Alert: Does Your State Contract Prohibit Offshore Outsourcing?

So your company has been diligently trying to comply with state and federal government contracting regulations. You pay your service employees in accordance with the Service Contract Act, you file your EEO-1s and VETS 100s, you monitor state campaign contributions, and you follow all of the additional requirements in your compliance plan. You think your company is “golden.” Right? Maybe. Are you “offshoring” services under your contract, or the data related to your state and/or Medicaid government contracts? This easily overlooked issue has been percolating to the top of the list for government agencies, state attorneys general, and perhaps, qui tam plaintiffs’ attorneys.

Offshoring, or “the import from abroad of goods or services that were previously produced domestically,”[1] is a major part of today’s business landscape, and government contracting at both federal and state levels is no exception. The issue of offshore outsourcing of services first drew attention in the world of government contracts in 2004, when the media reported that call centers in India were answering customer service calls from Food Stamp recipients.[2] The controversy faded from the public spotlight, but in response to public outcry some states passed legislation or issued executive orders prohibiting or limiting the practice.

A recent (April 11, 2014) report[3] from the Department of Health and Human Services (DHHS) Office of the Inspector General (OIG) resurfaced the issue of offshoring restrictions in the context of Medicaid contracts. The report reminded contractors that offshoring prohibitions and limitations remain in full force today, and government contractors need to be aware of them. Government contractors must review each individual state contract to ensure compliance with any offshore outsourcing prohibition or restriction. Running afoul of an offshore outsourcing prohibition could have serious consequences. Noncompliance could expose a contractor to suspension, debarment, or even liability under the state’s version of the False Claims Act under the theory that the contractor implicitly certified compliance with a material term of the contract.[4]

The varying levels of prohibitions on offshore outsourcing that exist throughout the United States and U.S. territories underpin the importance of carefully reviewing each state’s requirements and each individual contract. Some states, such as Alaska, Arizona, Missouri, New Jersey, Ohio, and Wisconsin, have broad prohibitions against offshore outsourcing of services. For example, Ohio’s standard solicitation includes a Standard Affirmation and Disclosure Form Governing the Expenditure of Public Funds on Offshore Services, which states, “If awarded a contract, both the Service Provider and any of its subcontractors shall perform no services requested under this Contract outside of the United States.”[5] Similarly, Wisconsin’s standard solicitation warns offerors that their “inability to perform all services in the United States shall be grounds for disqualifying your Proposal for this contract.”[6]

Even if a state does not have a statute, regulation, or Executive Order directly impacting the offshoring of services, it is still necessary to review all solicitations closely for language regarding offshoring. For example, Delaware contains no statutory or regulatory prohibition on offshore outsourcing, yet a recent Delaware solicitation states, “The State will not permit project work to be done offshore.”[7] The solicitation makes clear that this prohibition extends to subcontractors. For the most part, Pennsylvania frames the offshoring issue as a preference for “Domestic Workforce Utilization” by awarding bonus points to nonoutsourcing offerors, but the Commonwealth exercises strict border patrol when it comes to offshoring of customer service. A recent Pennsylvania RFP involving customer service support provided that the “Commonwealth requires that there be no offshoring of calls for participants.”[8]

Other states require the disclosure of services to be performed offshore without prohibiting offshoring. South Carolina has no offshoring prohibition on the books but does use the standard solicitation clause “Offshore Contracting,” requiring offerors to identify any work to be performed offshore, including work by subcontractors. Offerors in South Carolina must disclose (1) the type of work being contracted offshore; (2) the percentage of the total work being contracted offshore; (3) the percentage of the total value of the contract being contracted offshore; and (4) a Service Level Agreement between the contractor and offshore contractor. The “Vendor Disclosure Statement” in Colorado solicitations not only asks offerors to identify any planned offshoring but also to justify it: “If it is anticipated that services under the contract, or any subcontracts, will be performed outside of the United States or the State of Colorado, explain why it is necessary or advantageous to go outside the United States or the State of Colorado to perform the contract or any subcontracts.”

The recent DHHS OIG Report canvassed state Medicaid agencies and reported their policies on offshore outsourcing. According to the report, Medicaid contract provisions in Montana and New Mexico prohibit direct offshore outsourcing, highlighting the importance of consulting the solicitation closely, especially if the scope of work involves handling patient health information (PHI). The OIG cautions Medicaid agencies that if they “engage in offshore outsourcing of administrative functions that involve PHI, it could present potential vulnerabilities.”[9] The Health Insurance Portability and Accountability Act (HIPAA) requires Medicaid agencies to enter into Business Associate Agreements (BAAs) with contractors who offshore administrative functions to safeguard PHI.[10] However, the OIG believes that sending PHI offshore limits the effective enforcement of BAA provisions and therefore the BAAs themselves provide insufficient protection of PHI.[11]

One should not conclude from these restrictions that individual states are inward-focused and unengaged in the global market place; in fact the opposite trend is taking place. The offshore outsourcing prohibitions that exist are only directed at the location of the services performed, not the contractor’s country of origin. States want their contractors to employ Americans, but they welcome the business of favored international trading partners. Indeed, 37 U.S. states have signed the World Trade Organization (WTO) Government Procurement Agreement (GPA). The states’ positions on offshore outsourcing did not appear to have any bearing on their willingness to join the WTO GPA: Arizona and Wisconsin are among them. The WTO GPA requires its 43 member countries to afford one another equal treatment on acquisitions above a certain threshold. The current threshold for goods and services for the 37 states is $558,000.[12]

Nonetheless, the April 2014 DHHS Report coincides with a significant increase in states adopting and expanding False Claims Acts. Thirty-six states and the District of Columbia now have FCAs, which empower state attorneys general to file false claims actions, as well as review qui tam suits filed by relators to determine whether the state should intervene and assume primary responsibility for prosecuting the action. Further, states, mirroring action at the federal level, are expanding False Claims Acts to incorporate new theories of liability. Particularly relevant to the issue of offshoring is the implied certification theory, whereby a defendant submitting claims for payment is found to have implicitly certified that it has complied with all statutory, regulatory, and contractual provisions that are a precondition for payment—including state prohibitions on offshore outsourcing. The prospect of state action on such theories becomes only more likely as state attorneys general face pressure to recover funds for their states, and they—as well as qui tam relators, with whom state attorneys general increasingly work—are given ever more expansive tools with which to do so.

As with any procurement, but perhaps more so with the variety and flux across state acquisitions, a close reading of the solicitation is paramount. If your services involve sensitive client data (particularly PHI) or call centers, meticulously examine the RFP for any offshore outsourcing prohibitions.

• Review the solicitation closely. A state solicitation can contain offshoring prohibitions even where the state has no statutory or regulatory prohibition on offshoring.
• If your solicitation contains an offshoring provision, is it a total prohibition, a partial limitation, or just a disclosure requirement? Understand what is required for compliance.
• Do the services to be performed involve sensitive client data, like PHI? If offshoring such data, establish controls to appropriately safeguard the information.
  

To learn more about how we can work with you to address the issues presented above, please contact Merle M. DeLancey at delanceym@dicksteinshapiro.com or (202) 420-2282, Bernard Nash at nashb@dicksteinshapiro.com or (202) 420-2209, Adele H. Lack at lacka@dicksteinshapiro.com or (202) 420-3563, Christopher J. Allen at allenc@dicksteinshapiro.com or (202) 420-3324, or another member of our Government Contracts or State Attorneys General practices on our website.