TITLE: B-297915, CIGNA Government Services, LLC, May 4, 2006
BNUMBER: B-297915
DATE: May 4, 2006
*****************************************************
B-297915, CIGNA Government Services, LLC, May 4, 2006

   DOCUMENT FOR PUBLIC RELEASE
   The decision issued on the date below was subject to a GAO Protective
   Order. This redacted version has been approved for public release.

   Decision

   Matter of: CIGNA Government Services, LLC

   File: B-297915

   Date: May 4, 2006

   Craig A. Holman, Esq., Kara L. Daniels, Esq., and David J. Craig, Esq.,
   Holland & Knight, LLP, for the protester.

   Paul F. Khoury, Esq., Kathryn Bucher, Esq., Dorthula H. Powell-Woodson,
   Esq., Kara M. Sacilotto, Esq., Daniel P. Graham, Esq., and Kevin J.
   Plummer, Esq., Wiley Rein & Fielding LLP, for Noridian Administrative
   Services, LLC, an intervenor.

   Jeffri Pierre, Esq., Anthony E. Marrone, Esq., and Christine Simpson,
   Esq., Department of Health & Human Services, for the agency.

   Glenn G. Wolcott, Esq., and Michael R. Golden, Esq., Office of the General
   Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Agency's cost realism analysis of awardee's proposed cost/price was
   reasonable where agency considered specific cost elements of the proposed
   cost/price, comparing the cost/price proposed for those elements with
   historical costs incurred by both the awardee and other contractors in
   performing similar activities.

   DECISION

   CIGNA Government Services, LLC protests the award of a contract by the
   Department of Health & Human Services, Centers for Medicare and Medicaid
   Services (CMS), to Noridian Administrative Services, LLC under request for
   proposals (RFP) No. CMS-2005-0012 to provide Medicare claims processing
   and services related to claims from suppliers and beneficiaries of durable
   medical equipment.[1] CIGNA protests, among other things, that CMS failed
   to perform an adequate cost realism analysis with regard to Noridian's
   proposed cost/price.

   We deny the protest.

   BACKGROUND

   In December 2003, Congress enacted the Medicare Prescription Drug
   Improvement and Modernization Act of 2003 (MMA). Among other things, this
   legislation requires that CMS use competitive procurement procedures,
   pursuant to the Federal Acquisition Regulation (FAR), to replace the
   fiscal intermediaries and carriers on whom CMS has historically relied for
   claims processing services,[2] and who have been selected under other than
   competitive procedures. The replacement contractors under the MMA are
   referred to as "Medicare Administrative Contractors" (MACs). Pursuant to
   the transition, and in contrast to past practice, MACs are also required
   to comply with the Cost Accounting Standards (CAS).

   In April 2005, CMS published RFP No. CMS-2005-0012, seeking proposals, for
   each of four geographic jurisdictions,[3] to provide specified health
   insurance benefit administration services, including Medicare claims
   processing and payment services, related to durable medical equipment,
   prosthetics, orthotics and supplies (DMEPOS).[4] RFP sect. B.1. The
   procurements for each jurisdiction were conducted as separate
   competitions, but offerors were permitted to submit proposals for any or
   all of the jurisdictions. The solicitation provided that the source
   selection decision for each jurisdiction would be made on the basis of the
   proposal offering the best overall value to the government, considering
   cost/price and the following non-cost/price factors, listed in descending
   order of importance: offeror capability,[5] implementation,[6] quality
   control plan, corporate experience, past performance, and small
   disadvantaged business utilization plan. RFP sect. M.4. The solicitation
   provided that non-cost/price factors, when combined, were significantly
   more important than cost/price, and that cost/price would not be point
   scored but would be evaluated for cost realism. RFP sections M.2, M.7.

   Under prior Medicare claims processing procedures, CMS has employed an
   "activity-based costing" (ABC) system in which virtually all contractor
   costs, including all staffing hours, are direct-charged against a number
   of "activity codes." Hearing Transcript (Tr.), Apr. 4, 2006, at 19-20.[7]
   In specifying the various activities contemplated under this solicitation,
   the statement of work frequently referenced particular ABC codes that have
   been associated with particular activities under the prior system.[8]
   Under the most important non-cost/price evaluation factor, offeror
   capability, the solicitation directed each offeror to "provide a clear and
   concise description of its understanding of the requirements of the tasks
   provided in the statement of work." RFP sect.L.15, at 116. This portion of
   the solicitation further directed each offeror to submit a "Work Breakdown
   Structure," stating that:

     The WBS [work breakdown structure] shall contain the major work tasks,
     milestones, timeframes and deliverables of the technical proposal
     directly correlated to the business proposal. Subdivide the statement of
     work task into their constituent activities . . . . Briefly describe
     each activity and its inputs and outputs. . . . In addition, resource
     information in the cost template for FTE data concerning labor hours and
     categories, materials and subcontracts, etc. must be contained in the
     technical proposal so that your understanding of the scope of work may
     be evaluated.

   RFP sect. L.15, at 117.

   On or before the specified closing date, Noridian and CIGNA submitted
   proposals for the jurisdiction D contract.[9] Technical proposals were
   evaluated by a technical evaluation board (TEB);[10] cost/price proposals
   were evaluated by a business evaluation panel (BEP).[11] Noridian's
   proposed cost/price was [deleted] million; CIGNA's proposed cost/price was
   [deleted] million.[12] Agency Report (AR), Tab 17A, at 1; AR Tab 18A, at
   1.

   Upon completing the evaluation of initial proposals, the TEB submitted a
   report to the contracting officer which reflected the following ratings
   for the various evaluation factors: [13]

   +------------------------------------------------------------------------+
   |Evaluation Factor          |   Max. Score    |   CIGNA   |   Noridian   |
   |---------------------------+-----------------+-----------+--------------|
   |Offeror Capability         |       545       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Implementation             |       170       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Quality Control Plan       |       100       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Corporate Experience       |       80        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Past Performance           |       80        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |SDB Utilization Plan       |       25        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Total                      |      1000       | [deleted] |  [deleted]   |
   +------------------------------------------------------------------------+

   AR, Tab 9, at 2, 20.

   The TEB report identified various strengths and weaknesses in each
   proposal. Although the two proposals received relatively comparable point
   scores, the TEB expressed concern regarding Noridian's understanding of
   the unique DMEPOS claims processing requirements, stating:

     NAS [Noridian] does not appear to understand the differences between the
     unique rules of DMEPOS versus NAS' current [Medicare] Part B operations.
     This could be extremely problematic for future DME MAC operations. In
     many cases, NAS seems to think little or nothing will need to change in
     terms of their processing and knowledge of the staff to handle DMEPOS,
     but this is not an accurate assumption. DMEPOS claims are very different
     from physician/practitioner claims.

   AR, Tab 9, at 23.

   A portion of the TEB report, under the heading "Business Proposal,"
   prepared by the BEP's technical representative expressed similar concern,
   stating: "[Noridian's] estimates for the bills/claims functions appear
   significantly low. The basis for the estimates for some of the activity
   codes need to be reviewed with this offeror." AR, Tab 9, at 33-34.

   In reviewing the proposals for all jurisdictions, the agency found that
   some of the offerors, including Noridian, proposed to meet particular
   requirements through use of "service centers" that were proposed as "other
   direct costs" (ODCs).[14] AR, Tab 17A, at 3-4; Tr., Apr. 4, 2006, at
   384-85. Because these service centers performed work for contracts in
   addition to the DMEPOS contract, the costs proposed to perform certain
   DMEPOS contract requirements reflected only a portion of the service
   center's total costs; accordingly, the evaluators were unable to identify
   any "direct labor" charges to various DMEPOS activities--although the
   proposed ODC amounts for those activities clearly included labor costs.
   Tr., Apr. 4, 2006, at 385-86. In short, the agency determined that the
   total level of resources an offeror was proposing to perform various
   activites was not necessarily reflected by referencing only the "direct
   labor" proposed for that activity. Id.

   By letters dated August 24, 2005, the agency initiated discussions with
   CIGNA and Noridian. AR, Tab 43. Due to the agency's difficulty in
   determining the various levels of effort being proposed by the offerors,
   the agency created a "level of effort" (LOE) template for offerors to
   complete, sending that template to offerors with the August 24 discussion
   letters. With regard to the template, the discussion letters stated:

     CMS is requesting that you confirm your proposed level of effort by
     completing the enclosed template as instructed. The template shall
     include all productive hours to fulfill the statement of work
     requirements related to your proposal. This includes those hours charged
     to the contract whether those hours are allocated through an indirect
     cost pool or to an ABC code. Your subcontractor hours shall be
     identified as well.[[15]] The hours shall be provided by contract year
     for all years. In order to fully understand your proposed level of
     effort, CMS is asking that you confirm your proposed level of effort by
     way of completing this template. You are cautioned that this is not a
     request to revise your Business Proposal. Rather it is an analysis tool
     that will be used to better understand your proposed level of effort.

   AR, Tab 43, at 1-2.

   Both CIGNA and Noridian responded to the initial discussions and,
   thereafter, participated in various rounds of discussions, both written
   and oral, submitting various clarifications, modifications, and revisions
   to their initial proposals, including submission of the LOE templates.[16]

   On December 1, 2005, the TEB issued another report, summarizing the impact
   of the discussions, clarifications, modifications and revisions that had
   occurred up to that time. Among other things, this report stated:

     It should be noted that through discussions [with Noridian] it was noted
     by CMS that an area of improvement was demonstrated knowledge of
     specialized DME processing. NAS' response to this dealt with staff
     expertise in DME claims processing, prior communication with VMS on the
     claims processing system, a gap analysis between the Part B and DMERC
     claims information and a DME 101 training course for NAS employees. In
     summary, NAS feels these examples show how they will become more
     proficient with DME. As a result[,] these examples did provide
     information sufficient to raise some of the claims processing
     requirements scores. However, there continue to be concerns about NAS's
     understanding of how DMEPOS claims and processing is different than Part
     B.

   AR, Tab 14, TEB Report (Dec. 1, 2005), at 3.

   On November 30, the agency requested submission of final revised proposals
   (FRPs). CIGNA and Noridian each submitted an FRP on December 9. The
   submissions were subsequently evaluated by the various evaluation panels,
   including the TEB and BEP. Noridian's proposed cost/price was $97.4
   million; CIGNA's proposed cost/price was [deleted] million. AR, Tab 17(c),
   at 1; AR, Tab 18(c), at 1.

   On December 14, the TEB submitted its report on the offerors' FRPs.[17]
   The summary of the final technical evaluation ratings were as follows:

   +------------------------------------------------------------------------+
   |Evaluation Factor          |   Max. Score    |   CIGNA   |   Noridian   |
   |---------------------------+-----------------+-----------+--------------|
   |Offeror Capability         |       545       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Implementation             |       170       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Quality Control Plan       |       100       | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Corporate Experience       |       80        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Past Performance           |       80        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |SDB Utilization Plan       |       25        | [deleted] |  [deleted]   |
   |---------------------------+-----------------+-----------+--------------|
   |Total                      |      1000       | [deleted] |  [deleted]   |
   +------------------------------------------------------------------------+

   AR, Tab 14, at 2; Tab 5, at 2-3; Tab 41, at 27.

   With regard to Noridian's FRP, the TEB report, under the heading
   "Strengths," stated, among other things, as follows:

     The OnBase document and management workflow system is described in
     detail throughout the proposal. It shows benefits such as facilitating
     quality assurance practices, imaging, and tracking documents across
     components, monitoring and measuring as a tool to meet timeliness
     standards, and ensuring that documents are routed in a standard,
     controlled and expeditious manner. Implementation of this system into
     the DME MAC environment should increase "quality control, cost savings
     and performance monitoring capabilities of an electronic document
     management system.["] Examples of the benefits of OnBase are apparent
     throughout the proposal. . . .

     The proposal outlines innovative means to ensure high performance of
     employees.[[18]]

   AR, Tab 15, at 8-9.[19]

   Under the heading "Weaknesses," the report repeated the TEB's earlier
   concerns regarding Noridian's understanding of the unique aspects of
   DMEPOS contracting, stating:

     In the area of Offeror Capability, specifically DME claims processing,
     NAS has failed to demonstrate a thorough understanding of the basic
     principles, unique rules and complexities of DMEPOS claims processing as
     opposed to local carrier processing.

   AR, Tab 15, at 9.[20]

   Nevertheless, as shown in the tables above, the TEB's rating of Noridian's
   proposal with regard to offeror capability increased from an initial score
   of [deleted] to a score of [deleted] and that, overall, Noridian's
   proposal was rated only somewhat lower than CIGNA's proposal.[21]

   The portion of the TEB's final report prepared by the BEP's technical
   representative (who was tasked with performing the cost realism analysis)
   had a more focused concern with regard to Noridian's understanding of the
   requirements. Specifically, under the heading "Cost Realism Analysis," the
   final TEB report stated:

     The technical panel questioned the final calculation of number of claims
     per hour per person [that Noridian had presented orally during
     discussions] and asked NAS to revise their assumptions surrounding
     beneficiary submitted paper claims because there are more beneficiary
     paper claims submitted in DME vs. Part B. This could have a direct
     impact on NAS' assumed productivity.[[22]]

   AR, Tab 15, at 12.

   On December 14, the contracting officer met with all of the evaluation
   panel chairs to obtain their input regarding the award recommendations to
   be made to the source selection board (SSB) and the source selection
   authority (SSA) in a meeting scheduled to take place the following
   day.[23] At this meeting the TEB strongly recommended award to CIGNA with
   regard to jurisdiction D. The contracting officer expressed reservation
   with that recommendation, noting that CIGNA's proposed cost/price was
   significantly higher than Noridian's, yet CIGNA's rating for
   non-cost/price factors was only somewhat higher. Because of the TEB's
   concerns that Noridian did not have a complete understanding of the DMEPOS
   contract requirements, the contracting officer requested that the
   evaluation personnel consider whether an upward adjustment to Noridian's
   proposed cost/price should be made to reflect those concerns and, if so,
   to calculate what such an adjustment should be.

   In response to the contracting officer's request, the TEB calculated a
   potential upward adjustment to Noridian's cost/price by increasing it to
   reflect the total level of direct labor hours that CIGNA had charged to
   all "11000" activity codes (the codes associated with the entire
   "Bills/Claims Payment" function) in the immediately preceding period under
   CIGNA's incumbent DMERC contract. AR, Tab 15.

   Thereafter, the contracting officer reviewed the proposed adjustment, but
   concluded that it would not be appropriate to apply the adjustment to
   Noridian's proposed cost/price. Among other things, the calculation
   reflected an upward adjustment for all of the "11000" code activities; yet
   the TEB's concerns related only to the much narrower activity code, 11202,
   associated with handling paper claims.

   On December 15, the scheduled meeting between the evaluation personnel,
   the contracting officer, the SSB, and the SSA took place. At that meeting
   the contracting officer presented the TEB's conclusions with regard to the
   jurisdiction D competition and, consistent with the TEB's position,
   recommended award to CIGNA, notwithstanding CIGNA's higher cost/price. The
   calculated adjustment proposed by the TEB for Noridian's cost/price was
   not presented. Following completion of the presentations for each of the
   four jurisdictions, the SSA dismissed the evaluation panel chairs and "a
   further, lengthy discussion took place" between the SSA, SSB members, the
   contracting officer, and other "senior CMS management officials."[24]
   Contracting Officer's Statement, (Feb. 22, 2006), at 6.

   Based on this "further, lengthy discussion," the SSA concluded that he
   could not make a source selection decision in favor of either jurisdiction
   D offeror without obtaining additional information. Accordingly, the SSA
   directed the contracting officer and the evaluation personnel to perform
   further analysis, specifically requesting, among other things, that they
   make a determination as to whether Noridian could be realistically
   expected to perform the contract requirements at the cost/price it had
   proposed. Id.

   In response to the SSA's direction, the BEP's technical representative
   retrieved from CMS's existing database a substantial amount of proposal
   and historical cost information regarding all of the offerors that
   submitted proposals for the four DMEPOS jurisdictions; the BEP technical
   representative compiled the retrieved data in a chart labeled "Efficiency
   Comparison." Agency Report, Tab 16. The "Efficiency Comparison" chart
   compared offerors' various proposed costs, as well as various historical
   costs for Medicare Part B claims processing and, for incumbent DMERC
   contractors, specific costs billed under those contracts during the most
   recent contract period. Among other things, the "Efficiency Comparison"
   chart displayed the "cost per claim" for the total "Bills/Claims Payment"
   function as reflected in each offeror's proposal; the historic "cost per
   claim" for the total "Bills/Claims Payment" function incurred by each
   offeror under prior Part B Medicare work; and, for the four DMERC
   incumbents, the similar "costs per claim" incurred under those particular
   contracts. The proposed and historical costs were as follows:

   Cost Per Claim for "Bills/Claims Payment" (All 11000 Codes)

   +------------------------------------------------------------------------+
   |                    |    DMEPOS    |FY 2005 Medicare Part|   FY 2005    |
   |                    |              |          B          |              |
   |                    |   Proposal   |                     |  Incumbent   |
   |                    |              |   Cost Per Claim    |              |
   |                    |Cost Per Claim|                     |    DMERC     |
   |                    |              |                     |              |
   |                    |              |                     |Cost Per Claim|
   |--------------------+--------------+---------------------+--------------|
   |Noridian (Juris. D) |  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |CIGNA (Juris. D)    |  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |CIGNA (Juris. C)    |  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |Palmetto (Juris C)  |  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |Offeror W (Juris. B)|  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |Offeror X (Juris. B)|  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |Offeror Y (Juris. A)|  [deleted]   |      [deleted]      |  [deleted]   |
   |--------------------+--------------+---------------------+--------------|
   |Offeror Z (Juris. A)|  [deleted]   |      [deleted]      |  [deleted]   |
   +------------------------------------------------------------------------+

   AR, Tab 16, Efficiency Comparison Chart.

   More specifically, the "Efficiency Comparison" chart also displayed "cost
   per claim" data for the more specific activity code, 11202, "Manage Paper
   Bills/Claims." The proposed and historical costs for that particular
   activity were as follows:

   Cost Per Claim for "Manage Paper Bills/Claims" (Code 11202)

   +------------------------------------------------------------------------+
   |                        |   DMEPOS    |      FY 2005      |   FY 2005   |
   |                        |             |                   |             |
   |                        |  Proposal   |  Medicare Part B  |  Incumbent  |
   |                        |             |                   |             |
   |                        |             |                   |    DMERC    |
   |------------------------+-------------+-------------------+-------------|
   |Noridian (Juris. D)     |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |CIGNA (Juris. D)        |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |CIGNA (Juris. C)        |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |Palmetto (Juris C)      |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |Offeror W (Juris B)     |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |Offeror X (Juris B)     |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |Offeror Y (Juris A)     |  [deleted]  |     [deleted]     |  [deleted]  |
   |------------------------+-------------+-------------------+-------------|
   |Offeror Z (Juris. A)    |  [deleted]  |     [deleted]     |  [deleted]  |
   +------------------------------------------------------------------------+

   AR, Tab 16, Efficiency Comparison Chart.

   Upon reviewing all of the data displayed in the "Efficiency Comparison"
   chart, including the specific data displayed above, [25] the agency
   concluded that the data confirmed that, overall, Noridian has been a
   historically efficient and low-cost contractor. Further, the agency
   concluded that, with regard to the unique DMEPOS requirements involving
   paper claims, Noridian's proposal reflected a dramatically higher level of
   resources to perform that requirement in the DMEPOS environment than it
   has historically employed to handle paper claims under Part B of the
   Medicare program. More specifically, the agency determined that Noridian's
   proposed cost/price specifically contemplated costs at the rate of
   [deleted] per claim -- [deleted] times greater than the costs Noridian has
   historically incurred in processing paper claims under Part B of the
   Medicare program, and substantially higher than the costs proposed by most
   of the other DMEPOS offerors, including CIGNA. Accordingly, the agency
   concluded that Noridian properly anticipated that a significantly higher
   level of resources would be required to perform the requirements involving
   paper claims under the DMEPOS contract than Noridian has been required to
   apply to its successful performance of this activity under its prior
   Medicare work.

   Because, as discussed above, the TEB's concerns regarding Noridian's
   understanding of the DMEPOS requirements, following discussions, were
   primarily focused on the unique DMEPOS requirements involving processing
   of paper claims, the agency concluded, based on all of the proposed and
   historical data contained in the "Efficiency Comparison" chart, together
   with the other information submitted in Noridian's proposal, that
   Noridian's proposed cost/price was reasonable and realistic. Based on that
   determination, the agency concluded that CIGNA's somewhat higher--rated
   proposal with regard to non-cost/price evaluation factors did not warrant
   payment of CIGNA's substantially higher cost/price. Thereafter, Noridian's
   proposal was selected for award. This protest followed.

   DISCUSSION

   CIGNA protests that CMS "completely abdicated" its responsibility to
   perform a cost realism analysis because it did not upwardly adjust
   Noridian's proposed cost/price as initially suggested by the TEB. We
   disagree.

   When an agency evaluates a proposal for the award of a cost-reimbursement
   contract, an offeror's proposed estimated costs are not dispositive
   because, regardless of the costs proposed, the government is bound to pay
   the contractor its actual and allowable costs. Tidewater Constr. Corp.,
   B-278360, Jan. 20, 1998, 98-1 CPD para. 103. Consequently, the agency must
   perform a cost realism analysis to determine the extent to which an
   offeror's proposed costs represents what the contract should cost,
   assuming reasonable economy and efficiency. McDonnell Douglas Corp.,
   B-259694.2, B-259694.3, June 16, 1995, 95-2 CPD para. 51. That is, the
   purpose of a cost realism analysis is to determine what, in the
   government's view, it is likely to realistically cost the offeror to
   perform the contract requirements. Hager Sharp, Inc., B-258812, Feb. 17,
   1995, 95-1 CPD para. 93. The FAR specifically provides that an agency's
   required cost realism analysis should consider the separate cost elements
   of an offeror's proposal, along with the agency's application of judgment,
   and provides that an agency may use various techniques and procedures,
   specifically including consideration of actual/historical costs that have
   been incurred by the offeror or other contractors for the same or similar
   work. FAR sect. 15.404; United Int'l Eng'g, Inc. et al., B-245448 et al.,
   Jan. 29, 1992, 92-1 CPD para. 122 at 10-11; DATEX, Inc., B-270268.2, April
   15, 1996, 96-1 CPD 240.

   Here, as discussed above, the agency considered all of the information
   submitted in Noridian's proposal, including, to the extent possible, the
   levels of effort associated with the various DMEPOS requirements, yet
   properly recognized that the available information did not definitively
   identify the specific levels of effort that were proposed for some of the
   specific DMEPOS activities. In this regard, the agency properly recognized
   that, while Noridian's proposal reflected substantial costs it would incur
   in connection with efforts at its various "service centers," these
   proposed costs could not be broken down to identify the particular levels
   of direct labor hours flowing from those service centers to perform
   particular DMEPOS activities. The agency also reasonably concluded that
   Noridian's proposal reflected a higher level of automation and efficiency
   than CIGNA's more "manual-type" approach to claims processing. Finally,
   the agency specifically considered Noridian's proposed costs to perform
   the DMEPOS requirements regarding paper claims--the area on which the TEB
   had focused its concerns regarding Noridian's understanding of the
   contract requirements--and compared the proposed costs to various other
   offerors' proposed and historical costs for performing this activity,
   along with Noridian's own historical costs for processing paper claims
   under Part B of the Medicare program. Based in part on Noridian's proposal
   of substantially higher costs per claim to perform the DMEPOS requirements
   than the cost per claim Noridian has historically incurred, the agency
   concluded that Noridian's proposal reflected Nordian's anticipated
   application of a substantially higher level of resources to perform this
   portion of the DMEPOS contract than Noridian has previously applied to
   similar activities under Part B of the Medicare program. Accordingly, the
   agency concluded on the basis of all of its analysis that Noridian's
   proposed cost/price was reasonable and realistic.

   As noted above, the FAR specifically contemplates consideration of
   historical costs in performing a valid cost realism analysis. Accordingly,
   on the record here, we find no basis to question the reasonableness of the
   agency's cost realism analysis, which considered the unique attributes of
   Noridian's proposed approach as well as consideration of the specific
   costs proposed to perform particular elements of the contract
   requirements, comparing Noridian's proposed costs to similar costs that
   have been proposed and incurred by Noridian and other offerors for related
   activities.

   The protest is denied.[26]

   Anthony H. Gamboa

   General Counsel

   ------------------------

   [1] CIGNA has protested two separate contracts awarded under the same
   solicitation: one awarded to Noridian Administrative Services, LLC, and
   one awarded to Palmetto GBA, LLC. In response to CIGNA's initial protest
   submission and its supplemental submissions, our Office opened two docket
   numbers: B-297915 and B-297915.2. We are addressing in this decision,
   under docket number B-297915, all protest issues regarding the award to
   Noridian, and are addressing in a separate decision, under docket number
   B-297915.2, all protest issues regarding the award to Palmetto.

   [2] In general, fiscal intermediaries have been responsible for processing
   Medicare payments for institutional providers (for example, hospitals and
   skilled nursing facilities) under Part A of the Medicare program; carriers
   have been responsible for processing payments for professional providers
   (for example, physicians and diagnostic laboratories) under Part B of the
   Medicare program. More specifically, contractors known as "durable medical
   equipment regional carriers" (DMERCs) have been responsible for processing
   Medicare claims for durable medical equipment under Part B of the Medicare
   program. RFP, Statement of Work, at 12. CIGNA is the incumbent DMERC
   contractor for the requirements at issue here.

   [3] The jurisdictions were defined, according to state/territory boundary
   lines, as follows: Jurisdiction A--Connecticut, Delaware, District of
   Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
   York, Pennsylvania, Rhode Island, Vermont; Jurisdiction B--Illinois,
   Indiana, Michigan, Minnesota, Ohio, Wisconsin, Kentucky; Jurisdiction
   C--Alabama, Arkansas, Colorado, Florida, Georgia, Louisiana, Mississippi,
   New Mexico, North Carolina, Oklahoma, Puerto Rico, South Carolina,
   Tennessee, Texas, Virgin Islands, Virginia, West Virginia; Jurisdiction
   D--Alaska, Arizona, California, Guam, Hawaii, Idaho, Iowa, Kansas,
   Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota,
   Utah, Washington, Wyoming, Mariana Islands, American Samoa. RFP, Statement
   of Work, at 12.

   [4] The solicitation's statement of work provided an overview of the
   required tasks, stating:

     The contractor shall receive and control Medicare claims from DMEPOS
     suppliers and beneficiaries within its jurisdiction, as well as perform
     edits on those claims to determine whether the claims are complete and
     should be paid. . . . In addition, the Contractor calculates Medicare
     payment amounts and remits those payments to the appropriate party. The
     Contractor makes coverage decisions for new procedures and devices in
     local areas. The Contractor also conducts a variety of different
     suppliers' services, such as answering written inquiries, and educating
     them on Medicare's rules and regulations and billing procedures.

   RFP, Statement of Work, at 13-14.

   [5] With regard to offeror capability, the solicitation established the
   following subfactors, listed in descending order of importance:
   understanding the requirements, project management, key personnel,
   information security, and compliance plan. RFP sect. M.4, at 163.

   [6] With regard to the implementation factor, the solicitation established
   the following subfactors, listed in descending order or importance:
   implementation plan, key personnel, and implementation risk. RFP sect.
   M.4, at 163.

   [7] In reviewing CIGNA's protest issues, our Office conducted a hearing at
   the GAO building during which testimony was provided by various witnesses,
   including the source selection authority, the contracting officer, and
   various evaluation personnel. The hearing took place from April 4 through
   April 6, 2006; accordingly, the transcripts for each day's testimony are
   identified by reference to their respective dates.

   [8] Thus, the RFP advised offerors that the "Bills/Claims Payment"
   function in the Statement of Work (SOW) was associated with the "11000
   codes"; that the "Appeals/Reviews" function was associated with the "12000
   codes"; that the "Inquiries" function was associated with the "13000
   codes"; and that the "Provider Communications" function was associated
   with the "14000 codes." RFQ sect. L.12, at 104. The SOW provided more
   detail. By way of example, under the general function "Bills/Claims
   Payment," the SOW provided that more specific activities associated with
   "electronic data interchange support" were associated with activity codes
   11201 and 11203, that activities associated with "paper bills/claims" were
   associated with activity code 11202, and that "misdirected claims"
   activities were associated with activity codes 11204 and 11209. SOW at 4.

   [9] CIGNA and Noridian were the only two offerors to submit proposals for
   jurisdiction D.

   [10] Subject matter experts (SMEs) were also assigned to assist the TEB,
   but the SMEs did not point score the proposals.

   [11] There was also a corporate experience/past performance panel to
   evaluate proposals under those factors, and an implementation panel to
   evaluate proposals under the implementation factor.

   [12] The cost/price figures in this decision are rounded to the nearest
   tenth of a million.

   [13] Although the report was prepared by the TEB, it incorporated input
   from the corporate experience/past performance evaluation panel, the
   implementation panel, and the BEP's technical representative, who was
   responsible for reviewing the consistency between the technical proposal
   and the cost/price proposal.

   [14] At the GAO hearing, agency personnel explained that the requirement
   for offerors to change their accounting systems from the previously-used
   "activity based" systems to CAS-compliant systems affected the manner in
   which offerors' costs were identified and proposed. AR, Tab 17A, at 3-4;
   Tr., Apr. 4, 2006, at 384-85.

   [15] Notwithstanding the above, the contracting officer defined
   "productive hours" as hours of individuals that were assigned to work full
   time on the DMEPOS contract. Tr., Apr. 4, 2006, at 22-23. Accordingly, to
   the extent offerors were advised of the contracting officer's definition,
   their templates may have reflected something less than the complete levels
   of effort contemplated. Further, the template did not request that the
   levels of effort identified be associated with any activity codes.

   [16] As ultimately submitted, Noridian's template reflected a total of
   [deleted] hours for the base period and CIGNA's template reflected a total
   of [deleted] hours for this period. Noridian Hearing Notebook, Tabs 109,
   118. However, the LOE template hours were not associated with particular
   activity codes and, therefore, were not useful for assessing the level of
   effort an offeror was proposing to perform a particular activity.

   [17] As with prior reports, the TEB report incorporated input from the
   other evaluation panels.

   [18] At the GAO hearing, the contracting officer testified that, in
   general, CIGNA was considered to be a "more manual-type contractor," while
   Noridian was "more automated than CIGNA," and that Noridian was considered
   to be a "very efficient contractor." Tr., Apr. 4, 2006, at 66-67. This
   assessment is consistent with the TEB's conclusions in its initial
   evaluation report, which stated: "Compared to peers, NAS [Noridian] is one
   of the lowest cost contractors. They have also consistently maintained low
   CERT [comprehensive error rate testing] scores, and have very low turnover
   of staff in general." AR, Tab 9, at 32.

   [19] This TEB report also identified various strengths associated with
   CIGNA's proposal, including the following statement:

     [deleted]

   AR, Tab 15, at 4-5.

   [20] The report also identified various "weaknesses" in CIGNA's proposal,
   including the following statement: "The most prominent weakness in
   [CIGNA's] proposal is its tendency to reiterate the language in the SOW
   without providing details." AR, Tab 15, at 6.

   [21] With regard to "understanding the requirements," (the most important
   subfactor under the offeror capability evaluation factor) Noridian's final
   rating increased from an initial score of [deleted] (out of a possible
   300) to 220. AR, Tab 9, at 20; Tab 14, at 2. By comparison, CIGNA's
   initial rating under the "understanding the requirements" subfactor was
   [deleted] and its final rating was [deleted]. AR, Tab 9, at 2; Tab 15, at
   2.

   [22] At the GAO hearing, the TEB chair confirmed that the above-quoted
   description of the TEB's more focused concern regarding paper claims was
   accurate, testifying as follows:

     What's the difference between Part B and DME claims processing?

     A. . . . My understanding is there's more submitted paper claims.
     There's some claims that may need manual intervention to work through.
     The claims have more attachments to them. . . .

     Q. Putting aside paper claims, are there significant differences
     between DME claims processing and Part B claims processing?

     A. I don't believe so.

   Tr., Apr. 4, 2006, at 187-88.

   [23] The competitions for all four jurisdictions were conducted
   simultaneously; accordingly, meetings involving the contracting officer,
   the SSB, and the SSA generally involved discussions with regard to all
   four competitions.

   [24] At GAO's request, the agency identified the other "senior CMS
   management officials" that participated in this discussion. They included
   CMS's Director of the Medicare Contractor Management Group who, at GAO's
   request, appeared and testified at the GAO hearing.

   [25] In addition to the information displayed above, the "Efficiency
   Comparison" chart included other data relating to the proposed and
   historical costs of the various offerors.

   [26] CIGNA's protest challenging the agency's selection of Noridian makes
   various other allegations, including the assertions that CMS failed to
   make adjustments to CIGNA's overhead pool, misevaluated various other
   aspects of CIGNA's and Noridian's proposal, failed to conduct meaningful
   discussions, failed to perform a professional compensation analysis, and
   failed to make a proper best value determination. We have considered all
   of CIGNA's arguments regarding the jurisdiction D procurement and find no
   basis to sustain its protest.