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OPM Regulation Violated Statute, Was Arbitrary and Capricious

The Court of Appeals for the Federal Circuit invalidated an Office of Personnel Management Federal Employees Health Benefits Program Acquisition Regulation that prohibited adjusting the rates of health care providers during final contract years because the regulation was arbitrary and capricious, and in violation of law. The dispute concerned contracts with OPM for the provision of health benefits for government employees and retirees under the Federal Employees Health Benefits Program. The rates under these contracts are determined according to a procedure where for each year of performance, before the year begins the provider proposes rates based on its anticipated costs, and then six months into performance the parties "reconcile" the rates to reflect the actual cost of performance, and either the contractor remits payments to the government for overcharges, or the government reimburses the contractor for undercharges. However, according to OPM policy promulgated at FEHBAR 1652.216-70(b)(6), this practice is discontinued in the final year of a contractor's relationship with OPM. Under the regulation, the rates are not reconciled in the final year and neither party is reimbursed the difference between the contractor's estimated and actual costs. Three contractors, seeking entitlement to "reconciliation revenues" in the final year of their contracts, challenged the validity of FEHBAR 1652.216-70(b)(6) in the Court of Federal Claims. The CFC found the regulation violated 5 USC 8902(i), which requires OPM to calculate rates that "reasonably and equitably reflect the cost of the benefits provided."
Reasonable & Equitable Rates

On appeal, the Federal Circuit upheld the CFC's decision. Finding an absence of statutory authority directly addressing the issue, the court, applying the standard for evaluating the propriety of agency regulations established in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (467 U.S. 837), found the policy in FEHBAR 1652.216-70(b)(6) was not a permissible construction of 5 USC 8902(i). The rate reconciliation process devised by OPM specifically addressed the broad mandate of 5 USC 8902(1) to set rates that reasonably and equitably reflect costs, and thus the elimination of the reconciliation process in the final year of performance illegally contravened the statute. The government's arguments the rate reconciliation procedure was nonessential and unrelated to the statutory mandate for fair rates seemed to be based on post hoc rationalizations constructed during litigation, and even if this were not the case, the arguments were undermined by the record, including evidence of the government's own explanation for the reconciliation procedure. Even if the regulation did not directly conflict with the statute, it would be properly invalidated as arbitrary and capricious because abandonment of the reconciliation procedure could not be reasonably construed as furthering the statutory mandate for reasonable and equitable rates, or the government's stated purpose of data collection. Accordingly, the court reformed the contracts of the health care providers to ensure their rates accurately reflected the cost of performance. Since this opinion was released, OPM has issued a proposed rule that would amend FEHBAR 1652.216-70 to remove the ban on adjustments based on rate reconciliation for the final year of FEHBP contracts (see 70,285.03). (GHS Health Maintenance Organization, Inc., et al. v. U.S., CA-FC, 52 CCF 78,985)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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