Health Care Providers Beware — You May Be a Governmental Contractor

11 April 2013 Publication
Authors: Daniel A. Kaplan Mark J. Neuberger

Legal News Alert: Labor & Employment

Executive Order 11246 (Order) was first issued in September 1965 by President Johnson. Its purpose was to prohibit race, religion, color, and national origin discrimination by federal contractors and subcontractors and require them to engage in “affirmative action” to employ and advance minorities in employment. In 1967, the president amended the Order to also prohibit sex discrimination and require affirmative action by government contractors and subcontractors on behalf of women.

The responsibility of administering and enforcing the Order was delegated to the U.S. Secretary of Labor. The secretary was given power to adopt rules and regulations to enforce the Order. Subsequently, the secretary delegated the authority to enforce the Order and its accompanying regulations to the director of the Office of Federal Contract Compliance Programs (OFCCP).

In order to be subject to the Order and its regulations, a person or entity must first be a “contractor” or “subcontractor” with a “contract” to sell goods or services to an executive agency of the federal government. As such, governmental contractors have a number of obligations that non-governmental contractors do not, most significantly the requirement to comply with the Order and to maintain an affirmative action program. Over the years, there has been considerable litigation concerning who is a covered contractor or subcontractor.

On March 30, 2013, the federal district court for the District of Columbia in UPMC Braddock, et al. v. Harris determined that three Pittsburgh-area hospitals were subject to the Order by concluding that they were subcontractors. The court reached this conclusion based on the fact that the hospitals provided medical services to a health maintenance organization (HMO). The HMO, in turn, had a contract with the Office of Personnel Management (OPM), the human resources department of the executive branch of government. The hospitals’ agreement with the HMO tried to avoid acknowledging subcontractor status by excluding medical services as a basis for concluding the hospitals were subcontractors. The court rejected this proposition and agreed with the OFCCP (which was attempting to enforce the Order against the hospitals). The court held the provision of medical services was the basis for the HMO’s agreement with OPM and therefore the hospitals, as the providers of these services, were now federal subcontractors subject to the Order.

The district court distinguished its conclusion from the situation in which a health care provider simply contracts with a medical insurer — such as Blue Cross/Blue Shield — by noting that in the latter relationship, Blue Cross/Blue Shield simply agrees to “reimburse” the insured for the cost of medical services. In such a scheme, the government does not indirectly contract with a hospital for the provision of goods and services. In previous litigation, it has been held that receipt of funds alone does not trigger coverage under the Order. Whereas in UMPC, the HMO expressly negotiated and contracted for the provision of medical services with the hospitals and made federal government employees and their families use those service providers.

The decision expands OFCCP’s coverage into new areas of the health care industry. If the case stands (it is not yet known if UPMC will appeal), the implication on health care providers will likely be significant in the coming months and throughout the remainder of the Obama administration’s term. Health care providers are now more likely than ever to be “targeted” and subject to compliance reviews by the OFCCP. And, those that have contracts with HMOs to provide services to agency personnel will likely be subject to audit by this U.S. Department of Labor agency.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Daniel A. Kaplan
Madison, Wisconsin

Mark J. Neuberger
Miami, Florida

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