Legal fundamentals of contracting for healthcare.
Subject: Health care industry (Contracts)
Health care industry (Laws, regulations and rules)
Military nurses (Laws, regulations and rules)
Author: Judd, Kim K.
Pub Date: 01/01/2012
Publication: Name: U.S. Army Medical Department Journal Publisher: U.S. Army Medical Department Center & School Audience: Professional Format: Magazine/Journal Subject: Health Copyright: COPYRIGHT 2012 U.S. Army Medical Department Center & School ISSN: 1524-0436
Issue: Date: Jan-March, 2012
Topic: Event Code: 490 Contracts & orders let; 610 Contracts & orders received; 930 Government regulation; 940 Government regulation (cont); 980 Legal issues & crime Advertising Code: 94 Legal/Government Regulation Computer Subject: Government regulation; Contract agreement; Health care industry
Product: SIC Code: 8000 HEALTH SERVICES
Organization: Government Agency: United States. Army; United States. Army
Geographic: Geographic Scope: United States Geographic Code: 1USA United States
Accession Number: 284015860
Full Text: Senior leaders, in fact leaders at all levels within the US Army Medical Command (MEDCOM), should understand basic principles of contracting for healthcare. Many practical and legal problems can be avoided if these principles are kept in mind as MEDCOM strives to provide healthcare to our Soldiers and other beneficiaries.


Consider the following scenario which is based upon recent events at a major Army hospital. You are the Deputy Commander for Administration (DCA) at a hospital we will call The Medical Center. Your facility has previously awarded a contract for nurses to the company NursesRUS (NrUs) to address a critical shortage of nurses at The Medical Center. Under that contract, NrUs provides 47 nurses, all of whom work within the Department of Nursing. Most of the NrUs nurses are either former or retired Army Nurse Corps nurses or previous government civilian (GS) nurses, and many have previously worked at The Medical Center while on active duty/GS status. You have an open-door policy under which, once a month, you entertain complaints and allow anyone to come in and air their grievances. During one such open-door session, Nurse Johnson, an NrUs nurse, complains that she is not receiving her paycheck on a regular schedule. She also states that many NrUs nurses are not being paid on time, and further, more than a few of the other NrUs nurses are a month or more behind in receiving their paychecks. Nurse Johnson recently retired from the Army and worked for you before she retired.

What should you as the DCA do? What other parties should you involve? Should you have even entertained Nurse Johnson's complaint? As noted above, this particular scenario actually occurred, and is a textbook case of a good-intentioned DCA who failed to understand basic contracting principles. I will explain what happened at the end of the article.

First Fundamental

The first fundamental you must understand is that you, as a MEDCOM leader, do not have authority over contractor employees. While you are responsible and accountable to deliver healthcare to authorized beneficiaries, NrUs nurses are not your employees. They do not work for you, but rather are employed by a contractor, in this case, NrUs, which has a contract with an authorized MEDCOM agent empowered to enter into contracts which legally bind the Army. As a group, MEDCOM leaders are not empowered to enter into such contracts unless they are warranted contracting officers.

The only MEDCOM official who has authority over NrUs is the MEDCOM contracting officer that signed the contract with that company. That contracting officer almost always has a contracting officer's representative (COR), who helps the contracting officer monitor the performance of a company working under contract. The COR is usually nominated by the activity that needs contracting support. The contracting officer then appoints, in writing, the COR. The appointment letter specifies that the COR is only the eyes and ears of the contracting officer. In other words, the COR is to report contract performance issues to the appointing contracting officer so that the official with proper authority can attempt to resolve such issues.

To summarize this first principle, contractor employees are not government employees. Rather, they are employees of the company that hired them. Their employer is the holder of a contract with MEDCOM, and that contract is solely within the authority of the contracting officer who entered into that contract. Applying this principle to the described scenario, the DCA should not have heard complaints from someone who is not a government employee. Nurse Johnson is paid by NrUs, and the most that the DCA should have done was to tell Nurse Johnson that she should inform the COR that her employer, NrUs, was not paying its employees in a timely manner. It would then be the COR's duty to report the problem to the contracting officer.


The second fundamental is that government contracts are legal instruments between the government authorized buyer (the contracting officer) and the seller, NrUs. It is important that MEDCOM leaders clearly understand that there are 2 parties to a contract for sale of healthcare services. In our case, the buyer, as legal agent for the director of nursing at The Medical Center (the requiring activity with the need for contracted nurses) was a warranted contracting officer assigned to support The Medical Center. Further, the seller of those services was NrUs, which had the obligation to supervise and compensate its own employees, in this case, Nurse Johnson. The responsibility to pay Nurse Johnson rested with NrUs, not the government.

Put another way, Nurse Johnson is not "your troop" or "your employee." In every government contract, just as in every contract you enter into in your private life, there is a buyer and seller. This fact is often lost in the day-to-day mission performance where contractor employees work alongside government employees, whether active duty military or civil service. Compounding the problem is the fact that often both the buyer's employees (active duty military or GS nurses) are performing the same healthcare functions as the seller's employees, in this case, Nurse Johnson and her fellow NrUs employees.


The third fundamental is that MEDCOM healthcare contracts, as with all federal government contracts, are bound by laws which are not applicable in the civilian world. Our contracts are funded with federal appropriated funds (mostly defense health appropriations). Because of this, federal laws and contracting rules, not state laws, apply.

The contracting rules are contained within the Federal Acquisition Regulation (FAR) (48 CFR chap 1). The federal rules generally require competition among healthcare sellers to win our contracts, and require that, for a MEDCOM contract to be legally binding, it can be entered into or changed only by a warranted contracting officer. As the US Supreme Court has stated (Federal Crop Insurance Corp v Merrill, 332 US 380), the fact that sellers

... must turn square corners when they deal with the government" * does not reflect a callous outlook ... it merely expresses the duty of all courts to observe the conditions defined by Congress for charging the public treasury.

[* Rock Island, Arkansas & Louisiana R Co v United States, 254 US 141, 254 US 143]

With regard to our Nurse Johnson situation, the FAR specifically states that it is illegal to treat Nurse Johnson as if she were a government employee, and it is illegal for anyone other than a warranted contracting officer to enter into or change a MEDCOM contract. Could the DCA legally have excused Nurse Johnson from coming to work? Hopefully the answer is painfully apparent to anyone who understands that Nurse Johnson is an employee of a recipient seller company, NrUs, which had been awarded a federal (FAR) contract for healthcare services.


The fourth fundamental is that acquiring healthcare services under the FAR is a 3-step process:

1. Acquisition Planning--Begins when the customer determines the agency's needs. The customer coordinates with the contracting officer. Often, the commanding officer/MEDCOM leader is in charge in this phase. The customer delivers an acquisition package to the contracting office.

2. Contract Solicitation and Award--Only the contracting officer has authority to enter into a contract. A contracting specialist delivers the acquisition package (from step 1) to the contracting officer, who solicits offers, evaluates offers, and awards the contract. The contracting officer is "the buyer" for the customer.

3. Contract Administration--Only the contracting officer has authority to administer, modify, or terminate a contract. The contracting officer appoints a contracting officer's representative (COR) to conduct contract surveillance and communicate, through the contracting specialist, to the contracting officer. The contracting officer administers the contract for the customer.

In the case of Nurse Johnson, the director of nursing at The Medical Center, let us call her COL Caring, determined that she needed 47 nurses more than she had in her active duty military/GS nursing staff. She determined what nursing specialties were needed and then went to her supporting resource management office with a statement of work to determine if The Medical Center had the appropriate funding to send the acquisition package to her supporting contracting officer. COL Caring also nominated someone for appointment by the contracting officer as the COR.

The supporting warranted contracting officer then proceeded to obtain competitive offers from companies interested in providing the required services/personnel. The contracting officer picked the winner of this competition based upon criteria provided by COL Caring. For instance, if COL Caring, as the head of the requiring activity needing the contract support, was willing (and capable) to pay more for a company with more experienced nurses, the solicitation for offers would include that criteria. Once the contracting officer picked the winner (NrUs in this case) the contracting officer signed the contract award, and the result is a legally binding FAR contract.

Finally, NrUs employees began performing under the contract, and the terms of employment between NrUs and Nurse Johnson is a matter solely between those 2 parties. If Nurse Johnson, or any other NrUs nurse, fails to get paid or fails to show up for work, that is an employment matter between NrUs and its employees. Failure to show up for work is a contract performance problem which should be noted by COL Caring and reported immediately to the COR. The COR should then immediately report the contractor's performance failure to the contracting officer.


The following is the actual sequence of events upon which the above NrUs scenario is based. After listening to her complaint in the open-door session, the DCA told "Nurse Johnson" that this was an intolerable situation and that the Army did not function in this manner. He asked her to come back in a week if the nonpayment problem persisted. A week later she came back with several other "NrUs" nurses and it became apparent that the problem was getting worse. The DCA stated that the Army does not "mess with the troops' pay," and should that occur, the troops would not come to work. He told the NrUs nurses he would look into the situation. He never informed "COL Caring," the COR, or the contracting officer, and then he became so busy that he never looked into the situation, although he intended to do so. The NrUs nurses started calling in sick which caused a severe problem for COL Caring. When she could no longer cover for the nurses with other staff, she finally called the supporting regional contracting officer, although she never informed the COR. The COR only found out about the problem when the regional contracting officer arrived at The Medical Center with a letter terminating NrUs for a FAR contract default. Fortunately, the contracting officer discovered the basic facts described herein, discovered a systems problem with payment of contractor invoices, and was able to resolve late payments by the Army to NrUs. Once NrUs began receiving timely payments for its services, the employees began to promptly receive their pay (we think). All the contracting officer and COL Caring knew was that the sickout situation resolved itself soon after the payment problem was addressed.


This is a very brief overview of contracting fundamentals, a simplistic representation of which is provided in the Figure. I encourage all readers to ask for additional training/seminars from their Office of the Staff Judge Advocate or their healthcare contracting activity if they wish more information on various subjects, such as hiring, interviewing, timesheets, commending, awarding, causing removal or just critiquing contracted performance, trying to resolve contractor employment problems, requiring work different than that which the government bought, and labor hour problems. The fundamentals of these issues should be familiar to all AMEDD leaders.

Kim K. Judd, JD

Mr Judd is an Attorney Advisor in the Contract Law Section, Office of the Staff Judge Advocate, US Army Medical Command, Fort Sam Houston, TX.
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