Government Contracts Monitor

OFCCP Assertion of Jurisdiction Over “Subcontractor” Hospitals Upheld

April 19, 2013

By: Eric Whytsell

As we have previously reported, the Office of Federal Contract Compliance Programs (OFCCP) has had the health care industry in its sights for some time.  While most health care providers have never heard of the OFCCP, a recent decision by the U.S. District Court for the District of Columbia, UPMC Braddock v. Seth Harris (Acting Secretary of Labor), Civil Action No. 09-1210 (D.D.C. March 30, 2013), promises to significantly raise the office’s profile among hospitals and other providers.

The OFCCP is the branch of the Department of Labor (DOL) tasked with enforcing federal regulations prohibiting federal contractors and subcontractors from discriminating based upon race, color, sex, religion, national origin, disability, and veteran status.[1]  The OFCCP Laws impose numerous reporting, recordkeeping, and affirmative action requirements on federal contractors and subcontractors.

Historically, most health care providers have not considered themselves federal contractors or subcontractors subject to the OFCCP Laws.  However, that conventional wisdom was challenged in 2009 by the decision of the Department of Labor’s Administrative Review Board (ARB) in OFCCP v. UPMC Braddock, No. 08-048 (Dep’t of Labor May 29, 2009).  There, the ARB ruled that hospitals with HMO contracts to provide medical services to federal employees covered by the University of Pittsburgh Medical Center (UPMC) Health Plan were federal subcontractors subject to OFCCP jurisdiction -- despite the fact that the Health Plan’s insurance contract with the U.S. Office of Personnel Management (OPM) expressly excluded the hospitals from its definition of “subcontractor.”

On appeal, the District Court confirmed that the hospitals are covered subcontractors by virtue of their having entered into a contract with UPMC to provide medical services necessary to the performance of the prime contract between the Health Plan and OPM.  More particularly, the Court rejected the hospitals' attempt to rely on the prime contract’s exclusion of medical providers from its definition of "subcontractor," holding that OPM does not have the authority to define away the application of DOL regulations and that a contract provision that violates federal law is unenforceable and invalid.

The Court also rejected the hospitals’ assertion that they are not subcontractors because the medical services they provide do not constitute “nonpersonal services” required by the OFCCP Laws’ definition of “subcontract.”  Instead, the Court concluded that the hospitals’ services are “nonpersonal” because their personnel were not in an employer-employee relationship with the Health Plan and the Plan does not exercise the supervision and control over those personnel that an employer has over its employees.

Next, the Court held that the hospitals' agreements to provide medical services under the Health Plan do in fact constitute subcontracts because those services were necessary to the performance of the prime contract between the Health Plan and OPM and/or those agreements obligated the hospitals to perform, undertake, or assume a portion of the Health Plan's obligations under the prime contract. The Court distinguished the earlier decision in OFCCP v. Bridgeport Hospital, ARB Case No. 00-034, 2003 WL 244810 (Jan. 31, 2003), in which the prime contract only required the provision of health insurance and did not, like the Health Plan’s contract here, also obligate the prime contractor to provide medical services and supplies to federal employees.

Finally, the Court confirmed that the hospitals’ consent to become government contractors was not required to subject them to the OFCCP Laws, applying the "Christian Doctrine," which provides that "a mandatory contract clause that expresses a significant or deeply ingrained strand of public procurement policy is considered to be included in a contract by operation of law."[2]  While the Christian Doctrine has historically been applied only to prime government contractors who know they are contracting with the federal government, the Court found no reason to refrain from applying it to subcontractors who lack such knowledge.  The Court held that a subcontractor may be similarly bound if it helps the contractor to fulfill its agreement with the government, thereby reaping the financial benefit of that agreement.

This long-awaited decision has broad implications for a range of businesses that have not previously thought of themselves as government contractors.  In addition to making health care providers that have contractual relationships with health plans that in turn contract with OPM subject to the OFCCP Laws, the decision has broad implications for a range of other businesses – inside and outside the health care industry -- that have not previously thought of themselves as government contractors.  While the decision is unlikely to impact the analysis with respect to providers furnishing medical services to TRICARE beneficiaries (due to a recent statutory exemption) or under Medicare Part A and Part B and Medicaid (due to a longstanding statutory exemption), it remains unclear what position the OFCCP will take with respect to health care providers associated with other federal managed care programs, such as Medicare Part C (Medicare Advantage) and Part D (Prescription Drug Programs).

However, given the OFCCP’s enforcement posture under the Obama Administration, the decision likely will affect companies outside the health care industry that are be operating as federal “subcontractors” without knowing it.  The office will continue to seek ways to broaden its jurisdiction over companies of all sorts that provide goods and services to federal prime contractors, knowingly or not.  Businesses should not wait for a compliance review letter from OFCCP before assessing whether and to what extent their customers do business with the federal government, determining whether those relationship may render them a federal “subcontractor,” and, if so, taking appropriate action to comply with the OFCCP Laws. 

Eric Whytsell is the attorney responsible for the content of this article.

• Eric Whytsell