Type: Law Bulletins
Date: 04/23/2013

Who's a Government Subcontractor Now?

Much has been written lately about the U.S. District Court for the District of Columbia ruling in UPMC Braddock v. Harris where three hospitals providing medical services to an HMO with a prime contract with the United States government are, in fact, considered “subcontractors”.1 The upshot of this label is that these hospitals are now subject to regulation by the Office of Federal Contract Compliance Programs (“OFCCP”) in the Department of Labor. OFCCP enforces the federal statutes and regulations related to affirmative action, equal employment opportunity and equal pay required of those who do business with the federal government.

In UPMC Braddock, the three hospitals contracted with the UPMC Health Plan, an HMO, to provide medical services to federal employees. When the covered employees received medical services at one of the UPMC hospitals, the hospital billed the HMO. The UPMC hospitals believed that while the HMO qualified as a federal subcontractor, they did not. The hospitals provided multiple reasons why they believed they were exempt from the OFCCP’s jurisdiction. The District Court rejected each argument in turn.

The hospitals argued that they failed to meet the definition of “subcontractor” because they did not provide “nonpersonal services” to the health plan as defined in OFCCP’s regulations. There is no explicit definition of the term “nonpersonal services” in the regulations and no such exception in the Federal Acquisition Regulations (“FAR”) exempting them as a subcontractor. The court noted that it would be illogical for the regulations to “exclude nurses, doctors, and other hospital staff members from the laws’ protection while insurance company staffers and construction workers, for instance, remain within the ambit of that protection.”

The hospitals also argued that the contractual language with the HMO excluded the hospitals as subcontractors. The court held that the hospitals could not escape their obligations under federal equal opportunity statutes merely through contract and that OFCCP’s definition of “subcontractor” is binding. The court rejected the argument that the hospitals never consented to the equal opportunity clauses, as required by OFCCP's regulations to be included in covered federal subcontracts. The court noted that OFCCP's equal opportunity clauses apply to covered entities by operation of federal law and consent is not necessary.

Interestingly, while UPMC Braddock was developing, there was another case in which hospital providers under another federal government health care plan were challenging the OFCCP’s jurisdiction on the grounds that they were not a subcontractor. Florida Hospital of Orlando provided health care services to members of the armed forces and their families through TRICARE under an agreement with the TRICARE prime contractor in Florida. Like the UPMC Braddock case, the government had provided in the TRICARE contracts that the HMO providers were exempt from OFCCP’s regulations. Therefore, Florida Hospital’s contract contained none of the OFCCP-required equal opportunity clauses. When OFCCP sent Florida Hospital a notice of an audit of its affirmative action compliance, the hospital refused to supply the requested information, asserting that OFCCP lacked jurisdiction. OFCCP issued a show cause notice before the Department of Labor Administrative Law Judge ("ALJ").

In October 2010, the ALJ concluded that Florida Hospital was required to comply with OFCCP’s demands. The hospital appealed the ALJ ruling. While on appeal, Congress included a provision in the National Defense Authorization Act for 2012 (“NDAA”) expressly stating that the “TRICARE managed care support contract that includes the requirement to establish, manage, or maintain a network of providers may not be considered to be a contract for the performance of health care services or supplies” in determining whether TRICARE providers are subcontractors “for purposes of the Federal Acquisition Regulation or any other law.” The ALJ then reversed the earlier Florida Hospital decision, citing the 2012 NDAA. While health care providers everywhere hoped that this would be the end of OFCCP’s quest to expand its jurisdiction, clearly their hopes were in vain. UPMC Braddock presents the same issues but under a different federal health care plan. For those keeping score, it is OFCCP 1 (Federal Employee Healthcare Benefit Plan), hospital providers 1 (TRICARE).

At this writing it is unclear whether Congress will take action to prevent countless hospitals and providers from falling under OFCCP’s jurisdiction due to the UPMC Braddock decision and, if so, whether it will exempt them regardless of the federal health care plan involved, or tackle the issue one program at a time. The greater cause for apprehension, however, is whether OFCCP will seek to expand its jurisdiction to MEDICARE and MEDICAID providers.

In the wake of the UPMC Braddock ruling, health care companies should now analyze whether their contracts with health plans expose their entities to consideration by the OFCCP as federal subcontractors. This comes at a difficult time as health care providers prepare for the onset of the Affordable Care Act and now, apparently, have to consider how, and at what cost, OFCCP’s regulations will affect their operations.

 1UPMC Braddock v. Harris

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