February 24, 2011

Affirmative Action Developments: OFCCP Issues New Directive on Coverage of Healthcare Providers and Insurers

Holland & Knight Alert
Kenneth A. Jenero | David J. Santeusanio

The U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) recently issued a new directive designed to provide comprehensive guidance for determining whether a healthcare provider or insurer falls within the jurisdiction of the OFCCP as a federal contractor or subcontractor. The directive addresses jurisdictional coverage based on a healthcare provider or insurer’s relationship with three nationwide federal health programs: Medicare, TRICARE and the Federal Employees Health Benefits Program (FEHBP).

The coverage determination is important because federal contractors and subcontractors are subject to a number of significant and potentially burdensome equal employment and affirmative action obligations – including developing and implementing comprehensive written affirmative action programs – that would not otherwise apply. Furthermore, if an employer holds a covered contract or subcontract, then all of the employer’s establishments and facilities are subject to the OFCCP regulatory requirements, regardless of where the contract is to be performed.

Summary of the New Directive

Under the principles set forth in the new directive, the OFCCP will assert jurisdiction over employers who are providing insurance, healthcare services, administrative support (e.g., claims processing), or a combination of these services, as a contractor or subcontractor under a federal healthcare program. However, an insurance reimbursement agreement between a healthcare provider and a federal contractor contracted to provide health insurance only (and not healthcare services) does not trigger OFCCP jurisdiction. Similarly, reimbursements made pursuant to Medicare Parts A and/or B, or Medicaid, are forms of federal financial assistance (not contracts). As such, they do not provide a basis for OFCCP jurisdiction. But contracts related to Medicare Advantage (Part C) or Part D programs potentially qualify as covered federal contracts or subcontracts for purposes of OFCCP jurisdiction.

The new directive, which remains in effect until it is rescinded or modified, supersedes two prior directives on OFCCP coverage of healthcare providers and insurers issued in December 1993 and March 2003. Although some commentators have asserted that the new directive simply memorializes well established legal principles, it appears to be part of the OFCCP’s ongoing effort to expand and solidify its jurisdiction in the healthcare industry as the volume of federal dollars committed to the delivery of medical services and supplies continues to increase. The directive also portends stepped-up OFCCP enforcement initiatives directed at healthcare providers and insurers. Indeed, over the past two years, the OFCCP has prosecuted two cases against healthcare providers who were found to be federal contractors but did not have affirmative action plans in place. The directive and the OFCCP’s related enforcement efforts highlight the need for healthcare providers and insurers to examine this developing issue.

Why Does It Matter?

Employers who qualify as federal contractors or subcontractors must comply with additional legal requirements that do not apply to other employers, including nondiscrimination and affirmative action mandates established by Executive Order No. 11246 (based on race, sex, religion, color and national origin), Section 503 of the Rehabilitation Act (based on disability) and Section 4212 of the Vietnam Era Veterans’ Readjustment Assistance Act (based on veteran status). Depending on the number of employees and the dollar amount of the covered federal contract or subcontract, these mandates may include the following:

  • preparing written affirmative action programs for each of the covered employer’s establishments (regardless of whether they are involved in fulfilling the federal contract or subcontract), including various diagnostic components designed to evaluate the representation of females and minorities in the employer’s workforce, and action-oriented steps designed to correct any identified underutilization of females or minorities in any job group
  • developing internal auditing and reporting systems designed to capture relevant information and measure the effectiveness of the employer’s total affirmative action program, including detailed data on applicant flow, job placements, promotions, compensation and terminations
  • regularly reviewing the covered employer’s physical facilities, job qualifications, and personnel policies and practices to ensure that applicants are being recruited and employed, and that employees are being placed, trained, upgraded, promoted and otherwise treated during their employment without regard to their protected status
  • participating in OFCCP compliance evaluations designed to determine if the employer maintains nondiscriminatory hiring and employment practices and is taking the required affirmative action steps, including corporate management (or “glass ceiling”) reviews designed to ascertain whether individuals in protected categories are encountering artificial barriers to advancement into mid-level and senior corporate management
  • exposure to various sanctions for non-compliance, including withholding of contract payments, termination of the contract and prohibition against receipt of future contracts (i.e., debarment)

Determining OFCCP Jurisdiction

To be subject to the jurisdiction of the OFCCP, a healthcare provider or insurer must be a party to: (1) a contract with a federal agency or department for the purchase, sale or use of personal property or non-personal services, or (2) a subcontract for the purchase, sale or use of personal property or non-personal services which, in whole or in part, is necessary to the performance of a contract, or under which any portion of the federal contractor’s obligation under the contract is performed, undertaken or assumed.

The new directive addresses the circumstances under which employers participating in the following federal healthcare programs may qualify as covered federal contractors or subcontractors:

  • Medicare: A social insurance program, administered by the Centers for Medicare and Medicaid Services, which provides health insurance coverage to persons who are age 65 or older, or who meet other special criteria, including Medicare Part A (medical insurance), Medicare Part B (hospital insurance), Medicare Advantage (Part C) (managed/coordinated care plans), Medicare Part D (prescription drug plans), and Medicaid (a state-administered healthcare program primarily for low-income individuals).
  • TRICARE: A federal health insurance program, administered by the TRICARE Management Activity, which provides insurance, supplemental insurance, direct healthcare services, managed/coordinated care and special needs plans to active duty military service members, members of the National Guard and Reserve, military retirees, the families of military service members and certain former military spouses.
  • FEHBP: A federal healthcare program, administered by the U.S. Office of Personnel Management, which provides civilian federal employees, retirees and their families with a variety of healthcare options, including insurance and supplemental insurance plans, healthcare service plans and other special needs plans.

A variety of relationships may exist among healthcare providers, insurers, companies providing supplies and non-medical services, and the Medicare, TRICARE and FEHBP programs (the Federal Programs). For example, the Federal Programs, through their federal contracting agencies, may contract directly for the delivery of supplies and services. The Federal Programs may also award federal financial assistance or grants to healthcare providers or other companies to provide reduced or no-cost services to specified communities, groups or individuals. Under each of the Federal Programs, a company may enter into a direct (prime) contract with a governmental agency, and/or a prime contractor may subcontract elements of its contractual obligations to provide healthcare services, insurance, administrative support or other supplies and services.

Given the wide array of healthcare plans, providers, services and arrangements available, the directive notes that determining the existence of federal contractor or subcontractor status necessarily requires a case-by-case approach. The directive offers several basic principles and procedures for ascertaining the existence of federal contracts or subcontracts over which the OFCCP would have enforcement authority. These basic principles apply in four general categories of relationships: direct contracts, subcontracts, insurance and reimbursement arrangements, and Medicare reimbursements and grants.

Direct Contract Coverage

A company that enters into a prime contract with a governmental agency under one of the Federal Programs to provide insurance, healthcare services, administrative support (e.g., claims processing), or a combination of these services, is a federal contractor and will be subject to the jurisdiction of the OFCCP if the applicable coverage thresholds are met. Generally, a company must have one or more federal contracts that, when aggregated, are worth $10,000 or more, in order to fall within the OFCCP’s jurisdiction under Executive Order 11246. A company with 50 or more employees is required to develop a written affirmative action plan for women and minorities if it has a contract of $50,000 or more. A company must have a single contract worth at least $10,000 to be covered by Section 503 of the Rehabilitation Act. The single contract threshold is $100,000 under the Vietnam Era Veterans Readjustment Assistance Act.

The directive notes that direct contracts with health care providers usually require the provision of specified health care services to members and beneficiaries of one or more health plans within a Federal Program. A contract between a federal agency/Federal Program and a healthcare provider may also provide that the healthcare provider will establish or operate a managed or coordinated care plan (e.g., an HMO) or facility. Direct contracts with healthcare providers are used by TRICARE, FEHBP and Medicare’s Advantage and Part D programs.

Federal Programs and/or their contracting agencies also may enter into contracts for the provision of various other supplies and services for one or more of their health plans, or for the Federal Program as a whole. These may include, for example, contracts for the provision of administrative support, claims and data processing, customer service, marketing and medical savings/flexible spending plans. Such contracts are government supply and service contracts which may trigger OFCCP jurisdiction.

The directive provides the following examples of direct arrangements which provide a basis for OFCCP jurisdiction:

  • A Federal Program contracts with a hospital to provide an HMO plan for the members and beneficiaries of one of its health plans. The hospital is a direct (prime) contractor for purposes of OFCCP jurisdiction.
  • An outpatient medical facility contracts with the Department of Veterans Affairs and the Department of Defense to provide healthcare services to active duty and retired military personnel under the TRICARE program. The outpatient medical facility is a direct (prime) contractor subject to OFCCP jurisdiction.
  • A Federal Program contracts with a company to provide claims processing services and regional administrative service centers for the benefit of its members and beneficiaries. A direct contract relationship exists for purposes of OFCCP jurisdiction.

Subcontractor Relationships

A company that enters into a subcontract with a prime contractor for supplies or services necessary to the performance of the covered federal contract is a covered federal subcontractor. In addition, when a covered subcontractor contracts with another company to provide supplies or services necessary to the performance of the prime contract or to fulfill an element of the prime contract, another subcontract relationship is created and the OFCCP may assert jurisdiction over both subcontractors.

The directive provides the following examples of subcontract arrangements that provide a basis for OFCCP jurisdiction:

  • A Federal Program (e.g., FEHBP) contracts with a health plan company to put an HMO into operation. The health plan company then enters into contracts with various hospitals to provide members and beneficiaries of the HMO with medical supplies and services required under the health plan company’s prime contract with the Federal Program’s contracting agency. Each of the hospitals would be a federal subcontractor for purposes of OFCCP jurisdiction.
  • A Federal Program (e.g., TRICARE) enters into a prime contract with a health plan company under which the company is obligated to establish provider networks through contractual arrangements. The health plan company enters into an agreement with a hospital to provide healthcare services for TRICARE beneficiaries. Because the hospital is performing a portion of the healthcare company’s obligations by providing some of the medical services to TRICARE beneficiaries that the healthcare company has contracted to provide, the hospital would qualify as a federal subcontractor.
  • Medicare’s contracting agency contracts with a health plan company to provide a PPO Health Plan that includes a prescription drug plan (Medicare Part D) for Medicare Advantage members. The health plan company then contracts with a pharmaceutical company to provide the necessary prescription drugs and a hospital to provide the healthcare services the PPO requires. The pharmaceutical company and the hospital both qualify as federal subcontractors because they are fulfilling a portion of the prime contract between the Medicare contracting agency and the health plan company.

Insurance and Reimbursement Arrangements

When an insurance carrier enters into a prime contract with a Federal Program for the provision of health insurance, the insurance carrier is a federal contractor for purposes of OFCCP jurisdiction. However, insurers often enter into agreements with healthcare providers to reimburse the provider for the cost of eligible medical good and services that it provides to an insured. According to the directive, these insurance reimbursement agreements between insurers and healthcare providers do not create a covered subcontractor relationship. Because the prime contract is an insurance contract solely for the provision of health insurance to Federal Program members and beneficiaries, the payment of fees directly to healthcare providers is neither necessary to the performance of the prime contract nor the fulfillment of an element of the prime contract. However, a qualifying subcontractor relationship would be established if the reimbursement agreement was combined with a contractual obligation to provide medical services.

Medicare Reimbursements and Grants

Reimbursements made pursuant to Medicare Part A and/or B, or Medicaid, are considered to be federal financial assistance – not supply or service contracts. Therefore, health providers who enter into agreements to receive reimbursements for services provided to Medicare beneficiaries are not considered covered contractors because of the reimbursement relationship. However, the OFCCP may have jurisdiction over a healthcare provider receiving Medicare reimbursements if the provider also holds a separate covered federal contract or subcontract for the provision of medical services or supplies. Potential covered contracts or subcontracts may include contracts related to Medicare Advantage (Part C) or Part D programs, contracts with another Federal Program, and contracts with prime contractors of other Federal Programs.

Federal health care programs may offer grants for eligible companies and individuals. The receipt of a true grant does not create a contractual relationship for purposes of OFCCP jurisdiction. However, a grant recipient may also be a covered contractor if it has or enters into a qualifying federal contract or subcontract.

Recommendations for Healthcare Providers and Insurers

The analytical framework set forth in the new directive is based, in part, on recent administrative decisions addressing healthcare provider coverage issues. In these cases, the OFCCP successfully argued that a hospital participating in an HMO that serviced federal government employees and a hospital providing services under TRICARE were federal contractors subject to OFCCP jurisdiction. Although both of theses cases are still in active litigation, the new directive sets forth the framework that the OFCCP will continue to apply when determining a healthcare employer’s compliance with the nondiscrimination and affirmative action requirements of Executive Order 11246, Section 503 of the Rehabilitation Act and the Vietnam Era Veterans Readjustment Assistance Act. It also represents the OFCCP’s enforcement policy. Indeed, the OFCCP has been sending out desk audit letters to hospitals citing the TRICARE contracts to support its jurisdiction.

Therefore, unless or until the new directive is rescinded or modified, healthcare providers and insurers would be well advised to take each of the following steps:

  • examine existing contractual relationships to identify any connections with Federal Programs and contracting agencies and determine whether they subject the employer to OFCCP jurisdiction as a federal contractor or subcontractor
  • evaluate the amount of the covered contracts or subcontracts and the size of the employer’s workforce to determine whether threshold requirements for application of the OFCCP-enforced laws are met
  • consult with legal counsel to develop a comprehensive compliance program, including required affirmative action plans and related management/staff training programs, or an alternative strategy for effectively responding to OFCCP compliance reviews

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