Analysis

Flood Of Medical Funds May Hold Risks For New Contractors

By Daniel Wilson
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Law360 (May 14, 2020, 9:28 PM EDT) -- Health care firms that have never contracted with the U.S. government before are now being enticed to do so to tackle the COVID-19 pandemic, but these companies may get entangled in legal obligations they're not used to.

The recent CARES Act, for example, provided $27 billion in funding over the next several years for emergency public health programs, including $16 billion to help fill the strategic national stockpile, and commercial medical and protective device suppliers are eager to play their part for both business reasons and to provide a public service during the crisis.

But federal contracts, even emergency deals, come with significant caveats that don't apply to commercial contracts, such as domestic sourcing requirements and nondiscrimination clauses, and potential contractors should keep those in mind before deciding whether to sign an agreement with the government, Akin Gump Strauss Hauer & Feld LLP partner Scott Heimberg said.

"I think a lot of companies are viewing this as helping out the government in a terrible situation, [so] they're not really viewing it as a typical government contract," he said. "But the ones I've seen include very many of the typical government contract clauses."

Being a government contractor is a "highly regulated" status, and although selling preexisting commercial products to a federal agency is subject to fewer regulations than making products specifically for the government, there are still requirements that aren't usually a consideration in the commercial contracting world, Reed Smith LLP partner Holly Roth said.

For example, federal contracts usually come with affirmative action and equal employment opportunity requirements, as well as country-of-origin restrictions under the Buy American Act and Trade Agreements Act.

Another particularly difficult issue for firms contracting with the government for the first time is working out how to negotiate pricing, which is done differently than in the commercial world and is potentially risky for contractors, even with certain exceptions that may apply during the pandemic, Arnold & Porter partner Mike McGill said.

"One of riskiest areas of government contracting tends to be around that process of negotiating what the compensation will be — what information has to be provided to the government to allow the government to negotiate what it sees as a reasonable price, and if companies have never done business with the government before, that is going to be a process that is fraught with risk," he said.

And although less of an issue with many contracts related to COVID-19, which are often fixed-price deals, companies that enter into cost-reimbursement deals may also have to overhaul their business or accounting systems to make sure they stay on top of exactly what costs are attributable to their government work.

There are also agency-specific requirements, such as caps on individual compensation under deals with the U.S. Department of Health and Human Services, which are particularly relevant given much of the emergency response funding comes through HHS.

HHS is also not used to dealing with the volume of contracts it is now expected to handle, and that means some contractors and potential contractors are having difficulties getting information they need out of the agency, Mayer Brown LLP government contracts practice chair Marcia Madsen said.

"I don't think anybody's trying to be misleading, I just think it's all coming so fast," she said. "I think the private sector in doing business using the new money and under some of these new authorities is going to have to be pretty vigilant and try to take care of themselves to make sure they do the right thing. Just because a government official says it's OK to fill out a form in a particular way or say things in a particular way — contracting officers don't have authority to waive legal requirements."

Even for health care companies that don't enter into procurement contracts, many of the same requirements extend to grants, cooperative agreements and Other Transaction Authority deals, used for prototype and research work. The Coronavirus Aid, Relief and Economic Security Act provided tens of billions of dollars to help health care providers deal with revenue hits stemming from COVID-19, in effect creating many new government contractors and grantees who have never dealt with government agreements before, with perhaps the exception of Medicare reimbursements.

While they may be excited or relieved to receive that government funding, they may not realize there are important controls that come along with that money, such as anti-lobbying clauses and executive compensation limits, as well as being able to justify the amount of funding received, according to Dentons government contracts practice chair Steven Masiello.

"We're creating new government contractors by sending them money first — which is an admirable thing to do — but that have strings attached to them that, generally speaking, only an experienced government contractor would be well-equipped to handle," Masiello said.

Masiello said he was particularly concerned about smaller companies who are dealing with government grants for the first time, without the relevant experience or resources to effectively process those payments.

"It would be rational — maybe not practical, but rational — to think twice about using this money," he said. "They might want, for example, to put it in a separate account and make sure that anything they use it for is triple-checked prior to using it. I feel for those small groups who are going to be looking at this as a lifeline but with real serious strings attached and a liability tail on it that's long and prickly."

The potential risks of failing to meet the government's requirements include not only agencies attempting to claw money back, but exposure to False Claims Acts suits if a whistleblower or the government thinks the failure to comply with contractual obligations is fraudulent. Such cases often drag on for years.

"[Nontraditional] government contractors may have a rude awakening down the line after the crisis passes and audits take place or whistleblowers crop up, discovering that they have those obligations and they may say, 'I don't want to do this anymore. I helped out and I did my part and I am done and I'm going to return to the commercial marketplace and stay away from federal contracting,'" Heimberg said.

Suspension or debarment from federal contracting programs is also possible. Although that may not result in a big dip in revenue for companies that do most of their business in the commercial space, the reputational harm could still be significant, according to McGill.

"That's the reason why I talk about things like a code of conduct, and making sure they have internal controls," he said. "There's a reason why those things are so important and why they make financial sense for a company to invest in."

Although agencies have tried to make it easier for commercial firms to do business with them during the COVID-19 crisis, with the U.S. Department of Labor, for example, waiving affirmative action requirements on COVID-19 contracts through at least June 17, potential first-time contractors may ultimately need to consider whether they see working with the government as a long-term goal before deciding whether to take an emergency deal, Roth said.

"In my career, I have actually walked companies back from being government contractors, because they didn't realize the associated costs with compliance," she said. "If you're going to be a government contractor, you shouldn't jump into it in a small way. You should probably jump into it in a big way if you can do it."

--Editing by Breda Lund and Emily Kokoll.

For a reprint of this article, please contact reprints@law360.com.

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