add in its place 
``1615.406-2,'' and remove paragraph (d).


1652.215-71  [Amended]

    23. In the introductory text of section 1652.215-71, remove 
``1615.805-71'' and add in its place ``1615.470-1.''


1652.216-70  [Amended]

    24. In 1652.216-70, remove ``JAN 2000'' in the clause title and add 
in its place ``JAN 2003,'' and remove paragraph (c) of the clause.


1652.216-71  [Amended]

    25. In 1652.216-71, remove ``JAN 2000'' in the clause title and add 
in its place ``JAN 2003,'' and remove paragraph (d) of the clause.
    26. In 1652.222-70, paragraph (d) of the clause is revised to read 
as follows:


1652.222-70  Notice of Significant Events.

* * * * *

Notice of Significant Events (Jan 2001)

* * * * *
    (d) The Carrier shall insert this clause in any subcontract or 
subcontract modification if the amount of the subcontract or 
modification charged to the FEHB Program (or in the case of a 
community rated carrier, applicable to the FEHB Program) equals or 
exceeds $550,000.
(End of Clause)

    27. Section 1652.244-70, is revised to read as follows:


1652.244-70  Subcontracts.

    As prescribed in section 1644.270, the following clause shall be 
inserted in all FEHB Program contracts based on cost analysis 
(experience rated):

Subcontracts (Jan 2003)

    (a) The Carrier shall notify the Contracting Officer in writing 
at least 60 days in advance of entering into any subcontract or 
subcontract modification, or as otherwise specified by this 
contract, if the amount of the subcontract or modification charged 
to the FEHB Program equals or exceeds $550,000. Failure to provide 
advance notice may result in the Contracting Officer's disallowance 
of the costs. In determining whether the amount chargeable to the 
FEHB Program contract for a given subcontract or modification equals 
or exceeds the $550,000 threshold, the following rules apply:
    (1) For initial advance notification, the Carrier shall add the 
total price for the base year and all options, including quantity or 
service options and option periods, and
    (2) The Carrier shall give advance notification of modifications 
not accounted for in paragraph (a) of this clause, if they cause the 
total price to equal or exceed the threshold. The Carrier shall 
follow appropriate procurement procedures that comply with the 
Federal Acquisition Regulation's (FAR) policies and procedures 
relating to competition and contract pricing for the acquisition of 
both commercial and non-commercial items. All subcontracts or 
subcontract modifications that equal or exceed the threshold are 
subject to audit under FAR 52.215-2 Audit and Records-Negotiations.
    (b) The advance notification required by paragraph (a) of this 
clause shall include the information specified below:
    (1) A description of the supplies or services to be 
subcontracted;
    (2) Identification of the type of subcontract to be used;
    (3) Identification of the proposed subcontractor and an 
explanation of why and how the proposed subcontractor was selected, 
including the competition obtained;
    (4) The proposed subcontract price and the Carrier's cost or 
price analysis;
    (5) An explanation of why the subcontract has been categorized 
as a subcontract for a commercial item as defined in 48 CFR 2.101. 
If the subcontract is not for a commercial item, then the 
subcontractor's current, complete, and accurate cost or pricing data 
and a Certificate of Current Cost or Pricing Data must be submitted 
to the Contracting Officer.
    (6) (Reserved)
    (7) A negotiation memorandum reflecting--
    (i) The principal elements of the subcontract price 
negotiations;
    (ii) The most significant consideration controlling 
establishment of initial or revised prices;
    (iii) An explanation of the reason cost or pricing data are not 
required, if the item is not a commercial item but the carrier 
believes that cost or pricing data are not required.
    (iv) The extent, if any, to which the Carrier did not rely on 
the subcontractor's cost or pricing data in determining the price 
objective and in negotiating the final price;
    (v) The extent, if any, to which it was recognized in the 
negotiation that the subcontractor's cost or pricing data were not 
accurate, complete, or current; the action taken by the Carrier and 
the subcontractor; and the effect of any such defective data on the 
total price negotiated;
    (vi) The reasons for any significant difference between the 
Carrier's price objective and the price negotiated; and
    (vii) A complete explanation of the incentive fee or profit 
plan, when incentives are used. The explanation shall identify each 
critical performance element, management decisions used to quantify 
each incentive element, reasons for the incentives, and a summary of 
all trade-off possibilities considered.
    (c) The Carrier shall obtain the Contracting Officer's written 
consent before placing any subcontract for which advance 
notification is required under paragraph (a) of this clause. 
However, the Contracting Officer may ratify in writing any such 
subcontract for which written consent was not obtained. Ratification 
shall constitute the consent of the Contracting Officer.
    (d) The Contracting Officer may waive the requirement for 
advance notification and consent required by paragraphs (a), (b) and 
(c) of this clause where the Carrier and subcontractor submit an 
application or renewal as a contractor team arrangement as defined 
in FAR Subpart 9.6 and--
    (1) The Contracting Officer evaluated the arrangement during 
negotiation of the contract or contract renewal; and
    (2) The subcontractor's price and/or costs were included in the 
Plan's rates that were reviewed and approved by the Contracting 
Officer during negotiation of the contract or contract renewal.
    (e) If the Carrier follows the notification and consent 
requirements of paragraphs (a), (b) and (c) of this clause and 
subsequently obtains the Contracting Officer's consent or 
ratification, then the reasonableness of the subcontract's costs 
will be inferred as provided for in 1631.205-81. However, consent or 
ratification by the Contracting Officer will not constitute a 
determination
    (1) Of the acceptability of any subcontract terms or conditions;
    (2) Of the allowability of any cost under this contract; or
    (3) That the Carrier should be relieved of any responsibility 
for performing this contract.
    (f) No subcontract placed under this contract shall provide for 
payment on a cost-plus-a-percentage-of-cost basis. Any fee payable 
under cost reimbursement type subcontracts shall not exceed the fee 
limitations in FAR 15.404-4(c)(4)(i). Any profit or fee payable 
under a subcontract shall be in accordance with the provision of 
Section 3.7, Service Charge.
    (g) The Carrier shall give the Contracting Officer immediate 
written notice of any action or suit filed and prompt notice of any 
claim made against the Carrier by any subcontractor or vendor that, 
in the opinion of the Carrier, may result in litigation related in 
any way to this contract with respect to which the Carrier may be 
entitled to reimbursement from the Government.
(End of Clause)

Subpart 1652.3-FEHB Program Clause Matrix

    28. In section 1652.370, the FEHB Program Clause Matrix, is revised 
to read as follows:


1652.370  Use of the Matrix.

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[FR Doc. 03-20857 Filed 8-14-03; 8:45 am]
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