The OFFCP’s proposed rule to end the Tricare debate

April 28, 2020

What you need to know about this proposed rule.

On November 6, 2019, the U.S. Department of Labor (DOL) Office of Federal Contract Compliance Programs (OFCCP) issued a notice of proposed rulemaking (NPRM) to clarify its authority over healthcare providers that serve TRICARE beneficiaries.

 BACKGROUND

The OFCCP has authority to enforce Executive Order 11246 (E.O. 11246), Section 503 of the Rehabilitation Act of 1973 (Section 503), and the Vietnam Era Veterans Readjustment Assistant Act of 1974 (VEVRAA).  Together, these three laws require federal contractors and subcontractors to take affirmative steps to ensure equal opportunity in their employment practices.  For the past decade, the OFCCP has engaged in ongoing efforts to assert jurisdiction over hospitals and the healthcare industry based on its assertion that these entities are government subcontractors within the meaning of 41 C.F.R. § 60-1.3.

Pursuant to this regulation, a subcontract constitutes any agreement between a contractor and a third party for either: (1) the purchase, sale or use of personal property or non-personal services, which is necessary for the performance of any one or more contracts (Prong One); or (2) under which any portion of the contractor’s obligation under any one or more contracts is performed, undertaken or assumed (Prong Two).

The OFCCP has argued that hospitals are subcontractors under both of these prongs when they become involved in TRICARE networks or accept reimbursement payments from TRICARE.  TRICARE is a healthcare program of the Defense Health Agency under the guidance of the Assistant Secretary of Defense that provides civilian health benefits for military personnel, military retirees, and their dependents. 

These efforts were temporarily stalled when the DOL’s Administrative Review Board (ARB) ruled on October 9, 2012, in OFCCP v. Florida Hospital of Orlando, ARB Case No. 11-011, that under Section 715 of the National Defense Authorization Act (NDAA), the OFCCP did not have jurisdiction over Florida Hospital, as a subcontractor, simply because it provided medical services to TRICARE beneficiaries.  Section 715, in relevant part, provides that “a TRICARE managed care support contract that includes the requirement to establish, manage or maintain a network of providers may not be considered to be a contract for the performance of health care services or supplies on the basis of such requirement.”

However, on July 22, 2013, the ARB heard the OFCCP’s motion for reconsideration and reversed its initial decision.  In doing so, the ARB found that while Section 715 of the NDAA precludes the OFCCP from asserting jurisdiction over hospitals where they have merely performed, undertaken or assumed a portion of a federal contractor’s obligation to provide medical services to TRICARE beneficiaries (Prong Two of the subcontractor definition), it did not prevent the OFCCP from demonstrating that a hospital had otherwise entered into a subcontractor relationship with the government under Prong One.  Specifically, the ARB stated that Section 715 of the NDAA did not create a blanket prohibition of OFCCP jurisdiction over hospitals and a separate analysis must be performed to determine if Prong One jurisdiction still exists.  The ARB went on to find that Prong One jurisdiction still applied because the hospital’s contract with Humana Military Healthcare Services was for the performance of non-personal services, and the purchase of the hospital’s services was necessary for the managed care support contract between Humana and TRICARE.

The analysis of OFCCP jurisdiction did not end there however, and the ARB remanded the case back to the administrative law judge for additional fact-finding on the issue as to whether Congress intended for TRICARE to be a federal financial assistance program, thereby falling within another exception to the OFCCP’s jurisdiction. 

While the remand was pending, Congress introduced legislation that would exempt all healthcare providers from the OFCCP’s enforcement activities.  To prevent this legislation from progressing, the Secretary of Labor wrote to Congress proposing that the OFCCP would unilaterally limit its enforcement activities with regard to TRICARE for the next five years.

Accordingly, in May 2014, OFCCP issued Directive 2014-01, establishing a five-year moratorium on enforcement of affirmative action obligations for healthcare providers deemed to be TRICARE subcontractors.  The OFCCP also closed its compliance reviews of any contractors covered by the moratorium, which resulted in dismissal of the Florida Hospital case.  The moratorium was later extended by Directive 2018-02 in May 2018 and is currently set to expire on May 7, 2021. 

THE NOTICE OF PROPOSED RULEMAKING  

On November 6, 2019, the OFCCP issued the NPRM, which, if made final, would end the TRICARE debate once and for all.  The OFCCP proposed two alternative paths to clarify its authority. 

First, the OFCCP explained that it reconsidered its interpretation of Section 715 of the NDAA and now believes it does not have enforcement authority over TRICARE providers because an agreement between a health care provider and a managed support contractor is not a subcontract subject to the OFCCP’s authority.  The OFCCP reached this conclusion because in order to fulfill its contractual obligations to the Defense Health Agency to maintain a network of providers, a managed support contractor is required to enter into agreements with health care providers. 

Second, the OFCCP proposed creating an exemption from E.O. 11246, Section 503, and VEVRAA for healthcare providers with agreements to furnish medical services and supplies to individuals participating in TRICARE.  The OFCCP reasoned that there is a national interest in providing certainty to TRICARE providers and patients and ensuring access to care to active and veteran uniformed service members and their families.  Without such certainty, the OFCCP is concerned that providers may be less likely to participate in TRICARE because of the administrative costs and burdens of OFCCP compliance. 

The OFCCP clarified that the national interest exemption would not insulate healthcare providers from OFCCP authority if they hold separate federal contracts or subcontracts unrelated to TRICARE.  

IMPLICATIONS

The proposed rule has a potential for hundreds of millions of dollars in cost-savings for healthcare providers that serve TRICARE patients and may impact approximately 85,000 providers.  The DOL estimates that it takes each contractor over 120 hours annually to comply with E.O. 11246, Section 503, and VEVRAA.  Those healthcare providers not otherwise under OFCCP jurisdiction through separate government contracts or subcontracts would no longer be subject to these requirements. However, healthcare providers that do business with the federal government directly or as subcontractors under other federal health systems such as the Federal Employees Health Benefits program must remain vigilant to ensure they are complying with their Equal Employment Opportunity and Affirmative Action Plan obligations.

Although the OFCCP has yet to publish a final rule, the moratorium is still in place until May 7, 2021. The OFCCP received sixteen public comments, both for and against the proposed rule, in the thirty days following its publication.  It is unclear whether or to what extent the OFCCP will consider these comments in drafting a final rule.  With a little over a year until the moratorium ends, healthcare providers that serve TRICARE patients should continue to monitor the status of the proposed rule.  Where healthcare providers have questions as to their obligations as federal contractors or subcontractors, they should contact experienced counsel for guidance.

Kenneth A. Rosenberg is a partner with Fox Rothschild LLP and can be reached at 973.994.7510 or KRosenberg@FoxRothschild.com.  Fox Rothschild LLP is a full-service, national law firm. Nicole D. Espin is an associate with Fox Rothschild LLP and can be reached at 973.548.3334 or NEspin@FoxRothschild.com.  Mr. Rosenberg and Ms. Espin are members of the firm’s Labor & Employment Department and regularly counsel government contractors on Affirmative Action Plans and other OFCCP matters.