[Federal Register Volume 70, Number 104 (Wednesday, June 1, 2005)]
[Rules and Regulations]
[Pages 31389-31392]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10827]
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OFFICE OF PERSONNEL MANAGEMENT
48 CFR Parts 1631 and 1699
RIN 3206-AJ10
Federal Employees Health Benefits Program; Revision of Contract
Cost Principles and Procedures, and Miscellaneous Changes
AGENCY: U.S. Office of Personnel Management.
ACTION: Final rule.
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SUMMARY: The U.S. Office of Personnel Management (OPM) is issuing a
final regulation amending the Federal Employees Health Benefits (FEHB)
Acquisition Regulation (FEHBAR). This regulation provides additional
contract cost principles and procedures for FEHB Program experience-
rated contracts and is intended to clarify our requirements and enhance
our oversight of FEHB carriers.
DATES: Effective July 1, 2005.
FOR FURTHER INFORMATION CONTACT: Anne Easton, Manager (202) 606-0770,
by fax: (202) 606-0633, or e-mail: [email protected]).
SUPPLEMENTARY INFORMATION: We are enhancing our oversight of
experience-rated FEHB contracts by requiring carriers to apply
additional cost principles and procedures. We currently contract with
thirty-two experience-rated fee-for-service carriers and Health
Maintenance Organizations (HMOs). Under the FEHB law, 5 U.S.C. 8902, it
is part of OPM's responsibility to ensure that rates charged by health
benefits plans reasonably and equitably reflect the cost of the
benefits provided. Our interest, from a financial standpoint, is to pay
a reasonable price for the health care coverage we purchase from
private contractors on behalf of FEHB enrollees. OPM's independent
Inspector General regularly audits experience-rated carriers to
determine if they are in compliance with the Cost Principles in part 31
of title 48, Code of Federal Regulations (the Federal Acquisition
Regulation (FAR)) and chapter 16 of title 48, Code of Federal
Regulations (FEHBAR)). In addition, we have other requirements and
practices in place to provide assurance to FEHB Program administrators
that carriers' financial reporting and contractual requirements are
met.
The FEHBAR and part 31 of the FAR are the sole sources of cost
accounting principles and practices for FEHB contracts. The basic cost
accounting principles in the FAR Part 31 have been in place for over 40
years. During this time period, significant improvements in cost
accounting principles and practices have been made. Advances in
information technology have enabled FEHB contractors to implement cost
accounting practices more complex than those generally used when we
adopted the FAR cost principles. Also, we have observed some
differences in interpretation regarding the allocation of costs to
carriers' contracts. Therefore, we are updating the FEHBAR to allow
carriers to use more current contract cost accounting principles and
practices and to provide for consistent interpretation of our
requirements across the Program. These final regulations may apply to
contractors that also allocate costs to other federal contracts subject
to CAS-coverage or FAR provisions related to cost-based contracts. OPM
plans to contact other federal agencies that contract with the FEHB
contractors to discuss how cost accounting practices are applied to
business units that may have other cost-based contracts for federal
programs, such as Medicare or Tricare, to determine if a consistent
standard is appropriate governmentwide.
FAR Part 31 provides criteria that govern the allocation of
indirect costs to contracts. This regulation provides guidance to
carriers on allocating certain indirect costs to FEHB experience-rated
contracts. For example, we have included a section to supplement FAR
31.203 that describes techniques for accumulating and allocating
groupings of indirect costs (FEHBAR 1631.203-70). The new section
provides guidance for determining logical cost groupings as required by
FAR 31.203(c). It also provides methods for achieving the FAR 31.201-4
requirement that costs are to be allocated on the basis of relative
benefits received or other equitable relationship. We have also
provided more guidance on the allocation of business unit general and
administrative (G&A) expenses (FEHBAR 1631.203-71) and home office
expenses to carriers' business segments (FEHBAR 1631.203-72) to
supplement FAR 31.203. Our intent is to supplement, but not to supplant
FAR. Therefore, we believe that the provisions of FAR 31.203 dealing
with the allocation of indirect costs, including G&A expenses and home
office expenses, are rendered more useful for our purposes when
supplemented by FEHBAR 1631.203 -70, 71, and 72. In addition, we have
modified the FEHBAR to specifically recognize that monthly indirect
cost rates are a practice of the insurance industry and are therefore
permitted by FAR 31.203.
We have added subrogation settlements, prescription drug rebates,
and volume discounts to the list of FEHB credits in FEHBAR 1631.201-70.
This guidance specifies that the applicable portion of any credit
relating to any allowable cost and received by or accruing to the
carrier must be credited to the FEHB Program. We have always expected
carriers to ensure that the Program actually receives these credits.
Identifying them makes it even clearer that they are to be credited to
the Program. While the list of credits is not intended to be
exhaustive, we have added these examples to demonstrate how all credits
should be treated. Other enhancements include modifying FAR 31.205-10
to make facilities cost of money (COM) allowable under certain
circumstances, even if it is not specifically identified in a carrier
proposal (FEHBAR 1631.205-10). This change is intended to more closely
reflect the procedures we follow in our annual negotiation process with
carriers.
We have added a provision to establish that compensated personal
absence must be assigned to the cost accounting period in which the
entitlement was earned (FEHBAR 1631.205-72). This section is included
to ensure all carriers are following GAAP requirements applicable to
accrual procedures. We also provided a transition rule to permit
carriers to recover prior years' allocable liability for compensated
personal absence not previously charged to FEHB contracts. We believe
that the provisions of this section ensure that there is compatibility
between the applicable requirements of GAAP, FAR and FEHBAR. It should
also be stressed that the transition rule dealing with the recovery of
prior years' costs applies only to costs that have not been previously
charged to contracts or other final cost objectives.
Consistent with OPM's waiver of Cost Accounting Standards (CAS)
requirements, a new FEHBAR Subpart 1699.70 is added to clarify they do
not apply to experience-rated FEHB contracts.
We have worked collaboratively with carriers to develop procedures
that are consistent with insurance industry practices and assure an
equitable allocation of costs to the FEHB Program. When added to our
current financial reporting and disclosure requirements, these new
provisions will enhance our
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oversight of the FEHB Program. Because they have been developed in
coordination with the standard practices used by experience-rated
carriers, we expect they can be implemented within the FEHB Program
promptly and without impediments.
On March 26, 2004, OPM published a proposed rule in the Federal
Register (69 FR 15774). We received comments from two FEHB Program
carriers and one Federal employee union. One carrier commented on the
provision in 1631.205-72, which establishes that compensated personal
absence must be assigned to the cost accounting period in which the
entitlement was earned. The carrier asked that we clarify in the
preamble that a contractor subject to this provision be permitted to
draw the amount of the allowable compensated personal absence from the
Plan's letter of credit (LOC) reserves in the cost accounting period in
which the contractor determines that an entitlement had been earned. We
agree. Further, if it is later determined that the compensated personal
absence entitlement was not earned in the cost accounting period to
which it was assigned, the contractor will make an appropriate
adjustment and credit the LOC reserves. Another carrier commented that
it is important and highly appropriate that section 1699.70 provides
that the cost accounting standards do not apply to experience-rated
contracts, adding that this will avoid unnecessary and burdensome costs
to the Program. The carrier also commented on an anomaly in 1631.203 of
the proposed regulation which was created when the FAR Councils
published a final rule on April 5, 2004, after the publication date of
OPM's proposed regulation. The FAR Councils' rule revised FAR 31.203
regarding base periods for allocating indirect costs, stating `` * * *
the base period for allocating indirect costs shall be the contractor's
fiscal year used for financial reporting purposes in accordance with
generally accepted accounting principles. The fiscal year will normally
be 12 months, but a different period may be appropriate (e.g. when a
change in fiscal year occurs due to a business combination or other
circumstances.'' Historically, the practice in the insurance industry
has been to base the allocation of indirect costs on monthly rates,
unadjusted for annual differences. The FEHBAR allows for continuation
of normal business practices when there would be no material gain from
asserting a change. The practice of allocating indirect costs on a
monthly basis is in accordance with GAAP in the insurance industry.
Imposing a change would incur additional costs for the Government which
would have to pay for the cost of implementing and maintaining the
change in administrative systems. Therefore, this clause remains
unchanged except to adopt the new paragraph numbering reflected in the
updated FAR 31.203. The Federal employee union stated its objection to
OPM's waiver of the CAS and, subsequently to all the provisions in the
proposed rule except for one. The FAR 30.201-5(b)(2) permits the head
of an agency to waive the CAS for a particular contract or subcontract
under exceptional circumstances when necessary to meet the needs of the
agency. We determined there were sufficient reasons and granted waivers
for certain health plans under the FEHB Program. In October 2002, OPM
determined that it was appropriate to grant CAS waivers for certain
health plans under the FEHB Program for the reasons outlined below.
First, OPM determined that the Program has adequate cost accounting
requirements in its Federal Employees Health Benefits Acquisition
Regulations (FEHBAR), which supplement the Federal Acquisition
Regulation. The FEHBAR requires carriers to file annual financial
statements. The carriers, and their third party servicing agents, must
also adhere to financial and other related standards, comply with an
FEHB Program audit guide, and submit to audits by Independent Public
Accountants. Second, because OPM has contracted with carriers for
twenty to forty years, it has been able to collect extensive data on
each carrier, thus making disclosure statements superfluous. Their
existing systems are and have been their benchmarks. Third, the OPM
Office of the Inspector General audits health carriers on a regular
basis; contract rates, which are negotiated annually, are subject to
adjustment for audit findings. Fourth, insurance carriers are subject
to State regulatory authorities and must meet State statutory reserve
requirements in order to conduct business; in addition, many carriers
are required to submit to State rate setting procedures. Accordingly,
OPM's statutory oversight and regulatory requirements already in place
are sufficient to meet the Government's interests in a much less
burdensome way than applying CAS. This new regulation will enhance the
financial integrity of the Program and demonstrate to the public and
any other interested parties that accounting methods and related
financial disclosures by carriers are consistent with sound business
practices.
Regulatory Flexibility Act
I certify that this regulation will not have a significant economic
impact on a substantial number of small entities because it is based on
requirements already in place in the Federal Acquisition Regulation
(FAR).
Executive Order 12866, Regulatory Review
This rule has been reviewed by the Office of Management and Budget
in accordance with Executive Order 12866.
List of Subjects in 48 CFR Parts 1631 and 1699
Administrative practice and procedure, Government employees,
Government procurement, Health facilities, Health insurance, Health
professions, Reporting and record keeping requirements, Retirement.
U.S. Office of Personnel Management.
Dan G. Blair,
Acting Director.
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Accordingly, we are amending chapter 16 of title 48, Code of Federal
Regulations, as follows:
CHAPTER 16--OFFICE OF PERSONNEL MANAGEMENT FEDERAL EMPLOYEES HEALTH
BENEFITS ACQUISITION REGULATION
0
1. The authority citations for 48 CFR part 1631 continues to read as
follows:
Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c); 48 CFR 1.301.
PART 1631--CONTRACT COST PRINCIPLES AND PROCEDURES
0
2. Subpart 1631.1 consisting of section 1631.1 is added to read as
follows:
Subpart 1631.1--Definitions
1631.1 Definitions.
The definitions in FAR 31.001 are applicable to this section unless
otherwise noted.
Subpart 1631.2--Contracts with Commercial Organizations
0
3. Section 1631.201-70 is revised to read as follows:
1631.201-70 Credits.
The provisions of FAR 31.201-5 shall apply to income, rebates,
allowances, and other credits resulting from benefit payments. Examples
of such credits include:
(a) Coordination of benefit refunds, including subrogation
settlements;
(b) Hospital year-end settlements and other applicable provider
discounts;
[[Page 31391]]
(c) Uncashed and returned checks;
(d) Utilization review refunds;
(e) Contract prescription drug rebates;
(f) Volume discounts;
(g) Refunds and other payments or recoveries attributable to
litigation with subscribers or providers of health services; and,
(h) Erroneous benefit payment, overpayment, and duplicate payment
recoveries.
0
4. A new section 1631.203 is added to read as follows:
1631.203 Indirect costs.
For the purposes of applying FAR 31.203(g)(2) to FEHB Program
contracts, OPM considers the monthly rates used by some carriers to be
a general practice in the insurance industry.
0
5. Section 1631.203-70 is revised to read as follows:
1631.203-70 Allocation techniques.
(a) Carriers shall use the following methods for allocating
groupings of business unit indirect costs. Carriers shall consistently
apply the methods and techniques established to classify direct and
indirect costs, to group indirect costs and to allocate indirect costs
to cost objectives.
(1) Input method. The preferred allocation technique is one that
shows the consumption of resources in performance of the activities
(input) for the function(s) represented by the cost grouping. This
allocation technique should be used in circumstances where there is a
direct and definitive relationship between the function(s) and the
benefiting cost objectives. Measures of input ordinarily may be
expressed in terms such as labor hours or square footage. This means
costs may be allocated by use of a rate, such as a rate per labor hour
or cost per square foot.
(2) Output method. Where input measures are unavailable or
impractical to determine, the basis for allocation may be a measure of
the output of the function(s) represented by the cost grouping. The
output becomes a substitute measure for the use of resources and is a
reasonable alternative when a direct measure of input is impractical.
Output may be measured in terms of units of end product produced by the
function(s). Examples of output measures include number of claims
processed by a claims processing center, number of pages printed in a
print shop, number of purchase orders processed by a purchasing
department, or number of hires by a personnel office.
(3) Surrogate method. Where neither activity (input) nor output of
the function(s) can be measured practically, a surrogate must be used
to measure the resources utilized. Surrogates used to represent the
relationship generally measure the benefit to the cost objectives
receiving the service and should vary in proportion to the services
received. For example, if a personnel department provides various
services that cannot be measured practically on an activity (input) or
output basis, number of personnel served might reasonably represent the
use of resources of the personnel function for the cost objectives
receiving the service, where this base varies in proportion to the
services performed.
(4) Other method. Some cost groupings cannot readily be allocated
on measures of specific beneficial or causal relationships under
paragraph (a)(1), (a)(2), or (a)(3) of this section. Such costs do not
have a direct and definitive relationship to the benefiting cost
objectives. Generally, the cost of overall management activities falls
in this category. Overall management costs should be grouped in
relation to the activities managed. The base selected to measure the
allocation of these indirect costs to cost objectives should be a base
representative of the entire activity being managed. For example, the
total operating expenses of activities managed might be a reasonable
base for allocating the general indirect costs of a business unit.
Another reasonable method for allocating general indirect costs might
be to base them on a percentage of contracts. These examples are not
meant to be exhaustive, but rather are examples of allocation methods
that may be acceptable under individual circumstances. See also General
and Administrative (G&A) expenses, FEHBAR 1631.203-71.
(b) Carriers that use multiple cost centers to accumulate and
allocate costs shall apply the techniques in paragraph (a) of this
section at each step of the allocation process. Accordingly, the
allocation of costs among cost centers at the initial entry into the
cost accounting system shall be made in compliance with paragraph (a)
of this section. Likewise, the allocation of the cost of interim cost
centers to final cost centers is subject to paragraph (a) of this
section. If costs of final cost centers are allocated among final cost
objectives, the allocation shall also be made in accordance with
paragraph (a) of this section. It is possible that carriers using
multiple cost centers to accumulate and allocate costs may not have any
direct costs, i.e., costs identified specifically with a final cost
objective.
(c) The allocation of business unit general and administrative
expenses and the allocation of home office expenses to segments are
also subject to FEHBAR 1631.203-71 and FEHBAR 1631.203-72,
respectively.
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6. Section 1631.203-71 is added to read as follows:
1631.203-71 Business unit General and Administrative (G&A) expenses.
G&A expenses shall be allocated to final cost objectives by a base
or method that represents the total activity of the business unit.
0
7. Section 1631.203-72 is added to read as follows:
1631.203-72 Home office expense.
A carrier's practices for allocating home office expenses to the
segments of the carrier will be acceptable for purposes of FAR 31.203
if they are allocated on the basis of the beneficial or causal
relationship between the home office activities and the segments to
which the expenses are allocated. Expenses that cannot be allocated on
the basis of a more specific beneficial or causal relationship should
be allocated on a basis representative of the entire activity being
managed. The compliance of such allocations with FAR 31.203 shall be
determined on the basis of the facts and circumstances of each
situation.
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8. Section 1631.205-10 is added to read as follows:
1631.205-10 Cost of money.
For the purposes of FAR 31.205-10(b)(3), the estimated facilities
capital cost of money is specifically identified if it is identified in
the prior year's Annual Accounting Statement or, for new experience-
rated carriers, the supplemental information supporting submitted costs
(such as the Supplemental Schedule of Administrative Expenses).
0
9. Section 1631.205-72 is amended by designating the existing paragraph
as paragraph (a) and adding a new paragraph (b) to read as follows:
1631.205-72 FEHBP compensation for personal services.
(a) * * *
(b)(1) The costs of compensated personal absence shall be assigned
to the cost accounting period or periods in which entitlement was
earned. Entitlement means an employee's right, whether conditional or
unconditional, to receive a determinable amount of compensated personal
absence, or pay in lieu thereof.
(2) If at the beginning of the 1st year a carrier subject to
paragraph (b)(1) of this section has a liability for accrued but unpaid
expenses for compensated personal absences that would otherwise be
allocable to FEHB contracts, the
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carrier may include such costs in a suspense account. The suspense
account may be amortized and included in government contract costs at a
rate not exceeding 20 percent per year.
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10. Part 1699 is added consisting of subpart 1699.7, section 1699.70 to
read as follows:
PART 1699--COST ACCOUNTING STANDARDS
Subpart 1699.7--Cost Accounting Standards
1699.70 Cost accounting standards.
With respect to all experience-rated contracts currently existing
under the FEHB Program, the Cost Accounting Standards, found at 48 CFR
part 9904, of the Code of Federal Regulations, do not apply.
[FR Doc. 05-10827 Filed 5-31-05; 8:45 am]
BILLING CODE 6325-38-P