The Obama administration is relying heavily on outside contractors to implement a core component of healthcare reform as it races to set up a federal health insurance marketplace before 2014.

The fast-approaching deadline gives the administration little time to scrutinize private-sector partners for conflicts of interest.

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The purchase of one of these contractors, Quality Software Services, Inc. (QSSI), by UnitedHealth Group, a major healthcare conglomerate, has sparked concerns about a potentially uneven playing field.

QSSI, a Maryland-based contractor, in January won a large contract to build a federal data services hub to help run the complex federal health insurance exchange.

It will be working with several other contractors, including CGI Federal, Inc., to create the technological architecture for the exchange.

The quiet nature of the transaction, which was not disclosed to the Securities and Exchange Commission (SEC), has fueled suspicion among industry insiders that UnitedHealth Group may be gaining an advantage for its subsidiary, UnitedHealthcare.

UnitedHealth Group’s acquisition has caught the attention of Sen. Orrin Hatch Orrin Grant HatchBottom line Bottom line Senate GOP divided over whether they'd fill Supreme Court vacancy MORE (R-Utah), the ranking member on the Senate Finance Committee. He has expressed alarm over what he calls a lack of transparency in setting up a national insurance marketplace covering more than 30 states.

He asked Health and Human Services (HHS) Secretary Kathleen Sebelius Kathleen SebeliusThe Hill's Coronavirus Report: Mike Roman says 3M on track to deliver 2 billion respirators globally and 1 billion in US by end of year; US, Pfizer agree to 100M doses of COVID-19 vaccine that will be free to Americans The Hill's Coronavirus Report: Former HHS Secretary Sebelius gives Trump administration a D in handling pandemic; Oxford, AstraZeneca report positive dual immunity results from early vaccine trial Coronavirus Report: The Hill's Steve Clemons interviews Kathleen Sebelius MORE in an Oct. 19 letter for a full account of contractors hired to set up the national exchange and a list of administration officials who signed off on those awards.

“I am seeking more information about the contracts associated with the entities selected to build the federally facilitated exchange (FFE) and the federal data services hub that will support the FFE,” he wrote.

Hatch wants to know whether HHS reviewed UnitedHealth Group’s purchase of QSSI to determine whether it creates conflicts. He gave Sebelius a deadline of Oct. 26 to respond, which she has not met.

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Erin Shields Britt, a spokeswoman for HHS, said the Centers for Medicare and Medicaid Services (CMS), which has jurisdiction over the exchange, “evaluates contracts to ensure there are no conflicts of interest.”

But given how late the administration has been in issuing rules for the exchange, it would be extremely difficult to void a key contract, find another company to perform the work and still meet the 2014 deadline — should President Obama win reelection. Mitt Romney has vowed to repeal the healthcare law if elected.

By comparison, CMS finalized its rules for the Medicare Part D — created by the Medicare Modernization Act of 2003 — more than a year before its scheduled implementation in January of 2006.

It is difficult to know QSSI’s precise role because its contract is not publicly available and the department of health and human services did not provide a copy. A draft statement of work issued by HHS and used for the bidding process offers a glimpse of what the contract requires.

It reveals QSSI will finalize technical and systems requirements to develop and deliver plan management services, which includes the certifying and decertifying of health plans offered on the exchange. Plan management services also entails monitoring agreements with health plans to ensure compliance.

The exchange will be like Travelocity.com or Orbitz.com for health insurance plans. When customers enter their basic personal information, an automated process will determine their eligibility for federal subsidies and offer a menu of private insurance plans to choose.

The technology will wield massive flows of socio-economic and health information for populations around the country that an insurance company, if privy to, could use as valuable business intelligence to determine what markets to play in.

For insurance plans to reach millions of potential customers who will purchase insurance through a federal exchange, companies must meet federal requirements to be listed though the exchange. Billions of dollars in business will hinge on plans meeting those standards, but the process for deciding what plans pass muster is not clear.

HHS claims the final regulations will present a bright-line test for health plans, leaving contractors no room to judge them.

In May, HHS issued a bulletin stating the federally facilitated health insurance exchange will not be an active purchaser of health plans. It stated all qualified plans will be allowed to offer coverage through the exchange in an effort to minimize the possibility that any plan would have an advantage in the market.

If an insurance company had influence over the information technology architecture used to run the exchange, it could interpret federal standards in a way to exclude competitors or make it more difficult for them to win approval, say some insurance experts. Or it could have an inside track on knowing how to design plans that meet the standards.

The contractors working on the exchange will also have responsibility over payment calculation for risk adjustment.

This program is intended to redistribute funding from plans that attract younger and healthier participants, and thus have lower costs, to plans that attract people with more chronic diseases.

The draft statement of work for the contract shows QSSI will also work on technical requirements to deliver financial management services, such as payment calculation for risk adjustment.

The prospect that a subsidiary of UnitedHealth Group could have a role in calculating the reallocation of federal funds among rival health plans has unnerved some industry insiders.

It is difficult to know how the federal exchange will operate because the Obama administration has not yet finalized all the regulations for it.

In theory, HHS should decide what plans are included on the exchange and how to readjust funding levels but given the huge inflows of data, much of the responsibility will fall to the contractors.

The exchange must be up and running by the fall of next year so people have an opportunity to enroll in time for 2014.

Industry insiders, including sources not affiliated with competitors of United Healthcare, say the purchase of the contractor tasked with setting up the information technology architecture poses the appearance of conflicting interests. The officials would only talk on background because of the sensitivity of the issue so close to the presidential election.

One critic familiar with the business rivalries of the insurance industry compared UnitedHealth Group’s purchase of QSSI to the New York Yankees hiring the American League’s umpires.

A draft statement of work for the contract awarded to QSSI states the contractor should provide services necessary to acquire, certify and decertify health plans offered on a federal exchange. It stipulates the contractor should monitor agreements with health plans, ensure compliance with federal standards and “take corrective action when necessary.”

The statement of work also outlines the contractor’s role in calculating risk adjustment payments.

“Financial management services include the services necessary to spread risk among issuers and to accomplish financial interactions with issuers,” the document states. “The risk spreading services include but are not limited to: payment calculation for reinsurance, risk adjustment and risk corridors, along with required data collection to support these services.”

The value of the base contract and all options is $144.6 million, according to a summary of the award posted through the federal procurement data system. It’s estimated ultimate completion date is March of 2017.

The contract, which underwent a full and open competition, was initially awarded to QSSI in September of 2011 and finalized in January.

One state official working on a local insurance exchange said the wording of the statement is broad enough to raise questions about whether UnitedHealth Group’s subsidiary could set up the information technology architecture of the federal exchange in a way to favor another subsidiary: UnitedHealthcare.

“I can understand why everyone would have a problem with that,” said the source. “If United is having influence over which plans get listed and which plans don’t, it certainly creates the possibility there could be some influence over designing a system that excludes plans or that they would have inside knowledge about how the system works that other plans might not.”

The source said knowing the algorithm used for grading various health plans could help an insurance company tailor its offer in a way to boost the likelihood of winning acceptance to the federal exchange.

Experts estimate that as few as 15 states will have their own insurance marketplaces set up by the 2014 deadline. As a result, a majority of states will rely on the federally facilitated exchange.

A senior executive with Optum, the subsidiary of UnitedHealth Group which bought QSSI at the end of September, said his firm and UnitedHealthcare are entirely separate businesses despite belonging to the same parent company.

“UnitedHealthcare is a client of Optum, an arms-length client, separately reported financially and separately managed,” said Andy Slavitt, group executive vice president at Optum.

“Optum has a very simple mission and that is to engage in activities to make sure the healthcare system works better for all participants,” he said, citing services such as helping an employer or union manage pharmacy benefits or helping a health company implement technologies.”

He said Optum’s clients include major health plans competing with UnitedHealthcare, such as Cigna, Humana and WellPoint.

“The work we do for a client benefits our client and nobody else. Service companies don’t exist and reach the level of success we have unless they do that,” he said. “We sign contracts with very strict standards to maintain confidentiality for the work we’re doing for their client.”

A board member for one major insurance plan said the United’s purchase of QSSI is troublesome.

“On the face of it, it would certainly raise questions, depending on the security of the data,” said the source, who is not authorized to speak for the company.

Spokespersons for Cigna, Humana and WellPoint declined to comment for this article.

It’s unclear whether UnitedHealth Group informed HHS of its acquisition. The company did not file an 8-K form with the SEC disclosing it.

Lew Lowenfels, an expert on securities law based in New York, said a company must disclose such an action if it would be determined by a “reasonable investor” as important.

Experts say the reality will be more complicated because of the vast complexity and technical difficulty of running the exchange.

Many factors need to be weighed and much data needs to be processed to monitor whether health plans are complying with the exchanges rules. The size of the job and the limited ability of the executive branch to set up and maintain the infrastructure of the market means that private contractors will have to play a major role.

“The big issues are defining the rules of the road as clearly and effectively as possible and that hasn’t been done yet and, No. 2, is enforcing the rules consistently and reliably and that’s where a contractor should come in or CMS staff would do the work or a mixture of them,” said Mark McClellan, who served as CMS administrator during George W. Bush’s administration.

McClellan noted the rules for the prescription drug benefit program were set well over a year before it started. He said the implementation of the health insurance exchange is a significantly bigger challenge.

“It depends on how clear the rules are,” he said. “I think there will be some reliance on automation and some reliance on review. My guess is there is going to be some oversight from CMS and some compliance work done by the contractors. Not all that work is clearly defined.”

Meanwhile, Hatch’s request also appears aimed at shedding light on whether Steve Larsen, a former senior official at HHS, played a role in awarding the information technology contract to QSSI.

Larsen left the Center for Consumer Information and Insurance Oversight, the office tasked with crafting rules for the national exchange, in July to take a job with Optum. It is not clear how long Optum was in consultation with QSSI prior to purchasing it.

Shields Britt, the spokeswoman for HHS, said Larsen would have to comply with stringent rules.

“Former HHS employees are subject to the strict ethics policies put in place at the start of this administration, which are some of the toughest ethics rules ever imposed on executive branch appointees, and those standards certainly apply here,” she said.

Don Nathan, UnitedHealth Group's chief communications officer, said the company was careful to follow government ethics rules.

“Steve Larsen is an individual with a great deal of experience even beyond his most recent government assignment. We are vigilant in observing all the rules and regulations governing former government employees,” he said.

Nathan denied that QSSI would have any regulatory authority over the exchange.

“What QSSI does is connect and integrate systems. Policy determinations, regulatory oversight comes from CMS,” he said.

He said UnitedHealth was not required to disclose the purchase of the contractor because it was a small transaction for a company expected to earn $110 billion in revenues this year.

"We always disclose material events, including material transactions, which this was not," he said.

A CMS official said the data hub contractor “will not be making qualitative decisions about health plans in the exchange.”

Former Rep. Earl Pomeroy (D-N.D.), an expert on healthcare law who has known Larsen for a decade, dismissed the notion that Larsen may have given Optum an unfair advantage.

“I believe there is absolutely nothing in his career change that presents concerns of conveying an unfair advantage to his new employer as the Affordable Care Act is being implemented,” he said.

Pomeroy is a registered lobbyist with Alston & Bird, which represents Aetna.

--This report was originally published at 6:00 a.m. and last updated at 11:42 a.m.