[Federal Register Volume 70, Number 104 (Wednesday, June 1, 2005)]
[Rules and Regulations]
[Pages 31389-31392]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10827]



48 CFR Parts 1631 and 1699

RIN 3206-AJ10

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

AGENCY: U.S. Office of Personnel Management.

ACTION: Final rule.


SUMMARY: The U.S. Office of Personnel Management (OPM) is issuing a 
final regulation amending the Federal Employees Health Benefits (FEHB) 
Acquisition Regulation (FEHBAR). This regulation provides 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: Effective July 1, 2005.

FOR FURTHER INFORMATION CONTACT: Anne Easton, Manager (202) 606-0770, 
by fax: (202) 606-0633, or e-mail: [email protected]).

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 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 
    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 the FAR Part 31 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. These final regulations may apply to 
contractors that also allocate costs to other federal contracts subject 
to CAS-coverage or FAR provisions related to cost-based contracts. OPM 
plans to contact other federal agencies that contract with the FEHB 
contractors to discuss how cost accounting practices are applied to 
business units that may have other cost-based contracts for federal 
programs, such as Medicare or Tricare, to determine if a consistent 
standard is appropriate governmentwide.
    FAR Part 31 provides criteria that govern the allocation of 
indirect costs to contracts. 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). The new section 
provides guidance for determining logical cost groupings as required by 
FAR 31.203(c). It also provides methods for achieving the FAR 31.201-4 
requirement that costs are to be allocated on the basis of relative 
benefits received or other equitable relationship. We have also 
provided more guidance on the allocation of business unit general and 
administrative (G&A) expenses (FEHBAR 1631.203-71) and home office 
expenses to carriers' business segments (FEHBAR 1631.203-72) to 
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. 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.
    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. 
Identifying 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 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 
    We have 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 also provided 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 
also be 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.
    Consistent with OPM's waiver of Cost Accounting Standards (CAS) 
requirements, a new FEHBAR 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

[[Page 31390]]

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.
    On March 26, 2004, OPM published a proposed rule in the Federal 
Register (69 FR 15774). We received comments from two FEHB Program 
carriers and one Federal employee union. One carrier commented on the 
provision in 1631.205-72, which establishes that compensated personal 
absence must be assigned to the cost accounting period in which the 
entitlement was earned. The carrier asked that we clarify in the 
preamble that a contractor subject to this provision be permitted to 
draw the amount of the allowable compensated personal absence from the 
Plan's letter of credit (LOC) reserves in the cost accounting period in 
which the contractor determines that an entitlement had been earned. We 
agree. Further, if it is later determined that the compensated personal 
absence entitlement was not earned in the cost accounting period to 
which it was assigned, the contractor will make an appropriate 
adjustment and credit the LOC reserves. Another carrier commented that 
it is important and highly appropriate that section 1699.70 provides 
that the cost accounting standards do not apply to experience-rated 
contracts, adding that this will avoid unnecessary and burdensome costs 
to the Program. The carrier also commented on an anomaly in 1631.203 of 
the proposed regulation which was created when the FAR Councils 
published a final rule on April 5, 2004, after the publication date of 
OPM's proposed regulation. The FAR Councils' rule revised FAR 31.203 
regarding base periods for allocating indirect costs, stating `` * * * 
the base period for allocating indirect costs shall be the contractor's 
fiscal year used for financial reporting purposes in accordance with 
generally accepted accounting principles. The fiscal year will normally 
be 12 months, but a different period may be appropriate (e.g. when a 
change in fiscal year occurs due to a business combination or other 
circumstances.'' Historically, the practice in the insurance industry 
has been to base the allocation of indirect costs on monthly rates, 
unadjusted for annual differences. The FEHBAR allows for continuation 
of normal business practices when there would be no material gain from 
asserting a change. The practice of allocating indirect costs on a 
monthly basis is in accordance with GAAP in the insurance industry. 
Imposing a change would incur additional costs for the Government which 
would have to pay for the cost of implementing and maintaining the 
change in administrative systems. Therefore, this clause remains 
unchanged except to adopt the new paragraph numbering reflected in the 
updated FAR 31.203. The Federal employee union stated its objection to 
OPM's waiver of the CAS and, subsequently to all the provisions in the 
proposed rule except for one. The FAR 30.201-5(b)(2) permits the head 
of an agency to waive the CAS for a particular contract or subcontract 
under exceptional circumstances when necessary to meet the needs of the 
agency. We determined there were sufficient reasons and granted waivers 
for certain health plans under the FEHB Program. In October 2002, OPM 
determined that it was appropriate to grant CAS waivers for certain 
health plans under the FEHB Program for the reasons outlined below. 
First, OPM determined that the Program has adequate cost accounting 
requirements in its Federal Employees Health Benefits Acquisition 
Regulations (FEHBAR), which supplement the Federal Acquisition 
Regulation. The FEHBAR requires carriers to file annual financial 
statements. The carriers, and their third party servicing agents, must 
also adhere to financial and other related standards, comply with an 
FEHB Program audit guide, and submit to audits by Independent Public 
Accountants. Second, because OPM has contracted with carriers for 
twenty to forty years, it has been able to collect extensive data on 
each carrier, thus making disclosure statements superfluous. Their 
existing systems are and have been their benchmarks. Third, the OPM 
Office of the Inspector General audits health carriers on a regular 
basis; contract rates, which are negotiated annually, are subject to 
adjustment for audit findings. Fourth, insurance carriers are subject 
to State regulatory authorities and must meet State statutory reserve 
requirements in order to conduct business; in addition, many carriers 
are required to submit to State rate setting procedures. Accordingly, 
OPM's statutory oversight and regulatory requirements already in place 
are sufficient to meet the Government's interests in a much less 
burdensome way than applying CAS. This new regulation will enhance the 
financial integrity of the Program and demonstrate to the public and 
any other interested parties that accounting methods and related 
financial disclosures by carriers are consistent with sound business 

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 

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.

U.S. Office of Personnel Management.
Dan G. Blair,
Acting Director.

Accordingly, we are amending chapter 16 of title 48, Code of Federal 
Regulations, as follows:


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

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


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

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 
    (b) Hospital year-end settlements and other applicable provider 

[[Page 31391]]

    (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 

4. A new section 1631.203 is added to read as follows:

1631.203  Indirect costs.

    For the purposes of applying FAR 31.203(g)(2) 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 General 
and Administrative (G&A) expenses, FEHBAR 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 
    (c) The allocation of business unit general and administrative 
expenses and the allocation of home office expenses to segments are 
also subject to FEHBAR 1631.203-71 and FEHBAR 1631.203-72, 

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 
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 

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(b)(3), 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).

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

[[Page 31392]]

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:


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.

[FR Doc. 05-10827 Filed 5-31-05; 8:45 am]