A recent ruling by the U.S. Court of Federal Claims in CGI Federal Inc., v. United States leaves uncertain the future of Recovery Audit Contractor (“RAC”) audits and government contracts.1 The RAC program is an effort to ensure appropriate payment of Medicare claims; RACs are tasked with identifying improper payments and highlighting common billing errors, trends, or other Medicare payment issues.

In its pre-award bid protest, CGI Federal Inc. (“CGI”), a RAC for one of the CMS regions, asserted that the Centers for Medicare and Medicaid Services (“CMS”) ran afoul of Federal Acquisition Regulation (“FAR”) Part 8 by adding a provision that prolonged the time in which RACs would receive payment for appealed claims. CGI’s protest involved the Requests for Quotation (“RFQ”)2 for Regions 1, 2 and 4. Initially, the Court rebuffed CGI’s claims, granting CMS’ Motion for Judgment on the Administrative Record (the “Order”); however the Court then granted CGI’s motion to stay the ruling, pending CGI’s appeal, and enjoined CMS from awarding RAC contracts for the challenged regions.3 This leaves unclear the future of RAC contracts as well as opportunities under the Federal Supply Schedule (the “FSS”).

CGI’s Bid Protest

CGI’s dispute with CMS arose over the RAC payment mechanism. Under the original payment scheme, first set forth in RAC contracts in 2008, RACs can invoice CMS for the funds they recover at the time of collection, but must reimburse CMS if the recovery is overturned through appeal. However, the appeal process involves five separate levels of appeal, and often last for several years. The lengthy appeal process caused concern that CMS might not receive reimbursement, as appeals may outlast the RAC contracts. In the RFQs issued in January 2014, CMS altered the system, requiring RACs to wait to invoice CMS until the alleged improper claims cleared the second level of appeal. This would require the RACs to wait between 180 and 420 days to submit invoices for payment.

The Government Contracting Claims

CGI asserted, among other claims, that CMS violated the Federal Acquisition Streamlining Act (“FASA”) by including payment terms in the RFQ that are “inconsistent with customary commercial practices,” which runs contrary to FAR Part 12.4 According to the plaintiff, standard practice in the recovery audit industry is to invoice immediately after the payer recoups an audited claim (i.e., an improper payment).5 Pursuant to FAR Part 12.301(a)(2), “contracts for the acquisition of commercial items shall, to the extent practicable, include only those clauses [d]etermined to be consistent with customary commercial practice.” The issue boiled down to whether CMS was required to adhere to Part 12 in fashioning the RFQs.

The parties agreed that the RFQ fell within the scope of FAR Subpart 8.4, which governs the FSS.6 The FSS provides federal agencies with a simplified process for obtaining commercial supplies and services at prices associated with volume buying. Under the FSS Program,7 each supplier of services publishes a pricelist that includes pertinent contract terms and conditions. Government agencies then issue purchase orders under FSS contracts.

FAR Subpart 8.4 expressly lists the FAR provisions that do and do not apply to the FSS, but FAR Part 12 is not listed in either category. Although not clearly listed as applicable or inapplicable, FAR Part 12 is mentioned at three points in Subpart 8.4—none of which relate to payment clauses. Nor does FAR Part 12 make clear whether its provisions apply to FSS purchases. In effect, the question is whether an ordering agency can impose non-commercial requirements on contractors after the contractors negotiate prices at the FSS base contract level (on commercial terms, using commercial customers for comparison). Siding with CMS, the Court reasoned that Subpart 8.4 expressly provided for application of Part 12 in three instances, which did not include the payment terms, so the application of the Part 12 should be limited to those three areas.8 Although the Court refrained from substituting its judgment for that of the agency, it commented that the modified payment term would increase cost, reduce competition and “appears to be a bit excessive.”9

On September 2, 2014, the court granted CGI’s request to stay the ruling pending CGI’s appeal to the U.S. Court of Appeals for the Federal Circuit, and enjoined CMS from awarding RAC contracts for Regions 1, 2 and 4. In the meantime, CMS has not awarded RAC contracts for Regions 3 or 5, which were not part of the CGI case. Instead, the agency extended its contracts with existing RAC contractors, allowing for a limited scope of audits through August 2016.10

The Court’s Order and Impact

The impact of the CGI case could reach far beyond CMS and the RAC program, as other government agencies may try to follow CMS’ lead. Through CGI, the Court suggested that agencies are permitted to supplement RFQs with terms not considered “commercial” under FAR Part 12. If other agencies follow suit, some companies could be pushed out of pursuing opportunities under the General Services Administration FSS program—which is the principal mechanism for federal agencies to access millions of commercial products and services at volume discount pricing.

Recognizing the potential repercussions of the Court’s decision, the Professional Services Council, a trade association representing the government services industry, filed an amicus brief on October 27.11 The Council called on the U.S. Court of Appeals for the Federal Circuit to affirm that orders through the FSS Program must follow commercial practices, arguing that to decide otherwise would create an “absurd” result. According to the brief, which was unsealed on November 7, the decision runs contrary to the original intent of FASA, which was to incentivize commercial vendors to enter the federal marketplace, and instead actually “creates a disincentive to contract with the Government.”

For its part, the government filed a brief on November 17, arguing that CGI lacked standing in the lower court and therefore lacks standing before the U. S. Court of Appeals for the Federal Circuit, as well. According to the government, CGI lacks standing because it failed to demonstrate it was an actual or prospective bidder for the original CMS audit contract, and failed to prove prejudice.

While RACs will be anxious to learn whether CMS may alter the applicable payment scheme, the injunction on new RAC contracts has left many healthcare professionals uncertain about the status of RAC audits. If the CGI decision stands, CMS will be free to change the RAC payment scheme, and RACs could not seek payment from CMS until the conclusion of the second level of appeal. As a result, RACs would be required to wait a minimum of 120 days and no more than 420 days for payment. However, with the stay in place, not only is the RAC payment mechanism unclear, the ongoing status of the RAC program is uncertain until these challenges are resolved.

1 CGI Federal Inc. v. United States, 2014 U.S. Claims LEXIS 842 (Aug. 22, 2014) [hereinafter CGI v. US].
2 A Request for Quotation is a type of bidding solicitation in which suppliers or vendors are invited to provide a cost quote for the completion of a particular project or program.
3 CGI v. US, No. 14-355C (U.S. Claims Sept. 2, 2014).
4 CGI v. US at 2, 18-22.
5 CGI v. US at 18-21.
6 CGI v. US at 40.
7 The Federal Supply Schedule Program is also referred to as the GSA Schedules Program or the Multiple Award Schedule Program.
8 CGI v. US at 45-48.
9 CGI v. US at 50-51.
10 http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/Recovery-Audit-Program/Recent_Updates.html.
11 Brief for Prof’l Servs. Council as Amici Curiae Supporting Respondents, CGI v. U .S., No. 14-5143 (Fed. Cir., Nov. 7, 2014).The amicus brief is available at http://www.pscouncil.org/News2/NewsReleases/2014/PSC_Urges_Appeals_Court_to_Affirm_GSA_Schedules_are_Commercial.aspx.