Let the Seller Beware: Hospitals Treating HMO Patients Employed by the Federal Government are “Subcontractors” Governed by Affirmative Action Laws

by Sherman & Howard L.L.C.

When a health plan/HMO ("Plan") provides group health coverage to employers, including the federal government, the hospitals that treat federal employees under a contract with the Plan are government "subcontractors" subject to various affirmative action laws.  The court ruling in Braddock v. Harris [1], which affirmed administrative decisions adverse to the hospitals, means that hospitals and other health care providers with such arrangements are subject to compliance evaluations, on-site reviews and enforcement proceedings by the Office of Federal Contract Compliance Programs ("OFCCP").

This protracted case (which began in 2004) involved three hospitals - affiliated with the University of Pittsburgh Medical Center - all of which provided medical services and supplies to individuals enrolled in the UPMC Health Plan ("Health Plan"), a health maintenance organization.  The Health Plan, in turn, contracted with various employers seeking group health plan coverage for their workers.  One such employer was the federal government; the Health Plan and the U.S. Office of Personnel Management ("OPM") entered into a contract to provide coverage for federal employees who elected to participate in the Federal Employees Health Benefits Program. 

The arrangements were not exclusive.  The federal employees were offered health benefit options other than the Health Plan.  The hospitals treated patients other than the Health Plan participants.  And the Health Plan provided services to employers other than the federal government.  Also, the contracts between the hospitals and the Health Plan applied to all individuals covered by the Health Plan, not just federal employees, and in fact, did not even mention federal government employees.  None of the agreements between the hospitals and the Health Plan contained the EEO and affirmative action provisions mandated by Executive Order 11246, the Rehabilitation Act, or the Vietnam Era Veterans' Readjustment Assistance Act.

The hospitals refused to comply with OFCCP efforts to obtain information and records about hospital employees, taking the position that it was not a covered government contractor.  The Court in Braddock rejected many persuasive arguments advanced by the hospitals.

For example, OPM/Health Plan agreement expressly stated that a provider of medical services (like the hospitals) was not a "subcontractor" within the meaning of the contract.  The Court rejected the argument, however, ruling that contractual provisions in conflict with the law are void, and that parties to contracts (including OPM) have no authority to (mis)characterize a subcontractor relationship as something else.

A second argument focused on a Secretary of Labor regulation that defined "subcontract" as an agreement or arrangement for "the purchase, sale or use of personal property or nonpersonal services which, in whole or in part, is necessary to the performance of any one or more contracts...."[2]   Due to the deeply personal nature of health care services, this regulation would suggest that medical care is outside the definition of "subcontract."  However, the Court rejected the argument.  (Raise your hand if you thought your recent colonoscopy was "nonpersonal.")  The term "nonpersonal" was interpreted as services where the personnel rendering the services are not subject to the supervision and control usually prevailing in relationships between the government and its employees, a standard provided in Federal Acquisition Regulations[3] The Court also questioned the logic of any reading of the federal regulations that would expose nurses, doctors and other hospital staff members to employment discrimination.

Third, the hospitals argued that the case was governed by a 2003 OFCCP Policy Directive stating that doctors, nurses and other health care providers having a relationship with Federal Employees Health Benefits Program participants were "not covered under OFCCP's programs based solely on that relationship."  The Court in Braddock distinguished that Policy Directive, as having been based on a prior, distinguishable Administrative Review Board decision, OFCCP v. Bridgeport Hospital[4].In Bridgeport Hospital, Blue Cross/Blue Shield contracted with OPM to provide federal employees with health insurance, and it also entered into a medical services agreement with the hospital.  The hospital was found not to be a "subcontractor" of BC/BS under the affirmative action laws, as BC/BS was merely providing health insurance to the federal government, not "goods" or "services."  By contrast, the Plan in Braddock was not merely an insurer, but also an HMO that agreed to provide actual medical care to federal employees.

Fourth, the hospitals argued that they could not be government "subcontractors" because they never agreed to this status; nor had they agreed to the affirmative action and other obligations of the laws enforced by the OFCCP.  This argument was unsuccessful largely because of court decisions providing that contracts with the government are deemed to contain mandatory provisions, by operation of law, even if the agreements themselves are silent on the subject.  The government can compel a company to comply with the requirements of Executive Order 11246, for instance, even though the company has not expressly consented to be bound by the Order.

The Court in Braddock carefully noted that the OFCCP sought the hospitals' future compliance with the law, not any penalty for having failed to comply with the legal mandates in the past.  Because of this, any argument that the hospitals were being punished for non-compliance "during a period in which they did not actually realize they qualified as government subcontractors or reasonably believed otherwise," failed.

[1]Braddock v. Harris, Civil Action No. 09-1210 (PLF) (D.D.C. Mar. 30, 2013).

[2] 41 C.F.R. § 60-1.3.

[3] 48 C.F.R. § 37.101. 

[4]OFCCP v. Bridgeport Hospital, ARB Case No. 00-034 (Jan. 31, 2003).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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