Free Response to Cross Motion - District Court of Federal Claims - federal

Case 1:01-cv-00517-MBH

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Nos. 01-517C, 05-371C, 05-963C (Judge Horn)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS GHS HEALTH MAINTENANCE ORGANIZATION, INC., d/b/a BLUELINCS HMO, Plaintiff, TEXAS HEALTH CHOICE, L.C., Plaintiff, SCOTT & WHITE HEALTH PLAN Plaintiff, v. THE UNITED STATES, Defendant.

DEFENDANT'S REPLY TO PLAINTIFFS' OPPOSITION TO DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director SUSAN WHITMAN, Esq. JILL GERSTENFIELD, Esq. U.S. Office of Personnel Management Washington, D.C. 20415 JANE W. VANNEMAN Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 1100 L Street, NW, 8th Floor Washington, D.C. 20530 Telephone: (202) 307-1011 Facsimile: (202) 514-8624 Attorneys for Defendant

May 19, 2006

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v DEFENDANT'S REPLY TO PLAINTIFFS' OPPOSITION TO DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT . . . . . . . . . . . . . . . . . 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1. 2. The Major Flaws In Plaintiffs' Briefs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The FEHBA Rate Reconciliation Process As It Applies To Community Rated Carriers That Provide Prepaid Plans . . . . . . . . . . . . . . . . . 4

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. The Court's Review Of Plaintiffs' Challenge To The Non-Reconciliation Regulation, As Inconsistent With The Statute, Is Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Non-Reconciliation Regulation Is Not Inconsistent With The Statute . . . . . 9 A. The Language In The Statute, Requiring Rates That "Reasonably and Equitably Reflect" The "Cost of Benefits" Provided, Is Very Broad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1. 2. 3. Reasonable and Equitable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Cost of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 OPM's Interpretation Of The Statute Is Consistent With Other Federal Law Governing Prepaid Health Plans . . . . 13 Equitable Rates For The FEHBP Group Requires A Comparison Of "Rates" To The Appropriate Similarly Sized Subscriber Group (SSSG) Of The Carrier, Not A Comparison To The Carrier's Non-SSSG Group . . . . . . . . . . . . 15

II.

4.

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B.

The Non-Reconciliation Regulation Is Not Arbitrary Or Capricious . . . 17 1. The Regulation Is Valid Because It Is Based Upon Sound Rationales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 OPM's Rationales For The Non-Reconciliation Regulation Are Supported And Make Sense . . . . . . . . . . . . . . . 20 a. b. c. 4. Financial Disincentive . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Estimated Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Costs To The Government . . . . . . . . . . . . . . . . . . . . . . . . 23

2.

The Risk Imposed By The Non-Reconciliation Regulation Is Spread Equally Between The Government And The Health Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

C. D.

Plaintiffs' Reliance Upon Amfac Resorts Is Misplaced . . . . . . . . . . . . . 25 Plaintiffs' Arguments Relating To Record Retention Are Fatally Flawed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 That OPM Might Have Chosen Alternative Means To Address Rates In The Year In Which A Community Rated Carrier Elects To Exit The Program Does Not Invalidate The Means That OPM Chose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 The Regulation "As Applied" To Plaintiffs Is Consistent With The Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1. OPM May Reason From The Particular To The General, And Promulgate A Rule Of Uniform Application For The FEHB Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Even If OPM Performs A Calculation Of The Reconciliation, In Anticipation Of A Rate Reconciliation Or Adjustment, No Rate Adjustment Is Required If The Carrier Chooses To Exit The FEHB Program . . . . . . . . . . . 36

E

F.

2.

G.

Even If This Court Strikes The Kichak Declaration, The Regulation Is Consistent With The Statute . . . . . . . . . . . . . . . . . . . 38

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III.

Plaintiffs Are Bound By The Terms Of Their Contracts, Section 3.2; Reformation Of The Contract Is Not Warranted . . . . . . . . . . . . . . 38 A. Plaintiffs Waived Any Challenge To The Contract Terms . . . . . . . . . . . 38 1. This Court's CDA Review Is De Novo; Plaintiffs Might Have Been Able To Initiate The CDA Disputes Process Years Ago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 None of The Three Plaintiffs Submitted Any Comments Upon The Proposed Regulation, And Waived Their Right To Challenge It Later . . . . . . . . . . . . . . . . . 40

2.

B.

Congress Intended The Statute To Benefit The Government And Federal Enrollees, Not To Benefit Health Plans . . . . . . . . . . . . . . . 40 1. Governing Law In This Circuit Provides That, If A Statute Is Intended To Benefit The Government, A Contract Provision That May Be Inconsistent With A Statute Nevertheless Is Enforceable . . . . . . . . . . . . . . . . . . . . 40 Legislative History Of The FEHBA Makes Clear That The Nonreconciliation Regulation Is For The Benefit Of The Government And Federal Enrollees, Not The Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2.

C.

Even If The Court Concludes That The Nonreconciliation Regulation Is Invalid, Plaintiffs Remain Bound By Section 3.2 Of The Contract To Nonreconciliation In The Final Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 There Was No Mutual Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 There Is No Unjust Enrichment In Favor Of OPM . . . . . . . . . . . . . . . . . 49 Contract Reformation Is Not Warranted . . . . . . . . . . . . . . . . . . . . . . . . . 49

D E. F. IV.

Laches Bars Plaintiffs' Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 A. The Government Has Not Been Required To File An Answer In This Court; That No Affirmative Defense Of Laches Has Yet Been Pled Does Not Bar Our Laches Defense . . . . . . . . . . . . . 51

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B.

Any Delays In This Case Were Caused By Plaintiffs, Who Either Filed In The Wrong Court And/Or Did Not Pursue Diligently The Case Filed In This Court . . . . . . . . . . . . . . . . . . . 53 The Time To Evaluate Laches Should Be Measured From 1990, The Year In Which OPM Promulgated The Nonreconciliation Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Fairness Requires That The Court Enforce The Contract To Which The Parties Agreed . . . . . . . . . . . . . . . . . . . . . . 54

C.

D.

IV.

Bluelincs Raised The "Forfeiture" Argument Too Late In The Briefing; In Any Event, There Was No Forfeiture . . . . . . . . . . . . . . . . . . . 55 A. Bluelincs' Belated Attempt To Argue Forfeiture As A Merits Issue Should Be Rejected . . . . . . . . . . . . . . . . . . . . . . . . . . 55 There Was No "Forfeiture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

B.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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TABLE OF AUTHORITIES CASES

Page(s) AT&T v. United States, 48 Fed. Cl. 156 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41, 42, 48 Amfac Resorts, L.L.C. v. United States Dept of Interior, 282 F.3d 818 (D.C. Cir. 2002), rev'd on other grounds sub nom. Nat'l Park Hospitality Ass'n v. Dep't of Interior, 538 U.S. 803 (2003) . . . . 25, 26, 27, 61 Arizona v. Thompson, 281 F.3d 248 (D.C. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Assigned Car Cases, 274 U.S. 564 (1927) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 34 Association of Civilian Technicians v. Federal Labor Relations Authority, 269 F.3d 1112 (D.C. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Becho, Inc. v. United States, 47 Fed. Cl. 595 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Beta Systems v. United States, 838 F.2d 1179 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 48, 50 Camp v. Pitt, 411 U.S. 138 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Cessna Aircraft Co. v. Dalton, 126 F.3d 1442 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Chevron U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9 Chris Berg, Inc. v. United States, 426 F.2d 314 (Ct. Cl. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 46, 50

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Chris Berg v. United States, 192 Ct. Cl. 176 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Christopher Village, LP v. United States, 360 F.3d 1319 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Cities Serv. Helex Inc. v. United States, 542 F.2d 1306 (Ct. Cl. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Consolidated Edison Company of New York v. Abraham, 314 F.3d 129 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24 First Fed. Sav. Bank of Hegewisch, 52 Fed. Cl. 774 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Fla. Power & Light Co. v. Lorion, 470 U.S. 729 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Foman v. Davis, 371 U.S. 178 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Harris v. Secretary, 126 F.3d 339 (D.C. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Hassan v. United States Postal Serv., 824 F.2d 260 (11th Cir. 1988), citing Blonder-Tongue Lab., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 INS v. National Center for Immigrant' Rights, 502 U.S. 183 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Illinois Central R. R. Co. v. Interstate Commerce Commission, 206 U.S. 441 (1907) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Illinois Commerce Comm'n v. Interstate Commerce Comm'n, 776 F.2d 355 (D.C. Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Interstate Commerce Commission v. Illinois Central R. R. Co., 215 U. S. 452 (1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Knickerbocker Life Ins. Co. v. Norton, 96 U.S (6 Otto) 234 (1885) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 57

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LaBarge Products Inc. v. West, 46 F.3d 1547 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 46, 50 Ling-Temco-Vought v. United States, 475 F.2d 630 (Ct. Cl. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Lomont v. O'Neill, 285 F.3d 9 (D.C. Cir 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 35 Mexican Intermodal Equipment v. United States, 61 Fed. Cl. 55 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Mineral Policy Center v. Norton, 292 F.Supp. 2d 30 (D.C. D.C. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 27 NTEU v. Campbell, 589 F.2d 669 (D.C. Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C.Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 National Mining Ass'n v. Army Corps of Engineers, 145 F.3d 1399 (D.C. Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Permian Basin Area Rate Cases, 390 U.S. 747 (1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Precision Pine & Timber, Inc. v. United States., 50 Fed. Cl. 35 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Promac, Inc. v. West, 203 F.3d 786 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Reno v. Flores, 507 U.S. 292 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 25, 26 Rough Diamond Co. v. United States, 351 F.2d 636 (1965), cert. denied, 383 U.S. 957 (1966) . . . . . . . . . . . . . . . . . 45, 46, 47 Rough Diamond Co. v. United States, 173 Ct. Cl. 15, cert. denied, 383 U.S. 957 (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Scott & White Health Plan v. Office of Personnel Management, No. 01-1824 (JGP) (D. D.C.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 viii

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Skinner & Eddy Corporation v. United States, 249 U. S. 557 (1919) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Stockton East Water District et al. v. United States, 2006 WL 932374 (Fed. Cl. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Texas Health Choice v. Office of Personnel Management, 400 F.3d 895 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Texas Health Choice v. United States Office of Personnel Management, No. 9:03-CV-14 (E.D. Texas) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Tobin v. United States, 59 F.Supp. 410 (Ct. Cl. 1945) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 57 United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 United States v. Edmondston, 181 U.S. 500 (1901) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 United States v. Florida East Coast Ry, 410 U.S. 224 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 United States v. New River Co., 265 U. S. 533 (1924) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 United States v. Salerno, 481 U.S. 739 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Western Paper Makers' Chemical Co. v. United States, 271 U. S. 268 (1926) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Whittaker Electronic Systems v. Dalton, 124 F.3d 1443 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 WorldCom, Inc. v. F.CC., 238 F.3d 449 (D.C. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 32

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STATUTES, RULES AND REGULATIONS 42 C.F.R. §1602.170 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 48 C.F.R. 1602-170.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 48 C.F.R. 1602.170-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 48 C.F.R. 1602.170-13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 48 C.F.R. 1652 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 48 C.F.R. 1652-216.70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 6, 7 54 FR 43089 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 55 FR 27406 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9, 16, 21 55 FR 27414 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6

62 FR 47569 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 FR 47573 62 FR 47574 70 FR 31378

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Fed.R.Civ.P. 8(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 62 Fed. Reg. 47569, 47570 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Health Maintenance Organization Amendments of 1988, P.L. 100-517, 1988 HR 3235, 102 Stat 2578, 42 U.S.C. 201 note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5 USC 8903(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 U.S.C. § 8902(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 5 U.S.C. §8902(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 U.S.C. § 8903(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 4, 15, 42

x

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28 U.S.C. §1491(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 41 U.S.C. §§601 et seq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 41 U.S.C. §605 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 42 U.S.C. §300e-1(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Rule 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

MISCELLANEOUS 1959 U.S. Code Cong. &Admin. News, 2913, 2916 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1959 USCCAN at 2916 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1959 USCCAN at 2923 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 H. Rept. No. 957, 86th Cong 1st Sess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

GHS HEALTH MAINTENANCE ORGANIZATION, INC., d/b/a BLUELINCS HMO, Plaintiff, TEXAS HEALTH CHOICE, L.C., Plaintiff, SCOTT & WHITE HEALTH PLAN Plaintiff, v. UNITED STATES, Defendant.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Nos. 01-517C, 05-371C, 05-963C (Judge Horn)

DEFENDANT'S REPLY TO PLAINTIFFS' OPPOSITION TO DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

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INTRODUCTION 1. The Major Flaws In Plaintiffs' Briefs

In this reply brief, 1 defendant, the United States demonstrates that plaintiffs' briefs2 are long on rhetoric, but short on substance. This case involves the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. §§8902(i) (rates), and 8903(4) (prepaid plans). While raising a laundry list of arguments, plaintiffs fail to address most of the legal principles and judicial decisions upon which we rely. The decisions that they cite do not support their arguments. While accusing the Government of improper motives, they present a misleading view of the fundamental nature and purposes of the rate reconciliation process for a carrier that functions on a prepaid basis, a "community rated" carrier ­ a process that provides for an adjustment, or, "reconciliation," to the rates for the following insurance year, but only if the carrier remains in the FEHB program. Rather than address the necessary complexities of the FEHB program and the rationales for the nonreconciliation regulation, plaintiffs proffer numerous "strawmen" ­ imaginary propositions, set up only to be easily refuted ­ and then attempt to counter these strawmen, thereby diverting attention from the basic legal issues.

The titles of plaintiffs' briefs are incorrect. Plaintiffs' briefs are "oppositions" to defendant's cross motion for summary judgment. This brief is our final brief in "reply" on the dispositive motions. There are three plaintiffs. GHS Health Maintenance Organization (Bluelincs) joined in the brief filed by Scott & White and Texas Health Choice (Texas Health). Thus, when we refer to arguments made by "plaintiffs" (Plaintiffs' Brief (Pl.Br.)), we include all three plaintiffs. Plaintiffs' arguments are essentially the same, the only difference being that Bluelincs raised a "forfeiture" argument in its brief, whereas the other two plaintiffs (Scott & White, and Texas Health) did not make the "forfeiture" argument. 2
2

1

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Ultimately, their logic is circular. They argue that OPM's calculation of a reconciliation amount should result in an OPM obligation to pay that amount, when, in fact, pursuant to the regulation and/or the contract, OPM does not owe any amount calculated pursuant to the reconciliation process if a community rated carrier (prepaid plan) later informs OPM that the carrier will exit the program for the following insurance year. At times, plaintiffs take inconsistent positions: they criticize OPM, the agency with expertise, for making assumptions about financial incentives or disincentives of carriers, and then make their own assumptions, albeit erroneous, about those very same issues. They assume that the regulation is invalid, and never address our argument that, even if the Court invalidates the regulation, the contract provision, section 3.2, should be enforced as written, without the contract being reformed. Plaintiffs rely upon facts not supported by the record. They claim, without support, that the rate reconciliation process is "often" already completed by the time a plan announces its withdrawal from the program. They make assumptions without any evidence in the record, or, that lack common sense. Plaintiffs fail to acknowledge that this case is governed not only by the Administrative Procedure Act (APA) standard of review for their challenges, but is governed also by the de novo standard of review applied by this Court to the Contract Disputes Act (CDA) disputes relating to their contracts, including the contract reformation issue. 41 U.S.C. §§601 et seq. Finally, with our reply brief, we file a separate opposition to plaintiffs' motion to strike the declaration of Ms. Nancy Kichak, the Director of the Office of Personnel Management (OPM) Office of the Actuaries (Office of Actuaries), a component of OPM that is charged with administering the FEHBA, and with promulgating the nonreconciliation regulation.

3

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2.

The FEHBA Rate Reconciliation Process As It Applies To Community Rated Carriers That Provide Prepaid Plans

Plaintiffs' arguments are fatally flawed because the premise upon which their arguments rests is flawed. The FEHBA requires rates reasonably and equitably to reflect the cost of the benefits provided. 5 U.S.C. § 8902(i). The statute does not require rate reconciliation for community rated carriers in their final year of participation in the FEHB program. Plaintiffs mischaracterize the FEHBA statute and rating process as it applies to community rated carriers, otherwise known as health maintenance organizations (HMOs) - those that operate on a prepaid basis. Plaintiffs imply that there exists a concrete and ascertainable accurate dollar rate, that reasonably and equitably reflects the cost of benefits actually provided, that OPM in fact knows what this rate is, and that OPM is avoiding, intentionally, a responsibility to pay it. This is simply not the case. The statute requires community rated carriers, such as the three plaintiffs, to contract with OPM under the FEHBA "on a prepaid basis." 5 U.S.C. § 8903(4)(emphasis added).3 Thus,

3

5 USC 8903(4) defines comprehensive medical plans, also referred to as HMOs as

follows: (4) Comprehensive Medical Plans. (A) Group-practice prepayment plans. - Group-practice prepayment plans which offer health benefits of the types referred to by section 8904(4)of this title, in whole or in substantial part on a prepaid basis, with professional services thereunder provided by physicians practicing as a group in a common center or centers. The group shall include at least 3 physicians who receive all or a substantial part of their professional income from the prepaid funds and who represent 1 or more medical specialties appropriate and necessary for the population proposed to be served by the plan. (B) Individual-practice prepayment plans. - Individual-practice prepayment plans which offer health services in whole or substantial part on a prepaid basis, with professional services thereunder provided by individual physicians who agree, under certain conditions approved by the Office, to accept the payments provided by the plans as full payment for covered services given by them including, in addition to in-hospital services, 4

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in advance of the contract year, it cannot be known what the "actual" cost of benefits to be provided will be. The actual cost of benefits cannot be determined until after the utilization of services by the Federal subscribers is known. Thus, the notion, asserted cavalierly by plaintiffs, to the effect that the carrier is necessarily either underpaid or overpaid by the Government, is a notion that inheres in the essence of insurance risk, and is a natural result of the statutory, prepaid nature of these contracts. The "risk" of underpayment or overpayment is not affected by whether rates are reconciled or not reconciled in the final year of participation in the FEHB program. The unreconciled rates are developed before information as to what the carrier will charge its comparable private sector and/or other non-Federal groups is available. The unreconciled rates are based upon the carriers' estimates of what the carrier believes it will require to cover its costs of providing the anticipated benefits, and the revenues it will require, in order to generate a profit, for that insurance year. 48 C.F.R. 1652-216.70. The unreconciled rates are based upon data that the carrier maintains and presents to OPM, subject to benefit adjustments requested by OPM. The parties negotiate in good faith to establish the unreconciled rates for each contract year. Therefore, unreconciled rates represent the best and most reasonable actuarial projection of the cost of benefits that is available to the carrier and OPM,

general care given in their offices and the patients' homes, out-of-hospital diagnostic procedures, and preventive care, and which plans are offered by organizations which have successfully operated similar plans before approval by the Office of the plan in which employees may enroll. (C) Mixed model prepayment plans. - Mixed model prepayment plans which are a combination of the type of plans described in subparagraph (A) and the type of plans described in subparagraph (B). (emphasis added). 5

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on a prepaid basis, and are in complete harmony with the statute. As initially negotiated for a contract year, the unreconciled rates are legally binding. They are published in the carrier's benefit brochure. Federal enrollees and the Government pay those rates, and premiums based upon those rates, throughout the contract year. Once the carrier and OPM negotiate and agree on rates, OPM's statutory obligation to develop a rate is fulfilled. Plaintiffs ignore that fact that there is a significant difference between community rated carriers, that function on a prepaid basis, and experience rated carriers, that do not function on a prepaid basis. Community rated carriers expressly do not receive any adjustment in rates based upon the cost of actual benefits provided. See 48 C.F.R.1652.216-70(b)(5)(1991, 1998).4 To the extent that reconciliation is calculated, and paid in years when the community rated contract is renewed, the reconciliation is used to adjust the following year's rate ­ not to adjust the rate for the year at issue, or, for actual costs. Finally, plaintiffs ignore the purpose of the reconciliation. The purpose is for the benefit of the Government, to ensure that the Government receives a rate that is derived in a manner consistent with the rate that the carrier charges its other, non-Federal groups of a similar size (similarly sized subscriber groups, SSSG). The purpose is to ensure that OPM receives "the same discounts for the FEHB Program that are enjoyed by the SSSGs . . ." 62 Fed. Reg. 47569, 47570; Kichak Decl. para. 8.

4

We quoted this regulation in our moving brief, at page 7. Defendant's Brief (Deft.Br.). 6

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ARGUMENT I. The Court's Review Of Plaintiffs' Challenge To The Non-Reconciliation Regulation, As Inconsistent With The Statute, Is Limited We established in our motion that OPM is entitled to substantial deference in interpreting the FEHB Act that Congress charged it with administering, and in promulgating the nonreconciliation regulation to implement that statute. The regulation is a valid and proper exercise of OPM's very broad authority to administer the FEHBA in accordance with OPM's statutory mission. Nothing in plaintiffs' brief establishes otherwise. The statutory provision upon which plaintiffs rely is 5 U.S.C. §8902(i): Rates charged under health benefits plans described by 8903 or 8903a of this title shall reasonably and equitably reflect the cost of the benefits provided. Rates under health benefits plans described by section 8903(1) and (2) of this title shall be determined on a basis which, in the judgment of the Office, is consistent with the lowest schedule of basic rates generally charged for new group health benefit plans issued to large employers. The rates determined for the first contract term shall be continued for later contract terms, except that they may be readjusted for any later term, based on past experience and benefit adjustments under the later contract. Any readjustment in rates shall be made in advance of the contract term in which they will apply and on a basis which, in the judgment of the Office, is consistent with the general practice of carriers which issue group health benefit plans to large employers. (emphases added). The specific "non-reconciliation" regulation at issue, subsection 6, of 48 C. F. R. §1652.216-70(b)(6), that implements the statutory provision quoted above, provides, in the context of community rated HMOs (described by 5 U.S.C. 8903(4), in pertinent part: In the event this contract is not renewed, neither the Government nor the Carrier shall be entitled to any adjustment or claim for the difference between the subscription rates prior to rate reconciliation and the actual subscription rates. 7

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(emphasis added). See 54 FR 43089, App. 3-31; 55 FR 27406, App. 48. Plaintiffs do not dispute that the two-step Chevron analysis applies to the determination of the validity of this regulation. Chevron U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984).5

The cases upon which plaintiffs rely are distinguishable. In Arizona v. Thompson, 281 F.3d 248 (D.C. Cir. 2002), the court did not grant Chevron deference to the agency's statutory interpretation because the agency did not exercise its own judgment, but believed that the interpretation it espoused was compelled by Congress. In Association of Civilian Technicians v. Federal Labor Relations Authority, 269 F.3d 1112 (D.C. Cir. 2001), the court recognized that it owed great deference to the expertise of the agency administering the particular program at issue, but the agency had interpreted a statute that was not committed to its administration. Here, neither situation is present. OPM clearly exercised its own judgment in promulgating the non-reconciliation regulation. OPM interpreted the FEHBA, a statute that Congress had charged it with administering. Further, one case upon which plaintiffs rely is inapposite. While the Court in Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 743-44 (1985), stated the general proposition of APA record review, the Court remanded to the agency so that the agency would consider all relevant factors and provide additional explanation for the regulation. The Court recognized that it could not reach its own conclusion based upon its own investigation. See Camp v. Pitt, 411 U.S. 138, 142-43 (1973) (if rationale for agency action is not sustainable on administrative record, court should vacate decision and remand to agency for further consideration). Nothing of the kind is present here. In 1990 when it promulgated the regulation, OPM considered all the relevant factors and provided its explanation for the regulation. And, as we establish, OPM's rationales make ultimate sense. 8

5

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II.

The Non-Reconciliation Regulation Is Not Inconsistent With The Statute A. The Language In The Statute, Requiring Rates That "Reasonably and Equitably Reflect" The "Cost of Benefits" Provided, Is Very Broad 1. Reasonable and Equitable

While plaintiffs complain that OPM attempts to avoid the "plain language" of the statute, it is plaintiffs which fail to recognize that the plain language of the terms of the statute are expansive in scope and leave much to OPM's discretion. On its face, the statute does not specify the rates that are to be considered "reasonable and equitable." Thus, the first step in the Chevron analysis is satisfied. The statute does not define the relevant terms. Thus, the statute provides wide discretion to OPM to fashion an administrative scheme, relevant to carriers that provide pre-paid, community rate programs, to account for any adjustments to the rates when a carrier continues in the program, and to provide the necessary mechanism for rates when a carrier elects to exit the program. In fact, plaintiffs recognize that it is OPM's "permissible objective" to obtain rates which are "reasonable and equitable for the FEHBP group." (Pl. Br. p. 14, citing 55 Fed. Reg. 27406, 27409 col. 1 (1990). Accordingly, the ultimate dollar amount of the rates for these prepaid carriers, for their final year, need not necessarily reflect actual costs, and, indeed, likely will not reflect actual costs because they are determined in advance of known utilization of health care services. Rather, the ultimate rates that the community rated carriers charge to OPM and the Federal enrollees must only be "reasonable and equitable" when compared to the appropriate SSSGs in the carrier's relevant area,. See Deft. Br. 17-20, and adjustments are only to be made to future contract rates. 9

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2.

Cost of Benefits

It is also reasonable for OPM to construe liberally the term "cost of benefits provided," depending upon whether the carrier is a community rated carrier that functions on a prepaid basis, in contrast to an experience rated carrier that does not function on a prepaid basis. Because community rated carriers do not charge upon the basis of actual costs and experience, and because OPM and the community rated carriers negotiate and agree upon an estimated rate at the beginning of each contract year, the "cost of benefits provided" for a community rated carrier is not, as plaintiffs suggest, based upon actual costs. Because community rated carriers do not operate in the commercial world upon the basis of the actual "cost" of benefits provided, it is a permissible construction for OPM to rely upon, and ultimately pay, the rate that the carrier estimated, negotiated, and agreed to accept at the beginning of the contract year, in the final year when the carrier elects to exit the program. Plaintiffs' arguments about the "cost of benefits," and that the amounts that OPM calculated for plaintiffs as a "reconciliation" amount is an amount that somehow OPM owes to plaintiffs, lack merit. Plaintiffs assert that OPM's claims of "administrability" are not credible based upon their assertion that "OPM itself has already determined the amount that reasonably and equitably reflected the cost of the benefits" that Scott & White and Texas Health Choice provided in their final years of their contracts - $3,625,782 and $622,279, respectively (and $364,127 for Bluelincs) - which amounts are less than the amount the carriers were paid. Their argument demonstrates precisely the misunderstandings that underlie the premise of plaintiffs' argument. OPM did not determine that these amounts that were calculated reasonably and

10

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equitably reflected the cost of the benefits provided by these carriers. Rather, OPM determined that these amounts were the amounts that OPM would pay as an adjustment to future rates, but only if the carriers determined their Federal rates using the same methodology that the carriers determined for their SSSG rates, and only if the carriers chose to renew their FEHB contracts for the following year, to which any rate adjustments could be made. Whether the amounts represent "cost of benefits" was not, and could not be known, because community rated carriers do not track costs when care is provided by their managed care network; rather, they depend upon their various business relationships with providers, often based upon capitation.6 Even if community rated carriers were somehow able to track the cost of benefits actually provided for a prior contract year, it would be impossible for the Federal population of enrollees to utilize precisely the same benefits as the carriers' SSSG lines of business. Federal enrollees would utilize either more, or less benefits, and the actual cost of their benefits incurred would be either higher or lower than the SSSGs' costs, with the result that the rate should in fact be higher or lower, and the amounts calculated for reconciliation are necessarily wrong. Further, the figures presented by plaintiffs as the amounts that they are allegedly "owed," are derived from data that plaintiffs represented to OPM as appropriate for purposes of undertaking the calculation in the reconciliation process. It is undisputed that OPM did not audit or test this data. Nor was the data even subject to audit, because it is excluded from the data

"Capitation fees" are a set charge per member per month. See e.g., 48 C.F.R. 1602170.2. See section 3, below. 11

6

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required to be maintained in OPM's records retention provisions.7 Further, it is common knowledge in the Government contracts arena that the auditing process, for a contract that is terminated, generally presents to the administering agency the potential for difficulty in obtaining all necessary records and relevant data from the contractor, required to verify rate calculations.8 This case and its litigation posture is somewhat unique, as it has allowed plaintiffs to assert their claim that data is available for this purpose. However, no one can know, much less ensure, that these three plaintiffs, or any community rated carriers, would have been so careful and cooperative in the event the data resulted in a reconciliation calculation for which the carriers owed money to the Government in the final year. Although the plaintiffs would contend otherwise, this case demonstrates precisely the difficulties in administering the FEHB program that OPM predicted in its rulemaking approximately sixteen years ago, in 1990.

Pursuant to 48 C.F.R. 1652, the records to be retained are those relevant to the annual accounting statement, which includes charges and/or costs. The final year's reconciliation is not a charge or a cost and is not represented in the annual accounting statement, and therefore, is not covered by the records retention regulation. This is a point that plaintiffs stubbornly refuse to accept. Their arguments rely heavily upon assertions that reconciliation has been performed, that data is available, and that money is supposedly owed, without addressing at all that the data submitted in the reconciliation process is not audited and cannot be compelled pursuant to the records retention clause. Specifically here, although plaintiffs argue that they have preserved all relevant data, we still do not know whether the amounts they represent as "owed" are derived from accurate and verifiable data. 12
8

7

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3.

OPM's Interpretation Of The Statute Is Consistent With Other Federal Law Governing Prepaid Health Plans

OPM's interpretation is consistent with other Federal law. In the Health Maintenance Organization Amendments of 1988,9 enacted before promulgation of the nonreconciliation regulation, Congress provided a definition of "Community Rating," that included: predictions of the differences in the use of health services by individuals or families in each class; and, revenue requirements of the HMO, upon the basis of a composite of the organization's revenue requirements for providing services. 42 U.S.C. §300e-1(8)(C)(emphasis added). Clearly, a community rated carrier's operations are

not based upon actual "costs," as plaintiffs suggest. Rather, their operations are based upon predictions of the use of health services, by class of enrollees, combined with the community rated carrier's own internal estimates of its revenue requirements, viewed on a "composite" basis, in the context of its entire business and corporate structure. Therefore, the statutory term ­ "cost of benefit" provided ­ can have a variety of permissible meanings. There is no one dollar amount that is the only possible amount to satisfy the statute. The definition of "community rates" also includes the concept of a rate of payment based upon a per member per month "capitation" rate. The rate may include an "adjusted community rate" (ACR), one that adjusts the community rate for the "expected use" of medical resources of the FEHBP group; the ACR is a prospective rate, which cannot be retroactively revised to reflect actual experience, actual utilization of services, or actual costs of the FEHBP. Whether the amounts represent "cost of benefits" was not, and could not be known, because community

9

P.L. 100-517, 1988 HR 3235, 102 Stat 2578, 42 U.S.C. 201 note. 13

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rated carriers do not track costs when care is provided by their managed care network; rather, they depend upon their various business relationships with providers, often based upon capitation. See 55 FR 27414, July 2, 1990; 62 FR 47573, Sept. 10, 1997.10 Therefore, as we demonstrated in our motion, rates that "reasonably and equitably reflect the cost of benefits" provided may permissibly fall within a range of rates.11 Plaintiffs suggest that their community rated contract entitles them, effectively, to the benefit of the treatment that OPM provides to experience rated carriers. Pl.Br. 14. Plaintiffs' suggestion that community rated carriers are entitled to compensation at a rate that reflects the

Because the "actual costs" are not the relevant reference point, plaintiffs' reliance upon OPM's record retention requirements for its arguments is misplaced. Further, the declarations that they submit, that assert that they continued to maintain all the records that OPM could possibly require for any rate reconciliation, or for any audit, are not relevant for purposes of this dispute. See Part II D, below. Community rated carriers operate upon a much different basis than experience rated carriers, for which cost or pricing data, required by the Federal Acquisition Regulations (FAR), is much more significant. E.g., 48 C.F.R. 1602.170-5. For community rated carriers, OPM considers, among other things, trend data, actuarial data, factors that predict utilization, demographics such as family size, and adjustment factors for capitation. A community rated carrier may use any rating method other than retrospective experience rating. 48 C.F.R. 1602.170-13. In contrast, for experience rated carriers, OPM considers claims data, actual payments made, cost data, utilization data, and administrative expenses and retentions; see 62 FR 47574, Sept. 10, 1997; 70 FR 31378, June 1, 2005. By incorrectly attributing inexactly excerpted pieces of OPM's motion, plaintiffs attempt to make it appear that OPM has somehow suggested that neither estimated nor reconciled rates provide a truly "reasonable and equitable" measure of costs of providing benefits. See Deft. Br. p.16 n.2. In fact, OPM neither said nor suggested any such thing. What OPM established is that the reconciled rates do not necessarily represent the actual costs of benefits for community rated carriers. Because a range of rates, based on reasonable assumptions, can be acceptable, both reconciled and unreconciled rates can satisfy the statute. 14
11

10

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cost of benefits "actually provided" (rather than benefits "to be provided"), in essence, would eviscerate the prepaid nature of their contracts, pursuant to which they are defined, by statute. The statute defines them as "prepayment plans" which offer health benefits "in whole or in substantial part on a prepaid basis," and whose provider group receives income from prepaid funds or agrees to accept payment from the plan as full payment for covered services, for the population "proposed to be served" by the plan. 5 U.S.C. §8903(4). Plaintiffs' arguments makes no sense, because it is directly at odds with the FEHBA's comprehensive statutory and regulatory scheme established for community rated carriers. Therefore, the reconciliation provision does not exist for community rated carriers, as plaintiffs assert (Pl.Br. 14), for the purpose of obtaining a rate that represents the cost of benefits actually provided ­ as is statutorily provided for experience rated carriers at 8903(1) and (2). Finally, the adjustments that plaintiffs seek is expressly prohibited at section 1652.21670(b)(5), which provides: No upward adjustment in the rate established for this contract will be allowed or considered by the Government or will be made by the Carrier in this or in any other contract period on the basis of actual costs incurred, actual benefits provided, or actual size of composition of the FEHBP group during this contract period. (emphasis added). Plaintiffs do not challenge this part of the regulation. Accordingly, OPM's interpretation of the statute is consistent with other Federal law governing prepaid health plans. 4. Equitable Rates For The FEHBP Group Requires A Comparison Of "Rates" To The Appropriate Similarly Sized Subscriber Group (SSSG) Of The Carrier, Not A Comparison To The Carrier's Non-SSSG Group

Plaintiffs mischaracterize OPM's statements associated with issuing the regulation in 1990 when plaintiffs refer, erroneously, to a "new" and/or inconsistent rationale allegedly 15

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presented in this litigation. Pl.Br. 14. Plaintiffs suggest that reconciliation is required even in the final year in order to establish a statutorily acceptable rate. They are wrong. They fail to recognize the very important difference between an SSSG (similarly sized subscriber group) and a non-SSSG. What OPM discussed, in the context of the snippet of the text cited by plaintiffs, addressed solely the determination of the appropriate SSSG - as the point of comparison to determine the equitability issue for Federal enrollees. OPM's discussion focused upon its judgment that reconciliation is necessary to achieve equitable rates, for the FEHB group. See 55 Fed Reg 27406, 27409 (emphasis added), referenced at Pl.Br. 14. One commenter had inquired whether OPM's proposed regulation would prohibit HMOs (referred to in the statute and regulations as "comprehensive medical plans" or "CMPs") from using discounting and other methods of rating with groups other than a plan's SSSGs. OPM's response stated that OPM's primary objective is to obtain rates which are reasonable and equitable for the FEHBP group. In determining the FEHBP plans' rating, OPM will examine only the rating of the plans' SSSGs. 55 FS 27406, 27409 (1990). The text cited by plaintiffs was issued to assuage fears that community rated carriers might have regarding discounts they might provide to their non-SSSG lines of business. The regulation provided basically that a community rated carrier may conduct its business with nonSSSG lines of business, without regard to the FEHBP requirements -- such as by employing a more favorable rating methodology for a non-SSSG group resulting in a lower cost benefit package for a non-SSSG than for OPM -- and OPM would not insist upon also obtaining that favorable methodology. In promulgating the regulation, OPM insisted only that, in order for the

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FEHB plan to be treated "reasonably and equitably" in terms of receiving a rate that is calculated using an appropriate methodology, OPM must receive the benefit of discounts that carriers provide to their SSSGs, but not necessarily to their non-SSSGs. Therefore, when read in context, the text cited by plaintiffs does not establish, as they suggest, that reconciliation is required by statute. Rather, the text establishes that carriers wanted to charge certain lines of their businesses differently than they charge their Federal business, and, carriers did not want to be penalized for affording a subscriber group a discount that it did not provide to the FEHB group. In response, OPM recognized that the FEHBP group may not receive all the discounts that the community rated carrier might make available to a non-SSSG group. In that circumstance, OPM would not consider that type of rate unreasonable, so long as the rate that OPM receives is consistent with the carriers' SSSG group rates.12 Accordingly, nothing in the cited text suggests, as plaintiffs assert, that "only" through the reconciliation process can a statutorily acceptable rate be obtained. B. The Non-Reconciliation Regulation Is Not Arbitrary Or Capricious

We established above, based upon statutory provisions, regulations, and common sense, that the non reconciliation regulation is not arbitrary or capricious. As further support for our arguments, we included in our supplemental appendix the declaration of Ms. Nancy Kichak, the Director of the Office of Actuaries at OPM (Office of Actuaries).

Plaintiffs' argument, to the effect that the OPM guidelines that OPM distributed for community rated carriers somehow condemn OPM, is similarly misleading. Pl.Br. 15. Rate instructions and carrier letters regarding SSSGs are part of the complex program by which OPM attempts to ensure that the Government does not pay more for its health benefits than the carrier's other non-governmental groups. Plaintiffs' discussion about OPM's guidelines has no bearing on whether an unreconciled rate satisfies FEHBA's statutory requirement. 17

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1.

The Regulation Is Valid Because It Is Based Upon Sound Rationales

In December 2005, we filed an unopposed motion for leave to supplement the appendix with the declaration of Ms. Nancy Kichak, the OPM Director of the Office of Actuaries. With their opposition briefs filed on March 31, 2006, plaintiffs moved to strike the declaration of Ms. Kichak.13 Contemporaneously with this brief, we file our opposition to plaintiffs' motion to strike, to establish that the Court may consider her declaration.14 As we explain, Ms. Kichak's declaration is supported by statutes, regulations, OPM publications, and common sense. Ms. Kichak states, among other things, that OPM, in reviewing the rates proposed by community rated carriers, "does not analyze the appropriateness of the underlying rate." Para. 6. Rather, OPM "reviews the proposed rate to establish that the amount the plan determines it will charge are distributed appropriately to the FEHBP and the carrier's other covered, non-Federal groups of a similar size. OPM does not question what judgment the carrier has applied in its projections." Para. 6 (emphases added). Thus, when OPM reviewed the rates proposed by Scott & White, Texas Health, and Bluelincs at the start of what later became their final years of

13

Ms. Kichak's declaration is part of the supplemental appendix, filed on December 6,

2005. Plaintiffs waived their objection to the inclusion of Ms. Kichak's declaration in the record when they consented to our December 2005 motion to include it in the record, and they failed to express any objection until only very recently in the briefing schedule. This Court should permit supplementation of the record because her declaration will assist the Court in this complex case, and it is in the interests of justice to do so. Ms. Kichak's declaration relates to plaintiffs' facial challenge to the validity of the regulation, as well as to their as-applied challenge. Further, Ms. Kichak's declaration is relevant to these disputes as they relate to the CDA issues, including plaintiffs' claim for contract reformation. Ms. Kichak attested to non-controversial matters, those to which plaintiffs submitted no evidence to contradict. 18
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participation, OPM was not reviewing the reasonableness of the actual dollar amounts charged. The "FEHBP rate negotiation is premised on an estimate or projection of what a carrier's community rates will be for the ensuing contract year." Para 10. These statements are indisputably true. Thus, when OPM later requested limited reconciliation information from each of the carriers in what became their final year, OPM reviewed the carriers' estimated rates to the rates of the carriers other non-Federal groups of a similar size. OPM reviewed "the methodology and discounts used [by the carriers] to derive the rates charged to other similarly sized subscriber groups [SSSG]." Para 11. Ms. Kichak also stated that, at the time of reconciliation ­ assuming that there would be an adjustment to the following year's rates ­ OPM's Office of the Actuaries limits its review to the data the carrier makes available for reconciliation. The Office of the Actuaries does not obtain all detailed records that may be maintained at the carrier's place of business. The Office of the Actuaries does not have the resources, and it is not that Office's operational function, to look behind these data or to verify that they are correct and appropriate to use for purposes of negotiation and reconciliation. Para. 14. Rather, "OPM relies upon the audit feature of the FEHBP to provide an incentive for the carriers to accurately represent the data that drives their rates in the first instance." Para. 15. These statements are also true, and not rebutted by plaintiffs. Ms. Kichak explained OPM's judgment as of 1990, based upon its experience and predictions for the program, that a carrier which chooses to exit the program and which might find itself owing funds to the FEHBP on reconciliation "would have a financial disincentive to provide access to data, particularly in view of its inability to look to future reserves [from the OPM earmarked reserves] to offset the improper prior rate." Para. 21. Indeed, as of 1990, OPM had "found that it was unable to obtain adequate data to reconcile the rates for a variety of

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plans," and thus, contrary to plaintiffs' arguments in their opposition briefs, OPM's nonreconciliation regulation was not based on only two instances. Para. 21. These statements are true, based upon specific experiences of OPM, and not rebutted by plaintiffs. Accordingly, as we explain more fully in our opposition to plaintiffs' motion to strike Ms. Kichak's declaration, there is no reason not to consider Ms. Kichak's declaration. 2. OPM's Rationales For The Non-Reconciliation Regulation Are Supported And Make Sense a. Financial Disincentive

OPM (or its predecessor agency) has administered the FEHB program since 1959, when the FEHB statute was first enacted. OPM has been the expert in this area for decades. OPM has had the experience of negotiating rates with carriers for years, including those who provide for pre-paid, community rated plans -- first based upon a market price theory, and later based upon the negotiated premise. Deft. Br. 14-20. Plaintiffs' contention -- relating to OPM's rationale based upon the financial disincentives that a carrier which chooses to exit the program might face ­ lacks merit. OPM's experience, stated on the record in the rule-making process, was that OPM had found it difficult to obtain data required for rate reconciliation in the final year when a carrier chose to exit the FEHB program. OPM cited two major examples of these difficulties, which, contrary to plaintiffs' suggestion, are more than sufficient to support OPM's decision to promulgate the non-reconciliation regulation. Plaintiffs cite to no case law that OPM was required to undertake a wide-ranging review or survey of the hundreds of carriers at the time in order to promulgate the regulation. While it may be true, as plaintiffs argue, that each carrier that knows that it has overcharged OPM would have a financial disincentive to cooperate in any 20

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final year review of rates, that does not invalidate OPM's logic here. Plaintiffs' argument, that OPM has presented a "new" rationale, not present in the administrative record, is disingenuous. Pl.Br. 10-13. In 1990, OPM did state as one of its rationales that OPM had found, based upon its experience, that adequate data was difficult to obtain from carriers who exited the program.15 OPM's position, based upon the financial disincentive for departing carriers, merely posits additional, predicted, sources of difficulties, based upon OPM's real-world experience in requesting adequate data from departing carriers. The argument based upon the financial disincentives is merely a subset of the varied anticipated difficulties encompassed within OPM's previously articulated rationales, and is not a "new" argument, as plaintiffs contend. b. Estimated Rates

Plaintiffs argue that OPM's rationale based upon "estimated" rates is a new one, that does not appear in the rulemaking record. They claim that the rationale is inconsistent with OPM's formal determinations in the rulemaking process because OPM stated that its primary objective was to obtain rates which are reasonable and equitable "for the FEHBP group," and would examine only the rates in comparison to the SSSGs.16 Plaintiffs argue that the relevant SSSGs are not identified and their rates are unknown at the time that the carriers estimate their rates. They contend that it is only the reconciled rate that reflects the cost of benefits "actually provided" during the contract year, and that the purpose of the reconciliation process is to

The reasons for the difficulties in obtaining adequate data are varied, and the Kichak declaration provides insight and background information concerning them.
16

15

See Part II A 4, regarding 55 Fed. Reg. 27406, 27409. 21

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"compensate" the carriers for the cost of the benefits provided. None of these arguments has merit. Plaintiffs' arguments are based upon a mischaracterization of the fundamental procedures that OPM utilizes to negotiate rates with community rated carriers and the purpose of the rate reconciliation process. It is the responsibility of the carrier to propose estimated rates for the next contract year. The community rated carrier, running its business, is in the best position to know, or provide the best estimate - or, it should be in the best position to know or estimate ­ the projected rates for the FEHB group, as well as for the comparable SSSGs, to identify the most comparable SSSGs in the area, to project and estimate the rates for each group for the following insurance year, and to estimate its projected revenue requirements for that year. It is also in the carrier's best interest to be in this position, because, after evolving from the market-based or cost approach, OPM began to negotiate rates with the community rated carriers. Deft.Br. 12-19. The estimated rates to which the parties agree are rates that are negotiated, based upon the carriers' actuarial projections of services that would be utilized, its revenue requirements for those services, and its competitive position in whatever market area it serves. These rates are binding; they are published in the benefits brochures, and they determine premiums that are paid throughout the contract year by the enrollees and the Government. Thus, the fact that community rated carriers provide estimated rates does not support their arguments here that they should be compensated later, in their final year, based upon actual costs.

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c.

Costs To The Government

Plaintiffs contend, in effect, that OPM cannot consider its own administrative convenience and costs to run the program. However, courts routinely sustain agency regulations when they are based upon administrative efficiency and/or convenience. In Consolidated Edison Company of New York v. Abraham, 314 F.3d 1299, 1303 (Fed. Cir. 2002), the court of appeals sustained the validity of an agency presumption, stating: DOE's end-user presumption has a reasonable and rat