Free Cross Motion [Dispositive] - District Court of Federal Claims - federal

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Nos. 01-517C, 05-371C, 05-963C (Judge Horn) IN THE UNITED STATES COURT OF FEDERAL CLAIMS GHS HEALTH MAINTENANCE ORGANIZATION, INC., d/b/a BLUELINCS HMO, Plaintiff, TEXAS HEALTH CHOICE, L.C., Plaintiff, SCOTT & WHITE HEALTH PLAN Plaintiff, v. THE UNITED STATES, Defendant. DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: SUSAN WHITMAN, Esq. JILL GERSTENFIELD, Esq. U.S. Office of Personnel Management Washington, D.C. 20415 JANE W. VANNEMAN Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 1100 L Street, NW, 8th Floor Washington, D.C. 20530 Telephone: (202) 307-1011 Facsimile: (202) 514-8624 Attorneys for Defendant

February 17, 2006

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TABLE OF CONTENTS Page DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT . . . . . . . . . . . . . . 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF THE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 NATURE OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STATEMENT OF FACTS AND COURSE OF PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 6 A. B. Statutory and Regulatory Provisions And Contract Terms . . . . . . . . . . . . . . . . . . 6 Federal Employees' Health Benefits Program . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1. Responsibility of Office of Personnel Management (OPM) To Administer The FEHBP And To Contract With Carriers . . . . . . . . . 10 Annual Rate Negotiations For Community Rated (HMO) Plans - Prepaid Basis, And Methodology To Estimate, Negotiate, And Determine Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 a. b. Annual Rate Negotiations - Prepaid Nature of HMO Plans . . . . 12 OPM's 1989 Revisions To Community Rating Methodology To Identify Rates as Market Prices, Established In Advance Of The Plan Year, And, To Incorporate FAR Principles Relating to Price Negotiation And Records Retention . . . . . . . . 14 OPM's 1997 Revision of Community Rating Methodology From Market Prices To Negotiated Benefits, To Ensure That Federal Groups Receive The Same Discounts That Are Enjoyed By The Carrier's SSSG . . . . . . . . . . . . . . . . . . . . . . . . 16 OPM Reviews Prepaid Rates Proposed By The Carriers To Establish That The Amounts To Be Charged Are Distributed Appropriately To The Federal Group And The Carrier's SSSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.

c.

d.

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3.

Elements of the Rate Reconciliation Process For Carriers Which Continue In the FEHBP From Year to Year . . . . . . 20 Non-Reconciliation In the Year That Carrier Elects Not To Renew . . . . 22 Limited Audit Function of OPM's Office of Actuaries To Reconcile Rates, As Compared To Function Of OPM's Office of the Inspector General (OIG) To Verify That Carrier Used Accurate and Appropriate Data To Determine Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 23

4. 5.

C. D.

Promulgation of the Non-Reconciliation Regulation in 1990 . . . . . . . . . . . . . . . 25 Plaintiffs' Contracts, Section 3.2, Included The Terms Of the Non-Reconciliation Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

SUMMARY OF THE ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 I. II. Standard of Review - Summary Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Nonreconciliation Regulation Is Not Arbitrary or Capricious; Rather, It Is Valid and Effective As A Matter of Law . . . . . . . . . . . . . . . . . . . . 33 A. OPM Enjoys the Presumption of Regularity In Promulgating Regulations That Govern The FEHBA . . . . . . . . . . . . . 33 1. B. C. OPM Meets The General Standards For APA Review . . . . . . . . 33

OPM Discretion To Administer the FEHBA Is Very Broad . . . . . . . . . . 38 OPM's Construction of The FEHBA Statute, With Reference To The Non-Reconciliation Regulation, Is Not Arbitrary or Capricious; Rather, It Is Consistent With The Law Requiring That Rates For Community Rated Plans Reasonably and Equitably Reflect The Cost of Benefits Provided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 A Range of Rates For Community Rated Plans Satisfies The Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

D.

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E.

The Court Should Not Set Aside The Regulation, Because Plaintiffs Failed To Challenge Promulgation of The Regulation During The Comment Period, Even Though They Clearly Had Opportunities To Do So . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The Non-Reconciliation Regulation Is Valid and Proper As Applied To Plaintiffs . . . . . . . . . . . . . . . . . . . . . 46 1. The Regulation Applies to All Community Rated Carriers, Including Plaintiffs, Without Regard To Whether The Underlying Rationale Of the Regulation Pertains To Their Individual Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 The Record Retention Provisions Specific To The Annual Rate Reconciliation, Governing The Carriers' Operations When They Remain In The Program, Do Not Apply To Non-Reconciliation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

F.

2.

III.

Plaintiffs Are Bound By The Terms Of Their Contracts, Section 3.2 . . . . . . . . . 50 A. This Court's CDA Review Is De Novo, and The Court Interprets The Terms of the Contract As A Matter of Law . . . . . . . . . . . . . . . . . . . 50 Plaintiffs Signed The Contracts That Contained The Terms Of The Non-Reconciliation Regulation, And Are Bound . . . . . . . . . . . 51 Plaintiffs Waived Any Right To Object To Section 3.2(b)(6) Of Their Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 52 Laches Bars Plaintiffs' Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Fairness Requires That The Court Enforce The Contract To Which The Parties Agreed . . . . . . . . . . . . . . . . . . . . . . 56

B.

C.

D. E.

V.

OPM Did Not Breach Its Contract With Bluelincs . . . . . . . . . . . . . . . . . . . . . . . 59

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

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TABLE OF AUTHORITIES CASES: Page(s)

60 Key Centre Inc. v. Administrator of GSA, 47 F.3d 55 (2nd Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 57 Aerolease Long Beach v. United States, 31 Fed. Cl. 342 (1994), aff'd 39 F.3d 1198 (Fed. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . 34 American Contracting Corp. v. United States, 217 Ct. Cl. 338 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,59 American Federation of Government Employees v. Devine, 525 F. Supp. 250 (D.D.C. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 American Telephone & Telegraph Co. v. United States, 307 F.3d 1374 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Appeal of Humana, Inc., 00-2 BCA P31,142, ASBCA No. 49,951 (October 3, 2000) . . . . . . . . . . . . . . . . . . . . . 11 AT&T v. United States, 48 Fed. C1. 156 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Assigned Car Cases, 274 U.S. 564 (1927) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Becho, Inc. v. United States, 47 Fed. Cl. 595 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Beta Systems v. United States, 838 F.2d 1179 (Fed. Cir.1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Boeing Company v. United States, 480 F.2d 854 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Bolden v. Blue Cross and Blue Shield, 669 F.Supp. 1096 (D.C. Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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Bowman Transp. Inc. v. Arkansas-Best Freight System, 419 U.S. 281 (1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Brownlee v. DynCorp., 349 F.3d 1343 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Burnett Elecs. Lab., Inc. v. United States, 479 F.2d 1329 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Camp v. Pitts, 411 U.S. 38 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Caudill v. Blue Cross & Blue Shield of North Carolina, 999 F.2d 74 (4th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Chevron U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 35, 39 Chris Berg v. United States, 192 Ct. Cl. 176 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 City of Chicago v. Federal Power Commission, 385 F.2d 629 (D.C. Cir. 1967) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Colon v. Apfel, 133 F.Supp. 2d 300 (S.D. N.Y. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Cornetta v. United States, 851 F.2d 1372 (Fed. Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Craft Mach. Works, Inc. v. United States, 926 F.2d 1110 (Fed. Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

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Cubic Applications, Inc. v. United States, 37 Fed. C1. 345 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Defenders of Wildlife v. Norton, 257 F.Supp.2d 53 (D.C. D.C. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Do-Well Machine Shop, Inc v. United States, 870 F.2d 637 (Fed. Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 E. Walters & Co. v. United States, 576 F.2d 362 (Ct. C1. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Environmental Action, Inc. v. F.E.R.C, 939 F.2d 1057 (D.C. Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,47 Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Foley Co. v. United States, 11 F.3d 1032 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Food and Drug Administration v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Giesler v. United States, 232 F.3d 864 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Gold Line Sullivan v. Zebley, 493 U.S. 521 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Gould, Inc. v. United States, 935 F.2d 1271 (Fed. Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Hartford Accident & Indemnity Co. v. United States, 130 Ct. C1. 490 (1955) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Hercules Inc. v. EPA, 598 F.2d 91 (D.C. Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Hermes Consolidated, Inc. v. United States, 58 Fed. Cl. 3 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 53, 57 Jana, Inc. v. United States, 936 F.2d 1265 (Fed. Cir.), cert. denied, 502 U.S. 1030 (1992) . . . . . . . . . . . . . . . . 55, 56 -vi-

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Jersey Shore Broadcasting Corp. v. FCC, 37 F.3d 1531 (D.C.Cir.1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Kennedy v. Empire Blue Cross and Blue Shield, 989 F.2d 588 (2nd Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Kobleur v. Group Hospitalization, 954 F.2d 705 (11th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 LaBarge Prods, Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 LaCoste v. United States, 9 Cl. Ct. 313, 315 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 LaForge & Budd Constr. Co. v. United States, 48 Fed. Cl. 566(2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

Levin v. Connecticut Blue Cross and OPM, 487 F.Supp. 385 (N.D. Ill. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Ling-Temco-Vought, Inc. v. United States, 475 F.2d 630 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 58 Mackall v. Casilear, 137 U.S. 556 (1890) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Methodist Hospital v. Shalala, 38 F.3d 1225 (D.C. Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Mexican Intermodal Equipment v. United States, 61 Fed. Cl. 55 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Michigan Consol. Gas Co. v. F.E.R.C, 883 F.2d 117 (D.C. Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Mingus Constr., Inc. v. United States, 812 F.2d 1387 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Monon Corp. v. Stoughton Trailers, Inc., 239 F.3d 1253 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

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Motor Vehicle Mfrs. Ass 'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 41 Muratore v. United States Office of Personnel Management, 222 F.3d 918 (11th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 39 Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C.Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 National Federation of Federal Employees [NFFE] v. Devine, 679 F.2d 907 (D.C. Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 37, 38, 41 National Treasury Employees Union [NTEU] v. Campbell, 589 F.2d 669 (D.C. Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 42, 46, 47 NFFE v. Devine, 679 F.2d 907 (D.C. Cir. (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,37,38,41 Northrop Grumman Corp. v. United States, 47 Fed. Cl. 20 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 PCA Health Plans of Texas, Inc v. LaChance, 191 F.2d 1353 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PCA Health Plans of Texas, Inc. v. LaChance, 191 F.3d at 1356 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 59 PCL Construction Services, Inc. v. United States, 41 Fed. C1. 242 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Permian Basin Area Rate Cases, 390 U.S. 747 (1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Port Authority of City of Saint Paul v. United States, 432 F.2d 455 (Ct. Cl. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Promac, Inc. v. West, 203 F.3d 786 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 QualMed Plans for Health of New Mexico, Inc. v. United States, 267 F.3d 1319 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Ragsdale v. Wolverine World Wide, Inc, 535 U.S. 81 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 -viii-

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Reservation Ranch v. United States, 39 Fed. C1. 696, 712 (1997), aff'd., 217 F.3d 850 (Fed. Cir. 1999) (table) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Ruggiero v. United States, 420 F.2d 709 (Fed. Cir. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Rust v. Sullivan, 500 U.S. 173 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Scott & White v. Office of Personnel Management, No.01 CV 1824 (D. D.C.)(JGP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Scott & White v. United States, No. 03-61C (Fed. Cl.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Southwestern Bell Tel. Co. v. FCC, 168 F.3d 1344 (D.C.Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 State of Michigan v. U.S. Environmental Protection Agency, 213 F.3d 663 ( D.C. Cir 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 45 Strahan v. Linnon, 967 F.Supp. 581 (D. Mass 1997), aff'd, 187 F.3d 623 (1st Cir. 1998) . . . . . . . . . . . . . . 45 T.L. Roof & Assocs. Constr. Co. v. United States, 28 Fed. Cl. 572 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Tackitt v. Prudential lns. Co., 758 F.2d 1572 (11th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Tesoro Hawaii Corporation v. United States, 405 F.3d 1339 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Texas Health Choice v. Office of Personnel Management, 400 F.3d 895 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Time Warner Entertainment Co. v. FCC, 56 F.3d 151 (D.C. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Tunik v. Merit Systems Protection Board , 407 F.3d 1326 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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U.S.v. FCC, 652 F.2d 72 (D.C.Cir.1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 United States v. Florida East Coast Ry., 410 U.S. 224 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 United States v. Larionoff, 431 U.S. 864 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 United States v. Mead Corp., 533 U.S. 218 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 39 Vermont Yankee Nuclear Power Corp., 435 U.S. 419 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 41 Whittaker Electronic Systems v. Dalton, 124 F.3d 1443 (Fed. Cir. 1997), reh'g denied and en banc suggestion declined (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 53 Western Union Int'l, Inc. v. FCC, 804 F.2d 1280 (D.C. Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Wilner Construction Co. v. United States, 24 F.3d 1397 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Wind River Min. Corp. v. United States, 946 F.2d 710 (9th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 WorldCom, Inc. v. F.CC., 238 F.3d 449 (D.C. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 41, 47

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STATUTES, RULES AND REGULATIONS

48 C.F.R. §52.215-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 23, 49 48 C. F. R. §152.204-70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 48 C. F. R. §1602.170-13(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 18, 42 48 C.F.R. §1615.406-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 48 C.F.R. §1615.802(b) (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 23 48 C. F. R. §1615.804-70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 48 C. F. R. §1616.7001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 43 48 C. F. R. §1652.204-70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 48 C.F.R. §1652.216-70(b)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 53 FR 51781-01, 1988 WL 342709, 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 54 FR 43089 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 54 FR 43809 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 25, 26 55 FR 27406 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 55 FR 27406-01, 1996 WL 334151 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 28 62 FR 47577 ............................................................... 8

Fed. R. Civ. P. 56(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 31 52 Fed Reg. 47570 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 54 Fed. Reg. 43089-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 55 Fed. Reg. 27406 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 10 58 Fed. Reg. 34769 (June 29, 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 18

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62 Fed. Reg. 47569 (September 10, 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 5 U.S.C. §553 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5 U.S.C. §706(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 5 U.S.C. §706 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 U.S.C. § 902(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5 U.S.C. §8901 et seq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3. 10 5 U.S.C. §8902(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 5 U.S.C. §8903(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12, 17 40 U.S.C. §486(c), 10 U.S.C. Chapter 137, 42 U.S.C. §2473(c) . . . . . . . . . . . . . . . . . . . . . . . . 25 41 U.S.C. §§601 et seq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3 41 U.S.C. §609(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 42 USC 300e-1(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 44 U.S.C. §1507 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

MISCELLANEOUS H.R. Rep. No. 957, 86th Cong., 1st Sess., 4 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Pub.L. 100-517, 1988 HR 3235, 102 Stat 2578 42 USC 201 note . . . . . . . . . . . . . . . . . . . . . . 15 H.R. Rept. No. 957, 86th Cong., 1st Sess. 1 (1959) reprinted in 1959 U.S.C.C.A.N. 2913, 2914 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Rule 56(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

GHS HEALTH MAINTENANCE ORGANIZATION, INC., d/b/a BLUELINCS HMO, Plaintiff, TEXAS HEALTH CHOICE, L.C., Plaintiff, SCOTT & WHITE HEALTH PLAN Plaintiff, v. UNITED STATES, Defendant.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Nos. 01-517C, 05-371C, 05-963C (Judge Horn)

DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT INTRODUCTION Pursuant to Rule 56(c), defendant respectfully requests that this Court grant summary judgment in defendant's favor. Defendant relies upon plaintiffs' Complaints, defendant's memorandum of law in support of its motion, the parties' Joint Stipulation of Proposed Findings of Fact and Joint Statement of Issues of Law, and the administrative record, Appendix (App.) and Supplemental Appendix (Supp.App.). Plaintiffs are three health benefits carriers (carriers) ­ GHS Bluelincs Health 1

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Maintenance Organization (HMO) (Bluelincs), Texas Health Choice, L.C. (Texas Health), and Scott & White Health Plan (Scott and White). They executed contracts with the Office of Personnel Management (OPM) during the 1990s and until 1999 and/or 2000 to provide health benefits to Federal employees and retirees. The Court consolidated the three cases, because they raise the same legal issue involving the validity of a "nonreconciliation" regulation promulgated by OPM governing the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. §8901 et seq. and contract matters. As explained below, defendant filed the Administrative Record (App. 1-87) because the issue involving the validity of an OPM regulation is subject to review pursuant to the standards of the Administrative Procedure Act (APA), 5 U.S.C. §706. The remainder of the documents in the appendices are contract documents specific to each of the three plaintiffs. Because these contracts are governed by the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§601 et seq., the court's review, and interpretation of pertinent contract provisions, is de novo.1 STATEMENT OF THE ISSUES 1. Whether 48 C.F.R. §1652.216-70(b)(6), the "nonreconciliation" regulation, is valid on its

face and/or as applied to plaintiffs. 2. Whether plaintiffs are bound by the contracts they executed which included section 3.2,

the terms of the non-reconciliation regulation at issue, even if the non-reconciliation regulation is held to be invalid. 3. Whether plaintiffs, having performed the contracts, have waived their right to object to

the terms of the contract and/or the regulation relating to the nonreconciliation of rates in the

1

See section 5.36, Disputes, App. 132 (Scott & White). 2

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final year of nonrenewal. 4. 5. Whether plaintiffs' claims are barred by the doctrine of laches. Whether, if plaintiffs were to prevail on liability; a. b. c. BlueLincs would be entitled to recover $369,127, or some lesser amount. Scott & White would be entitled to recover $3,625,782, or some lesser amount. Texas Health Choice would be entitled to recover $622,246, or some lesser amount. NATURE OF THE CASE These cases involve contracts between the carriers and OPM. The contracts are governed by the Contract Disputes Act (CDA), 41 U.S.C. §§601 et. seq. These CDA cases are unusual, however, because plaintiffs attempt to challenge the validity of an OPM regulation, the terms of which were expressly incorporated into the contracts. The contracts were executed on an annual basis since at least 1990 when OPM promulgated the regulation, and included section 3.2 with the nonreconciliation of rates provision. For years, the three carriers - Bluelincs, Scott & White, and Texas Health - entered into contracts with OPM under the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. § 8901 et seq. See Joint Stipulation of Facts (Stip). ¶1-2; ¶15 (Bluelincs); ¶28-29 (Texas Health); ¶¶40-41 (Scott & White).2 At the time that plaintiffs commenced litigation,3 they had performed

The contracts are contained in the appendix. App. 87-378 (Bluelincs); App. 87-181, 188-238 (Scott & White); App. 87-256 (Texas Health). The CDA claim letters are also in the appendix. App. 510, 525 (Bluelincs); App. 246 (Scott & White); App. 270 (Texas Health). There are no contracting officers' final decisions, and the claims are deemed denied. Only Bluelincs filed first in this Court. Both Scott & White, and Texas Health Choice, filed first in a Federal district court. See Texas Health Choice v. Office of Personnel 3
3

2

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their contracts for numerous years and each had notified OPM that it would exit the Federal Employees Health Benefits Program (FEHBP). Stip. ¶¶19, 22 (Bluelincs); ¶¶40-41 (Scott & White); ¶29 (Texas Health). Each of the carriers submitted a certified claim to the contracting officer. See Stip. ¶¶ 24-25 (Bluelincs); ¶¶33-34 (Texas Health); ¶¶44-45 (Scott & White).4 Therefore, this Court possesses jurisdiction to entertain the action. Plaintiffs are health maintenance organizations (HMOs), or, "community rated plans," that offer health plans under the FEHBP on a prepaid basis. The HMO prepaid basis plans are

Management, 400 F.3d 895 (Fed. Cir. 2005)(case transferred from district court to Court of Federal Claims). Scott and White filed first in the United States District Court for the District of Columbia, Scott & White v. Office of Personnel Management, No.01 CV 1824 (JGP), and later, filed in this Court. Scott & White v. United States, No. 03-61C (Fed. Cl.); this Court dismissed without prejudice. Order, April 22, 2003. However, after the decision of the United States Court of Appeals for the Federal Circuit in Texas Health Choice, the district court transferred the Scott & White case to this Court, and Scott & White filed its complaint in this Court, No. 05-963C (Fed. Cl.). There are minor factual differences with respect to each of the three plaintiffs, none of which are pertinent to the legal issues addressed in the dispositive motions. Bluelincs and OPM had an earlier dispute involving lost investment income. Stip. ¶¶20-21, 23. OPM withheld from Scott and White an amount that would have otherwise been payable because of an unresolved audit issue. Stip. ¶¶38-39. OPM at first paid Texas Health a reconciliation amount, but later recouped that amount after Texas Health announced that it would exit the FEHBA program. Stip. ¶¶28-31. 4
4

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different than plans that are based upon an "experience-rated" basis. Plaintiffs challenge the OPM regulation, 48 C. F. R. §1652.216-70(b)(6) that governs the manner and conditions under which OPM and the various community-rated health plans "reconcile" community rates from year to year ­ those rates charged to the relevant FEHBA group, as compared with other nonFederal employer groups that the carrier insures. Specifically, plaintiffs contend that the "reconciled" rate is a rate necessary to satisfy the statutory provision set forth at 5 U.S.C. §8902(i), which provides that rates must "reasonably and equitably reflect the cost of benefits" provided under the FEHBA. We establish that the nonreconciliation regulation ­ the terms of which were expressly incorporated into the contracts for all of the contract years at issue5 - satisfies the statute by providing, in the final year of contract nonrenewal, for the unreconciled, binding rate to which the carriers agreed upon negotiations with OPM, for which they projected their costs as ably as their information would allow in advance of that final plan year. Reconciled rates merely mirror more closely the rates charged to other comparable employer groups that the carrier insures. We establish that, as such, reconciled rates are no better a reflection of "actual costs of benefits" than unreconciled rates.

Bluelincs held its contract from 1990 to 2000 (Bluelincs, Stip. ¶19). Scott & White held its contract from 1990 to 1999 (Scott & White, Stip. ¶41). Texas Health held its contract from 1990 to 2000 (Stip. ¶29). 5

5

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STATEMENT OF FACTS AND COURSE OF PROCEEDINGS A. Statutory and Regulatory Provisions And Contract Terms

There are statutory, regulatory, and contract provisions at issue. The statutory provision upon which plaintiffs rely is 5 U.S.C. §8902(i): Rates charged under health benefits plans described by 8903 or 8903a of this title shall reasonably and equitably reflect the cost of the benefits provided. Rates under health benefits plans described by section 8903(1) and (2) of this title shall be determined on a basis which, in the judgment of the Office, is consistent with the lowest schedule of basic rates generally charged for new group health benefit plans issued to large employers. The rates determined for the first contract term shall be continued for later contract terms, except that they may be readjusted for any later term, based on past experience and benefit adjustments under the later contract. Any readjustment in rates shall be made in advance of the contract term in which they will apply and on a basis which, in the judgment of the Office, is consistent with the general practice of carriers which issue group health benefit plans to large employers. (emphases added). The specific "non-reconciliation" regulation at issue, subsection 6, of 48 C. F. R. §1652.216-70(b)(6), that implements the statutory provision quoted above, provides, in pertinent part: In the event this contract is not renewed, neither the Government nor the Carrier shall be entitled to any adjustment or claim for the difference between the subscription rates prior to rate reconciliation and the actual subscription rates. (emphasis added). See 54 FR 43089, App. 3-31; 55 FR 27406, App. 48. The terms of the nonreconciliation regulation are expressly included in the contracts, specifically in section 3.2(b)(6). Stip. ¶12; Part 1, Section 1.1, 1.2, 1.4; App. 263 (BL); App. 5 6

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(Scott & White); App. 118 (Texas Health). Section 3.2 provides for annual accounting of the HMO's operations, and, also for adjustments to the subscription rates for community rated plans. As of 1991, the accounting and price adjustment clause in the contract provided: Section 3.2 ACCOUNTING AND PRICE ADJUSTMENT (JAN. 1991) (FEHBAR 1652.216-70 (a) Annual Accounting Statement. The Carrier, not later than 90 days after the end of each contract period, shall furnish to OPM for that contract period an accounting of its operations under the contract. The accounting shall be in a form prescribed by OPM. (b) Adjustments (1) The contract is community rated as defined in FEHBAR 1602.170-2. (2) The subscription rates agreed to in this contract are derived from the market price, which is a per member per month (PMPM) capitation of its equivalent that applies to a combination of subscriber groups. The market price established in this contract may be an estimate of the Carrier's actual market price that will be in effect during the contract period. (3) If, for the contract period, the Carrier establishes an actual market price higher than the market price established for this contract and the higher market price is actually paid by the similarly sized subscriber groups (see FEHBAR 1602.170-11), the Carrier may include an adjustment to the next contract period's FEHBP rates to recover the difference between the estimated market price and the actual market price. (4) If, for the contract period, the Carrier establishes an actual market price lower than the market established for this contract and the lower market price is actually paid by similarly sized subscriber groups, the Carrier shall reimburse the Fund, for example, by reducing the next contract period's FEHB rates to reflect the difference between the estimated market price and the actual market price. (5) No upward adjustment in the rate established for this contract will be allowed or considered by the Government or will be made by the Carrier in this or in any other contract period on the basis of actual costs incurred, actual benefits provided, or actual size of composition of the FEHBP group during this contract period. (6) In the event this contract is not renewed, neither the Government nor the Carrier shall be entitled to any adjustment or claim for the difference between the estimate and the actual market price, PMPM capitation or revenue requirement. (emphases added). As of 1998, the clause was revised as follows: 7

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Accounting and Price Adjustment (JAN 1998) (a) Annual Accounting Statement. The Carrier, not later than 90 days after the end of each contract period, shall furnish to OPM for that contract period an accounting of its operations under the contract. The accounting shall be in the form prescribed by OPM. (b) Adjustment. (1) This contract is community rated as defined in FEHBAR 1602.170-2. (2) The subscription rates agreed to in this contract shall be equivalent to the subscription rates given to the carrier's similarly sized subscriber groups (SSSGs) as defined in FEHBAR 1602.170-13. (3) If, at the time of the rate reconciliation, the subscription rates are found to be lower than the equivalent rates for the lower of the two SSSGs, the carrier may include an adjustment to the Federal group's rates for the next contract period. (4) If, at the time of the rate reconciliation, the subscription rates are found to be higher than the equivalent rates for the lower of the two SSSGs, the Carrier shall reimburse the Fund, for example, by reducing the FEHB rates for the next contract term to reflect the difference between the estimated rates and the rates which are derived using the methodology of the lower rated SSSG. (5) No upward adjustment in the rate established for this contract will be allowed or considered by the Government or will be made by the Carrier in this or in any other contract period on the basis of actual costs incurred, actual benefits provided, or actual size or composition of the FEHBP group during this contract period. (6) In the event this contract is not renewed, neither the Government nor the Carrier shall be entitled to any adjustment or claim for the difference between the subscription rates prior to rate reconciliation and the actual subscription rates. 62 FR 47577, Sept. 10, 1997. Thus, as the statute, regulation, and contract provide, the rate negotiation for community rated plans is based upon the carrier's estimate of what its community rates will be for the ensuing year, and this estimated rate is in effect during the contract period. OPM conducts an annual "reconciliation" (or, "adjustment" ) in which OPM determines whether the actual negotiated subscription rate charged to the Federal group was higher or lower than the price charged to a similarly sized subscriber groups (SSSG), with an adjustment upward or downward (if necessary), to rates for the next contract period. Pursuant to subsection (5), there is no

8

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adjustment in the rates for the then-current contract period or any other contract period on the basis of actual costs incurred, actual benefits provided, or actual size of the composition of the FEHBP group. Thus, when the carrier continues its participation in the FEHBA program from year to year, the parties "reconcile" community rates (negotiated between the parties in advance of a contract year, and, based upon estimates of what the contractor believed its actual community rates would be), with "actual" community rates -- once the rates for the carrier's other comparable groups for the contract year become known, and OPM is able to determine that the Federal subscriber group was afforded the benefit of the lowest discount in the rates. If, in the reconciliation process, it is determined that the reconciled rates were higher or lower than the carriers' proposed estimated rates, the carrier may adjust its rates downward, or upward, respectively, for the subsequent year to account for the difference.6 However, no adjustment in rates is ever made for the then-current insurance year. When a carrier makes the choice not to renew its participation in the FEHBA program for the following insurance year, the "nonreconciliation" regulation applies. Contract provision 3.2(b)(6) provides that no reconciliation of rates will take place for that final year of the carrier's participation when the contract is not renewed. There is no reconciliation, in part, because there are no rates to adjust for the subsequent insurance year. The regulation places the risk of inaccurate negotiated rates equally upon OPM and the carriers in the year a

In certain limited circumstances, rates might be changed for the current year, if OPM were to adjust or reduce rates if the carrier had submitted defective pricing or defective cost or pricing data. E.g., FEHBAR 1652-215-70, section 3.3 of the contract. App. 108 (Scott & White). See generally QualMed Plans for Health of New Mexico, Inc. v. United States, 267 F.3d 1319 (Fed. Cir. 2001); PCA Health Plans of Texas, Inc v. LaChance, 191 F.2d 1353 (Fed. Cir. 1999)(carrier's incorrect selection of SSSG constitutes provision of defective cost or pricing data). 9

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carrier later makes the decision not renew its FEHBP contract. Stip. ¶12. B. Federal Employees' Health Benefits Program 1. Responsibility of Office of Personnel Management (OPM) To Administer The FEHBP And To Contract With Carriers

Because resolution of the issues involves a complex statutory scheme, background facts necessarily derive from statutes and caselaw.5 The Federal Employees Health Benefits (FEHB) Program was created in 1959 by the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. §8901 et seq., to provide Federal employees protection against the financially burdensome costs of medical service through a comprehensive Government-wide program of insurance. H.R. Rept. No. 957, 86th Cong., 1st Sess. 1 (1959) reprinted in 1959 U.S.C.C.A.N. 2913, 2914. In creating the FEHB Program, Congress intended "to assure that federal employee health benefits are equivalent to those available in the private sector so that the federal government can compete in the recruitment and retention of competent personnel." E.g, American Federation of Government Employees v. Devine, 525 F. Supp. 250, 252 (D.D.C. 1981).

Various Federal Register publications set forth changes in the programs and reasons for those changes over periods pertinent to this case. E.g., 48 CFR 1615.406-2 Certificate of Accurate Cost or Pricing Data for Community-Rated Carriers; 53 FR 51781-01, 1988 WL 342709, 48 CFR Parts 1602, 1632, and 1652 December 23, 1988 (regulation to enhance OPM's financial management of FEHB Program; cost to the government and to enrollees is very important); 54 FR 43809, App. 3-31; 55 FR 27406-01, 1996 WL 334151 (revision of contract clauses and community rating practices, July 2, 1990); 58 FR 34769, 1993 WL 229615 (June 29, 1993) (revision of definition of SSSG; contract size requirement, not necessarily substantially same benefits package as Federal group); 62 FR 47569, 1997 WL 556873, Sept 10, 1997 (rate instructions contain guidance, not policy statements by OPM; complexities of FEHB program carriers' rating systems).

5

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The FEHBA grants OPM broad discretionary authority to negotiate and contract for the benefits to be offered by health carriers. National Federation of Federal Employees [NFFE] v. Devine, 679 F.2d 907, 912 (D.C. Cir. 1981). In enacting the FEHBA, Congress intended that OPM would obtain "maximum health benefits for employees at the lowest possible cost to themselves and to the Government." H.R. Rep. No. 957, 86th Cong., 1st Sess., 4 (1959); NFFE v. Devine, 679 F.2d at 912. "When the cost to the government reaches a final figure, the extent and nature of the health benefits to be made available is the only open ended matter. The entire legislative scheme is based upon OPM considering cost to the government in contracting for health benefit plans." Id. Pursuant to the FEHBA, Congress expressly delegated authority to OPM to negotiate health benefit contracts with carriers, promulgate regulations and, in general, administer the program. Id. §§8902, 8913; 5 C. F. R. Ch. 89. OPM promulgated regulations that govern the FEHBP at 5 CFR Chapter 89 and 48 C.F.R. Part 16. NFFE v. Devine, 679 F.2d at 907. As described below, health maintenance organization plans ­ or, community rated plans ­ are offered under the FEHBP on a prepaid basis. 5 U.S.C. §8903(4). Rates for these "community rated" plans are based upon the rates that the carrier charges its other customers for comparable levels of benefits. See, e.g. Appeal of Humana, Inc., 00-2 BCA P 31,142, ASBCA No. 49,951 (October 3, 2000).

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2.

Annual Rate Negotiations for Community Rated (HMO) Plans - Prepaid Basis, and Methodology To Estimate, Negotiate, And Determine Rates a. Annual Rate Negotiations - Prepaid Nature of HMO Plans

OPM annually negotiates benefits and premiums with each carrier participating in the FEHB Program. Premiums may be negotiated upon the basis of experience rating or community rating. Rate proposals for a given calendar year are generally submitted in May of the prior year, and rate negotiations between OPM and the carriers typically take place in June, July and August, so that rates are established prior to the open season for the given year. Kichak Decl at ¶4, Supp. App. 2.6 There were essentially two major types of health benefits plans described by 5 U.S.C. §§8903 and 8903a, the universe of plans with which OPM is authorized to contract. The community rated plan is at issue here, as contrasted with the experience rated plan. The differences between the two plans is significant for purposes of these cases. The Governmentwide Service Benefit Plan is described by 5 U.S.C. §8903(1); this plan is an experience-rated, fee-for-service plan, the rates for which are developed for any given year by taking into account past experience and actual costs. In contrast, for community rated HMO plans, the rates are developed based upon estimated subscription rates for the year, on a per member per month capitation rate, depending upon the demographics of the subscriber groups and the benefits

The parties generally agree on the rough chronology for the process of rate negotiations. Stip. ¶¶5-6, 8. Details are set forth in the declaration of Ms. Nancy Kichak, Director of Office of the Actuaries, Retirement and Insurance Service for OPM. Supp. App. 17. Her declaration is Docket Document number 44, filed December 6, 2005. Because there were no appendix page numbers assigned, we identify our references by the paragraph and page number of her declaration. 12

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packages offered, and based upon a prepaid basis. Although the FEHBA expressly describes the method for determining rates for experience rated plans at §8902(i), the FEHBA does not describe a rating methodology to apply to community rated comprehensive medical plans, such as the plans of the three plaintiff carriers. Authority for entering into contracts with these plans is set forth at section 8903(4), which provides that these plans will offer benefits "in whole or in substantial part on a prepaid basis." Thus, in advance of the contract year for a community rated plan, it cannot be known what the "actual"cost of benefits to be provided will be. Rather, the actual cost of benefits can not be determined until after the utilization of services by the Federal subscribers is known. Thus, the notion -- to which the plaintiffs/carriers cavalierly refer as "Russian Roulette," whereby the carrier is necessarily either underpaid or overpaid by the Government -- is a notion that is inherent in the essence of insurance risk, and is a natural result of the statutory prepaid nature of the community-rated contracts. This result is not affected by the fact of reconciliation or nonreconciliation of rates. OPM recognizes that in developing a rate for the Federal contract, prior to the contract year, the community rated carriers do not yet possess information about rates for their comparable employer groups. Reconciliation permits the carrier and OPM to use the lateracquired information ­ rates for comparable employer groups determined after OPM has negotiated the Federal rate - to make adjustments to future rates for subsequent insurance years, or to compensate the carrier or OPM for inaccurate estimates of comparison group rates, for carriers that remain in the program in ensuing years. Rate reconciliation, however, does not

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change the rate in effect for any given contract year, nor does it mean that a rate negotiated for a year fails to reflect the best estimates at the time of the negotiations. Therefore, unreconciled rates are valid approximations, on a prepaid basis, of the anticipated cost of any particular benefit package. Reconciled rates do not represent better estimates of the cost of benefits provided to the Federal group than unreconciled rates -- they are merely better reflections of rates that the particular carrier charges its other large employer groups. As discussed below, the Federal group is necessarily either a higher or lower utilizer of services than a comparison group. Therefore, even charging a reconciled rate identical to the comparison group rate does not ensure that the rate will reflect the actual cost of benefits provided to, or utilized by, the Federal group. b. OPM's 1989 Revisions To Community Rating Methodology To Identify Rates as Market Prices, Established In Advance Of The Plan Year, And, To Incorporate FAR Principles Relating to Price Negotiation And Records Retention

In 1989, OPM revised its community rating methodology. In light of the HMO Amendments Act of 1988, P.L. 100-517, OPM modified its community rating system to recognize increasing diversity in community rating practices and to redefine community rating to identify resulting rates as "market prices" under the Federal Acquisition Regulation (FAR). 54 Fed. Reg. 43089.7 OPM's objective, through regulation, is to obtain rates that are reasonable and

See 42 USC 300e-1(8)(C), regulations promulgated by the Department of Health and Human Services, governing HMO. This regulation provides, in part, that if a HMO sets rates of payment for individuals and families by groups, it shall classify all of the members of the organization into classes based upon factors which the HMO determines predict the differences in the use of health services by the individuals or families in each class. The HMO also determines its revenue requirements for providing services to the members of each class, and is 14

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equitable for the FEHBP group, as compared to the rates that the carriers charge to the SSSGs. Pub.L. 100-517, 1988 HR 3235, 102 Stat 2578 42 USC 201 note, Health Maintenance Organization Amendments of 1988; 55 Fed. Reg. 27406 at 27406, 27409. OPM's new community rating methodology was developed, drawing in part from the experience rating language of 5 U.S.C. §8902(i). The SSSG mechanism ensured that rates for the Federal group would be consistent with the lowest schedule of rates that the carrier generally charged for large employers, by comparing the groups of similar size to the Federal group, and selecting, for the Federal group, the lowest of the two rates derived with consistent methodology. 48 C. F. R. §1602.170-13(d). OPM replaced the prospective "adjustment for experience of the group" component of the experience rating process, applicable to section 8903(1) and (2) plans, with the "prepaid basis" element required by section 8903(4) for community rated plans, by requiring an estimated "market price" to be established in advance of the plan year. The community rating methodology provided for a future reconciliation of estimated to actual market prices as a manner of ensuring rates are consistent with that of similarly sized groups served by the carrier. The community rating methodology also incorporated three elements of FAR policy relating to market prices, price negotiation, and record retention, including: (1) the policy of deeming a community rate the equivalent of the FAR's description of an established catalog or market price, 48 C.F.R. §1615.802(b) (1990); implementing and supplementing FAR subpart 15.8 policy regarding price negotiation and price analysis, 48 C. F. R. §1615.802 (1990); and,

(2)

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(3)

implementing and supplementing the FAR records retention provisions at 48 C.F.R. §§52.215-2 and 1652.204-70 that would enable data presented by a carrier to be analyzed and verified as a manner of establishing accountability.

The result of OPM's reliance upon experience rating and FAR principles - to develop the methodology for community rates - was a regulation that, as of 1990, used the market price as its cornerstone. The regulation also incorporated elements of consistency with other similarly large employer groups, advance determination of a rate that does not equate to actual experience, and fair market prices capable of verification through price analysis. 48 C. F. R. §1652.216-70 (1990). c. OPM's 1997 Revision of Community Rating Methodology From Market Prices To Negotiated Benefits, To Ensure That Federal Groups Receive The Same Discounts That Are Enjoyed By The Carrier's SSSG

In September 1997, OPM altered its characterization of community rates from "market prices" to "negotiated benefits." In view of increasing complexities in the community rating industry, OPM recognized that FEHBP contracts no longer fit neatly into the FAR "market price" category. Supplemental, 62 Fed. Reg. 47569, 47570 (September 10, 1997). In recharacterizing the nature of community rated FEHBP contracts, OPM indicated that its responsibility is to ensure a reasonable and equitable rate for Federal enrollees and the Government. OPM stated that "one of the ways OPM accomplishes this is to require the same discounts for the FEHB Program that are enjoyed by the SSSGs; and analyzing cost or pricing data is the only way OPM can achieve accountability." 62 Fed. Reg. 47569, 47570. As earlier, the nonreconciliation in year of nonrenewal provision was the final clause in the regulation governing community rates. d. OPM Reviews Prepaid Rates Proposed By The Carriers 16

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To Establish That The Amounts To Be Charged Are Distributed Appropriately To the Federal Group And The Carrier's SSSG As explained above, community rated HMOs provide comprehensive medical plans under the FEHBP on a "prepaid" basis. 5 U.S.C. § 8903(4). Thus, community rated carriers may not adjust their rates for actual experience or utilization of health services by the covered group. 48 C.F.R. §1652.216-70(b)(5). The carriers are at risk when they determine their rates. If they charge too much, they are at risk of losing enrollees in the competitive open season process. If they charge too little, they may not earn enough premium income to meet the covered health services of the group. It is the carrier's responsibility to project the appropriate amount to charge for covered services in advance of the year in which the services will be provided. Kichak Decl. ¶5, Supp. App. 2; Stip. ¶7. OPM does not analyze the appropriateness of the underlying rate. Instead, it reviews the carrier's proposed rate to establish that the amounts the plan determines it will charge are distributed appropriately to the FEHBP and the carrier's other covered, non-Federal groups of a similar size (SSSG). OPM also does not question what judgment the carrier has applied in its cost and premium projections. Kichak Decl. ¶6, Supp. App. 2; 62 FR 47569, 47571. OPM simply looks at data directly related to its responsibility under the FEHB law to evaluate a proposed rate in order to ensure that the FEHB rates reasonably and equitably reflect the cost of benefits provided, and requires cost or pricing data sufficient to verify rates. Kichak Deck ¶7, Supp. App. 2; 62 FR 47569, 47571. See Stip. ¶¶9-10. Therefore, it is not expected that rates for a community rated carrier will reflect, in fact, the actual cost of benefits provided to the group, as is the case for experience rated carriers.

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Rather, it is the community rated carrier's goal to cover its costs and generate a profit by the application of the negotiated rate. When OPM negotiates rates with a community rated carrier, OPM's objective is to receive a rate that is derived in a manner consistent with the rate that the carrier charges its other, non-Federal groups of a similar size. See, e.g., Supplemental, 58 Fed. Reg. 34769, 34769 (June 29, 1993); Kichak Decl. ¶8, Supp.App. 2. OPM uses the regulatory term "similarly sized subscriber groups," or "SSSGs," to describe a carrier's two other employer groups that present a risk pool of approximately the same size and utilize the same rating method as the FEHBP group. Specifically, SSSGs are defined to be a comprehensive medical plan carrier's two employer groups that: (1) As of the date specified by OPM in the rate instructions, have a subscriber enrollment closest to the FEHBP subscriber enrollment; and (2) use any rating method other than retrospective experience rating; and (3) meet the criteria specified in the rate instructions issued by OPM. 48 C. F. R. §1602.170-13(a). Thus, until 1997, OPM required its community rated carriers to use SSSG rates to calculate the FEHBP group's rates as its manner of ensuring that the community rate met the FAR requirements of a "market price." Supplemental, 54 Fed. Reg. 43089, 43090. After 1997, OPM continued to require the use of SSSGs, to ensure that the negotiated rate is a "fair and reasonable premium rate." Supplemental, 52 Fed Reg. 47570. OPM ultimately determines the FEHBP rate "by selecting the lower of the two rates derived by using rating methods consistent with those used to derive the SSSG rates." 48 C. F. R. §1602.170-13(d). Thus, FEHBP rates are not required to equal SSSG rates in dollar terms. Rather, they are required to be developed using a methodology that is consistent with the methodology used to

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determine the rates for the carrier's SSSGs. 48 C. F. R. §1615.804-70; Supplemental, 55 Fed. Reg. 27406, 27409 (July 2, 1990). For example, if an actuarial estimate regarding claims is used for the FEHBP group, the actuarial methodology used to establish that estimate should also be used to set the SSSG's rates. Supplemental, 62 FR 47569, 47571. OPM recognizes that the actual community rates, and methodologies for determining them, for the following contract year, may not be available at the time of the carrier's rate submission to OPM. Kichak Decl. ¶9, Supp. App. 3. Prior to 1997, in developing proposed rates, carriers were expected to start from a current market price and adjust that price for the next year. Supplemental, 54 Fed. Reg. 43089, 43090 (October 20, 1989). Presently, the FEHBP rate negotiation is premised upon an estimate or projection of what a carrier's community rates will be for the ensuing contract year. Kichak Decl. ¶10, Supp. App. 3. Generally, beginning in April of the contract year, after community rates are known, community rated carriers and OPM engage in a process to reconcile the community rates currently in force with the actual rates the carriers should have charged. The actual rates are derived after reviewing the methodology and discounts used to derive the rates charged to other similarly sized subscriber groups. Kichak Decl. ¶11, Supp. App. 3. In years when the contract is renewed, if it is determined that the rates currently in force were higher than the reconciled rates, the carrier pays OPM the difference, through lower rates in subsequent years, or by cash payment. If it is determined that the rates currently in force were lower than the reconciled rates, OPM pays the carrier the difference through higher rates in subsequent years, or by cash payment from the contingency reserves to the extent that funds are available. Kichak Decl. ¶12, Supp. App. 3; 48 C. F. R. § 1652.216-70(b)(3),(4). This is the

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