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cordance with FPR 1-3.807-3 shall be tracts. See OPMPR 16-4.151-13 for required along with its own submission definition of subcontractor. to submit, or arrange for the submission of, cost or pricing data from its 816-3.807-11 Overhead rate considera. subcontractors as stated in FPR 13.807-3(d). See OPMPR 16-4.151-13

FPR 1-3.807-11 is applicable to the for definition of subcontractor.

administration of the FEHBP con$ 16-3.807-4 Certificate of current cost or

tracts. In FEHBP, overhead (indirect) pricing data.

costs are components of administra

tive expenses in the FEHBP. Where a certificate of cost or pricing data is required in accordance with 816-3.807-50 Certificate of community FPR 1-3.807-3, a certificate in the

rating. form specified in FPR 1-3.807-4 shall be submitted as soon as practicable

(a) Each carrier proposing a commuagreement is reached on the con- nity rate shall submit the following tract subscription rates.

certification with its proposal: § 16–3.807-5 Defective cost or pricing


This is to certify that the proposed subFPR 1-3.807-5 is applicable to the scription rate, subject to recognized adjustadministration of the FEHBP con

ments allowed by OPMPR 16-4.152-1(a)(2),

is a community rate in accordance with tracts.

OPMPR 16-4.151-2. $ 16-3.807–6 Refusal to provide cost or (b) If it is determined that the subpricing data.

scription rate (subect to the adjustFPR 1-3.807-6 is applicable to the ments allowed by OPMPR 16-4.152administration of the FEHBP con 1(a)) is not a community rate as detracts.

fined by OPMPR 16-4.151-2, the Gov

ernment shall be entitled to an adjust8 16-3.807-7 Unacceptable substitutes for

ment of the price so that it is a true pricing negotiations.

community rate. If the price of the adFPR 1-3.807-7 is applicable to the justed rate is lower than the subscripadministration of the FEHBP con tion rate, the Government will be enti. tracts.

tled to a price reduction. If the carrier 8 16-3.807-8

cannot or refuses to determine a true Evaluation and pricing of in

community rate, the Government may dividual contracts.

require the carrier to experience rate FPR 1-3.807-8 is applicable to the the contract and if the price for an exadministration of the FEHBP con

perience rated contract is less than the tracts. Application of this paragraph

original contract price, the Governshould not be confused with the read

ment is entitled to a price reduction. justment of rates on an experience

The clause set forth in OPMPR 16rated contract. Surpluses or deficits in

3.814-50 shall be inserted in each comreserves in the preceding year on experience rated contracts may be consid

munity rated contract. ered in the adjustment of rates upon 816-3.808 Service charge. the renewal of contracts.

FPR 1-3.808-1 is applicable in the 8 16-3.807-9 Specified contingencies. administration of FEHBP contracts. FPR 1-3.807-9 is applicable to the

In determining the service charge. administration of the FEHBP con

FEHBP carriers shall apply the printracts.

ciples set out in FPR Temporary Reg.

ulation 61, 46 FR 27645-27649, dated 8 16-3.807-10 Subcontracting consider May 21, 1981 in the administration of ations in cost analysis.

FEHBP contracts. FPR 1-3.807-10 is applicable to the administration of the FEHBP con

$ 16-3.808-50 Factors and considerations writes the contract, that is, assumes

for determining the service charge. the risk of loss in any one contract (a) In the construction of a subscrip

year, experience rating aims to allow tion rate, the insurance industry in

the loss in any one contract year to be cludes a charge known as “retentions”.

recovered in future years. In effect, Retentions represent the excess of

the contract is redetermined on the premiums over benefit claim expenses

basis of actual costs incurred. Conseand subscriber dividends. Retentions quently, a loss on the contract can specifically include administrative ex

only result if the contract is terminatpenses, a return to stockholders, if ed in a year in which the contract has any, on their capital investments, and a cumulative deficit or if the adminisa contribution to reserves. In large

trative cost ceiling is exceeded. In the group contracts, total retention may

first situation, the contract might probe established as a result of negotia

vide for some additional indemnification and/or direct competition among tion. The amount of service charge for carriers seeking the employer's ac

underwriting risk in this case would be count.

relatively less. However, circumstances (b) In FEHBP community rated con- in a particular situation may warrant tracts, the community rate is assumed a greater consideration. to include an adequate and competi- (2) Conversions. The FEHB law protive retention charge. Under FEHBP vides that for an employee whose enexperience rated contracts, adminis. rollment is ended, except by cancellatrative expenses (see OPMPR 16 tion, the carrier must offer the em4.153(b)) are determined on the basis ployee the option to convert, without of actual costs incurred and the bal evidence of good health, to a nongroup ance of the retention charge is a nego contract providing health benefits. [5 tiated sum. The part that is negotiat. U.S.C. 8902(g)] The potential convered, i.e., return to stockholders and con sions of persons with preexisting contributions to reserves, is not unlike ditions represent an underwriting risk "profit” or “fee”. However, this negoti. that is fully assumed by the carrier ated sum in the FEHBP is known as and the service charge should be influthe "service charge”.

enced accordingly. (c) The carrier may propose a service (3) Extent of financial assistance. charge for a variety of reasons, such Generally, the FEHBP contracts are as, providing a return to stockholders intended to be self-supporting. The and/or a contribution to reserves. premiums are paid to the carrier semiHowever, the carrier's basis for deter monthly and are set so as to recover mining a service charge may differ all projected costs, including a reserve from OPM's basis for determining the for unpaid, but incurred claims. Consereasonableness of a proposed service quently, premiums paid from the Fedcharge.

eral Employees Health Benefits Fund (d) The service charge is a negotiat- generally finance the cost of the coned amount which may or may not be tract. Because of its underwriting reproposed by an experience rated carri- sponsibilities, however, the carrier er in the FEHBP. If proposed, the con- may have to finance contract opertracting officer shall evaluate the rea ations during periods of underwriting sonableness of the proposed service losses that deplete contract reserves charge on the basis of the following until a time when premiums can be adfactors which are directly pertinent to justed to restore them. When contract FEHBP experience rated contracts. funds finance FEHBP costs, the servThese factors are solely for the pur ice charge should not include a factor pose of analysis by the contracting of for financing. When, due to underwritficer and do not represent a basis for ing losses, the carrier must finance which a carrier may claim a service FEHBP costs, the service charge charge.

should include a factor for financing. (1) Underwriting risk. The degree of This condition can be recognized in risk assumed by the carrier should in the determination of subscription fluence the amount of the service rates when the condition actually charge. Although the carrier under- exists.

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(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 seryice 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 con tract renewals, the contracting officer may also consider any significant changes in the health plan's enrollment and changes in the consumer price index.

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.

§ 16–3.810 Exchange of information.

FPR 1-3.810 is applicable to the administration of FEHBP contracts.

816-3.811 Record of price negotiation.

FPR 1-3.811 is applicable to the administration of FEHBP contracts.

§ 16–3.812 Disposition of postaward

audits. FPR 1-3.812 is applicable to the administration of FEHBP contracts.

§ 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 func. tion as stated in FPR 1-3.809 is gener ally applicable to the administration

8 16-3.813 Startup and other nonrecurring

costs. In order for a new carrier to provide benefits on the effective date of the FEHBP contract, a certain amount of start-up costs are necessary. For experience rated contracts, the contracting officer shall determine whether it is the carrier's intention to absorb these precontract costs or to recover them from the contract. When the carrier has conveyed its intention to absorb any portion of the start-up cost, there shall be an express contractual provi.

sion that such portion will not be charged to the contract.

§ 16-3.814 Contract clauses.

The appropriate contract clause specified in FPR 1-3.814 shall be included in each experience rated FEHBP contract.

816–3.814-50 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.

§ 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

Subpart 16-3.9—Subcontracting

Policies and Procedures

816-3.903-2 Review and approval of sub

contracts. 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.

(3) Contracts under $500,000 unless the carrier is performing CAS covered contracts, in which case the FEHBP contract would be exempt if the amount of the contract is under $100,000.


Subpart 16-4.1-Federal Employees Health

Benefits Contracts

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.

Sec. 16-4.150 Scope and applicability of part. 16-4.151 Definition of terms. 16-4.151-1 Carrier. 16-4.151-2 Community rate. 16-4.151-3 Contractor. 16-4.151-4 Contract modification. 16-4.151-5 Contracting officer. 16-4.151-6 Director. 16-4.151-7 Experience rate. 16-4.151-8 FEHBP. 16-4.151-9 Government-wide plans. 16-4.151-10 Health benefits plan. 16-4.151-11 Negotiation. 16-4.151-12 OPM. 16-4.151-13 Subcontractor. 16-4.152 Policies and procedures. 16-4.152-1 Types of health benefits plan

contracts. 16-4.152-2 Types of health plans. 16-4.152-3 Applications to participate in

the FEHB Program. 16-4.152-4 Proposals of existing FEHBP

carriers. 16-4.152-5 Program requirements-infor

mation required of participating FEHBP

plans. 16-4.153 Cost of benefits provided under

experience rated contracts. AUTHORITY: 40 U.S.C. 486(c); 5 U.S.C. 8913.

SOURCE: 46 FR 51576, Oct. 20, 1981, unless otherwise noted.

Subpart 16–3.12—Cost Accounting


Subpart 16-4.1-Federal Employees

Health Benefits Contracts

$ 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,

8 16-4.150 Scope and applicability of part.

This part describes the principal types of FEHBP contracts and sets forth policies and procedures used in connection with the procurement of health insurance coverage under the Federal Employees Health Benefits Program. 8 16-4.151 Definition of terms.

For the purposes of this chapter, and unless otherwise indicated, the

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