[Federal Register Volume 69, Number 59 (Friday, March 26, 2004)]
[Proposed Rules]
[Pages 15774-15777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6790]


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OFFICE OF PERSONNEL MANAGEMENT

48 CFR Parts 1631 and 1699

RIN 3206-AJ10


Federal Employees Health Benefits Program; Revision of Contract 
Cost Principles and Procedures, and Miscellaneous Changes, Parts 1631 
and 1699

AGENCY: Office of Personnel Management.

ACTION: Proposed rule.

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SUMMARY: The U.S. Office of Personnel Management (OPM) is issuing a 
proposed regulation amending the Federal Employees Health Benefits 
(FEHB) Acquisition Regulation (FEHBAR). This regulation includes 
additional contract cost principles and procedures for FEHB Program 
experience-rated contracts and is intended to clarify our requirements 
and enhance our oversight of FEHB carriers.

DATES: Comments must be received on or before May 25, 2004.

ADDRESSES: Send or deliver comments to Abby L. Block, Deputy Associate 
Director, Employee and Family Support Policy, Strategic Human Resources 
Policy Division, Office of Personnel Management, Room 3400, 1900 E 
Street NW., Washington, DC; 20415-3601, or by fax: (202) 606-0633, or 
e-mail to: [email protected]).

FOR FURTHER INFORMATION CONTACT: Anne Easton, Senior Policy Analyst 
(202) 606-0004.

SUPPLEMENTARY INFORMATION: We are enhancing our oversight of 
experience-rated FEHB contracts by requiring carriers to apply 
additional cost principles and procedures. We currently contract with 
thirty-two experience-rated fee-for-service carriers and Health 
Maintenance Organizations (HMOs).
    Under the FEHB law, 5 U.S.C. 8902, it is part of OPM's 
responsibility to ensure that rates charged by health benefits plans 
reasonably and equitably reflect the cost of the benefits provided. Our 
interest, from a financial standpoint, is to pay a reasonable price for 
the health care coverage we purchase

[[Page 15775]]

from private contractors on behalf of FEHB enrollees.
    OPM's independent Inspector General regularly audits experience-
rated carriers to determine if they are in compliance with the Cost 
Principles in part 31 of title 48, Code of Federal Regulations (the 
Federal Acquisition Regulation (FAR)) and chapter 16 of title 48, Code 
of Federal Regulations (FEHBAR)). In addition, we have other 
requirements and practices in place to provide assurance to FEHB 
Program administrators that carriers' financial reporting and 
contractual requirements are met. The FEHBAR and part 31 of the FAR are 
the sole sources of cost accounting principles and practices for FEHB 
contracts. The basic cost accounting principles in part 31 of the FAR 
have been in place for over 40 years. During this time period, 
significant improvements in cost accounting principles and practices 
have been made. Advances in information technology have enabled FEHB 
contractors to implement cost accounting practices more complex than 
those generally used when we adopted the FAR cost principles. Also, we 
have observed some differences in interpretation regarding the 
allocation of costs to carriers' contracts. Therefore, we are updating 
the FEHBAR to allow carriers to use more current contract cost 
accounting principles and practices and to provide for consistent 
interpretation of our requirements across the Program. FAR Part 31 
provides certain factors that are required to be considered in 
allocating indirect costs and which must accord with generally accepted 
accounting principles (GAAP) that are consistently applied. It does 
not, however, provide specific guidance on the formation of indirect 
cost groupings and the methods for their allocation. This regulation 
provides guidance to carriers on allocating certain indirect costs to 
FEHB experience-rated contracts. For example, we have included a 
section to supplement FAR 31.203 that describes techniques for 
accumulating and allocating groupings of indirect costs (FEHBAR 
1631.203-70). We have also provided more guidance on the allocation of 
business unit general and administrative expenses (FEHBAR 1631.203-71) 
and home office expenses to carriers' business segments (FEHBAR 
1631.203-72). These sections also supplement FAR 31.203. Our intent is 
to supplement, but not to supplant FAR. Therefore, we believe that the 
provisions of FAR 31.203 dealing with the allocation of indirect costs, 
including G&A expenses and home office expenses, are rendered more 
useful for our purposes when supplemented by FEHBAR 1631.203 -70: 71 
and 72. We believe that the proposed FEHBAR provisions are compatible 
with existing FAR provisions dealing with the allocation of indirect 
costs. However, any comments on this topic would be appreciated. In 
addition, we have modified the FEHBAR to specifically recognize that 
monthly indirect cost rates are a practice of the insurance industry 
and are therefore permitted by FAR 31.203(e)(2).
    We have added subrogation settlements, prescription drug rebates, 
and volume discounts to the list of FEHB credits in FEHBAR 1631.201-70. 
This guidance specifies that the applicable portion of any credit 
relating to any allowable cost and received by or accruing to the 
carrier must be credited to the FEHB Program. We have always expected 
carriers to ensure that the Program actually receives these credits. 
Idewntifying them makes it even clearer that they are to be credited to 
the Program. While the list of credits is not intended to be 
exhaustive, we have added these examples to demonstrate how all credits 
should be treated. Other enhancements we have made include modifying 
FAR 31.205-10 to make facilities cost of money (COM) allowable under 
certain circumstances, even if it is not specifically identified in a 
carrier proposal (FEHBAR 1631.205-10). This change is intended to more 
closely reflect the procedures we follow in our annual negotiation 
process with carriers.
    We have also added a provision to establish that compensated 
personal absence must be assigned to the cost accounting period in 
which the entitlement was earned (FEHBAR 1631.205-72). This section is 
included to ensure all carriers are following GAAP requirements 
applicable to accrual procedures. We are also providing a transition 
rule to permit carriers to recover prior years' allocable liability for 
compensated personal absence not previously charged to FEHB contracts. 
We believe that the provisions of this section ensure that there is 
compatibility between the applicable requirements of GAAP, FAR and 
FEHBAR. It should be also stressed that the transition rule dealing 
with the recovery of prior years' costs applies only to costs that have 
not been previously charged to contracts or other final cost 
objectives. Any relevant comments on these points would be appreciated.
    Consistent with OPM's waiver of Cost Accounting Standards (CAS) 
requirements, a new Subpart 1699.70 is added to clarify they do not 
apply to experience rated FEHB contracts.
    We have worked collaboratively with carriers to develop procedures 
that are consistent with insurance industry practices and assure an 
equitable allocation of costs to the FEHB Program. When added to our 
current financial reporting and disclosure requirements, these new 
provisions will enhance our oversight of the FEHB Program. Because they 
have been developed in coordination with the standard practices used by 
experience-rated carriers, we expect they can be implemented within the 
FEHB Program promptly and without impediments, following the public 
comment period.

Regulatory Flexibility Act

    I certify that this regulation will not have a significant economic 
impact on a substantial number of small entities because it is based on 
requirements already in place in the Federal Acquisition Regulation 
(FAR).

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 1631 and 1699

    Administrative practice and procedure, Government employees, 
Government procurement, Health facilities, Health insurance, Health 
professions, Reporting and record keeping requirements, Retirement.

    Office of Personnel Management.
Kay Coles James,
Director.
    Accordingly, we propose to amend chapter 16 of title 48, Code of 
Federal Regulations, as follows:

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

    1. The authority citations for 48 CFR part 1631 continues to read 
as follows:

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

PART 1631--CONTRACT COST PRINCIPLES AND PROCEDURES

    2. Subpart 1631.1 consisting of section 1631.1 is added to read as 
follows:

[[Page 15776]]

Subpart 1631.1 Definitions.


1631.1  Definitions.

    The definitions in FAR 31.001 are applicable to this section unless 
otherwise noted.

Subpart 1631.2--Contracts with Commercial Organizations

    3. Section 1631.201-70 is revised to read as follows:


1631.201-70  Credits.

    The provisions of FAR 31.201-5 shall apply to income, rebates, 
allowances, and other credits resulting from benefit payments. Examples 
of such credits include:
    (a) Coordination of benefit refunds, including subrogation 
settlements;
    (b) Hospital year-end settlements and other applicable provider 
discounts;
    (c) Uncashed and returned checks;
    (d) Utilization review refunds;
    (e) Contract prescription drug rebates;
    (f) Volume discounts;
    (g) Refunds and other payments or recoveries attributable to 
litigation with subscribers or providers of health services; and,
    (h) Erroneous benefit payment, overpayment, and duplicate payment 
recoveries.
    4. A new section 1631.203 is added to read as follows:


1631.203  Indirect Costs.

    For the purposes of applying FAR 31.203(e) to FEHB Program 
contracts, OPM considers the monthly rates used by some carriers to be 
a general practice in the insurance industry.
    5. Section 1631.203-70 is revised to read as follows:


1631.203-70  Allocation techniques.

    (a) Carriers shall use the following methods for allocating 
groupings of business unit indirect costs. Carriers shall consistently 
apply the methods and techniques established to classify direct and 
indirect costs, to group indirect costs and to allocate indirect costs 
to cost objectives.
    (1) Input method--The preferred allocation technique is one that 
shows the consumption of resources in performance of the activities 
(input) for the function(s) represented by the cost grouping. This 
allocation technique should be used in circumstances where there is a 
direct and definitive relationship between the function(s) and the 
benefiting cost objectives. Measures of input ordinarily may be 
expressed in terms such as labor hours or square footage. This means 
costs may be allocated by use of a rate, such as a rate per labor hour 
or cost per square foot.
    (2) Output method--Where input measures are unavailable or 
impractical to determine, the basis for allocation may be a measure of 
the output of the function(s) represented by the cost grouping. The 
output becomes a substitute measure for the use of resources and is a 
reasonable alternative when a direct measure of input is impractical. 
Output may be measured in terms of units of end product produced by the 
function(s). Examples of output measures include number of claims 
processed by a claims processing center, number of pages printed in a 
print shop, number of purchase orders processed by a purchasing 
department, or number of hires by a personnel office.
    (3) Surrogate method--Where neither activity (input) nor output of 
the function(s) can be measured practically, a surrogate must be used 
to measure the resources utilized. Surrogates used to represent the 
relationship generally measure the benefit to the cost objectives 
receiving the service and should vary in proportion to the services 
received. For example, if a personnel department provides various 
services that cannot be measured practically on an activity (input) or 
output basis, number of personnel served might reasonably represent the 
use of resources of the personnel function for the cost objectives 
receiving the service, where this base varies in proportion to the 
services performed.
    (4) Other method--Some cost groupings cannot readily be allocated 
on measures of specific beneficial or causal relationships under 
paragraph (a)(1), (a)(2), or (a)(3) of this section. Such costs do not 
have a direct and definitive relationship to the benefiting cost 
objectives. Generally, the cost of overall management activities falls 
in this category. Overall management costs should be grouped in 
relation to the activities managed. The base selected to measure the 
allocation of these indirect costs to cost objectives should be a base 
representative of the entire activity being managed. For example, the 
total operating expenses of activities managed might be a reasonable 
base for allocating the general indirect costs of a business unit. 
Another reasonable method for allocating general indirect costs might 
be to base them on a percentage of contracts. These examples are not 
meant to be exhaustive, but rather are examples of allocation methods 
that may be acceptable under individual circumstances. See also 
Business Unit General and Administrative (G&A) expenses, FEHBAR 48 CFR 
1631.203-71.
    (b) Carriers that use multiple cost centers to accumulate and 
allocate costs shall apply the techniques in paragraph (a) of this 
section at each step of the allocation process. Accordingly, the 
allocation of costs among cost centers at the initial entry into the 
cost accounting system shall be made in compliance with paragraph (a) 
of this section. Likewise, the allocation of the cost of interim cost 
centers to final cost centers is subject to paragraph (a) of this 
section. If costs of final cost centers are allocated among final cost 
objectives, the allocation shall also be made in accordance with 
paragraph (a) of this section. It is possible that carriers using 
multiple cost centers to accumulate and allocate costs may not have any 
direct costs, i.e., costs identified specifically with a final cost 
objective.
    (c) The allocation of business unit general and administrative 
expenses and the allocation of home office expenses to segments are 
also subject to FEHBAR 48 CFR 1631.203-71 and 1631.203-72, 
respectively.
    6. Section 1631.203-71 is added to read as follows:


1631.203-71  Business Unit General and Administrative (G&A) expenses.

    G&A expenses shall be allocated to final cost objectives by a base 
or method that represents the total activity of the business unit.
    7. Section 1631.203-72 is added to read as follows:


1631.203-72  Home office expense.

    A carrier's practices for allocating home office expenses to the 
segments of the carrier will be acceptable for purposes of FAR 
31.203(b) if they are allocated on the basis of the beneficial or 
causal relationship between the home office activities and the segments 
to which the expenses are allocated. Expenses that cannot be allocated 
on the basis of a more specific beneficial or causal relationship 
should be allocated on a basis representative of the entire activity 
being managed. The compliance of such allocations with FAR 31.203 shall 
be determined on the basis of the facts and circumstances of each 
situation.
    8. Section 1631.205-10 is added to read as follows:


1631.205-10  Cost of money.

    For the purposes of FAR 31.205-10(a)(2)(iii), the estimated 
facilities capital cost of money is specifically identified if it is 
identified in the prior year's Annual Accounting Statement or, for new 
experience-rated carriers, the supplemental information supporting 
submitted costs (such as the Supplemental Schedule of Administrative 
Expenses).

[[Page 15777]]

    9. Section 1631.205-72 is amended by designating the existing 
paragraph as paragraph (a) and adding a new paragraph (b) to read as 
follows:


1631.205-72  FEHBP compensation for personal services.

    (a) * * *
    (b)(1) The costs of compensated personal absence shall be assigned 
to the cost accounting period or periods in which entitlement was 
earned. Entitlement means an employee's right, whether conditional or 
unconditional, to receive a determinable amount of compensated personal 
absence, or pay in lieu thereof.
    (2) If at the beginning of the 1st year a carrier subject to 
paragraph (b)(1) of this section has a liability for accrued but unpaid 
expenses for compensated personal absences that would otherwise be 
allocable to FEHB contracts, the carrier may include such costs in a 
suspense account. The suspense account may be amortized and included in 
government contract costs at a rate not exceeding 20 percent per year.
    10. Part 1699 is added consisting of subpart 1699.7, section 
1699.70 to read as follows:

PART 1699--COST ACCOUNTING STANDARDS

Subpart 1699.7--Cost Accounting Standards


1699.70  Cost accounting standards.

    With respect to all experience-rated contracts currently existing 
under the FEHB Program, the Cost Accounting Standards, found at 48 CFR 
part 9904, of the Code of Federal Regulations, do not apply.


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

[FR Doc. 04-6790 Filed 3-23-04; 3:58 pm]
BILLING CODE 6325-38-P