Federal Register / Vol. 70, No.

104 / Wednesday, June 1, 2005 / Rules and Regulations 31389

[FR Doc. 05–10643 Filed 5–31–05; 8:45 am] principles and practices for FEHB modified the FEHBAR to specifically
BILLING CODE 6325–01–C contracts. The basic cost accounting recognize that monthly indirect cost
principles in the FAR Part 31 have been rates are a practice of the insurance
in place for over 40 years. During this industry and are therefore permitted by
OFFICE OF PERSONNEL time period, significant improvements FAR 31.203.
MANAGEMENT in cost accounting principles and We have added subrogation
practices have been made. Advances in settlements, prescription drug rebates,
48 CFR Parts 1631 and 1699 information technology have enabled and volume discounts to the list of
RIN 3206–AJ10 FEHB contractors to implement cost FEHB credits in FEHBAR 1631.201–70.
accounting practices more complex than This guidance specifies that the
Federal Employees Health Benefits those generally used when we adopted applicable portion of any credit relating
Program; Revision of Contract Cost the FAR cost principles. Also, we have to any allowable cost and received by or
Principles and Procedures, and observed some differences in accruing to the carrier must be credited
Miscellaneous Changes interpretation regarding the allocation of to the FEHB Program. We have always
costs to carriers’ contracts. Therefore, expected carriers to ensure that the
AGENCY: U.S. Office of Personnel Program actually receives these credits.
we are updating the FEHBAR to allow
Management. Identifying them makes it even clearer
carriers to use more current contract
ACTION: Final rule. cost accounting principles and practices that they are to be credited to the
and to provide for consistent Program. While the list of credits is not
SUMMARY: The U.S. Office of Personnel
interpretation of our requirements intended to be exhaustive, we have
Management (OPM) is issuing a final added these examples to demonstrate
regulation amending the Federal across the Program. These final
regulations may apply to contractors how all credits should be treated. Other
Employees Health Benefits (FEHB) enhancements include modifying FAR
Acquisition Regulation (FEHBAR). This that also allocate costs to other federal
contracts subject to CAS-coverage or 31.205–10 to make facilities cost of
regulation provides additional contract money (COM) allowable under certain
cost principles and procedures for FEHB FAR provisions related to cost-based
contracts. OPM plans to contact other circumstances, even if it is not
Program experience-rated contracts and specifically identified in a carrier
is intended to clarify our requirements federal agencies that contract with the
FEHB contractors to discuss how cost proposal (FEHBAR 1631.205–10). This
and enhance our oversight of FEHB change is intended to more closely
carriers. accounting practices are applied to
business units that may have other cost- reflect the procedures we follow in our
DATES: Effective July 1, 2005. based contracts for federal programs, annual negotiation process with
FOR FURTHER INFORMATION CONTACT: such as Medicare or Tricare, to carriers.
Anne Easton, Manager (202) 606–0770, We have added a provision to
determine if a consistent standard is
by fax: (202) 606–0633, or e-mail: establish that compensated personal
appropriate governmentwide.
[email protected]). absence must be assigned to the cost
FAR Part 31 provides criteria that accounting period in which the
SUPPLEMENTARY INFORMATION: We are govern the allocation of indirect costs to entitlement was earned (FEHBAR
enhancing our oversight of experience- contracts. This regulation provides 1631.205–72). This section is included
rated FEHB contracts by requiring guidance to carriers on allocating to ensure all carriers are following
carriers to apply additional cost certain indirect costs to FEHB GAAP requirements applicable to
principles and procedures. We currently experience-rated contracts. For example, accrual procedures. We also provided a
contract with thirty-two experience- we have included a section to transition rule to permit carriers to
rated fee-for-service carriers and Health supplement FAR 31.203 that describes recover prior years’ allocable liability
Maintenance Organizations (HMOs). techniques for accumulating and for compensated personal absence not
Under the FEHB law, 5 U.S.C. 8902, it allocating groupings of indirect costs previously charged to FEHB contracts.
is part of OPM’s responsibility to ensure (FEHBAR 1631.203–70). The new We believe that the provisions of this
that rates charged by health benefits section provides guidance for section ensure that there is
plans reasonably and equitably reflect determining logical cost groupings as compatibility between the applicable
the cost of the benefits provided. Our required by FAR 31.203(c). It also requirements of GAAP, FAR and
interest, from a financial standpoint, is provides methods for achieving the FAR FEHBAR. It should also be stressed that
to pay a reasonable price for the health 31.201–4 requirement that costs are to the transition rule dealing with the
care coverage we purchase from private be allocated on the basis of relative recovery of prior years’ costs applies
contractors on behalf of FEHB enrollees. benefits received or other equitable only to costs that have not been
OPM’s independent Inspector General relationship. We have also provided previously charged to contracts or other
regularly audits experience-rated more guidance on the allocation of final cost objectives.
carriers to determine if they are in business unit general and administrative Consistent with OPM’s waiver of Cost
compliance with the Cost Principles in (G&A) expenses (FEHBAR 1631.203–71) Accounting Standards (CAS)
part 31 of title 48, Code of Federal and home office expenses to carriers’ requirements, a new FEHBAR Subpart
Regulations (the Federal Acquisition business segments (FEHBAR 1631.203– 1699.70 is added to clarify they do not
Regulation (FAR)) and chapter 16 of title 72) to supplement FAR 31.203. Our apply to experience-rated FEHB
48, Code of Federal Regulations intent is to supplement, but not to contracts.
(FEHBAR)). In addition, we have other supplant FAR. Therefore, we believe We have worked collaboratively with
requirements and practices in place to that the provisions of FAR 31.203 carriers to develop procedures that are
provide assurance to FEHB Program dealing with the allocation of indirect consistent with insurance industry
administrators that carriers’ financial costs, including G&A expenses and practices and assure an equitable
reporting and contractual requirements home office expenses, are rendered allocation of costs to the FEHB Program.
are met. more useful for our purposes when When added to our current financial
The FEHBAR and part 31 of the FAR supplemented by FEHBAR 1631.203 reporting and disclosure requirements,
are the sole sources of cost accounting –70, 71, and 72. In addition, we have these new provisions will enhance our

VerDate jul<14>2003 14:13 May 31, 2005 Jkt 205001 PO 00000 Frm 00069 Fmt 4700 Sfmt 4700 E:\FR\FM\01JNR1.SGM 01JNR1
 31390 Federal Register / Vol. 70, No. 104 / Wednesday, June 1, 2005 / Rules and Regulations

oversight of the FEHB Program. Because insurance industry. Imposing a change disclosures by carriers are consistent
they have been developed in would incur additional costs for the with sound business practices.
coordination with the standard practices Government which would have to pay
Regulatory Flexibility Act
used by experience-rated carriers, we for the cost of implementing and
expect they can be implemented within maintaining the change in I certify that this regulation will not
the FEHB Program promptly and administrative systems. Therefore, this have a significant economic impact on
without impediments. clause remains unchanged except to a substantial number of small entities
On March 26, 2004, OPM published a adopt the new paragraph numbering because it is based on requirements
proposed rule in the Federal Register reflected in the updated FAR 31.203. already in place in the Federal
(69 FR 15774). We received comments The Federal employee union stated its Acquisition Regulation (FAR).
from two FEHB Program carriers and objection to OPM’s waiver of the CAS Executive Order 12866, Regulatory
one Federal employee union. One and, subsequently to all the provisions Review
carrier commented on the provision in in the proposed rule except for one. The
This rule has been reviewed by the
1631.205–72, which establishes that FAR 30.201–5(b)(2) permits the head of
Office of Management and Budget in
compensated personal absence must be an agency to waive the CAS for a accordance with Executive Order 12866.
assigned to the cost accounting period particular contract or subcontract under
in which the entitlement was earned. exceptional circumstances when List of Subjects in 48 CFR Parts 1631
The carrier asked that we clarify in the necessary to meet the needs of the and 1699
preamble that a contractor subject to agency. We determined there were Administrative practice and
this provision be permitted to draw the sufficient reasons and granted waivers procedure, Government employees,
amount of the allowable compensated for certain health plans under the FEHB Government procurement, Health
personal absence from the Plan’s letter Program. In October 2002, OPM facilities, Health insurance, Health
of credit (LOC) reserves in the cost determined that it was appropriate to professions, Reporting and record
accounting period in which the grant CAS waivers for certain health keeping requirements, Retirement.
contractor determines that an plans under the FEHB Program for the
entitlement had been earned. We agree. U.S. Office of Personnel Management.
reasons outlined below. First, OPM
Further, if it is later determined that the Dan G. Blair,
determined that the Program has
compensated personal absence Acting Director.
adequate cost accounting requirements
entitlement was not earned in the cost in its Federal Employees Health Benefits ■ Accordingly, we are amending chapter
accounting period to which it was Acquisition Regulations (FEHBAR), 16 of title 48, Code of Federal
assigned, the contractor will make an which supplement the Federal Regulations, as follows:
appropriate adjustment and credit the Acquisition Regulation. The FEHBAR CHAPTER 16—OFFICE OF PERSONNEL
LOC reserves. Another carrier requires carriers to file annual financial MANAGEMENT FEDERAL EMPLOYEES
commented that it is important and HEALTH BENEFITS ACQUISITION
statements. The carriers, and their third
highly appropriate that section 1699.70 REGULATION
party servicing agents, must also adhere
provides that the cost accounting ■ 1. The authority citations for 48 CFR
to financial and other related standards,
standards do not apply to experience- part 1631 continues to read as follows:
comply with an FEHB Program audit
rated contracts, adding that this will
guide, and submit to audits by Authority: 5 U.S.C. 8913; 40 U.S.C. 486(c);
avoid unnecessary and burdensome
costs to the Program. The carrier also Independent Public Accountants. 48 CFR 1.301.
commented on an anomaly in 1631.203 Second, because OPM has contracted
with carriers for twenty to forty years, PART 1631—CONTRACT COST
of the proposed regulation which was PRINCIPLES AND PROCEDURES
created when the FAR Councils it has been able to collect extensive data
published a final rule on April 5, 2004, on each carrier, thus making disclosure
■ 2. Subpart 1631.1 consisting of section
after the publication date of OPM’s statements superfluous. Their existing
1631.1 is added to read as follows:
proposed regulation. The FAR Councils’ systems are and have been their
rule revised FAR 31.203 regarding base benchmarks. Third, the OPM Office of Subpart 1631.1—Definitions
periods for allocating indirect costs, the Inspector General audits health
carriers on a regular basis; contract 1631.1 Definitions.
stating ‘‘* * * the base period for
allocating indirect costs shall be the rates, which are negotiated annually, are The definitions in FAR 31.001 are
contractor’s fiscal year used for financial subject to adjustment for audit findings. applicable to this section unless
reporting purposes in accordance with Fourth, insurance carriers are subject to otherwise noted.
generally accepted accounting State regulatory authorities and must
meet State statutory reserve Subpart 1631.2—Contracts with
principles. The fiscal year will normally
requirements in order to conduct Commercial Organizations
be 12 months, but a different period
may be appropriate (e.g. when a change business; in addition, many carriers are ■ 3. Section 1631.201–70 is revised to
in fiscal year occurs due to a business required to submit to State rate setting read as follows:
combination or other circumstances.’’ procedures. Accordingly, OPM’s
Historically, the practice in the statutory oversight and regulatory 1631.201–70 Credits.
insurance industry has been to base the requirements already in place are The provisions of FAR 31.201–5 shall
allocation of indirect costs on monthly sufficient to meet the Government’s apply to income, rebates, allowances,
rates, unadjusted for annual differences. interests in a much less burdensome and other credits resulting from benefit
The FEHBAR allows for continuation of way than applying CAS. This new payments. Examples of such credits
normal business practices when there regulation will enhance the financial include:
would be no material gain from integrity of the Program and (a) Coordination of benefit refunds,
asserting a change. The practice of demonstrate to the public and any other including subrogation settlements;
allocating indirect costs on a monthly interested parties that accounting (b) Hospital year-end settlements and
basis is in accordance with GAAP in the methods and related financial other applicable provider discounts;

VerDate jul<14>2003 14:13 May 31, 2005 Jkt 205001 PO 00000 Frm 00070 Fmt 4700 Sfmt 4700 E:\FR\FM\01JNR1.SGM 01JNR1
 Federal Register / Vol. 70, No. 104 / Wednesday, June 1, 2005 / Rules and Regulations 31391

(c) Uncashed and returned checks; resources utilized. Surrogates used to FEHBAR 1631.203–71 and FEHBAR
(d) Utilization review refunds; represent the relationship generally 1631.203–72, respectively.
(e) Contract prescription drug rebates; measure the benefit to the cost ■ 6. Section 1631.203–71 is added to
(f) Volume discounts; objectives receiving the service and read as follows:
(g) Refunds and other payments or should vary in proportion to the
recoveries attributable to litigation with services received. For example, if a 1631.203–71 Business unit General and
subscribers or providers of health personnel department provides various Administrative (G&A) expenses.
services; and, services that cannot be measured G&A expenses shall be allocated to
(h) Erroneous benefit payment, practically on an activity (input) or final cost objectives by a base or method
overpayment, and duplicate payment output basis, number of personnel that represents the total activity of the
recoveries. served might reasonably represent the business unit.
■ 4. A new section 1631.203 is added to use of resources of the personnel ■ 7. Section 1631.203–72 is added to
read as follows: function for the cost objectives receiving read as follows:
the service, where this base varies in
1631.203 Indirect costs. 1631.203–72 Home office expense.
proportion to the services performed.
For the purposes of applying FAR (4) Other method. Some cost A carrier’s practices for allocating
31.203(g)(2) to FEHB Program contracts, groupings cannot readily be allocated on home office expenses to the segments of
OPM considers the monthly rates used measures of specific beneficial or causal the carrier will be acceptable for
by some carriers to be a general practice relationships under paragraph (a)(1), purposes of FAR 31.203 if they are
in the insurance industry. (a)(2), or (a)(3) of this section. Such allocated on the basis of the beneficial
■ 5. Section 1631.203–70 is revised to costs do not have a direct and definitive or causal relationship between the home
read as follows: relationship to the benefiting cost office activities and the segments to
objectives. Generally, the cost of overall which the expenses are allocated.
1631.203–70 Allocation techniques.
management activities falls in this Expenses that cannot be allocated on the
(a) Carriers shall use the following category. Overall management costs basis of a more specific beneficial or
methods for allocating groupings of should be grouped in relation to the causal relationship should be allocated
business unit indirect costs. Carriers activities managed. The base selected to on a basis representative of the entire
shall consistently apply the methods measure the allocation of these indirect activity being managed. The compliance
and techniques established to classify costs to cost objectives should be a base of such allocations with FAR 31.203
direct and indirect costs, to group representative of the entire activity shall be determined on the basis of the
indirect costs and to allocate indirect being managed. For example, the total facts and circumstances of each
costs to cost objectives. operating expenses of activities situation.
(1) Input method. The preferred managed might be a reasonable base for ■ 8. Section 1631.205–10 is added to
allocation technique is one that shows allocating the general indirect costs of a read as follows:
the consumption of resources in business unit. Another reasonable
performance of the activities (input) for method for allocating general indirect 1631.205–10 Cost of money.
the function(s) represented by the cost costs might be to base them on a For the purposes of FAR 31.205–
grouping. This allocation technique percentage of contracts. These examples 10(b)(3), the estimated facilities capital
should be used in circumstances where are not meant to be exhaustive, but cost of money is specifically identified
there is a direct and definitive rather are examples of allocation if it is identified in the prior year’s
relationship between the function(s) and methods that may be acceptable under Annual Accounting Statement or, for
the benefiting cost objectives. Measures individual circumstances. See also new experience-rated carriers, the
of input ordinarily may be expressed in General and Administrative (G&A) supplemental information supporting
terms such as labor hours or square expenses, FEHBAR 1631.203–71. submitted costs (such as the
footage. This means costs may be (b) Carriers that use multiple cost Supplemental Schedule of
allocated by use of a rate, such as a rate centers to accumulate and allocate costs Administrative Expenses).
per labor hour or cost per square foot. shall apply the techniques in paragraph ■ 9. Section 1631.205–72 is amended by
(2) Output method. Where input (a) of this section at each step of the designating the existing paragraph as
measures are unavailable or impractical allocation process. Accordingly, the paragraph (a) and adding a new
to determine, the basis for allocation allocation of costs among cost centers at paragraph (b) to read as follows:
may be a measure of the output of the the initial entry into the cost accounting
function(s) represented by the cost system shall be made in compliance 1631.205–72 FEHBP compensation for
grouping. The output becomes a with paragraph (a) of this section. personal services.
substitute measure for the use of Likewise, the allocation of the cost of (a) * * *
resources and is a reasonable alternative interim cost centers to final cost centers (b)(1) The costs of compensated
when a direct measure of input is is subject to paragraph (a) of this personal absence shall be assigned to
impractical. Output may be measured in section. If costs of final cost centers are the cost accounting period or periods in
terms of units of end product produced allocated among final cost objectives, which entitlement was earned.
by the function(s). Examples of output the allocation shall also be made in Entitlement means an employee’s right,
measures include number of claims accordance with paragraph (a) of this whether conditional or unconditional,
processed by a claims processing center, section. It is possible that carriers using to receive a determinable amount of
number of pages printed in a print shop, multiple cost centers to accumulate and compensated personal absence, or pay
number of purchase orders processed by allocate costs may not have any direct in lieu thereof.
a purchasing department, or number of costs, i.e., costs identified specifically (2) If at the beginning of the 1st year
hires by a personnel office. with a final cost objective. a carrier subject to paragraph (b)(1) of
(3) Surrogate method. Where neither (c) The allocation of business unit this section has a liability for accrued
activity (input) nor output of the general and administrative expenses but unpaid expenses for compensated
function(s) can be measured practically, and the allocation of home office personal absences that would otherwise
a surrogate must be used to measure the expenses to segments are also subject to be allocable to FEHB contracts, the

VerDate jul<14>2003 14:13 May 31, 2005 Jkt 205001 PO 00000 Frm 00071 Fmt 4700 Sfmt 4700 E:\FR\FM\01JNR1.SGM 01JNR1
 31392 Federal Register / Vol. 70, No. 104 / Wednesday, June 1, 2005 / Rules and Regulations

carrier may include such costs in a PART 1699—COST ACCOUNTING FEHB Program, the Cost Accounting
suspense account. The suspense STANDARDS Standards, found at 48 CFR part 9904,
account may be amortized and included of the Code of Federal Regulations, do
in government contract costs at a rate Subpart 1699.7—Cost Accounting not apply.
not exceeding 20 percent per year. Standards
[FR Doc. 05–10827 Filed 5–31–05; 8:45 am]
■ 10. Part 1699 is added consisting of 1699.70 Cost accounting standards. BILLING CODE 6325–38–P
subpart 1699.7, section 1699.70 to read With respect to all experience-rated
as follows: contracts currently existing under the

VerDate jul<14>2003 14:13 May 31, 2005 Jkt 205001 PO 00000 Frm 00072 Fmt 4700 Sfmt 4700 E:\FR\FM\01JNR1.SGM 01JNR1