01 August 2001
INFORMATION PAPER
SUBJECT: Contracting Alternatives
1. Purpose. To explain differences in methods of contracting as they relate to direct health care providers.
2. Facts.
a. Personal and Nonpersonal Services Contracts.
(1) The Department of Defense has the authority (10 USC 1091) to enter into personal services contracts for personnel engaged directly in the provision of health care. A personal services contract can be with an individual health care provider or with a company. A Personal Services Contract (PSC) is a contract under which the personnel rendering the services are subject, either by the contract's terms or by the manner of its administration, to the supervision and control usually prevailing in relationships between the Government its employees. Such contracts are illegal except when, as in DOD's case, they are specifically authorized by statute. It creates an employer-employee relationship between the Government and the individual health care provider (HCP) for the purposes of the Gonzales Act and the Federal Tort Claims Act. The performance of the HCP is subject to day-to-day supervision and control by healthcare facility personnel comparable to that exercised over military and civil service HCPs engaged in comparable work. Any personal injury claims alleging negligence by the individual HCP within the scope of PSC shall be processed by DOD as claims alleging negligence by DOD military or civil services HCPs. Therefore, neither an individual HCP nor a HCP company is required to obtain medical malpractice liability insurance. The PSC does not create an employer-employee relationship between the Government and any corporation, partnership, business association or other party or legal entity with which the individual HCP may be associated; however, the employer-employee relationship still exists between the Government and the HCP.
(2) A Nonpersonal Services Contract is a contract under which the personnel rendering the services are not subject, either by the contract's terms or by the manner of its administration, to the supervision and control usually prevailing in relationships between the Government and its employees. Medical malpractice liability insurance is required.
b. The attached paper, "The Total Cost of Contracting with Individuals," addresses the significant difference between contracts with health care companies and contracts with individuals. Some of the pros and cons of contracting with individuals are:
Pros
Shorter contracting lead time.
Lower contract costs.
Cons
Places administrative burden on the government (Contracting, DFAS, MTF) for
managing shifts and multiple contracts, etc.
Additional time and money to recruit when turnover occurs.
Nonavailability of providers in the immediate geographic area
where advertisement was placed whereas under contract with a company, they
generally have a national recruiting program.
If more than one provider, multiple receiving reports and payments.
No ability to provide backup during provider's absence.
Payment problems affect provider directly whereas under a contract with a
company the provider is paid on a regular basis.
Margaret Walker/MCAA-C-DHCP/DSN 471-4188
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The Total Cost of Contracting with Individuals
There are many choices available in contracting methods to satisfy the needs of you the customer in acquiring direct health care services. Some of these choices include nonpersonal services, personal services, Indefinite Delivery Order Indefinite Quantity (IDIQ) contracts supporting multiple services at a single site, known as umbrella, and IDIQ contracts for a single service for multiple locations. These contracts have been traditionally awarded to companies that specialize in providing direct health care providers services. However, in the last few years a new type of contract has emerged that is awarded to individual health care providers. This paper addresses the significant differences between contracts with health care companies and contracts with individuals, and is intended to assist in making the decision in choosing the right contracting vehicle.
Every contracting action is unique. Therefore, it is imperative that the right type of contract be awarded that will result in maximum efficiency and effectiveness. There will be times when contracting with a company will maximize delivery of services and minimize costs and there are times when contracting with individuals will be the most economical and efficient method.
The end user is a stakeholder in this process and as such he needs to be knowledgeable and involved in the contracting process. Conveying the requirements precisely is the first step to a good procurement. By stating the requirements in terms of objectives rather than being concerned by the method, the best solution can be reached. Start the contracting method by having an open mind as to the method.
The significant difference between the two methods is in the amount of support required. It is very important to understand the amount of effort that goes into providing health care services. For example for every hour of service being provided to the patient, there is an amount of effort required to recruit, credential, relocate, train, pay, document, supervise, assess, schedule, and provide for additional fringe benefits and taxes. The cost of providing that service is much more than just the hourly pay provided to the health care provider, The Government as the receiver of the services is going to pay for these services.
The cost may come in many different forms both directly and indirectly. Direct costs are obvious such as hourly bill rates, which contain direct labor as well as the other costs associated with providing the service. The total cost is very visible as the customer writes out the bill each month for the hours used. Indirect costs, such as the cost to the government in supporting the contract in such functions as payment, and surveillance, are not so apparent. Indirect costs can be significant and are difficult to track.
One of the biggest factors in deciding between contracts with individuals and contracts with companies is whether or not the Government will be able to get the services of the individual provider without having to pay all the overhead and profit that a company normally assesses. In many cases the direct costs for using individual contracts may appear to be less. However, when the total of all direct and indirect costs are considered, these types of individual contracts may be more expensive. Factors such as fringe benefits and indirect costs caused by the individual contract award and administration must be considered. As an example, in an individual contract, the government is the party bearing the cost and time expended in advertising in the local newspaper. Further, the Government then bears the time and cost burden in interviewing applicants, preparing the IRS forms such as the 1099, and then making semimonthly payments to the individual providers.
If more than one individual is required, the costs compound quickly. For example, in the case where 5 providers are needed, there are 120 payments per year (24 *5) versus 12 with a company (12 * 1). If the cost of making a payment is $28, then the result is $ 3,024 per year lower by contracting with a company for payment costs. When the providers leave (as they are under no long‑term obligation) the government must run more advertisements and conduct more interviews with potential providers. This can cost the Government as much as $1,000 per provider considering the cost of the advertisement and selection process. In most cases the MEDCOM contracting community already has a direct health care provider contract ready for use to meet the Government customer’s requirement.
From the standpoint of individual providers, they would not want to work only for their hourly direct labor rate. For example, take a Registered Nurse who is currently making a salary of $38,000 per year. To receive an equivalent rate as an individual
provider she would have to charge the following:
Hourly Rate (38,000/2080) $18.27 /hour
Vacation (3 weeks (120/2080*18.27) 1.05
Sick Time (1 week (40/2080*18.27) .35
Holidays (10 days(80/2080*18.xx) .70
Other (CME, jury duty/etc (3 days) .21
Health/dental insurance ($2800) 1.35
Self employment Social Security (7.65%) 1.56
Life Insurance ($500) .24
CME ($500) .24
401 K Contribution ($500) .24
Total Expected Hourly Rate $24.21
That represents the cost of just breaking even on the salary compared to what the RN would make as a company employee receiving benefits, and does not include such things as disability insurance and unemployment insurance. It does not take into account the additional costs for the provider to prepare 24 invoices per year, or making payments and filings with the IRS, paying for insurance, and a host of other things required by the self employed. These all need to be considered by the individual provider when arriving at a price to charge the government.
It is true that not all providers will charge the government everything mentioned above. Some will not be sophisticated enough to know all that goes into working for yourself, such as the knowledge to allocate paid time off as the provider can only get billed for actual hours of service provided. Other providers may not be concerned with the benefits but like the idea of working for themselves. The point is, though, if they do not take into account their additional costs, they are working for less money than if they were a company employee. Remember that even though a provider may not want or need insurance or paid time off, he must still pay total social security taxes (his share and that which would have been the employer's) which results in an additional 7.65 percent. The same principle applies to the individual health care provider, as does the automobile mechanic. Although the mechanic is making $18 per hour, the garage must charge you $50.
Another important factor to take into consideration when choosing between a company or individuals is the availability of providers. When contracting with a company, the company is providing recruitment services, usually on a national level. They are experts in recruiting health care providers and in maintaining that workforce. The companies understand that all turnover costs money. Therefore, they keep current on compensation rates. When contracting for individuals, your recruitment efforts are confined to only the immediate geographic area where the advertisement was place. In addition, you have to know what the local market rates are in terms of compensation so you get a fair and reasonable price.
A further factor to consider in making the decision is the criticality given to turnover. Can the Government afford to be without service? In dealing with a company, they are responsible for providing the service and are, therefore, constantly recruiting and filling vacancies as they arise. If they do not perform, they lose money in lost billings and may have to pay damages to the Government. When dealing individuals, the Government customer bears the lost service. Not only are you without service, but you will also have to spend more money now to recruit. This is an important point to consider if continuity in service is important.
In many cases the customer has somebody in mind when a contracting requirement arises. When this happens, the contracting method choice should not be affected. Companies providing health care providers are always on the lookout for retiring military and civilian personnel as well as any other individuals the company feels would make a good provider. This only makes good business sense as it reduces recruitment costs.
On the surface contracting with individuals looks very appealing from an economic standpoint. It is important however to know the total costs involved. Generally speaking, the more the providers are needed, the less attractive this alternative becomes, as the number of actions taken on the part of the Government increases (recruitment, payments, etc.). It is usually cheaper overall in those cases to pay a contractor to provide those services. However, if only one or two providers are needed, and if you know the local market will result in enough candidates, then contracting with individuals is probably the better choice. For further information please contact your local MEDCOM contracting office or the MEDCOM Health Care Acquisition Activity.
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