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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: March 26, 2004

SUBJECT: Federal Employees Health Benefits Acquisition Regulation (FEHBAR); Contract Cost Principles and Procedures

SOURCE: Federal Register, March 26, 2004, Vol. 69, No. 59, page 15774

AGENCIES: Office of Personnel Management (OPM)

ACTION: Proposed Rule

SYNOPSIS: OPM is proposing to amend the FEHBAR to include additional contract cost principles and procedures for FEHB program experience-rated contracts for clarity and to enhance oversight of FEHB carriers.

EDITOR'S NOTE: The FEHBAR is Chapter 16 of Title 48 of the Code of Federal Regulations (CFR). It is available at: http://www.access.gpo.gov/nara/cfr/cfrhtml_00/Title_48/48cfrv6_00.html#1601.

DATES: Comments on the proposed rule must be submitted on of before May 25, 2004.

ADDRESSES: Submit comments on the proposed rule to Abby L. Block, Deputy Associate Director, Employee and Family Support Policy, Strategic Human Resources Policy Division, Office of Personnel Management, Room 3400, 1900 E Street NW, Washington, DC 20415-3601; or by fax to 202-606-0633; or by e-mail to: aseaston@opm.gov.

FOR FURTHER INFORMATION CONTACT: Anne Easton, 202-606-0004.

SUPPLEMENTAL INFORMATION: OPM currently contracts with 32 experience-rated fee-for-service carriers and health maintenance organizations (HMOs) for health care coverage for FEHB enrollees. Under FEHB law, it is part of OPM's responsibility to insure that rates charged by health benefits plans reasonably and equitably reflect the cost of the benefits provided.

OPM's Inspector General (IG) regularly audits experience-rated carriers to determine if they are in compliance with the Cost Principles in Federal Acquisition Regulation (FAR) Part 31, Contract Cost Principles and Procedures, and the FEHBAR, which are the sole sources of cost accounting principles and practices for FEHB contracts.

The basic cost accounting principles in FAR Part 31 have been in place for over 40 years. During that period, significant improvements in cost accounting principles and practices have been made -- advances in information technology enable FEHB contractors to implement cost accounting practices more complex than those generally used when OPM adopted the FAR cost principles. Also, there are some differences in interpretation regarding the allocation of costs to carriers' contracts. Therefore, OPM proposes to update the FEHBAR to allow carriers to use more current contract cost accounting principles and practices and to provide for consistent interpretation of its requirements across the FEHB program.

The following changes are proposed to the FEHBAR:

• FEHBAR 1631.201-70, Credits, would be amended to add subrogation settlements, prescription drug rebates, and volume discounts to the list of FEHB credits. 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. OPM has always expected carriers to make the program actually receives these credits. Identifying them clarifies that they are to be credited to the program. While the list of credits is not intended to be exhaustive, OPM has added these examples to demonstrate how all credits should be treated.
  
  
• FEHBAR 1631.203, Indirect Costs, would be added. FAR Part 31 provides certain factors that are required to be considered in allocating indirect costs and which must be consistently applied in accordance with generally accepted accounting principles (GAAP). However, FAR Part 31 does not provide specific guidance on the formation of indirect cost groupings and the methods for their allocation. Therefore, FEHBAR 1631.203 would supplement FAR 31.203, Indirect Costs, by providing guidance to carriers on allocating certain indirect costs to FEHB experience-rated contracts as follows:
  
  
  • FEHBAR 1631.203, Indirect Costs, would state, "For the purposes of applying FAR 31.203(e) to FEHB program contracts, OPM considers the monthly rates used by some carriers to be a general practice in the insurance industry."
    
    
  • FEHBAR 1631.203-70, Allocation Techniques, would describe techniques for accumulating and allocating groupings of indirect costs (that is, "input method," "output method," "surrogate method," and "other method").
    
    
  • FEHBAR 1631.203-71, Business Unit General and Administrative (G&A) Expenses, would provide more guidance on the allocation of business unit G&A expenses by stating, "G&A expenses shall be allocated to final cost objectives by a base or method that represents the total activity of the business unit."
    
    
  • FEHBAR 1631.203-72, Home Office Expense, would state, "A carrier's practices for allocating home office expenses to the segments of the carrier will be acceptable for purposes of FAR 31.203(b) 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."
  
  
• FEHBAR 1631.205-10, Cost of Money, would be added to make facilities capital cost of money allowable under certain circumstances even if it is not specifically identified in a carrier proposal. OPM states, "This change is intended to more closely reflect the procedures we follow in our annual negotiation process with carriers."
  
  
• FEHBAR 1631.205-72, FEHBP Compensation for Personal Services, would be revised by designating the current text as paragraph (a) and adding a new paragraph (b) that would require that compensated personal absence be assigned to the cost accounting period in which the entitlement was earned. Paragraph (b) would provide a transition rule to permit carriers to recover prior years' allocable liability for compensated personal absence not previously charged to FEHB contracts. OPM states that these will make sure "all carriers are following GAAP requirements applicable to accrual procedures...We believe that the provisions of this section ensure that there is compatibility between the applicable requirements of GAAP, FAR and FEHBAR. It should be also 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. Any relevant comments on these points would be appreciated."
  
  
• Consistent with OPM's waiver of Cost Accounting Standards (CAS) requirements, a new FEHBAR Part 1699, Cost Accounting Standards, consisting of FEHBAR 1699.70, Cost Accounting Standards, is added to clarify that the CAS do not apply to experience-rated FEHB contracts.

EDITOR'S NOTE: In the introduction to the proposed rule, OPM states, "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 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, following the public comment period."

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

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