On March 30, the US District Court for the District of Columbia held that three University of Pittsburgh Medical Center-affiliated hospitals were federal subcontractors to an HMO that provided a managed care health plan to federal employees under a contract with the Office of Personnel Management (“OPM”). Although the hospitals had never consented to be considered subcontractors of the HMO for affirmative action compliance purposes or to be subject to affirmative action audits by the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”), and notwithstanding that the HMO’s contract with OPM expressly excluded medical service providers from its definition of “subcontractor,” the hospitals nevertheless were bound by the OFCCP’s nondiscrimination and affirmative action requirements. This decision is another step in a long and contentious battle between health care service providers and the OFCCP over whether and under what circumstances health care providers with no direct federal contracts can be forced to comply with affirmative action rules, audits, and penalties that apply to government contractors. The case, UPMC Braddock v. Harris, D.D.C., No. 09-01210, 3/30/13, is the most definitive decision on the issue to date.

The OFCCP Mandate

Executive Order 11246, the Rehabilitation Act of 1973, and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 all require that applicable government contracts and subcontracts include clauses furthering the equal opportunity goals of federal law. Each subcontractor, in addition to complying with the nondiscrimination and affirmative action obligations must also permit OFCCP access to its books and records to allow OFCCP to determine whether the subcontractor is in compliance with the regulations. OFCCP conducts periodic audits of federal contractors and subcontractors. Parties determined to have violated the equal opportunity rules are subject to penalties, including loss of contracts and substantial fines.

The UPMC Braddock Case

In 1995 the UPMC hospitals entered into agreements with the HMO to provide medical services to HMO beneficiaries whose employers had purchased group coverage from the HMO. The hospitals agreed to bill the HMO for the services provided to plan beneficiaries at agreed rates and terms. Five years later, the HMO entered into a contract with the OPM to provide coverage to federal employees that elected the coverage. The contract between OPM and the HMO expressly provided that the health service providers, including the UPMC hospitals, were not “subcontractors” to the federal government for OFCCP enforcement purposes. None of the agreements between the hospitals and the HMO contain provisions that require the hospitals to comply with the federal affirmative action requirements in Executive Order 11246, the Rehabilitation Act, or VEVRAA.

In January 2004, OFCCP sent letters to each hospital announcing that it had been selected for a compliance audit. The hospitals refused to submit to the audit on the grounds that they were not government subcontractors and that the OFCCP had no jurisdiction to review their affirmative action compliance. The OFCCP filed administrative complaints before a Department of Labor Administrative Law Judge (“ALJ”), and in January 2008 the ALJ sided with the agency. The hospitals appealed to the Labor Department’s Administrative Review Board (“ARB”). In May 2009, the ARB issued a final decision and order upholding the ALJ’s decision and confirming that the hospitals’ agreements with the HMO are subcontracts covered by the affirmative action requirements.

The hospitals appealed again, this time to the US District Court. The hospitals raised three arguments for overturning the ARB decision: (i) the contract between the HMO and OPM excluded medical service providers from its definition of “subcontractor,” (ii) they never consented to be bound by OFCCP’s nondiscrimination and affirmative action requirements, and (iii) they did not provide “nonpersonal services” to plan beneficiaries and therefore were exempt from OFCCP regulation. The court rejected all three arguments and granted the OFCCP summary judgment.

The court held that “OPM and the Health Plan have no authority to define the contours of the equal opportunity laws governing federal procurement by devising their own meaning for the word ‘subcontractor,’ the definition of that word in the OPM/Health Plan contract has no effect on whether the hospitals lawfully may be regarded as government subcontractors.” The Labor Department, not the contracting agency, is the agency with the authority to decide whether the hospitals were subcontractors for equal opportunity compliance purposes.

The court also rejected the argument that health care services to plan beneficiaries were “personal services” exempt from the OFCCP’s regulations. The court said that the personal vs. nonpersonal services distinction does not refer to the interaction between the hospital’s employees and the health plan beneficiary, but between the subcontractor’s personnel and the federal contracting agency. Therefore, the medical services were not “nonpersonal” and were covered by the OFCCP regulations. Furthermore, because the OPM contract was a managed medical service plan, not an insurance plan such as Blue Cross/Blue Shield or Medicare, the hospital’s contracts were “subcontracts” because the services were necessary to the HMO’s fulfillment of its contract obligations to OPM. The hospitals’ agreements with the HMO were subcontractors because the medical services they provide are necessary to the performance of the HMO’s prime contract with OPM. The health plan, as an HMO, “did agree to supply medical care, not just insurance, to federal employees under its contract with OPM,” said the court.

The court also dismissed the hospitals’ argument that they could not be bound to the OFCCP’s rules because their subcontracts failed to include the required language. “[A] mandatory contract clause that expresses a significant or deeply ingrained strand of public procurement policy is considered to be included in a contract by operation of law. Thus, where … a contractual relationship exists between a company and the government, notwithstanding the company’s ‘attempt to disclaim government-contractor status,’ the company’s ‘express consent’ is unnecessary for it to be bound by the obligations imposed by statute and regulation on federal contractors.”

The Florida Hospital Case

At the same time the UPMC Braddock case was being appealed, another case with similar facts also was being litigated through the OFCCP with respect to the managed care plans provided to armed services personnel and their families through the US Department of Defense TRICARE health plans.

Like OPM, the TRICARE Management Agency (“TMA”) had provided in its contracts with plan managers that health care providers giving service to TRICARE beneficiaries were exempt from OFCCP regulations.

Florida Hospital of Orlando provided health care services to TRICARE beneficiaries under an agreement with the TRICARE prime contractor for military families in Florida. Florida Hospital’s contract contained none of the equal opportunity clauses because TMA had taken the position that such hospitals were not subject to OFCCP rules. OFCCP sent Florida Hospital a notice of an audit of its affirmative action program as a government subcontractor. The hospital refused to supply requested information, asserting that OFCCP lacked jurisdiction over it. After several administrative exchanges, OFCCP issued a notice to show cause before the Labor Department ALJ.

In October 2010, the ALJ concluded that TRICARE operates like the HMO model at issue in UPMC Braddock, rather than as a financial assistance/insurance model, and that Florida Hospital had to comply with the OFCCP demands. While the case was on appeal to the ARB, Congress passed the National Defense Authorization Act for 2012, which declared that a “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” for determining “whether network providers are subcontractors for purposes of the Federal Acquisition Regulation or any other law.” Following this enactment, the ALB reversed the ALJ’s Florida Hospital decision, citing the new statute.

The decision was complicated, however, by the fact that there were several dissents to the reasoning advanced for various aspects of the decision. A plurality of the ARB judges conceded that the statute removed one basis by which OFCCP may exercise jurisdiction over Florida Hospital — specifically, that Florida Hospital performed, undertook, or assumed the TRICARE contractor’s obligations under its prime contract with TMA. There was not agreement that OFCCP could not assert jurisdiction under the other prong of the “subcontract” definition, which would make Florida Hospital a subcontractor within OFCCP jurisdiction because its services as a TRICARE network participant are “necessary to the performance” of the TRICARE contractor’s prime contract. Therefore, while the decision bows to the Congressional enactment with respect to the TRICARE contracts, it left open the door to further litigation over TRICARE under a different theory.

Summary of the Current State of the Law

At present, health care providers that contract with TRICARE plans to provide services to beneficiaries are exempt from OFPPC regulation arising out of their TRICARE agreements. Health care providers that provide services to Medicare recipients are exempt because Medicare is deemed a financial assistance plan to the Medicare beneficiary, not a medical services plan.

Following the UPMC Braddock decision, health care providers that contract with managed care plans designed to provide medical services to plan members, as opposed to mere financial reimbursement of medical costs incurred by the beneficiary, should assume that they will be subject to OFCCP regulations, audits, and penalties if the plans with which they contract also contract with federal agencies to provide HMO services to their employees.