BNUMBER:  B-261316.4
DATE:  November 9, 1995
TITLE:  Blue Cross Blue Shield of Texas, Inc.

**********************************************************************

REDACTED DECISION
A protected decision was issued on the date below and was subject to a 
GAO Protective Order.  This version has been redacted or approved by 
the parties involved for public release.

Matter of:Blue Cross Blue Shield of Texas, Inc.

File:     B-261316.4

Date:     November 9, 1995

Thomas G. Jeter, Esq., Patrick K. O'Keefe, Esq., and Mark J. Meagher, 
Esq., McKenna & Cuneo, L.L.P., for the protester.
Thomas P. Humphrey, Esq., Robert M. Halperin, Esq., Peter J. 
Lipperman, Esq., Stephanie V. Corrao, Esq., and Nabil W. Istafanous, 
Esq., Crowell & Moring, for Foundation Health Federal Services, Inc., 
an interested party.
Kenneth S. Lieb, Esq., and Philip E. Adams, Esq., Office of the 
Civilian Health and Medical Program of the Uniformed Services, for the 
agency.
Glenn G. Wolcott, Esq., and Paul Lieberman, Esq., Office of the 
General Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  Agency was not obligated to advise offeror that its price for a 
portion of the proposal was higher than the government estimate where 
agency did not consider the price unreasonable.

2.  Agency's methodology for assessing a risk premium associated with 
each offeror's projected costs was reasonable and consistent with the 
evaluation scheme set forth in the solicitation.

3.  Awardee's reduction in price between initial proposals and best 
and final offers was reasonable where government estimate during this 
period decreased in an amount greater than the awardee's price 
reduction.

4.  Where one element of awardee's proposed pricing methodology 
significantly exceeded the government's estimate, agency's evaluation 
of awardee's proposal was reasonable where agency recognized and 
quantified the risk associated with awardee's proposed high price and 
considered that risk in making its source selection decision.

5.  [Deleted]

6.  Agency reasonably evaluated awardee's proposal as offering a "net" 
savings approach to resource sharing expenditures.

7.  Agency reasonably determined that award to offeror submitting 
lower-rated, lower-price proposal was in the government's best 
interest.

DECISION

Blue Cross Blue Shield of Texas, Inc. (BCBSTX) protests the award of a 
contract by the Office of the Civilian Health and Medical Program of 
the Uniformed Services to Foundation Health Federal Services, Inc. 
(FHFS) under request for proposals (RFP) No. MDA906-93-R-0004.[1]  The 
RFP sought proposals to provide managed health care services for 
CHAMPUS beneficiaries in Arkansas, Oklahoma, Louisiana, and Texas.  
The RFP contemplated award of a contract for a base period with five 
1-year options.  BCBSTX protests that the agency failed to conduct 
meaningful discussions, improperly evaluated various aspects of its 
and FHFS' proposals, and failed to perform an appropriate 
cost/technical tradeoff.

We deny the protest.

BACKGROUND

The RFP was issued on November 1, 1993, and sought proposals for the 
development and operation of a health care delivery and support system 
for CHAMPUS beneficiaries in the States of Oklahoma and Arkansas and 
major portions of the States of Texas and Louisiana, which are 
collectively referred to as Region 6.  Offerors were required to 
submit proposals in two parts:  one part to perform administrative 
functions (primarily claims processing and support services) and one 
part to provide health care services.  Separate technical and business 
proposals were required and the RFP provided that, in the source 
selection decision, technical factors would be given a weight of 60 
percent and business factors a weight of 40 percent.     

Regarding the health care portion of the contract, proposals were 
required to offer CHAMPUS beneficiaries three health care options with 
increasing levels of managed care.  The required options were (1) 
"TRICARE Standard," under which beneficiaries select providers of 
their own choosing who are compensated on a fee-for-service basis; (2) 
"TRICARE Extra," under which the beneficiaries' health care is to be 
provided by members of the contractor's preferred provider 
organization (PPO); and (3) "TRICARE Prime," under which the 
beneficiaries' health care is to be provided through a 
contractor-established health maintenance organization (HMO).

The RFP stated that the government intended to award a fixed-price 
contract (with the price subject to specified adjustments during 
performance).  For the administrative portion of the business 
proposal, the RFP required conventional firm, fixed-price proposals.  
Under the health care portion of the contract, the fixed-price nature 
of the contract was modified by a risk-sharing arrangement which is a 
key characteristic of OCHAMPUS managed-care solicitations.  Under this 
arrangement, in the event of health care cost overruns or underruns, 
the government and the contractor will share the responsibility or 
benefits respectively through application of loss-sharing or 
gain-sharing formulas. 

In the event of cost overruns, responsibility for excess costs will be 
shared by the government and the contractor, pursuant to the 
established formula, until the contractor has absorbed overruns equal 
to the amount of equity which the contractor offered to put at risk in 
its proposal.[2]  At that point, the contract will begin to function 
on a cost reimbursement basis, with the government paying for all 
additional health care costs.  

Actual health care costs will be a function of a large number of 
variables, such as the number of CHAMPUS beneficiaries who enroll in 
the HMO or PPO options, the level of provider discounts, inflation, 
and the contractor's ability to manage health care utilization.  
Offerors were required to propose "trend factors" (which are 
essentially multiplication coefficients) for each of the variables; 
the proposed trend factors represented the offerors' prediction of its 
cost performance in comparison to the agency's experience during the 
12-month period immediately preceding contract performance.  Data 
estimates regarding the government's experience during the preceding 
12-month period (referred to as the "data collection period" or "DCP") 
was provided as part of the RFP.  Thus, in the event an offeror was 
predicting that its costs would be identical to those experienced in 
the DCP, its proposed trend factor would be 1.0.  If the offeror was 
predicting a cost decrease, its proposed trend factor would be less 
than 1.0, while if it was predicting a cost increase its proposed 
trend factor would be greater than 1.0.[3]  

The RFP distinguished between trend factors over which the contractor 
was likely to have control and those over which the contractor was 
unlikely to have control.[4]  Specifically, in projecting actual 
health care costs, the RFP stated that offerors' proposed controllable 
trend factors would be evaluated "based upon the justification and 
documentation provided for the trends in the business proposal" and 
upon "the government's estimate of the likely trends under the 
offeror's approach."  Based on this assessment, the agency would 
adjust the offeror's proposed figures to reflect the agency's judgment 
regarding the actual costs that would be incurred under each offeror's 
approach.  Regarding evaluation of the uncontrollable trend factors, 
the RFP stated that the agency would substitute its independent 
government cost estimate (IGCE) for those proposed by offerors, except 
in instances in which an offeror had "a signed capitation agreement 
with specified capitation rates."  The agency's final assessment of 
projected actual health care costs for each offeror would reflect the 
costs proposed, as modified by the agency's adjustments of either 
controllable or uncontrollable factors.  

The RFP further explained that, after calculating the projected costs 
associated with each proposal (including the fixed-price 
administrative area and health care profit), the agency would estimate 
the cost to the government (pursuant to the risk-sharing formula) of 
various percentages of overruns and underruns relative to each 
offeror's projected cost.  This analysis was performed in order to 
assess each proposal's "sensitivity" to cost overruns or underruns.[5]  
The resulting calculation would lead to a further adjustment to the 
total probable cost for the proposal through the addition of a "risk 
premium."  

Initial proposals were received from five offerors, including BCBSTX 
and FHFS, by August 31, 1994.  Following evaluation, all five 
offerors' proposals  were determined to be within the competitive 
range and discussions occurred between October 1994, and February 
1995.  Best and final offers (BAFO) were submitted on February 27.  
Following BAFO evaluation, FHFS' and BCBSTX's proposals were 
determined to be the two proposals offering the greatest value to the 
government.  BCBSTX's proposal received a final technical score of 
610.177 at a total evaluated price of $2.361 billion; FHFS' proposal 
received a technical score of 566.239 at a total evaluated price of 
$1.988 billion.  A best buy analysis was performed, applying the 
appropriate weighting factors to the cost and technical scores, which 
resulted in a best buy score of 956.795 for the FHFS proposal and 
936.824 for the BCBSTX proposal.

After considering underlying reports and analyses of the business 
proposal evaluation team (BPET) and the source selection evaluation 
board (SSEB), the source selection advisory council (SSAC) recommended 
that the source selection authority (SSA) award a contract to FHFS, 
stating 

    "(1) While BCBSTX has significant strengths in the administrative 
    areas, these strengths were not perceived to be worth an 
    additional $120 million in costs to the Government.  (2) In the 
    area of health care delivery, the strengths of FHFS, plus their 
    lower cost of approximately $370 million represent substantial 
    cost savings to the Government."[6] 

The SSA reviewed the complete file and recommendations and selected 
FHFS for contract award.  The contract was awarded on April 28.  On 
May 8, BCBSTX filed its initial protest.  Following an agency 
debriefing, BCBSTX filed its first supplemental protest on May 19.  
The agency responded to BCBSTX's initial and first supplemental 
protests in its report to our Office on June 23.  In a letter dated 
July 10, BCBSTX stated

    "In light of the expansive Agency Report and documents supporting 
    that report, as well as our conclusion that certain of the grounds 
    raised in the original and first supplemental protest have been 
    adequately addressed by the agency, these comments focus only on 
    those remaining grounds of protest . . . [on] which [BCBSTX] 
    requests the GAO to render a decision."[7] 

On July 10, BCBSTX filed a second supplemental protest based on 
information obtained from the June 23 agency report.  

DISCUSSION

Meaningful Discussions

BCBSTX first protests that the agency failed to engage in meaningful 
discussions regarding the price it proposed to perform the 
administrative portion of the contract.  In this regard, BCBSTX's 
initial price for administrative services exceeded the government's 
estimate by approximately [deleted] percent.  BCBSTX asserts that "[an 
offeror's] price should be the subject of discussions if that price 
exceeds the government's own corresponding price estimate" and, on 
that basis, maintains that the award to FHFS should be overturned.[8]

The agency responds that although BCBSTX's initially proposed price 
for administrative services exceeded the IGCE by approximately 
[deleted] percent, the agency did not view that price as unreasonably 
high.  Accordingly, the agency concluded that any specific advice to 
BCBSTX's regarding its proposed administrative price would have, 
effectively, communicated to BCBSTX that its price was too high in 
relation to another offeror.[9]  

An agency may not inform an offeror of a cost it must meet to obtain 
further consideration or of its relative price standing, Innovative 
Training Sys., B-251225.3, Oct. 19, 1993, 93-2 CPD  232, and need not 
inform an offeror that its cost is too high unless the government has 
reason to think the cost is unreasonable.  Price Waterhouse, 65 Comp. 
Gen. 205 (1986), 86-1 CPD  54; Applied Remote Technology, Inc., 
B-250475, Jan. 22, 1993, 93-1 CPD  58; Warren Elec. Constr. Corp., 
B-236173.4; B-236173.5, July 16, 1990, 90-2 CPD  34.  Further, an 
agency has no duty to enter into price discussions with an offeror 
solely because its price is significantly higher than the prices 
proposed by other offerors.   In fact, pursuant to Federal Acquisition 
Regulation (FAR)  15.610(e)(2), an agency is prohibited from 
informing an offeror that its price is high in relation to another 
offeror's, unless its price is unrealistic for what is offered.    

Here, the RFP did not designate a particular approach which offerors 
were required to employ in performing the administrative services; 
rather, each offeror was responsible for preparing its own technical 
approach and proposed price based on its analysis of what would be 
most advantageous to the government.  The agency found that BCBSTX's 
technical approach to performing the administrative functions was 
superior and its overall technical rating reflected numerous 
strengths.  In this context, the agency did not view BCBSTX's price 
for administrative services as unreasonably high; rather, it simply 
concluded ultimately that the associated technical benefits were not 
worth the additional cost to the government.  On this record, given 
that an agency is not required to inform an offeror that its price is 
higher than the government estimate unless the agency believes the 
price is unreasonable, the agency's decision not to advise BCBSTX that 
its administrative price was higher than the IGCE is unobjectionable.    

Agency's "Sensitivity Analysis"

BCBSTX next challenges the "sensitivity analysis" employed by the 
agency to assess a "risk premium" for each proposal.  BCBSTX protests 
that the agency's analysis in this regard was flawed in that it 
"assume[d] that BCBSTX and FHFS were equally likely to overrun or 
underrun health care costs."   

BCBSTX's complaint fails to recognize that, before performing the 
sensitivity analysis, the agency conducted an extensive evaluation of 
each offeror's projected health care costs, thoroughly considering the 
unique aspects of each offeror's proposed controllable trend factors.  
Specifically, the agency adjusted each offeror's proposed price in 
each instance where it was not fully persuaded that the costs proposed 
accurately reflected the costs likely to be incurred, given the 
offeror's proposed approach.  The result of this evaluation was a most 
probable cost for each offeror's proposal which reflected the agency's 
best judgment as to the likely costs to be incurred by each offeror.  
Accordingly, the agency's subsequent sensitivity analysis assumed that 
the likelihood of overruns or underruns, in relation to the agency's 
best judgment of the offerors' respective costs, would be the same for 
all offerors.  In essence, the agency reasonably believed that its 
individual assessments of the offerors' likely costs were equally 
reliable.  See QualMed, Inc., B-257184.2, Jan. 27, 1995, 95-1 CPD  
94.  Accordingly, we find no basis to question this aspect of the 
agency's cost analysis.  

FHFS' BAFO Price Reduction 

BCBSTX next protests that the agency erred in its cost evaluation of 
FHFS' proposal by failing to specifically evaluate the reasons for 
FHFS' reduction in health care costs in its BAFO.  BCBSTX accurately 
notes that FHFS' health care costs were reduced by approximately 
[deleted] percent between submission of its initial proposal and its 
BAFO.  BCBSTX asserts "there is nothing in the record that shows that 
[the agency] questioned this reduction, evaluated whether it was 
reasonable, or assessed the impact of the reduction on FHFS' technical 
capabilities."

This allegation is inconsistent with the record.  First, the final 
BPET report specifically listed the differences in FHFS' health care 
costs between its initial proposal and BAFO, by option period and 
contract line item, reflecting the agency's individual assessment of 
each aspect of FHFS' revised price.  More importantly, BCBSTX's 
protest fails to take into consideration the fact that the 
government's IGCE for health care costs decreased by approximately  
[deleted] percent between submission of initial proposals and BAFOs.  
This reduction was based on revised DCP data as well as changes in the 
RFP requirements.[10]  Finally, in raising this issue, BCBSTX neglects 
to mention that its own proposed health care costs decreased between 
submission of initial proposals and BAFOs by almost [deleted] percent.  
On the record presented here, this portion of BCBSTX's protest is 
without merit.

Evaluation of DRG Capital/DME Costs

BCBSTX next protests that the agency failed to reasonably evaluate 
FHFS' proposal with regard to one of the cost categories--diagnostic 
related group (DRG) capital and direct medical education (DME) 
costs.[11]  BCBSTX notes that FHFS' proposal was significantly higher 
than the agency's IGCE for DRG capital/DME costs and maintains that 
the agency failed to properly consider the risk associated with this 
aspect of FHFS' proposal.  

The estimated data in the DCP period regarding DRG capital/DME costs 
supported the agency's IGCE of [deleted] million in DRG capital/DME 
costs for the base period and [deleted] million over the entire 
contract period.  FHFS' proposed costs for the entire contract period 
amounted to [deleted] million.  As discussed above, the RFP provided 
for adjustments to offerors' proposed prices on the basis of changes 
in DCP data.  Because FHFS' proposed DRG capital/DME costs were 
significantly greater than the government's IGCE, a change in the 
baseline DCP data would have a magnifier effect on FHFS' proposed 
price.[12]  BCBSTX asserts that the agency failed to give appropriate 
consideration to this risk during its evaluation of FHFS' proposal.  

Contrary to BCBSTX's allegation, the agency did, in fact, thoroughly 
consider the potential impact of FHFS' proposed DRG capital/DME costs.  
The BPET report specifically stated

    "There is one additional element of risk we wish to bring to the 
    attention of the SSAC concerning [FHFS] . . . .   There is an 
    issue concerning [FHFS'] proposed prices for DRG capital and 
    Direct Medical Education (DME) costs which creates some additional 
    risk to the Government, as follows:   . . . [FHFS] formally 
    proposed approximately [deleted] million for DRG capital/DME costs 
    over the life of the contract.  This amount is approximately 
    [deleted] times the level of DRG capital/DME costs that we 
    estimated that FHFS would experience under our cost realism 
    estimates ([deleted] million).  While our cost realism methodology 
    reflects our estimate for these costs rather than [FHFS'] estimate 
    (because these costs are classified as an uncontrollable cost 
    factor), our methodology does not take into account the risk 
    associated with the fact that, under the RFP's bid price 
    adjustment provisions, the contractors' proposed prices for DRG 
    capital/DME in each Option Period will be multiplied by the ratio 
    of the actual level of these costs in the DCP to the DCP level 
    projected in the RFP.  Further, while the [deleted] million of DRG 
    capital/DME costs projected for the DCP is relatively low compared 
    to health care costs overall, the effect of this DCP adjustment 
    would be magnified because of FHFS' significant overestimate of 
    these costs during the Option Periods."  

Consistent with this recognition of risk, and properly taking into 
account the risk-sharing provisions of this procurement, the agency 
calculated that FHFS' proposed DRG capital/DME costs added a risk 
factor of approximately [deleted] million to FHFS' proposed price; 
FHFS' final evaluated price properly reflected this assessment.  In 
the context of evaluating FHFS' DRG capital/DME costs, the agency also 
considered whether FHFS' status as the incumbent health care services 
provider for approximately 15 percent of the Region 6 CHAMPUS 
beneficiaries affected its risk assessment.[13]  Noting that DRG 
capital/DME costs are controlled by hospitals rather than the 
contractor and that FHFS does not own any hospitals in Region 6, the 
agency concluded that it would not assess further risk based on FHFS' 
status as the health care provider for BRAC sites in Region 6.  
Finally, the agency noted that FHFS' high estimate for DRG capital/DME 
expenses would have an equally magnified impact on its adjusted price 
in the event the actual DCP data was lower than the government's 
estimate--that is, if actual DRG capital/DME costs for the DCP were 
lower than estimated, FHFS' adjusted price would decrease 
significantly.  Given that the DCP estimate represented the most 
accurate information available regarding what the actual DCP data 
would be, the agency concluded there was the same likelihood that the 
actual DCP data would be less than the initial estimate as there was a 
likelihood that the data would be greater than the initial estimate.  

When agencies evaluate proposals for award of contracts with cost 
reimbursement aspects, the agency must perform a cost realism analysis 
to determine the extent to which an offeror's proposed costs represent 
the true cost to the government.  CACI, Inc.--Fed., 64 Comp. Gen. 71 
(1984), 84-2 CPD  542.  Because the contracting agency is in the best 
position to make this cost realism determination, our review of an 
agency's exercise of judgment in this area is limited to determining 
whether the determination was reasonably based and not arbitrary.  
General Research Corp., 70 Comp. Gen. 279 (1991), 91-1 CPD  183, 
aff'd, American Management Sys., Inc.; Department of the Army--Recon., 
70 Comp. Gen. 510 (1991), 91-1 CPD  492; Grey Advertising, Inc., 55 
Comp. Gen. 1111 (1976), 76-1 CPD  325.

Here, we find the agency's evaluation of the risk associated with 
FHFS' proposed DRG capital/DME expenses reasonably based.  As noted 
above, the agency did, in fact, consider the potential impact that 
FHFS' proposed DRG capital/DME costs could have on the government's 
costs, accurately calculating a potential [deleted] million additional 
risk to the government under the appropriate risk-sharing provisions 
of the RFP.  This assessment was properly reported to and considered 
by the SSA in the ultimate decision to award the contract to FHFS.  
Regarding the agency's assumption that increases or decreases in 
relation to its estimated DCP data were equally likely, BCBSTX offers 
no evidence that the DCP data would be more likely to be either higher 
or lower than the initial estimate.  Accordingly, we find no basis to 
question the agency's evaluation of this portion of FHFS' proposal.  

[Deleted]

Evaluation of FHFS' Resource Sharing 

BCBSTX next protests that award to FHFS was improper because FHFS' 
proposal "made inconsistent and ambiguous representations concerning 
resource sharing."  BCBSTX maintains that the agency was obligated to 
reject FHFS' proposal because it could not reasonably evaluate what 
FHFS intended to propose in this regard. 

Under the provisions of this RFP, resource sharing refers to the 
contractor's placement of resources--that is, personnel and/or 
equipment--at military treatment facilities (MTFs) with the purpose of 
encouraging beneficiaries to use the MTFs.  Because costs associated 
with MTFs are easier to control, such expenditure of resources can 
result in net program savings; that is, the level of resources spent 
to encourage MTF use may be less than the savings resulting from those 
expenditures.

This portion of BCBSTX's protest is based on the fact that, in one of 
the exhibits which the RFP required offerors to submit, FHFS proposed 
"0" resource sharing expenditures; yet, its proposal contemplated 
program savings based on resource sharing expenditures.  Thus, BCBSTX 
asserts that FHFS' proposal was internally inconsistent and, 
therefore, should have been rejected as unacceptable.

The agency responds that it evaluated FHFS' "0" entry as reflecting a 
"net" approach to resource sharing.[14]  The agency notes that this 
interpretation of FHFS' proposal was consistent with other portions of 
FHFS' business and technical proposal in which it clearly contemplated 
resource sharing expenditures.  Specifically, FHFS' business proposal 
explicitly stated that FHFS intended to incur [deleted] million for 
resource sharing in option year 1; [deleted] million in option year 2; 
[deleted] million in option year 3; [deleted] million in option year 
4; and [deleted] million in option year 5.  Similarly, FHFS' technical 
proposal devoted [deleted] pages to discussing how it intended to 
coordinate with MTFs to identifying resource sharing opportunities and 
specifically stated that FHFS would "project the amount of resources 
and actual cost of obtaining them" and "subtract the resource sharing 
expense from the projected CHAMPUS cost."  

In determining whether a proposal must be rejected as technically 
unacceptable a procuring agency must assess whether the proposal, 
reasonably read as a whole, offers to perform all material terms of 
the solicitation without exception.  See, e.g., Keyes Fibre Co., 
B-225509, Apr. 7, 1987, 87-1 CPD  383.  Here, we conclude that the 
agency reasonably determined, based on its review of FHFS' entire 
proposal, that FHFS' "0" proposal for resource savings in one of the 
required exhibits represented a "net" savings approach.[15]  
Accordingly, we find no merit in this portion of BCBSTX's protest.

Cost/Technical Tradeoff

Finally, BCBSTX protests that the agency failed to conduct a 
reasonable cost/technical tradeoff.  BCBSTX notes that the RFP 
provided that technical factors would be given a weight of 60 percent 
and cost/price factors a weight of 40 percent for purposes of the 
cost/technical tradeoff, and that its proposal was rated technically 
superior to FHFS' proposal.  In view of this, BCBSTX asserts that the 
agency failed to adequately justify its decision to award a contract 
on the basis of FHFS' lower technically rated, lower-priced proposal.

In responding to this portion of BCBSTX's protest, the agency has 
provided a detailed description, along with supporting documentation, 
describing the analysis it performed in arriving at the source 
selection decision.  As discussed above, the BPET and the SSEB 
performed evaluations of the individual aspects of each offeror's 
technical and business proposals.  During the evaluation there were 
"crosstalks" among the evaluators to ensure a complete understanding 
of each offeror's approach.  The conclusions of the BPET and the SSEB 
were formally documented, extensively detailing the perceived 
strengths and weaknesses of each proposal, and were included in the 
final reports which were forwarded to the SSAC.  In instances where 
the SSAC had questions or concerns regarding the evaluation, questions 
were sent back to the BPET or SSEB for appropriate written responses.  
In addition, the SSAC was briefed extensively by the BPET and the SSEB 
in face-to-face meetings.  After determining that FHFS' and BCBSTX's 
proposals offered the greatest value, the SSAC focused on the various 
strengths of each proposal.  In performing this analysis, the SSAC 
prepared two tables, which listed each of BCBSTX's and FHFS' proposal 
strengths by technical task and, under the heading "value to the 
government," specifically assessed each strength as having low, 
medium, or high value to the government.  Finally, based on its review 
of the entire record before it, as well as its own documented 
analysis, the SSAC concluded

    "Analysis of the strengths of the technical proposals of [BCBSTX] 
    and FHFS reveals savings to the Government in two areas.  (1)  
    While BCBSTX has significant strengths in the administrative 
    areas, these strengths were not perceived to be worth an 
    additional $120 million in costs to the Government.  (2)  In the 
    area of health care delivery, the strengths of FHFS, plus their 
    lower cost of approximately $370 million, represent substantial 
    costs savings to the Government."

The SSA executed the source selection statement on April 28, 1995.  In 
that statement, the SSA stated that he had reviewed all of the SSEB, 
BPET and SSAC reports, along with various other documents.  In his 
statement, he summarized the strengths of both BCBSTX and FHFS, as 
well as each offeror's expected costs and various aspects of those 
costs, concluding

    "I believe that the Best Buy Analysis clearly substantiates award 
    to the number one best buy offeror, FHFS.  The difference in total 
    proposed price of FHFS' proposal ($1.822 million) versus that of 
    BCBSTX ([deleted] million) of [deleted] million is a very 
    significant factor of this final award decision.  While the cost 
    realism analysis decreases this difference to $373 million, the 
    proposal submitted by FHFS continues to provide a very 
    advantageous price to the Government."

In a negotiated procurement, an agency may make award to a 
lower-priced, lower technically rated offeror if it determines that 
the price premium involved in awarding to a higher-rated, 
higher-priced offeror is not justified given the acceptable level of 
technical competence obtainable at the lower price.  Securiguard, 
Inc.; Vance Uniformed Protection Servs.; MVM, Inc., B-254392.8 et al., 
Feb. 9, 1994, 94-1 CPD  92; W.M. Schlosser Co., Inc., B-247579.2, 
July 8, 1992, 92-2 CPD  8.  We will review such tradeoffs to assure 
that they are reasonable in light of the evaluation scheme.  Lockheed 
Corp., B-199741.2, July 31, 1981, 81-2 CPD  
 71.  

Here, the record amply supports the reasonableness of the agency's 
cost/technical tradeoff.  The record specifically reflects that the 
SSA reviewed and considered each of the BPET, SSEB, and SSAC reports 
which extensively documented the strengths and weaknesses of each 
offeror.  In this regard, the SSAC report included a head-to-head 
comparison of BCBSTX's and FHFS' respective strengths, by task to be 
performed, assessing a relative value to the government applicable to 
each strength.  Accordingly, we find without merit BCBSTX's assertion 
that the agency failed to perform or adequately document its 
cost/technical tradeoff.

The protest is denied.

Comptroller General
of the United States

1. Throughout this decision, we refer to the program as CHAMPUS, and 
the agency as OCHAMPUS.

2. The RFP required offerors to place a minimum of $60 million of 
equity at risk with at least $15 million pledged per year, but 
permitted them to exceed this minimum in order to make their proposals 
more attractive to the government.

3. Because the DCP data provided in the RFP was preliminary, the RFP 
stated that the data would be revised at two specified points during 
contract performance.  The revised data would lead to adjustments in 
the contractor's proposed price for purposes of applying the risk 
sharing formula.  Thus, the contractor's actual performance would be 
more accurately measured in light of its required operating 
environment.

4. Controllable trend factors included provider discounts, resource 
sharing, and penetration rates.  Uncontrollable trend factors included 
inflation, volume tradeoff, and diagnostic related group capital and 
direct medical education expenditures.

5. For example, a proposal that offered more than the minimum required 
level of equity at risk would be less "sensitive" to cost overruns 
since the point of total government responsibility for costs would be 
delayed.  

6. This $370 million figure represents the overall evaluated cost 
differential, which includes the $120 million in administrative costs.

7. Accordingly, our decision today does not address the issues raised 
in BCBSTX's initial and first supplemental protest which BCBSTX did 
not pursue following receipt of the agency report.  Datum Timing, Div. 
of Datum, Inc., B-254493, Dec. 17, 1993, 93-2 CPD  328; Heimann Sys. 
Co., B-238882, June 1, 1990, 90-1 CPD  520.

8. In its July 10 comments, BCBSTX for the first time asserted that 
certain questions posed by the agency during discussions were designed 
to affirmatively mislead BCBSTX.  The record is clear that BCBSTX knew 
all of the information on which this allegation is based after the 
agency debriefing on May 5.  Accordingly, BCBSTX was required to raise 
this issue within 10 working days after the debriefing.  4 C.F.R.  
21.2(a)(2) (1995).  Since BCBSTX did not raise this allegation until 
July 10, the issue is untimely raised and will not be considered. 

9. The records shows that, in fact, two other offerors proposed 
administrative prices significantly higher than BCBSTX, and a third 
offeror's proposed administrative price was virtually identical to 
BCBSTX.

10. For example, the RFP requirements were changed between submission 
of initial proposals and BAFOs to incorporate a "uniform benefit" in 
the CHAMPUS program.  This change provided a basis for some cost 
reduction.

11. DRG payments are prospective payments for hospital operating costs 
that are based on the diagnosis of the patient and resources routinely 
needed to treat that condition; DRG payments generally do not vary.  
DRG capital/DME payments are retrospective payments to hospitals that 
are not included in prospective DRG hospital payments; DRG capital 
costs include interest, rent and depreciation.  DME costs are expenses 
directly related to conducting graduate medical education programs, 
such as the salaries of interns and residents.  Hospitals submit 
invoices for DRG capital/DME costs directly to the contractor.  The 
portion of a hospital's DRG capital/DME costs applicable to the 
CHAMPUS program is determined by multiplying the hospital's total DRG 
capital/DME costs by the ratio of CHAMPUS patient days to total 
patient days.  Thus, DRG capital/DME costs are controlled by the 
hospital, not the contractor.  Consistent with this, the RFP provided 
that DRG capital/DME costs were to be treated as an uncontrollable 
trend factor.

12. That is, a 50-percent increase or decrease in the DCP data, which 
would result in a [deleted] million increase or decrease to the IGCE 
(50 percent of [deleted] million), would result in a [deleted] million 
increase or decrease in FHFS' proposed price (50 percent of [deleted] 
million).

13. FHFS is the incumbent contractor providing health care services to 
CHAMPUS beneficiaries in Base Realignment and Closure (BRAC) sites in 
Region 6.  The BRAC sites account for approximately 15 percent of the 
DCP health care costs in the Region. 

14. That is, the agency evaluated FHFS' proposal as anticipating 
savings as a result of its resource sharing expenditures at a level in 
excess of its resource sharing expenditures.  Thus, the agency 
concluded that FHFS' proposed savings due to resource sharing were 
decreased by the amount of its expenditures; accordingly, its resource 
sharing expenditures were proposed at "0" to ensure that the agency 
did not inadvertently subtract those expenditures from its proposed 
savings a second time.  

15. In QualMed, Inc., B-257184.2, Jan. 27, 1995, 95-1 CPD  94, we 
similarly rejected the argument BCBSTX now raises under virtually 
identical circumstances.