A pair of large contracts for administrative services with the Centers for Medicare & Medicaid Services (CMS) are great but two pairs are better. In a recent case, National Government Services, a company holding multiple contracts with CMS, protested when agency rules prevented them from competing for several more. Ultimately, the agency was able to successfully defend the limitations written into their solicitation, and the case provides a template for other agencies that may find themselves in similar circumstances.
Administrative Services Contracts with CMS
It’s no surprise that providing claims processing services for Medicare is a huge program with very large contracts. In fact, even the smallest of these contracts processes over 10 million claims each year and allocates $15 billion in payments annually to providers. As such, administrative services contracts with CMS are both lucrative and competitive.
To foster competition, CMS organizes its program by dividing the country into 12 regions. Contractors compete to handle claims processing services by region, with some companies holding contracts across multiple regions. The agency does, however, place two limitations on how much of the total Medicare services market one contractor can provide. First, it says a single company cannot exceed 26% of the national market. Next, it mandates that an affiliated group of companies cannot exceed 40% of it. Thus, a company can hold several regional contracts, but when an additional contract will exceed those limits, the company is restricted from competing.
A Competitor Nears the Agency’s Limit
CMS’ limitations posed a problem for National Government Services (NGS), a company holding contracts in two regions, but wanting to compete in multiple procurements for additional regions. The contracts they currently hold make up nearly 20% of the total market, so they can add just one more before hitting CMS’ limit. Hoping to win additional contracts, NGS headed to GAO to protest CMS’ solicitation for services in the region comprised of Indiana and Michigan.
Determining When Restrictions Are Too Restrictive
The case raises the question of what are appropriate restrictions on the amount of contracts a company can hold. At the heart of the protest, the contractor alleged that the agency’s solicitations were unduly restrictive of competition and therefore violated the law. This, as always, is a question of facts and circumstances, and CMS would have to justify its restrictions in order to convince GAO to toss NGS’ protest.
In their defense, CMS stated that they were trying to maintain a dynamic marketplace, which would be impossible if a single player got too big a piece of the pie. Furthermore, the agency stressed the importance of maintaining business continuity. Yes, CMS wanted companies to be capable of running more than one region for continuity’s sake. But the agency did not want a single company to dominate the marketplace.
CMS claimed that their reason for avoiding market dominance was directly related to risk mitigation. The agency noted a litany of external threats about which they were concerned. In particular, hazards such as natural disasters and cyber threats could immobilize a contractor and, if the contractor is responsible for a large share of territory, endanger CMS’ functioning.
Beyond external threats, there were also internal threats, such as integrity issues. In fact, CMS cited past problems with contractors doing business improperly. Because entry into this particular marketplace is so difficult and these contracts so big, CMS was concerned that one dominant player might exert too much leverage over the agency.
CMS and NGS Argue the Validity of Limitations
NGS claimed not only that CMS’ restrictions were too restrictive, but also that the agency’s 26% and 40% limitations were arbitrary. NGS also felt it was unfair that affiliated companies, of which they were not, were granted a chance to compete for a larger share of the market. In response to this allegation, CMS justified the 26% limit, stating it meant restricting a single contractor to either two large contracts or three smaller ones. Given the 12 regional contracts (some large, some small), that limit made sense because it allowed for enough players to maintain a significant marketplace.
CMS also validated their limit for affiliated groups by reasoning that such groups can weather a single threat, like a natural disaster, better than a single company. It was unlikely that a threat would affect all entities within in an affiliated group at once. By sharing the rationale behind them, CMS was able to defend both the restrictions and limitations laid out in their solicitation.
Victory for the Agency
Because CMS provided a strong case for the parameters of their solicitation, GAO denied the protest. The ruling shows that an agency trying to organize a large program like this has some flexibility in how it structures its contracts. The agency can justify specifications and limits that are restrictive of competition, as long as it has a reasonable basis for doing so given its program goals.
For more on this case, listen to my interview with Tom Temin on Federal News Radio’s Federal Drive.