Affirmative Action Invades the Health Care Industry

For decades, Executive Order 11246, Section 503 of the Rehabilitation Act of 1973 (“Section 503″), and the Vietnam Era Veterans' Readjustment Assistance Act (“VEVRAA”) have imposed certain affirmative action obligations on federal government contractors and subcontractors. These laws, and federal regulations promulgated pursuant to these laws, are enforced by the Office of Federal Contracts Compliance Programs (“OFCCP”), which has jurisdiction over federal contractors and subcontractors subject to these laws and regulations.

Generally speaking, OFCCP jurisdiction over employers kicks in when an employer has at least $10,000 in federal contracts or subcontracts in a 12-month period. The stakes are raised for employers who have at least 50 employees and $50,000 worth of federal contracts or subcontracts in a given 12-month period. These employers must prepare and annually update affirmative action programs (“AAPs”). For affirmative action purposes, a federal contract is an agreement or arrangement with a government agency for the purchase, sale or use of personal property or nonpersonal services. A federal subcontract is an agreement or arrangement between any person or entity and a federal contractor: 1) 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; or 2) under which any portion of the contractor's obligation under any one or more contracts is performed, undertaken or assumed. 41 C.F.R. ' 60-1.3.

Although these requirements are for the most part self-policing ' employers are responsible for determining whether they are a federal contractor or subcontractor, and do not have to file their AAPs with the government ' the OFCCP conducts periodic compliance reviews of federal contractors and subcontractors to determine their compliance with affirmative action laws and regulations. In what has become an all too common occurrence in the health care industry, these compliance reviews increasingly have become the first time a health care provider learns that it is considered a federal contractor or subcontractor ' and that they have not been meeting their affirmative action obligations, often with costly consequences.

But Wait, I Don't Have a Contract with the Federal Government! Do I?

For years, hospitals and other health care providers operated with the understanding that, absent a clear contractual or subcontractual relationship with the federal government, they are not federal contractors or subcontractors subject to affirmative action requirements. This belief was based on the 2003 decision in OFCCP v. Bridgeport Hospital, ARB No. 00-034 (Jan. 31, 2003), which was widely understood as automatically insulating health care providers from federal subcontractor status. In that case, Bridgeport Hospital had a contract with Blue Cross/Blue Shield (“BCBS”) to provide medical care to BCBS's policyholders. BCBS, in turn, had a contract with the Office of Personnel Management (“OPM”) to provide health insurance to federal government employees under the Federal Employees Health Benefits Program (“FEHBP”). The U.S. Department of Labor's Administrative Review Board (“ARB”) held that because BCBS contracted with the federal government to provide insurance, and Bridgeport Hospital contracted with BCBS to provide medical care, Bridgeport Hospital's contract with BCBS was not a subcontract.

Two relatively recent decisions, however, have shattered the false sense of security provided by Bridgeport Hospital.

OFCCP v. UPMC Braddock

In OFCCP v. UPMC Braddock, ARB No. 08-048 (May 29, 2009), UPMC Hospitals had a contract with UPMC Health Plan, an HMO, to provide health care services to Plan beneficiaries. UPMC Health Plan in turn had an FEHBP contract with the federal government to provide health care services to federal employees. UPMC Hospitals' contract with UPMC Health Plan expressly excluded the hospitals from the definition of “subcontractor.” Nonetheless, the ARB found that the hospitals' provider agreement with an HMO, which in turn had a federal contract to provide medical services to government employees, made the hospital system a federal subcontractor subject to affirmative action requirements.

The ARB distinguished its holding in Bridgeport because there, the federal contract held by Blue Cross was to provide insurance ' by providing medical care, Bridgeport Hospital was not providing a service necessary to the performance of BCBS's insurance contract, nor was it performing, undertaking or assuming any portion of BCBS's obligations under its government contract. In contrast, in UPMC Braddock, the UPMC Health Plan's contract with the government was to provide health care services; because UPMC Hospitals' contract with UPMC Health Plan was also to provide health care services, the ARB held that UPMC Hospitals were performing a portion of UPMC Health Plan's obligations under its government contract.

OFCCP v. Florida Hospital Of Orlando

Any hopes that the UPMC Braddock decision was an outlier were dashed by the October 2010 U.S. Department of Labor Administrative Law Judge (“ALJ”) decision in OFCCP v. Florida Hospital of Orlando, DOL OALJ No. 2009-OFC-00002 (Oct. 18, 2010), which expanded federal subcontractor affirmative action requirements to health care providers that provide medical services to beneficiaries of TRICARE, the U.S. Department of Defense's health care program for active and retired military members and their families. Florida Hospital participates in a health care provider network established by Humana Military Healthcare Services, Inc. (HMHS), a non-insurer/non-HMO that has a government contract to administer the provider network for TRICARE. As part of that network, Florida Hospital provides medical services to TRICARE recipients. Similar to UPMC Braddock, the ALJ determined that because the hospital provides medical services to TRICARE beneficiaries through the network, it performs a portion of HMHS's obligations under its contract with TRICARE, and therefore is a federal subcontractor subject to affirmative action obligations.

OFCCP's Policy Directive Addressing Jurisdiction over Health Care Providers

Following UPMC Braddock, which held that subcontractor status, and OFCCP jurisdiction, could flow from FEHBP contracts ' and Florida Hospital, which extended the OFCCP's jurisdictional reach to the TRICARE context, health care providers faced an uncertain legal landscape in the absence of clear, comprehensive guidance on the subject of OFCCP jurisdiction over health care providers. On Dec. 16, 2010, the OFCCP filled that void when it issued Policy Directive No. 263 to “provide comprehensive guidance for assessing when health care providers and insurers are federal contractors or subcontractors based on their relationship with” or participation in a federal health care program.

The directive, which bases its analytical framework on the UPMC Braddock and Florida Hospital decisions, establishes several key principles regarding OFCCP jurisdiction over health care providers:

• OFCCP jurisdiction (i.e., federal contractor or subcontractor status) has to be determined on a case-by-case basis, given the wide array of contractual arrangements.
• Contractor and subcontractor obligations cannot be avoided or limited by agreement (e.g., provisions stating that an agreement is not a federal contract or subcontract).
• Reimbursement agreements between insurers and health care providers do not subject the health care provider to OFCCP jurisdiction.
• Health care providers receiving reimbursement pursuant to Medicare Parts A and B or Medicaid are not covered entities by virtue of that reimbursement.
• Contractual arrangements under Medicare Part C (Medicare Advantage) and Medicare Part D (prescription drug plans) may impose OFCCP jurisdiction.
• Contractual arrangements with the FEHBP and TRICARE impose OFCCP jurisdiction.
• Medical service, supply and device companies may be subject to OFCCP jurisdiction if they provide services, supplies and devices to covered health care providers that are necessary for the provider's performance of its obligations under a federal contract or subcontract, or that fulfill an element of the contract or subcontract.

So, Now What?

Over the past several months, it has become clear that the OFCCP increasingly is targeting hospitals and health care providers for compliance reviews ' and many health care providers are still being caught off-guard. While UPMC Braddock, Florida Hospital, and the OFCCP's December 2010 Directive are startling developments for many health care providers, the good news is that the vast majority of health care providers have time to determine whether they are a federal contractor or subcontractor, and, if so, to comply with their affirmative action obligations before the OFCCP knocks on their door.

First, Determine Contractor or Subcontractor Status

The first, and most logical, step for health care providers to take is to determine whether they are federal contractors or subcontractors subject to the OFCCP's jurisdiction. To make this determination, health care providers necessarily must first examine their contractual and other arrangements to determine whether they have a federal contract or subcontract. For example, is your organization a network provider for a TRICARE network? Does your organization have an agreement with an HMO to provide health care services to federal employees? Does your organization ' any part of it ' have an agreement with a health plan to provide prescription drugs to Medicare Advantage members? Does your organization provide medical supplies to a hospital, which in turn uses those medical supplies to treat TRICARE beneficiaries? If so, do the agreements or arrangements add up to $50,000 a year?

Health care providers should not only undertake this analysis for existing contracts and other arrangements, but they should also take a close look at the issue before they enter into agreements or other arrangements to provide health care or related services. Some organizations may decide that they simply do not want to deal with the burden of being an affirmative action contractor, and choose not to enter into such an agreement. As the saying goes, buyer beware!

Then, Comply! (It's Not As Hard As You Think)

If you determine that your organization is, or soon will become, a federal contractor or subcontractor subject to affirmative action regulations, then the next step, one which should be taken immediately, is compliance. For those unfamiliar with affirmative action requirements, they can seem daunting at first, particularly if your organization currently does not have the systems and processes in place to prepare the required AAPs for women and minorities, and for individuals with disabilities and (where applicable) protected veterans. If the organization devotes the resources necessary to prepare AAPs properly, and takes care to implement those AAPs (don't let them gather dust on the shelf!), affirmative action compliance can become ingrained within the fabric of the organization, at a manageable cost. Furthermore, if done properly, affirmative action compliance can help an organization diagnose and address problems with its selection practices (applicants and hiring, terminations, promotions) and compensation systems ' or ensure that such problems do not exist and cannot get an organizational foothold ' before a group of employees files a costly class action or (you guessed it) the OFCCP knocks on your door and demands to know why you haven't taken the necessary steps to ensure compliance.

Now Stop Worrying ' and Take Action, Before It's Too Late!

In just the past year, the affirmative action compliance landscape has changed dramatically, not just for health care providers, but for all contractors and subcontractors. The Obama administration has pumped more money into the OFCCP, allowing it to hire more staff and initiate more compliance reviews. The OFCCP has moved away from its Bush-era focus of addressing only perceived systemic issues to enforcing the law across the board, no matter how small the perceived violation or how few employees it impacts. The OFCCP is taking a more aggressive stance on compensation discrimination, particularly gender-based pay disparities, and has implemented new compensation guidelines that will likely result in even closer scrutiny of compensation-related issues. And it has issued new Active Case Enforcement directive that foretells a much more intensive approach to compliance reviews.

In other words, the stakes have never been higher! But the window to get into compliance ' while shrinking by the day ' is still open for many health care providers and others in the health care industry. Only if the appropriate steps are taken to determine federal contractor or subcontractor status, and develop and implement AAPs where necessary, will health care providers be able to stop worrying and maybe, just maybe, learn to love the OFCCP.

Christopher D. Durham, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law.

In the health care industry, rapid ' often seismic ' change frequently feels like the norm. Even by that standard, however, in the past year or so, health care providers and others in the industry have felt under siege, due in no small part to the passage of the landmark federal health care reform law, the Patient Protection and Affordable Care Act, in March 2010. And it has been easy for hospitals and other health care providers to become fixated on the reform drama that is currently playing out in the halls of Congress, and in ballot boxes and federal courtrooms around the country, all the while scrambling to comply with the law's many provisions scheduled to phase-in over the next several years.

Consequently, many health care providers, understandably, have lost sight of another significant change in the industry that has been afoot since mid-2009 ' the imposition of affirmative action laws and regulations on hospitals and other health care providers that are considered federal government contractors or subcontractors. Government contractor or subcontractor status has far-reaching implications and potentially dire consequences for health care providers ' subjecting them to close government scrutiny of their employment practices, and where they are
not in compliance with their affirmative action obligations, the possibility of significant financial liability, among other things, for unsuspecting violations of those obligations.

Government Contractor Status and Affirmative Action:
A Brief Introduction

For decades, Executive Order 11246, Section 503 of the Rehabilitation Act of 1973 (“Section 503″), and the Vietnam Era Veterans' Readjustment Assistance Act (“VEVRAA”) have imposed certain affirmative action obligations on federal government contractors and subcontractors. These laws, and federal regulations promulgated pursuant to these laws, are enforced by the Office of Federal Contracts Compliance Programs (“OFCCP”), which has jurisdiction over federal contractors and subcontractors subject to these laws and regulations.

Generally speaking, OFCCP jurisdiction over employers kicks in when an employer has at least $10,000 in federal contracts or subcontracts in a 12-month period. The stakes are raised for employers who have at least 50 employees and $50,000 worth of federal contracts or subcontracts in a given 12-month period. These employers must prepare and annually update affirmative action programs (“AAPs”). For affirmative action purposes, a federal contract is an agreement or arrangement with a government agency for the purchase, sale or use of personal property or nonpersonal services. A federal subcontract is an agreement or arrangement between any person or entity and a federal contractor: 1) 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; or 2) under which any portion of the contractor's obligation under any one or more contracts is performed, undertaken or assumed. 41 C.F.R. ' 60-1.3.

Although these requirements are for the most part self-policing ' employers are responsible for determining whether they are a federal contractor or subcontractor, and do not have to file their AAPs with the government ' the OFCCP conducts periodic compliance reviews of federal contractors and subcontractors to determine their compliance with affirmative action laws and regulations. In what has become an all too common occurrence in the health care industry, these compliance reviews increasingly have become the first time a health care provider learns that it is considered a federal contractor or subcontractor ' and that they have not been meeting their affirmative action obligations, often with costly consequences.

But Wait, I Don't Have a Contract with the Federal Government! Do I?

For years, hospitals and other health care providers operated with the understanding that, absent a clear contractual or subcontractual relationship with the federal government, they are not federal contractors or subcontractors subject to affirmative action requirements. This belief was based on the 2003 decision in OFCCP v. Bridgeport Hospital, ARB No. 00-034 (Jan. 31, 2003), which was widely understood as automatically insulating health care providers from federal subcontractor status. In that case, Bridgeport Hospital had a contract with Blue Cross/Blue Shield (“BCBS”) to provide medical care to BCBS's policyholders. BCBS, in turn, had a contract with the Office of Personnel Management (“OPM”) to provide health insurance to federal government employees under the Federal Employees Health Benefits Program (“FEHBP”). The U.S. Department of Labor's Administrative Review Board (“ARB”) held that because BCBS contracted with the federal government to provide insurance, and Bridgeport Hospital contracted with BCBS to provide medical care, Bridgeport Hospital's contract with BCBS was not a subcontract.

Two relatively recent decisions, however, have shattered the false sense of security provided by Bridgeport Hospital.

OFCCP v. UPMC Braddock

In OFCCP v. UPMC Braddock, ARB No. 08-048 (May 29, 2009), UPMC Hospitals had a contract with UPMC Health Plan, an HMO, to provide health care services to Plan beneficiaries. UPMC Health Plan in turn had an FEHBP contract with the federal government to provide health care services to federal employees. UPMC Hospitals' contract with UPMC Health Plan expressly excluded the hospitals from the definition of “subcontractor.” Nonetheless, the ARB found that the hospitals' provider agreement with an HMO, which in turn had a federal contract to provide medical services to government employees, made the hospital system a federal subcontractor subject to affirmative action requirements.

The ARB distinguished its holding in Bridgeport because there, the federal contract held by Blue Cross was to provide insurance ' by providing medical care, Bridgeport Hospital was not providing a service necessary to the performance of BCBS's insurance contract, nor was it performing, undertaking or assuming any portion of BCBS's obligations under its government contract. In contrast, in UPMC Braddock, the UPMC Health Plan's contract with the government was to provide health care services; because UPMC Hospitals' contract with UPMC Health Plan was also to provide health care services, the ARB held that UPMC Hospitals were performing a portion of UPMC Health Plan's obligations under its government contract.

OFCCP v. Florida Hospital Of Orlando

Any hopes that the UPMC Braddock decision was an outlier were dashed by the October 2010 U.S. Department of Labor Administrative Law Judge (“ALJ”) decision in OFCCP v. Florida Hospital of Orlando, DOL OALJ No. 2009-OFC-00002 (Oct. 18, 2010), which expanded federal subcontractor affirmative action requirements to health care providers that provide medical services to beneficiaries of TRICARE, the U.S. Department of Defense's health care program for active and retired military members and their families. Florida Hospital participates in a health care provider network established by Humana Military Healthcare Services, Inc. (HMHS), a non-insurer/non-HMO that has a government contract to administer the provider network for TRICARE. As part of that network, Florida Hospital provides medical services to TRICARE recipients. Similar to UPMC Braddock, the ALJ determined that because the hospital provides medical services to TRICARE beneficiaries through the network, it performs a portion of HMHS's obligations under its contract with TRICARE, and therefore is a federal subcontractor subject to affirmative action obligations.

OFCCP's Policy Directive Addressing Jurisdiction over Health Care Providers

Following UPMC Braddock, which held that subcontractor status, and OFCCP jurisdiction, could flow from FEHBP contracts ' and Florida Hospital, which extended the OFCCP's jurisdictional reach to the TRICARE context, health care providers faced an uncertain legal landscape in the absence of clear, comprehensive guidance on the subject of OFCCP jurisdiction over health care providers. On Dec. 16, 2010, the OFCCP filled that void when it issued Policy Directive No. 263 to “provide comprehensive guidance for assessing when health care providers and insurers are federal contractors or subcontractors based on their relationship with” or participation in a federal health care program.

The directive, which bases its analytical framework on the UPMC Braddock and Florida Hospital decisions, establishes several key principles regarding OFCCP jurisdiction over health care providers:

• OFCCP jurisdiction (i.e., federal contractor or subcontractor status) has to be determined on a case-by-case basis, given the wide array of contractual arrangements.
• Contractor and subcontractor obligations cannot be avoided or limited by agreement (e.g., provisions stating that an agreement is not a federal contract or subcontract).
• Reimbursement agreements between insurers and health care providers do not subject the health care provider to OFCCP jurisdiction.
• Health care providers receiving reimbursement pursuant to Medicare Parts A and B or Medicaid are not covered entities by virtue of that reimbursement.
• Contractual arrangements under Medicare Part C (Medicare Advantage) and Medicare Part D (prescription drug plans) may impose OFCCP jurisdiction.
• Contractual arrangements with the FEHBP and TRICARE impose OFCCP jurisdiction.
• Medical service, supply and device companies may be subject to OFCCP jurisdiction if they provide services, supplies and devices to covered health care providers that are necessary for the provider's performance of its obligations under a federal contract or subcontract, or that fulfill an element of the contract or subcontract.

So, Now What?

Over the past several months, it has become clear that the OFCCP increasingly is targeting hospitals and health care providers for compliance reviews ' and many health care providers are still being caught off-guard. While UPMC Braddock, Florida Hospital, and the OFCCP's December 2010 Directive are startling developments for many health care providers, the good news is that the vast majority of health care providers have time to determine whether they are a federal contractor or subcontractor, and, if so, to comply with their affirmative action obligations before the OFCCP knocks on their door.

First, Determine Contractor or Subcontractor Status

The first, and most logical, step for health care providers to take is to determine whether they are federal contractors or subcontractors subject to the OFCCP's jurisdiction. To make this determination, health care providers necessarily must first examine their contractual and other arrangements to determine whether they have a federal contract or subcontract. For example, is your organization a network provider for a TRICARE network? Does your organization have an agreement with an HMO to provide health care services to federal employees? Does your organization ' any part of it ' have an agreement with a health plan to provide prescription drugs to Medicare Advantage members? Does your organization provide medical supplies to a hospital, which in turn uses those medical supplies to treat TRICARE beneficiaries? If so, do the agreements or arrangements add up to $50,000 a year?

Health care providers should not only undertake this analysis for existing contracts and other arrangements, but they should also take a close look at the issue before they enter into agreements or other arrangements to provide health care or related services. Some organizations may decide that they simply do not want to deal with the burden of being an affirmative action contractor, and choose not to enter into such an agreement. As the saying goes, buyer beware!

Then, Comply! (It's Not As Hard As You Think)

If you determine that your organization is, or soon will become, a federal contractor or subcontractor subject to affirmative action regulations, then the next step, one which should be taken immediately, is compliance. For those unfamiliar with affirmative action requirements, they can seem daunting at first, particularly if your organization currently does not have the systems and processes in place to prepare the required AAPs for women and minorities, and for individuals with disabilities and (where applicable) protected veterans. If the organization devotes the resources necessary to prepare AAPs properly, and takes care to implement those AAPs (don't let them gather dust on the shelf!), affirmative action compliance can become ingrained within the fabric of the organization, at a manageable cost. Furthermore, if done properly, affirmative action compliance can help an organization diagnose and address problems with its selection practices (applicants and hiring, terminations, promotions) and compensation systems ' or ensure that such problems do not exist and cannot get an organizational foothold ' before a group of employees files a costly class action or (you guessed it) the OFCCP knocks on your door and demands to know why you haven't taken the necessary steps to ensure compliance.

Now Stop Worrying ' and Take Action, Before It's Too Late!

In just the past year, the affirmative action compliance landscape has changed dramatically, not just for health care providers, but for all contractors and subcontractors. The Obama administration has pumped more money into the OFCCP, allowing it to hire more staff and initiate more compliance reviews. The OFCCP has moved away from its Bush-era focus of addressing only perceived systemic issues to enforcing the law across the board, no matter how small the perceived violation or how few employees it impacts. The OFCCP is taking a more aggressive stance on compensation discrimination, particularly gender-based pay disparities, and has implemented new compensation guidelines that will likely result in even closer scrutiny of compensation-related issues. And it has issued new Active Case Enforcement directive that foretells a much more intensive approach to compliance reviews.

In other words, the stakes have never been higher! But the window to get into compliance ' while shrinking by the day ' is still open for many health care providers and others in the health care industry. Only if the appropriate steps are taken to determine federal contractor or subcontractor status, and develop and implement AAPs where necessary, will health care providers be able to stop worrying and maybe, just maybe, learn to love the OFCCP.

Christopher D. Durham, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law.