The U.S. District Court for the District of Columbia has affirmed a determination by the Department of Labor (DOL) that three hospitals under contract to provide health care services to an HMO were government subcontractors because the HMO, in turn, held a contract with the Office of Personnel Management (OPM) to provide medical services to federal employees. UPMC Braddock v. Harris, No. 09-02120 (D.D.C. Mar. 30, 2013). For DOL’s Office of Federal Contract Compliance Program (OFCCP), the decision represents a significant victory in its quest to broaden its enforcement authority by pursuing jurisdiction over hospitals and other providers of health care services. But for health care providers and other entities, the decision brings unexpected risk and uncertainty, as parties that never contemplated doing business with the government suddenly may find themselves subject to complex federal labor and employment laws.

BACKGROUND

The three hospitals involved in the case, all of which are affiliated with the University of Pittsburgh Medical Center, had contracted with UPMC Health Plan ( Health Plan) to provide medical services to individuals covered by Health Plan’s program. Subsequently, Health Plan entered into a contract with OPM under which it agreed to provide medical coverage to beneficiaries of the Federal Employees Health Benefits Program (FEHBP). Because the hospitals provided services to Health Plan, which in turn contracted to provide medical services to OPM, OFCCP took the position that the hospitals qualified as government subcontractors and therefore were subject to a host of nondiscrimination and affirmative action requirements. The hospitals challenged OFCCP’s interpretation, but both an Administrative Law Judge and DOL’s Administrative Review Board (ARB) sided with OFCCP, prompting the hospitals to seek review in federal court.

THE COURT’S DECISION

On March 30, 2013, nearly four years after the case was originally filed, the district court upheld the ARB’s decision and entered summary judgment for OFCCP. In so holding, Judge Paul L. Friedman addressed -- and rejected -- three discrete arguments that the hospitals had raised in an attempt to avoid being designated government subcontractors.

No Circumventing Regulatory Definition of "Subcontractor"

The hospitals first argued that a provision in Health Plan’s contract with OPM spared them from being designated federal subcontractors. Although the ARB had concluded below that the hospitals met the definition of "subcontractors" contained in DOL regulations, the hospitals asserted that this regulatory definition was trumped by the contract between Health Plan and OPM, which adopted a narrower definition of "subcontractor" that specifically excluded direct medical providers. The district court rejected the notion that this contractual provision could supplant the definition of "subcontractor" promulgated by DOL in the Code of Federal Regulations, because the authority to administer the statutes and Executive Order containing federal affirmative action requirements resides exclusively with DOL, not OPM. Emphasizing the well-accepted principle that "a provision in a government contract that violates or conflicts with a federal statute is invalid or void," the court concluded that "the definition of [subcontractor] in the OPM/Health Plan contract has no effect."

Hospitals Met the Regulatory Definition of "Subcontractor"

The court next considered whether the hospitals qualified as subcontractors under the governing DOL regulations, which define "subcontractor" as any person holding: (1) a contract for the purchase or sale of "nonpersonal services" that are "necessary to the performance" of some other contract; or (2) a contract under which some portion of a contractor’s obligation under another contract is undertaken or assumed. 41 C.F.R. § 60-1.3. Focusing on the first of these prongs, the hospitals argued that they were not "subcontractors" because the medical services they provided were neither "nonpersonal" nor "necessary to the performance" of Health Plan’s contract with OPM.

Services Provided by Hospitals Were "Nonpersonal"

The hospitals contended that the services they provided -- "like colonoscopies or proctology exams" -- were inherently personal services. The court had little trouble rejecting this argument, explaining that under Federal Acquisition Regulation (FAR) 37.104 whether services are deemed "personal" or "nonpersonal" depends not on the type of service provided, but rather on "the relationship between the subcontractor’s personnel and the contracting government agency." Thus, the services in question here were nonpersonal because the hospital employees providing them did not have an employee-employer relationship with Health Plan.

Hospitals’ Medical Services Were "Necessary to the Performance" of Health Plan’s Contract with OPM

The hospitals also asserted that their services were not "necessary to the performance" of Health Plan’s contract. According to the hospitals, Health Plan’s contract with OPM only required it to provide "insurance coverage" and not "actual medical services," so the medical services provided by the hospitals did not contribute to the fulfillment of Health Plan’s contractual obligations. For support, the hospitals relied on OFCCP v. Bridgeport Hospital, ARB Case No. 00-034 (Jan. 31, 2003), in which the ARB held that a hospital was not a subcontractor where it held a medical services contract with Blue Cross/Blue Shield, which in turn had contacted with OPM to provide federal employees with health insurance. But Judge Friedman distinguished Bridgeport Hospital on the ground that Blue Cross/Blue Shield had agreed to provide only insurance coverage, whereas Health Plan, which served as an HMO instead of a more traditional insurer, had agreed to "provide medical services to federal employees." Thus, the court concluded that the healthcare services provided by the hospitals were indeed "necessary for [Health Plan] to meet a portion of its obligations under its contract with OPM."

Affirmative Action Provisions "Read Into" Contract Under Christian Doctrine

Finally, the hospitals argued that even if they were government subcontractors, they should not be subject to "equal opportunity" employment provisions because their contracts with Health Plan made no mention of these requirements. The district court found that this argument failed in light of the so-called Christian Doctrine, which permits a court to read into a contract an unstated or omitted clause when that clause is required under applicable administrative regulations and expresses a "significant or deeply ingrained strand of public procurement policy." See G.L. Christian & Assocs. v. United States, 312 F.2d 418, 424 (Ct. Cl. 1963). Because affirmative action and nondiscrimination provisions are required for all government contracts -- and because there was "no serious doubt" that these clauses express a significant and deeply ingrained public procurement policy -- the court determined that the Christian Doctrine applied. And although the Christian Doctrine traditionally has applied in the context of prime contracts to which the government is a party, the district court concluded that there was not "any cogent reason why the government may impose terms on government contracts by operation of law but not on government subcontracts." Hewing closely to the decision of the ARB below, the court therefore applied the Christian Doctrine and held that the hospitals were bound by federal affirmative action obligations notwithstanding the subcontract’s silence on this point. Having thus rejected the last of the hospitals’ arguments, the district court entered summary judgment for OFCCP.

IMPLICATIONS OF RULING

The district court’s expansive view of OFCCP’s jurisdiction is likely to have far-reaching effects in the health care industry and beyond. Even health care providers who are only indirectly linked to government customers may suddenly find themselves targeted by an OFCCP compliance audit, a troubling possibility given the complexity of affirmative action provisions and the potentially considerable cost of compliance. Further, OFCCP may well take the position that the reasoning in the Braddock opinion is applicable outside the health care context, a stance that could cause the agency to push to impose its jurisdiction onto a broad range of potential subcontractors in other industries. Companies not currently in compliance with the labor and employment obligations imposed on federal contractors and subcontractors should examine their contracting relationships to see whether possible modifications of their employment-related policies and procedures may be warranted.