tracts. See OPMPR 16-4.151-13 for definition of subcontractor.

§ 16-3.807-11 Overhead rate consideration.

FPR 1-3.807-11 is applicable to the administration of the FEHBP contracts. In FEHBP, overhead (indirect) costs are components of administrative expenses in the FEHBP.

§ 16-3.807-50 Certificate of community rating.

(a) Each carrier proposing a community rate shall submit the following certification with its proposal:

CERTIFICATE OF COMMUNITY RATING

This is to certify that the proposed subscription rate, subject to recognized adjustments allowed by OPMPR 16-4.152-1(a)(2), is a community rate in accordance with OPMPR 16-4.151-2.

(b) If it is determined that the subscription rate (subect to the adjustments allowed by OPMPR 16-4.1521(a)) is not a community rate as defined by OPMPR 16-4.151-2, the Government shall be entitled to an adjustment of the price so that it is a true community rate. If the price of the adjusted rate is lower than the subscription rate, the Government will be entitled to a price reduction. If the carrier cannot or refuses to determine a true community rate, the Government may require the carrier to experience rate the contract and if the price for an experience rated contract is less than the original contract price, the Government is entitled to a price reduction. The clause set forth in OPMPR 163.814-50 shall be inserted in each community rated contract.

§ 16-3.808 Service charge.

FPR 1-3.808-1 is applicable in the administration of FEHBP contracts. In determining the service charge.

FEHBP carriers shall apply the principles set out in FPR Temporary Regulation 61, 46 FR 27645-27649, dated May 21, 1981 in the administration of FEHBP contracts.

§ 16-3.808-50 Factors and considerations

for determining the service charge. (a) In the construction of a subscription rate, the insurance industry includes a charge known as "retentions". Retentions represent the excess of premiums over benefit claim expenses and subscriber dividends. Retentions specifically include administrative expenses, a return to stockholders, if any, on their capital investments, and a contribution to reserves. In large group contracts, total retention may be established as a result of negotiation and/or direct competition among carriers seeking the employer's account.

(b) In FEHBP community rated contracts, the community rate is assumed to include an adequate and competitive retention charge. Under FEHBP experience rated contracts, administrative expenses (see OPMPR 16– 4.153(b)) are determined on the basis of actual costs incurred and the balance of the retention charge is a negotiated sum. The part that is negotiated, i.e., return to stockholders and contributions to reserves, is not unlike "profit" or "fee". However, this negotiated sum in the FEHBP is known as the "service charge".

(c) The carrier may propose a service charge for a variety of reasons, such as, providing a return to stockholders and/or a contribution to reserves. However, the carrier's basis for determining a service charge may differ from OPM's basis for determining the reasonableness of a proposed service charge.

(d) The service charge is a negotiated amount which may or may not be proposed by an experience rated carrier in the FEHBP. If proposed, the contracting officer shall evaluate the reasonableness of the proposed service charge on the basis of the following factors which are directly pertinent to FEHBP experience rated contracts. These factors are solely for the purpose of analysis by the contracting officer and do not represent a basis for which a carrier may claim a service charge.

(1) Underwriting risk. The degree of risk assumed by the carrier should influence the amount of the service charge. Although the carrier under

writes the contract, that is, assumes the risk of loss in any one contract year, experience rating aims to allow the loss in any one contract year to be recovered in future years. In effect, the contract is redetermined on the basis of actual costs incurred. Consequently, a loss on the contract can only result if the contract is terminated in a year in which the contract has a cumulative deficit or if the administrative cost ceiling is exceeded. In the first situation, the contract might provide for some additional indemnification. The amount of service charge for underwriting risk in this case would be relatively less. However, circumstances in a particular situation may warrant a greater consideration.

(2) Conversions. The FEHB law provides that for an employee whose enrollment is ended, except by cancellation, the carrier must offer the employee the option to convert, without evidence of good health, to a nongroup contract providing health benefits. [5 U.S.C. 8902(g)] The potential conversions of persons with preexisting conditions represent an underwriting risk that is fully assumed by the carrier and the service charge should be influenced accordingly.

(3) Extent of financial assistance. Generally, the FEHBP contracts are intended to be self-supporting. The premiums are paid to the carrier semimonthly and are set so as to recover all projected costs, including a reserve for unpaid, but incurred claims. Consequently, premiums paid from the Federal Employees Health Benefits Fund generally finance the cost of the contract. Because of its underwriting responsibilities, however, the carrier may have to finance contract operations during periods of underwriting losses that deplete contract reserves until a time when premiums can be adjusted to restore them. When contract funds finance FEHBP costs, the service charge should not include a factor for financing. When, due to underwriting losses, the carrier must finance FEHBP costs, the service charge should include a factor for financing. This condition can be recognized in the determination of subscription rates when the condition actually exists.

90-140 0-82--30

(4) Carrier's performance. The contracting officer may consider performance elements, such as, quality of service to subscribers, timeliness and accuracy in processing benefit claims, health care cost containment, and timeliness and accuracy of reports required by OPM. Where the carrier has consistently achieved excellent results in the foregoing areas, this performance merits a proportionately greater opportunity for service charges. Conversely, a poor record in this regard may have a negative influence on the amount of the service charge.

(5) Subcontracting. Carriers provide health benefits plans for the FEHBP through a wide variety of organizational structures and contractual arrangements. In some instances, a significant portion of the performance of a health benefits plan is subcontracted so that only a minimum amount of responsibility or risk remains with the FEHBP carrier. The contracting officer shall ensure that in these instances there is no unreasonable pyramiding of the service charge. The service charge for each organizational component of the contract shall be evaluated as to its reasonableness with respect to the services performed.

(6) Other considerations. In renegotiating a service charge during contract renewals, the contracting officer may also consider any significant changes in the health plan's enrollment and changes in the consumer price index.

§ 16-3.809 Contract audit as a pricing aid.

Each health benefits plan is audited by the Audits Division, Compensation Group, OPM, on a periodic basis according to a schedule determined by the Audits Division in consultation with the contracting officer. The Audits Division prepares audit reports which are supplied to the contracting officer and the Office of the Actuary. The contracting officer utilizes these audit reports in evaluating the validity and accuracy of data submitted by the carriers, in conducting negotiations on rates proposed by carriers, and in evaluating the efficiency and effectiveness of carrier operations. The audit function as stated in FPR 1-3.809 is generally applicable to the administration

of FEHBP contracts. However, due to the distinctive nature of the FEHBP contracts, the contracting officer need not make a specific request for an audit review of revised subscription rates on experience rated contract renewals. The evaluation of projections and trends in estimating health insurance subscription rates requires the expertise of an actuary. The subscription rate estimates are, consequently, reviewed by the Office of the Actuary. One component of the estimated subscription rate is the balance of the Special Reserve, that is, the contract surplus or deficit (see 5 CFR 890.201(8)). The Audits Division conducts periodic audits on an historical basis of carrier costs and thereby verifies the propriety of the reported Special Reserve balance. Although these reviews are not labeled as precontract audits, they amount to audits of the costs upon which future subscription rates are predicated. Therefore, in the context of the FEHBP, a post-contract audit is the functional equivalent of the precontract audit required by FPR 1-3.809.

§ 16-3.814-50 Price reduction for defective certificate of community rating.

The following clause shall be included in all contracts where the subscription rate was established on the basis of a community rate:

PRICE REDUCTION FOR DEFECTIVE
CERTIFICATE OF COMMUNITY RATING

If it is determined that the subscription rate (Subject to the adjustments allowed by OPMPR 16-4.152-1(a)) is not a community rate as defined by OPMPR 16-4.151-2, the Government will be entitled to an adjustment of the price so that it is a true community rate. If the carrier cannot or refuses to determine a true community rate, the Government may require the carrier to experience rate the contract. The experience rated price shall be determined on the basis of actual costs incurred in accord with 41 CFR 1-15.2, including a fair and reasonable service charge. If the price of the adjusted community rate, or if there is no community rate, the experience rate, is less than the original subscription price, the price of this contract shall be reduced accordingly. Refunds due the Government shall be used to reduce future FEHBP subscription charges of the carrier.

Subpart 16-3.9-Subcontracting Policies and Procedures

§ 16-3.903-2 Review and approval of subcontracts.

FPR 1-2.903-2 is applicable to the administration of the FEHBP contracts. Under experience rated FEHBP contracts, advance approval shall be required on all subcontracts or modifications to subcontracts the price of which exceeds $25,000 and which provide for administration of the carrier's FEHB plan. Administration is defined as enrollment and eligibility determinations, adjudication and payment of benefits, and/or underwriting. The subcontract clause specified in OPMPR 16-3.903-50 shall be included in each experience rated contract.

§ 16-3.903-50 Subcontract clause.

SUBCONTRACTS

(a) The Contractor shall notify the Contracting Officer reasonably in advance of entering into any subcontract or subcontract modification if the subcontract exceeds $25,000 and provides for administration of the carrier's FEHB plan. Administration is defined as enrollment and eligibility determinations, adjudication and payment of benefits, and/or underwriting.

(b) The advance notification required by paragraph (a) above shall include:

(i) A description of the services to be called for by the subcontract;

(ii) Identification of the proposed subcontractor and an explanation of why and how the proposed subcontractor was selected;

(iii) The proposed subcontract price, together with the Contractor's cost or price analysis thereof;

(iv) The subcontractor's current, complete, and accurate cost or pricing data and Certificate of Current Cost or Pricing Data, when such data and certificates are required by other provisions of this contract to be obtained from the subcontractor;

(v) Identification of the type of subcontract to be used;

(vi) A memorandum of negotiation which sets forth the principal elements of the subcontract price negotiations. A copy of this memorandum shall be retained in the Contractor's file for the use of Government reviewing authorities. The memorandum shall be in sufficient detail to reflect the most significant considerations controlling the establishment of initial or revised prices. The memorandum should include an explanation of why cost or pricing data was, or was not, required and, if it was not required in the case of any price negotiation in excess of $100,000, a statement of the basis for determining that the price resulted from or was based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation. If cost or pricing data was submitted and a certificate of cost or pricing data was required, the memorandum shall reflect the extent to which reliance was not placed upon the factual cost or pricing data submitted and the extent to which this data was not used by the Contractor in determining the total price objective and in negotiating the final price. The memorandum shall also reflect the extent to which it was recognized in the negotiation that any cost or pricing data submitted by the subcontractor was not accurate, complete, or current; the action taken by the Contractor and the subcontractor as a result; and the effect, if any, of such defective data on the total price negotiated. Where the total price negotiated

differs significantly from the Contractor's total price objective, the memorandum shall explain this difference;

(vii) When incentives are used, the memorandum of negotiation shall contain an explanation of the incentive fee profit plan identifying each critical performance element, management decisions used to quantify each incentive element, reasons for incentives on particular performance characteristics, and a brief summary of trade-off possibilities considered as to cost, performance, and time; and

(viii) The Subcontractor's Disclosure Statement or Certificate relating to Cost Accounting Standards when such data are required by other provisions of this contract to be obtained from the subcontractor.

(c) The Contractor shall not enter into any subcontract for which advance notification to the Contracting Officer is required by this clause, without the prior written consent of the Contracting Officer; Provided, That the Contracting Officer in his discretion, may ratify in writing any subcontract. Such ratification shall constitute the consent of the Contracting Officer required by this paragraph.

(d) Consent by the Contracting Officer to any subcontract or any provisions thereof shall not be construed to be a determination of the acceptability of any subcontract price or of any amount paid under any subcontract or to relieve the Contractor of any responsibility for performing this contract, unless such approval or consent specifically provides otherwise.

(e) The Contractor agrees that no subcontract placed under this contract shall provide for payment on a cost-plus-a-percentage-of-cost basis.

Subpart 16-3.12-Cost Accounting Standards

§ 16-3.1200 Scope of subpart.

The portions of FPR 1-3.12 applicable to the administration of FEHBP contracts are summarized as follows:

(a) Disclosure statements are not required under FEHBP contracts (FPR 1-3.1203-1).

(b) Cost Accounting Standards are applicable to FEHBP contracts which will usually meet the criteria for the modified contract clause (FPR 13.1204-2(b)) except that the following FEHBP contracts would be exempt from CAS coverage in accordance with FPR 1-3.1203-2(c):

(1) Community rated contracts, (2) Small business concern contracts,