Federal Employees Health Benefits (FEHB) Program and Department of Defense (DoD) Demonstration Project; and Other Miscellaneous Changes

OFFICE OF PERSONNEL MANAGEMENT

48 CFR Parts 1615, 1632, and 1652

RIN 3206 AI67

Federal Employees Health Benefits (FEHB) Program and Department

of Defense (DoD) Demonstration Project; and Other Miscellaneous Changes

AGENCY: Office of Personnel Management.

ACTION: Interim regulation.

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SUMMARY: OPM is issuing an interim regulation to implement the portion

of the Defense Authorization Act for 1999 that establishes authority

for a demonstration project under which certain Medicare and other

eligible DoD beneficiaries can enroll in health benefit plans in

certain geographic areas under the Federal Employees Health Benefits

(FEHB) Program. The demonstration project will run for a period of

three years from January 1, 2000, through December 31, 2002. This

regulation specifies only the requirements that differ from existing

FEHB Program regulations because of unique aspects of the demonstration

project.

DATES: The effective date of this regulation is July 6, 1999. Comments

must be received on or before September 7, 1999.

ADDRESSES: Comments must be sent to Abby L. Block, Chief, Insurance

Policy and Information Division, OPM, Room 3425, 1900 E Street, NW.,

Washington, DC 20415-0001.

FOR FURTHER INFORMATION CONTACT: Michael W. Kaszynski, (202) 606-0004.

You may submit comments and data by sending electronic mail (E-mail)

to: [email protected].

SUPPLEMENTARY INFORMATION: The purpose of this regulation is to

implement the portion of the Defense Authorization Act for 1999, Public

Law 105-261, that amended chapter 55 of title 10, United States Code,

and chapter 89 of title 5, United States Code, to establish a

demonstration project under which certain Medicare and other eligible

DoD beneficiaries can enroll in health benefit plans under the FEHB

Program. The legislation was signed into law on October 17, 1998. The

demonstration project will run for a period of three years from January

1, 2000, through December 31, 2002. DoD, with OPM concurrence, has

selected eight geographic areas to serve as demonstration project

areas. The legislation requires that between 6 and 10 geographic areas

be selected. No more than 66,000 individuals can participate in the

demonstration project at any one time. Beneficiaries who are provided

coverage under the demonstration project will not be eligible to

receive care at a military medical treatment facility or to enroll in a

health care plan under DoD's TRICARE program. Individuals who disenroll

or cancel enrollment from the demonstration project are not eligible to

reenroll in the demonstration project. OPM will establish separate risk

pools for developing demonstration project enrollee premium rates. The

Government contribution for demonstration enrollees will be paid by DoD

and cannot exceed the percentage that the Government would have

contributed had the enrollee been enrolled as a regular FEHB enrollee

in the same health benefits plan and level of benefits.

The legislation requires OPM and DoD to jointly produce and submit

two reports to Congress designed to assess the viability of expanding

access to the FEHB Program to certain Medicare and other eligible DoD

beneficiaries permanently. The first report is due by April 1, 2001;

the second is due by December 31, 2002. The reports will focus on

enrollee participation levels, impact on Medicare Part B enrollment,

impact on premium rates and costs as compared to regular FEHB

enrollees, impact on accessibility of care in military treatment

facilities, impact on medical readiness and training in military

treatment facilities, impact on the cost, accessibility, and

availability of prescription drugs for DoD beneficiaries, and

recommendations on eligibility and enrollment.

OPM has determined it necessary to specify certain differences from

existing FEHB Program regulations because of the unique features of the

demonstration project. This regulation amends chapter 16 of title 48,

Code of Federal Regulations (CFR) to enumerate these differences.

When developing premium rates for demonstration project community-

rated carriers, OPM will not use similarly sized subscriber group

(SSSG) rating methodologies to determine the reasonableness of the

carrier's demonstration project premium rates. We are not using SSSG's

because we have learned from our consultations with community-rated

carriers that

[[Page 36272]]

there are no similar employer sponsored groups with which to compare.

Instead we are benchmarking premiums against adjusted community-rates

if available, Medigap offerings, or other similar products to determine

reasonableness. We believe that these data will result in competitively

developed premium rates.

We have determined the most cost effective and administratively

efficient way for the federal government to track expenditures is to

allow experience-rated carriers participating in the demonstration

project to draw funds from their existing FEHB Letter of Credit (LOC)

account to pay demonstration project benefits costs in the same manner

as they do for benefits costs incurred by regular FEHB members.

However, experience-rated carriers must account separately for health

benefits charges paid using demonstration project funds and regular

FEHB funds. Direct administrative costs attributable solely to the

demonstration project will be fully chargeable to the demonstration

project. Indirect administrative costs associated with the

demonstration project will be allocated to the demonstration project

based on the percentage obtained by dividing the dollar amount of

claims processed under the demonstration project by the total claims

processed for FEHB Program activity. This same percentage will also be

used to determine the amount of the Carrier's service charge that will

be allocated to the demonstration project.

Because of the way premiums are collected from enrollees and

annuitants and the way the government distributes them to carriers,

there will be a period between the effective date of demonstration

project enrollees' coverage and the first payment of premium into

experience-rated carriers' LOC accounts. DoD enrollments will become

effective on January 1, 2000, and the first demonstration project

premiums will be withheld from annuities on February 1, 2000. The

enrollees' and Government's share of the premiums are due to OPM from

DoD on the first day of each month thereafter through the conclusion of

the demonstration project. However, since enrollees will be entitled to

coverage for at least a month before the first premium payment, there

won't be an opportunity for carriers to build a sufficient cash flow to

cover the costs of the demonstration project group during this period.

By allowing experience-rated carriers to draw on their existing LOC

accounts in the same manner as for regular FEHB claims, this problem is

addressed.

Since this is a start-up program with no specific experience, we

have determined that experience-rated carrier risk must be mitigated in

order to keep premiums as low as possible. Experience rated-carriers

will report on demonstration project revenues, health benefits charges,

and administrative expenses as directed by OPM and they will perform a

final reconciliation of revenue and costs for the demonstration group

at the end of the demonstration project. Experience-rated carrier costs

in excess of the premiums will be reimbursed first from the carrier's

demonstration project Contingency Reserve and then from OPM's

Administrative Reserve. Any surplus after the final accounting will be

paid by carriers to OPM's Administrative Reserve. Should the program be

extended beyond the three year demonstration project period, we will

regulate to address any necessary changes to these provisions.

We also have made minor editorial changes to clarify title 48, CFR.

Waiver of Notice of Proposed Rule Making

Pursuant to section 553(b)(3)(B) of title 5 of the United States

Code, I find that good cause exists for waiving the general notice of

proposed rulemaking. The notice is being waived because FEHB Program

carriers need the information contained in these regulations now in

order to have sufficient time to develop reserve accounts and premiums

for enrollments to be effective January 1, 2000, as required by Public

Law 105-261.

Regulatory Flexibility Act

I certify that this regulation will not have a significant economic

impact on a substantial number of small entities because the regulation

will only affect health insurance carriers under the Federal Employees

Health Benefits Program.

Executive Order 12866, Regulatory Review

This rule has been reviewed by the Office of Management and Budget

in accordance with Executive Order 12866.

List of Subjects in 48 CFR Parts 1615, 1632, and 1652

Government employees, Government procurement, Health insurance.

Office of Personnel Management.

Janice R. Lachance,

Director.

For the reasons set forth in the preamble, OPM is amending chapter

16 of title 48, CFR as follows:

CHAPTER 16--OFFICE OF PERSONNEL MANAGEMENT FEDERAL EMPLOYEES HEALTH

BENEFITS ACQUISITION REGULATIONS

1. The authority citation for 48 CFR Parts 1615, 1632, and 1652

continues to read as follows:

Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c); 48 CFR 1.301.

PART 1615--CONTRACTING BY NEGOTIATION

Subpart 1615.8--Price Negotiation

2. In Sec. 1615.802 paragraph (e) is added to read as follows:

1615.802 Policy.

* * * * *

(e) Exceptions for the 3-Year DoD Demonstration Project (10 U.S.C.

1108).

(1) Similarly sized subscriber group (SSSG) rating methodologies

will not be used to determine the reasonableness of a community-rated

carrier's demonstration project premium rates. Carrier premium rates

will not be adjusted for equivalency with SSSG rating methodologies.

Carriers will benchmark premiums against adjusted community rates if

available, Medigap offerings, or other similar products.

(2) Community-rated carriers must propose premium rates with cost

or pricing data and rating methodology, and experience-rated carriers

must propose premium rates with cost data and rating methodology

regardless of group size or annual premiums.

PART 1632--CONTRACT FINANCING

Subpart 1632.1--General

3. In Sec. 1632.170 paragraph (c) is added to read as follows:

1632.170 Recurring premium payments to carriers.

* * * * *

(c) Exceptions for the 3-Year DoD Demonstration Project (10 U.S.C.

1108).

(1) Carriers will create and maintain separate risk pools for

demonstration project experience and regular FEHB experience for the

purpose of establishing separate premium rates.

(2) OPM will create and maintain a demonstration project

Contingency Reserve separate from the regular FEHB Contingency Reserve

for each carrier participating in the demonstration project.

(3) Experience-rated carriers participating in the demonstration

project will draw funds from their Letter of Credit (LOC) account to

pay demonstration project benefits costs in the same manner as they do

for benefits

[[Page 36273]]

costs incurred by regular FEHB members. Experience-rated carriers will

account separately for health benefits charges paid using demonstration

project funds and regular FEHB funds. Direct administrative costs

attributable solely to the demonstration project will be fully

chargeable to the demonstration project. Indirect administrative costs

associated with the demonstration project will be allocated to the

demonstration project based on the percentage obtained by dividing the

dollar amount of claims processed under the demonstration project by

the total claims processed for FEHB Program activity. This same

percentage will also be used to determine the amount of the experience-

rated carrier's service charge that will be allocated to the

demonstration project.

(4) Carriers will report on demonstration project revenues, health

benefits charges, and administrative expenses as directed by OPM.

Experience-rated carriers will perform a final reconciliation of

revenue and costs for the demonstration group at the end of the

demonstration project. Experience-rated carrier costs in excess of the

premiums will be reimbursed first from the carrier's demonstration

project Contingency Reserve and then from OPM's Administrative Reserve.

Any surplus after the final accounting will be paid by experience-rated

carriers to OPM's Administrative Reserve.

PART 1652--CONTRACT CLAUSES

Subpart 1652.2--Texts of FEHBP Clauses

4. Section 1652.215-70 is amended by removing ``(JAN 1998)'' from

the clause heading and adding in its place ``(JAN 2000)'' and by adding

a new paragraph (d) to read as follows:

1652.215-70 Rate Reduction for Defective Pricing or Defective Cost or

Pricing Data.

* * * * *

(d) Exception for the 3-Year DoD Demonstration Project (10 U.S.C.

1108).

Similarly sized subscriber group (SSSG) rating methodologies shall

not be used to determine the reasonableness of the carrier's

demonstration project premium rates. The Carrier's rates shall not be

adjusted for equivalency with SSSG rating methodologies. The Carrier

shall benchmark premiums against adjusted community rates if available,

Medigap offerings, or other similar products.

5. Section 1652.216-70 is amended by removing ``(JAN 1998)'' from

the clause heading and adding in its place ``(JAN 2000)'' and by adding

a new paragraph (c) to read as follows:

1652.216-70 Accounting and price adjustment.

* * * * *

(c) Exception for the 3-Year DoD Demonstration Project (10 U.S.C.

1108).

Similarly sized subscriber group (SSSG) rating methodologies shall

not be used to determine the reasonableness of the Carrier's

demonstration project premium rates. The Carrier's rates shall not be

adjusted for equivalency with SSSG rating methodologies. The Carrier

shall benchmark premiums against adjusted community rates if available,

Medigap offerings, or other similar products.

6. Section 1652.216-71 is amended by revising the clause to read as

follows:

1652.216-71 Accounting and allowable cost.

* * * * *

Accounting and Allowable Cost (FEHBAR 1652.216-71) (JAN 2000)

(a) Annual Accounting Statements. (1) The Carrier shall furnish

to OPM an accounting of its operations under the contract. In

preparing the accounting, the Carrier shall follow the reporting

requirements and statement formats prescribed by OPM in the FEHBP

Experience-Rated Carrier and Service Organization Audit Guide

(Guide).

(2) The Carrier shall have its Annual Accounting Statements and

that of its underwriter, if any, audited in accordance with the

Guide. The Carrier shall submit the audit report and the Annual

Accounting Statements to OPM in accordance with the requirements of

the Guide.

(3) Based on the results of the independent audit prescribed by

the Guide and/or a Government audit, the Carrier shall adjust its

annual accounting statements (i) By amounts found not to constitute

actual, reasonable, allowable, or allocable costs; and/or (ii) to

reflect prior overpayments or underpayments.

(4) The Carrier shall develop corrective action plans, in

accordance with and as defined by the Guide, to resolve all audit

findings.

(b) Definition of costs. (1) The Carrier may charge a cost to

the contract for a contract term if the cost is actual, allowable,

allocable, and reasonable. In addition, the Carrier must:

(i) On request, document and provide accounting support for the

cost and justify that the cost is reasonable and necessary; and

(ii) Determine the cost in accordance with: (A) The terms of

this contract, and (B) Subpart 31.2 of the Federal Acquisition

Regulation (FAR) and Subpart 1631.2 of the Federal Employees Health

Benefits Program Acquisition Regulation (FEHBAR) applicable on the

first day of the contract period.

(2) In the absence of specific contract terms to the contrary,

the Carrier shall classify contract costs in accordance with the

following criteria:

(i) Benefits. Benefit costs consist of payments made and

liabilities incurred for covered health care services on behalf of

FEHBP subscribers less any refunds, rebates, allowances or other

credits received.

(ii) Administrative expenses. Administrative expenses consist of

all actual, allocable, allowable and reasonable expenses incurred in

the adjudication of subscriber benefit claims or incurred in the

Carrier's overall operation of the business. Unless otherwise stated

in the contract, administrative expenses include, in part: all taxes

(excluding premium taxes, as provided in section 1631.205-41),

insurance and reinsurance premiums, medical and dental consultants

used in the adjudication process, concurrent or managed care review

when not billed by a health care provider and other forms of

utilization review, the cost of maintaining eligibility files, legal

expenses incurred in the litigation of benefit payments and bank

charges for letters of credit. Administrative expenses exclude the

cost of Carrier personnel, equipment, and facilities directly used

in the delivery of health care services, which are benefit costs,

and the expense of managing the FEHBP investment program which is a

reduction of investment income earned.

(iii) Investment income. The Carrier shall invest and reinvest

all funds on hand, including any in the Special Reserve or any

attributable to the reserve for incurred but unpaid claims, which

are in excess of the funds needed to discharge promptly the

obligations incurred under the contract. Investment income

represents the net amount earned by the Carrier after deducting

investment expenses. Investment expenses are those actual,

allowable, allocable, and reasonable contract costs which are

attributable to the investment of FEHBP funds, such as consultant or

management fees.

(iv) Other charges. (A) Mandatory statutory reserve. Charges for

mandatory statutory reserves are not allowable unless specifically

provided for in the contract. When the term ``mandatory statutory

reserve'' is specifically identified as an allowable contract charge

without further definition or explanation, it means a requirement

imposed by State law upon the Carrier to set aside a specific amount

or rate of funds into a restricted reserve that is accounted for

separately from all other reserves and surpluses of the Carrier and

which may be used only with the specific approval of the State

official designated by law to make such approvals. The amount

chargeable to the contract may not exceed an allocable portion of

the amount actually set aside. If the statutory reserve is no longer

required for the purpose for which it was created, and these funds

become available for the general use of the Carrier, the Carrier

shall return to the FEHBP a pro rata share based upon FEHBP's

contribution to the total Carrier's set aside in accordance with FAR

31.201-5.

(B) Premium taxes. When the term ``premium taxes'' is used in

this contract without further definition or explanation, it means a

tax, fee, or other monetary payment directly or indirectly imposed

on FEHB premiums by any State, the District of Columbia, or the

Commonwealth of Puerto Rico or by any political subdivision or other

governmental authority of those entities, with the sole exception of

a tax on net income or profit, if that tax, fee, or payment is

[[Page 36274]]

applicable to a broad range of business activity.

(c) Certification of Accounting Statement Accuracy. (1) The

Carrier shall certify the annual accounting statement in the form

set forth in paragraph (c)(3) of this clause. The Carrier's chief

executive officer and the chief financial officer shall sign the

certificate.

(2) The Carrier shall require an authorized agent of its

underwriter, if any, also to certify the annual accounting

statement.

(3) The certificate required shall be in the following form:

Certification of Accounting Statement Accuracy

This is to certify that I have reviewed this accounting

statement and to the best of my knowledge and belief:

1. The statement was prepared in conformity with the guidelines

issued by the Office of Personnel Management and fairly presents the

financial results of this reporting period in conformity with those

guidelines.

2. The costs included in the statement are actual, allowable,

allocable, and reasonable in accordance with the terms of the

contract and with the cost principles of the Federal Employees

Health Benefits Acquisition Regulation and the Federal Acquisition

Regulation.

3. Income, rebates, allowances, refunds and other credits made

or owed in accordance with the terms of the contract and applicable

cost principles have been included in the statement.

4. If applicable, the letter of credit account was managed in

accordance with 5 CFR part 890, 48 CFR chapter 16, and OPM

guidelines.

Carrier Name:----------------------------------------------------------

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Name of Chief Executive Officer:

(Type or Print)

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Name of Chief Financial Officer:

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Signature of Chief Executive Officer:

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Signature of Chief Financial Officer:

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Date Signed:

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Date Signed:

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Underwriter:-----------------------------------------------------------

Name and Title of Responsible Corporate Official:

(Type or Print:)-------------------------------------------------------

Signature of Responsible Corporate Official:

----------------------------------------------------------------------

Date Signed:-----------------------------------------------------------

(End of Certificate)

(d) Exceptions for the 3-Year DoD Demonstration Project (10

U.S.C. 1108).

(1) The Carrier shall draw funds from its Letter of Credit (LOC)

account to pay demonstration project benefits costs in the same

manner as it does for benefits costs incurred by regular FEHB

members. The Carrier shall account separately for health benefits

charges paid using demonstration project funds and regular FEHB

funds. Direct administrative costs attributable solely to the

demonstration project shall be fully chargeable to the demonstration

project. Indirect administrative costs associated with the

demonstration project will be allocated to the demonstration project

based on the percentage obtained by dividing the dollar amount of

claims processed under the demonstration project by the total claims

processed for FEHB Program activity. This same percentage will also

be used to determine the amount of the Carrier's service charge that

will be allocated to the demonstration project.

(2) The Carrier shall submit a separate annual accounting

statement and monthly incurred claims report for demonstration

project experience.

(End of Clause)

7. Section 1652.232-71 is amended by removing ``(Jan. 1999)'' from

the clause heading and adding in its place ``(JAN 2000),'' and adding a

new paragraph (f) to read as follows:

1652.232-71 Payments--experience-rated contracts.

* * * * *

(f) Exception for the 3-Year DoD Demonstration Project (10 U.S.C.

1108).

The Carrier will perform a final reconciliation of revenue and

costs for the demonstration project group at the end of the

demonstration project. Costs in excess of the premiums will be

reimbursed first from the Carrier's demonstration project Contingency

Reserve and then from OPM's Administrative Reserve. Any surplus after

the final accounting will be paid by the Carrier to OPM's

Administrative Reserve.

(End of Clause)

[FR Doc. 99-16913 Filed 7-2-99; 8:45 am]

BILLING CODE 6325-01-U