Small Business Set-Asides in Federal Healthcare Contracting: The Rule of Two


(Reprinted from August 3, 2009 issue of HealthLeaders Media)

In our last article, we discussed the major categories of businesses that are eligible for healthcare and other contracts that the federal government “sets aside” in order to benefit small business. In this article, we look at examples of how set-asides affect both small and large businesses.

Generally speaking, contracting agencies work closely with the U.S. Small Business Administration (“SBA”) to determine whether certain contracts should be “set aside” for small businesses. Federal procurement law actually requires agencies to set aside purchases for small businesses under certain circumstances: “The contracting officer shall (emphasis added) set aside any acquisition over $100,000 for small business participation when there is a reasonable expectation that (1) offers will be obtained from at least two responsible small business concerns…and (2) award will be made at fair market prices.” (Federal Acquisition Regulation (FAR), Subpart 19.502-2(b).

For many healthcare providers, this is an enormously powerful–and legitimate–tool to narrow the competitive field and greatly increase the chances of an award, but you need to understand how set-aside decisions generally are made in order to most effectively take advantage of this aspect of federal healthcare contracting.

Despite the requirement to use small businesses when two or more healthcare groups can apparently meet an agency’s requirement for healthcare services, an agency may not always follow this “rule of two.”

If you are a physician practicing in a small group, believe you can fulfill an agency’s healthcare needs at a fair market price, and you know of at least one other small business that can do the same, you can approach the agency if they have not yet set aside the procurement and try to demonstrate that the “rule of two” applies to the planned acquisition. If the agency still declines to set aside the procurement, you still have options open to you.

For example, the VA recently issued a solicitation for a contractor to develop and operate a primary care clinic in Ohio. Although originally issued for businesses of any size, using information from a publicly accessible federal database, we demonstrated to the agency that there was a reasonable probability that it would receive at least two bids from qualified small business firms. As a result, the agency reconsidered its previous position and set aside the contract for small businesses, eventually leading to award of the contract to the client.

Companies pursuing federal healthcare contracts also need to be on the lookout for other problematic set-aside situations, such as a procurement in which an agency unreasonably excludes large businesses from competing for a healthcare contract, or one in which a contract set aside for small business is actually awarded to a large business. Several remedies are available in such cases. For example, a large business that can meet an agency’s needs for a particular procurement can file a protest with the agency or GAO arguing that the decision to set aside a procurement for small business was not warranted.

Such a protest may be called for, for example, where you are a large healthcare business and have solid evidence that an agency could not have had a reasonable expectation of obtaining at least two offers of fair market prices from small businesses. If successful, such a challenge can “open up” the procurement to allow you to compete. Similarly, the law allows for a protest to SBA if you believe that a contract set aside for small business has been awarded to a company that is not, in fact, a small business under federal contracting rules.

Requirements for set-asides in federal contracting can create significant opportunities for all kinds of healthcare providers. Be alert, however, for set-asides that seem unduly restrictive or, conversely, ones that are unrestricted but should be set aside based on facts known to you. Agencies may be willing to voluntarily consider changes to initial contracting strategies based on a review of objective documentation establishing facts that support a decision to either:

  1. Set aside a contract that was previously open to businesses of any size; or
  2. Remove a previous set-aside to allow businesses of any size to bid.

If the agency is unwilling to voluntarily make a change based on the facts as you understand them, federal bid protest regulations preserve your rights to formally challenge the agency’s decision. The regulations contain strict and tight deadlines, so prompt action greatly increases your chances of being able to successfully compete for a contract.

Small Business Set-Asides in Federal Healthcare Contracting: The Rule of Two


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