TITLE: B-298478, Matter of:, October 13, 2006
BNUMBER: B-298478
DATE: October 13, 2006
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B-298478, Matter of:, October 13, 2006

   Decision

   Matter of: Eagle Home Medical Corporation

   File: B-298478

   Date: October 13, 2006

   Gerald H. Werfel, Esq., Pompan, Murray & Werfel, PLC, for the protester.

   Merilee Rosenberg, Esq., Department of Veterans Affairs, for the agency.

   Peter D. Verchinski, Esq., and John M. Melody, Esq., Office of the General
   Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Contracting agency reasonably rejected protester's proposal based on
   determination that its low price was unreasonably high where price was 39
   percent higher than government estimate, which was primarily based on
   price of recently negotiated contract extension with incumbent contractor.

   DECISION

   Eagle Home Medical Corporation (EHMC) protests the rejection of its
   proposal as unreasonably high-priced under request for proposals (RFP) No.
   247-0260-06, issued by the Department of Veterans Affairs (VA) to provide
   home oxygen services and supplies at the William Jennings Bryan Dorn
   Veterans Affairs Medical Center in Columbia, South Carolina.

   We deny the protest.

   On May 22, 2006, VA issued the RFP as a HUBZone (historically
   underutilized business zone) small business set-aside. Offerors were
   requested to propose fixed prices for 20 different contract line items
   (CLIN), covering various oxygen cylinders, liquid oxygen, and compressed
   air items, for a 1-year base period, with 4 option years. Award was to be
   made to the offeror submitting the lowest-priced, technically acceptable
   proposal.

   VA had been receiving these services and supplies from Medical Comfort
   Systems, Inc. (MCS), under a contract awarded on January 1, 2001. In
   October 2005, near the end of the last option year of that contract, the
   agency negotiated a 6-month extension (from January 2006 through June
   2006) with MCS at prices approximately 2 percent higher than the final
   option year prices.

   VA received two proposals by the June 15 closing date, including EHMC's,
   which was the lowest-priced. After evaluating the proposals, the agency
   determined that EHMC's total price of $5,013,000 (with a net present value
   of $4,315,479) was unreasonably high, and thus ineligible for award; the
   proposal so greatly exceeded the government's estimate of $3,595,002[1]
   (with a net present value of $3,104,309) that meaningful discussions were
   not possible. The agency then proceeded to cancel the solicitation.

   EHMC challenges the agency's determination that its price was unreasonably
   high, noting that its price was lower than both the prices VA has paid for
   the same services under a previous contract, and the cost guidelines
   utilized by the Medicare program for home oxygen services.

   A determination concerning price reasonableness is a matter of
   administrative discretion involving the exercise of business judgment by
   the contracting officer; therefore, we will question such a determination
   only where it is unreasonable. The Right One Co., B-290751.8, Dec. 9,
   2002, 2002 para. 214 at 3.

   The agency formulated the government estimate based primarily on the
   prices it was currently paying under the 6-month contract extension
   negotiated in October, but increased the price for CLIN 1--for oxygen
   concentrators, which formed the largest single segment of the
   contract--from $60 (the extension price) to $90.[2] Even with this
   50-percent increase in the CLIN 1 price, as noted, EHMC's price exceeded
   the estimate by 39 percent. Notwithstanding that there may have existed
   other price measures that would have been more favorable to EHMC,
   comparison of prices to a government estimate is a legitimate means of
   determining price reasonableness. See Bahan Dennis, Inc., B-249496.3, Mar.
   3, 1994, 94-1 CPD para. 184 at 3 (cancellation based solely on comparison
   to the government estimate was reasonable). This is particularly the case
   here, since the estimate was largely based on prices currently being paid
   under an existing contract.

   EHMC asserts that the estimate was too low and did not constitute a proper
   basis for determining price reasonableness. Specifically, EHMC argues
   that, since the prior contract was awarded to MCS on January 1, 2001, and
   since the prices in that contract remained constant throughout the base
   year and 4 option years, those prices--which were reflected in the 6-month
   extension and, thus, the estimate--were not an accurate reflection of the
   current cost of oxygen equipment and services. We disagree.

   While EHMC is correct that the prices in the 6-month extension were
   similar to those under the preceding contract, this fact in no way
   diminishes their validity for purposes of determining price
   reasonableness. Since the prices in the 6-month extension were negotiated
   in October 2005, and MCS was actually performing the work at the
   negotiated price when the RFP was issued, we see no reason why the agency
   could not accept those prices as representative of the current market
   price. The protester has not shown that the agency failed to consider
   market conditions or other extenuating circumstances that rendered the
   negotiated price an invalid basis for comparison. Moreover, the agency did
   not merely rely on the extension prices; rather, as noted above, it
   increased the estimate for CLIN 1, the largest segment of the work under
   the RFP, 50 percent above the fourth option year price under MCS's
   contract.

   Regarding CLIN 1, although MCS was performing at a unit price of $60 (and,
   as noted, had been performing at that price during the fourth option year
   of its contract), the contracting officer (CO) explains that the 50
   percent upward adjustment was based on his discussions with another
   contracting official who had contacted other VA medical centers to obtain
   prices. CO's Statement, Sept. 21, 2006, at 2. The $90 unit price also
   closely reflected offerors' prices under the same CLIN for the 2001-05
   contract--offerors there proposed level 5-year pricing (except for MCS's
   reduced fourth year option price) of $90, $93, and $95. Protester's
   Comments, Sept. 26, 2006, exh. 1. Thus, while the $90 unit price was
   similar to prices from proposals that were submitted in 2000, those
   proposals essentially reflected the offerors' views that prices would not
   increase significantly through 2005. Against this backdrop, given MCS's
   willingness, as of January 2006, to perform CLIN 1 at a substantially
   lower price, the agency certainly had ample reason to believe that $90 did
   not understate the current market price.

   The protester also argues that the estimate was flawed in that it did not
   provide for inflation over the life of the contract. However, while the
   estimate apparently was based on level pricing ($719,000) for the base and
   4 option years, as already discussed, under the prior contract each of the
   offerors proposed level pricing over the 5 contract years. Id.
   Furthermore, while the protester maintains that some significant inflation
   factor should be applied to each contract year, we note that the protester
   itself only proposed to increase prices in 2 of the 4 option years. The
   protester also has failed to provide any evidence establishing that cost
   increases for home oxygen services and supplies are, or should be,
   expected to occur over the contract term. We therefore are not persuaded
   that inflation should have been factored into the government estimate.[3]

   Finally, the protester points to the fact that the agency and MCS
   negotiated a price for a 6-month interim contract (to begin after
   expiration of MCS's 6-month extension in June 2006) that was substantially
   higher than the extension price or the estimate, as evidence that its
   price was not excessive. EHMC notes that the price--$583,914 for 6
   months--on an annualized basis ($1,167,828), is significantly higher than
   EHMC's base year price of $951,000. The agency asserts that the interim
   contract price was high and did not reflect the market, because MCS, as
   the incumbent, was the only firm in a position to provide a continuity of
   oxygen supplies; the agency agreed to the high price only because it had
   no bargaining power. The agency further explains that MCS was motivated to
   charge a high rate because it had become aware that the new requirement
   would be set aside for HUBZone small businesses, and that it therefore
   would be unable to compete for the requirement. CO's Statement, Sept. 21,
   2006, at 1. Given the agency's apparently unfavorable position in
   negotiating the interim contract, we conclude that the interim contract
   prices were not relevant to the agency's price reasonableness
   determination.

   In short, we have no basis on this record to conclude that the government
   estimate was not reasonable.[4] Accordingly, the agency reasonably
   rejected EHMC's proposal as unreasonably high-priced.

   The protest is denied.

   Gary L. Kepplinger

   General Counsel

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

   [1] It appears from the record that the estimate should have been
   calculated as $3,595,000--that is, $719,000 per year for 5 years. However,
   this minor discrepancy is immaterial to our decision.

   [2] MCS's contract priced CLIN 1 at $90 for the base year and first 3
   option years of its contract, and at $60 for the final option year.

   [3] Even assuming that the agency was required to account for inflation in
   a manner comparable to EHMC's own approach--i.e., increasing prices in 2
   option years--we find EHMC was not prejudiced by the agency's actions.
   EHMC proposed an approximate 5.5 percent increase for option year 2, and a
   5.2 percent increase for option year 3. Applying the same increases to the
   government estimate increases the total estimate to $3,792,525 (that is,
   $719,000 for the base year and option year 1, $758,545 for option year 2,
   and $797,990 for option years 3 and 4). Since, even with this increase,
   the protester's price--$5,013,000--still would exceed the estimate by a
   substantial amount--$1,220,475, or 32 percent--EHMC was not materially
   prejudiced by any error in this area, and this argument thus provides no
   basis for sustaining the protest. AEC-ABLE Eng'g Co., Inc., B-257798.2,
   Jan. 24, 1995, 95-1 CPD para. 37.

   [4] EHMC also asserts that the agency should have based its government
   estimate on a "Home Oxygen Contracts Study" prepared for VA by an outside
   consultant in 2002. Protester's Comments, Sept. 26, 2006, exh. 3. Had the
   estimate been based on the average cost per patient ($1,640) provided in
   this study, with an adjustment for inflation, EHMC's price would have been
   in line with the estimate. This argument is without merit. VA was under no
   obligation to create a government estimate in the manner in which EHMC
   proposes; the agency was only required to use a reasonable estimate. See
   OMNI Gov't Servs., LP, B-297240.2 et al., Mar. 22, 2006, 2006 CPD para. 56
   at 3. As already discussed, we find that the agency's methodology in
   developing its estimate was reasonable. In any case, EHMC's suggested
   approach to calculating the estimate appears problematic. For example,
   while EHMC would have the agency use the average cost per patient figure
   from the study, since the patient costs varied significantly depending on
   location, it would seem more reasonable for the agency to use the average
   cost for other VA patients located in South Carolina. In this respect, the
   study shows Charleston, South Carolina's average cost is $759. Protester's
   Comments, Sept. 26, 2006, exh. 3, at 27.