Defense Base Act Insurance
Review Needed of Cost and Implementation Issues Gao ID: GAO-05-280R April 29, 2005Since the Iraq conflict began in March 2003, the Departments of Defense (DOD) and State, the U.S. Agency for International Development, and other federal agencies have issued contracts to perform reconstruction activities in Iraq. The large number of contractors working amid continued violence has raised concerns over the use of contractors to support U.S. military and civilian operations overseas, including the cost of workers' compensation insurance provided to contractor employees in Iraq under the Defense Base Act (DBA). We have received requests from over 100 members of Congress asking us to review a number of Iraq-related issues, including issues associated with DBA insurance. Because of the level of interest in issues dealing with Iraq, the Comptroller General initiated this review under his statutory authority. The objectives of our review were to identify the cost to the U.S. government of insurance coverage purchased under DBA and to assess the act's implementation. DBA provides disability and medical benefits for contractors' and subcontractors' employees injured on the job and death benefits to survivors when those employees are killed.
We are limited at this time in what we can conclude about the cost of DBA insurance. Recent investigations by several states into a number of insurance companies and brokers during the course of our review raise questions over the reliability of information that we obtained from the insurance industry, a primary source of data in our review. Additionally, we found that it is difficult to aggregate reliable data on the cost of DBA insurance due in part to the large number of contractors and the multiple levels of subcontractors performing work in Iraq. Lacking reliable aggregate data, we were unable to calculate the total cost of DBA insurance to the government or the impact of DBA insurance costs on reconstruction activities in Iraq. This report explains DBA requirements; discusses DBA insurance rates, which are higher for DOD than for other agencies; identifies challenges and concerns that federal agencies face when implementing DBA; and suggests that Congress consider requiring that the Director of the Office of Management and Budget (OMB) determine, in coordination with DOD, the Departments of Labor and State, and the U.S. Agency for International Development, what actions should be taken to address issues that came to light during our review.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-280R, Defense Base Act Insurance: Review Needed of Cost and Implementation Issues
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United States Government Accountability Office:
Washington, DC 20548:
April 29, 2005:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
Subject: Defense Base Act Insurance: Review Needed of Cost and
Implementation Issues:
Since the Iraq conflict began in March 2003, the Departments of Defense
(DOD) and State, the U.S. Agency for International Development, and
other federal agencies have issued contracts to perform reconstruction
activities in Iraq. The large number of contractors working amid
continued violence has raised concerns over the use of contractors to
support U.S. military and civilian operations overseas, including the
cost of workers' compensation insurance provided to contractor
employees in Iraq under the Defense Base Act (DBA).[Footnote 1] We have
received requests from over 100 members of Congress asking us to review
a number of Iraq-related issues, including issues associated with DBA
insurance.
Because of the level of interest in issues dealing with Iraq, the
Comptroller General initiated this review under his statutory
authority. The objectives of our review were to identify the cost to
the U.S. government of insurance coverage purchased under DBA and to
assess the act's implementation. DBA provides disability and medical
benefits for contractors' and subcontractors' employees injured on the
job and death benefits to survivors when those employees are killed.
We are limited at this time in what we can conclude about the cost of
DBA insurance. Recent investigations by several states into a number of
insurance companies and brokers during the course of our review raise
questions over the reliability of information that we obtained from the
insurance industry, a primary source of data in our review.
Additionally, we found that it is difficult to aggregate reliable data
on the cost of DBA insurance due in part to the large number of
contractors and the multiple levels of subcontractors performing work
in Iraq. Lacking reliable aggregate data, we were unable to calculate
the total cost of DBA insurance to the government or the impact of DBA
insurance costs on reconstruction activities in Iraq.
This report explains DBA requirements; discusses DBA insurance rates,
which are higher for DOD than for other agencies; identifies challenges
and concerns that federal agencies face when implementing DBA; and
suggests that Congress consider requiring that the Director of the
Office of Management and Budget (OMB) determine, in coordination with
DOD, the Departments of Labor and State, and the U.S. Agency for
International Development, what actions should be taken to address
issues that came to light during our review. We provided a draft of
this report to OMB; DOD; the Departments of State, Justice, and Labor;
and the U.S. Agency for International Development. OMB agreed with our
assessment of the challenges agencies face, and DOD took no exception
to the factual information in our report, but neither agency agreed
with our recommendation. State had no comments. Justice and Labor
provided technical comments. Labor and the U.S. Agency for
International Development expressed willingness to work with other
agencies to identify needs, options, and risks associated with DBA
insurance.
DBA Overview:
Congress enacted DBA in 1941 to provide workers' compensation
protection to employees of government contractors working at U.S.
defense bases overseas. If employees incur injuries during the course
of employment, DBA provides them with uniform levels of disability and
medical benefits or--in the event of death--provides death benefits to
their eligible dependents. Workers' compensation insurance had
previously been unavailable or deemed inadequate in some countries
where the employees performed work. Subsequent amendments to DBA
extended coverage to other classes of employees, such as those working
under public work contracts.[Footnote 2] The Department of Labor
administers DBA. Labor's role is to ensure that workers' compensation
benefits are provided for covered employees.
Under DBA, contractors working in Iraq, including all levels of
subcontractors, are required to obtain DBA insurance for all employees,
including foreign nationals.[Footnote 3] The cost of DBA insurance
premiums is passed on to the government. Under the War Hazards
Compensation Act,[Footnote 4] the government also reimburses insurance
carriers for DBA benefits paid if the injury or death is caused by a
"war-risk hazard,"[Footnote 5] provided that the insurance carrier did
not charge its customer a war-risk hazard premium. In addition to
disability and death payments, war-risk hazard benefits include funeral
and burial expenses, medical expenses, and reasonable costs necessary
to process the claims.
Increasing Use of Contractors and Continued Concerns over Cost Pose
Challenges for Agencies Implementing DBA:
When Congress passed DBA, the military's reliance on contractors for
direct support was not as great as it is today. Contractors have been
involved in every major U.S. military operation since the Persian Gulf
War in 1991,[Footnote 6] and military officials believe there has been
a significant increase since then in the use of contractors to support
a downsized military using more sophisticated weapons. While agencies
have made some changes in implementing DBA over the years, large
numbers of contractors in Iraq and conditions in that country have
renewed concerns over the cost and administration of DBA.
Large Numbers of Contractors in Iraq Have Led to Concerns over the Cost
of DBA Insurance:
The number of employees required to be covered under DBA while working
in Iraq is significant. Work performed under U.S. contracts and
subcontracts in Iraq includes rebuilding clinics, schools, and other
institutions; restoring oil infrastructure; restoring electricity,
water, and other essential services; providing security; and
strengthening local governance institutions. We could not locate any
reliable U.S. government agency estimate of the total number of U.S. or
foreign nationals employed under U.S. government contracts in Iraq.
Additionally, while State reported that as of March 16, 2005, over
150,000 Iraqis were performing work in Iraq on U.S. government-
administered projects, we could not validate these numbers, and agency
officials told us there is no consistent or coordinated method for
tracking employment figures.
We reported on concerns over the cost and implementation of DBA and
related insurance in 1971 and 1980.[Footnote 7] Since that time, the
Department of State and the U.S. Agency for International Development
have instituted single-insurer programs that require all contractors
performing work overseas for these agencies to purchase DBA insurance
from a specified insurance carrier at a set rate negotiated by the
agencies. During the course of our review, contractors working for the
Department of State and the U.S. Agency for International Development
paid approximately $2 to $5 for every $100 of salary cost for DBA
insurance in all locations.
In contrast, DOD contractors must independently acquire their own
insurance. The eight DOD prime contractors we contacted reported that
they were paying DBA insurance rates between approximately $10 and $21
per $100 of salary cost for work in Iraq during the period of our
review. While the government has limited visibility into how DBA
insurance rates are set, agency officials at the Department of State
and U.S. Agency for International Development told us the lower rates
under their single-insurer programs are due to such factors as the
pooling of work done in Iraq with work done in other places in the
world, the less risky nature of the work they perform, and a low number
of claims.
DOD completed a congressionally directed study in 1996 on the
feasibility and desirability of initiating a single-insurer program.
While DOD concluded at that time that such a program would not lead to
cost savings, the DBA insurance rates defense contractors are now
paying have led to concerns among DOD officials over the cost of DBA
insurance. To address these concerns, DOD, through the U.S. Army Corps
of Engineers, issued a solicitation on March 7, 2005, for a 1-year
pilot contract to a single insurer for DBA insurance for all Army Corps
of Engineers contractors performing work overseas. The solicitation
originally required offers be submitted by April 7, 2005. The deadline
was extended indefinitely to allow DOD to prepare responses to
questions received from prospective offerors.
Agencies Face Challenges Implementing DBA in Iraq:
According to agency officials, conditions in Iraq, such as mixed-
funding sources for contracts and language barriers, have led to
complications in implementing DBA. Implementation challenges include
clarifying when DBA applies, providing adequate and accurate
information to companies and workers, monitoring compliance, and
processing claims. Despite actions taken by agencies, many challenges
remain unresolved.
Department of Labor officials have reported, and GAO has observed,
confusion among federal agencies and contractors over DBA.[Footnote 8]
One source of confusion relates to when DBA is required. Some agency
officials initially believed they could apply existing waivers granted
by Labor for DBA insurance in Iraq, but Labor officials clarified that
waivers do not apply in that country because of the absence of a local
workers' compensation system. Subsequently, in December 2004, the
Department of State issued a proposed change to its acquisition
regulation to clarify when DBA insurance coverage is and is not
required. However, new questions about when DBA applies have arisen.
For example, while Labor has taken the position that DBA requirements
do not cover work performed under grants, officials from other agencies
recently expressed confusion over what benefits would be provided if
grantees purchase DBA insurance. In addition, it is unclear to many
agency officials whether DBA applies in cases where non-U.S.
appropriated funds are mixed with U.S. appropriations.
In addition to questions over DBA, a number of other implementation
challenges have surfaced. Labor and State officials told us that
language and literacy barriers present a challenge when providing DBA
information to companies and workers in Iraq. Labor officials told us
that enhancing enforcement of DBA would require reports of coverage to
be sent to Labor on every contract and subcontract in Iraq. Labor
officials also informed us that the department is limited in the
actions it can directly take for noncomplying contractors. Adding to
the implementation challenges, Labor officials told us that the
processing of claims has been slowed by difficulty in obtaining medical
and other personal information because of conditions in Iraq and the
need to respect local customs. Additionally, at a recent Department of
Labor seminar, attorneys involved in DBA issues reported difficulty in
obtaining necessary documentation, including contracts and marriage
records, to file and report claims.
Conclusion:
It is difficult to determine whether all DBA insurance is purchased in
a cost-effective manner or if agencies' implementation challenges
hinder their effectiveness in providing workers' compensation coverage
under DBA. Lack of reliable information on numbers of contractors and
cost of DBA insurance restricts the ability of agencies to make
informed decisions on purchasing strategies for DBA. Additionally,
confusion over when DBA applies and difficulty in enforcing DBA and
processing claims remain largely unresolved problems, despite actions
taken by agencies. Finally, new challenges, such as growing numbers of
contractors, have arisen since 1941, when DBA was passed. These factors
highlight the need for a coordinated effort among affected agencies to
identify actions that can address such challenges.
Matter for Congressional Consideration:
To ensure that DBA cost and implementation issues are adequately
addressed, we suggest that Congress consider requiring the Director of
OMB to determine, in coordination with DOD, the Departments of Labor
and State, and the U.S. Agency for International Development, current
and future needs, options, and risks associated with DBA insurance. The
agencies involved in this coordinated effort should identify actions,
including any necessary legislative changes, to address the following
issues:
* identifying cost-effective options for acquiring DBA insurance;
* developing methods for coordinating data collection efforts among
agencies and contractors on the cost of insurance and other relevant
information to make informed decisions;
* facilitating consistent, collective, and collaborative application of
DBA across agencies by:
* developing and disseminating guidance on when and to whom DBA
applies,
* improving communication within and among agencies about the
implementation of DBA and associated difficulties through such means as
an informal network, interagency working groups, conferences, forums,
or Web sites;
* identifying actions to address difficulties with administering DBA,
such as:
* identifying potential means to address enforcement challenges,
* collecting data from contractor employees to facilitate claims
processing,
* collecting and reporting to Labor information on contractors
performing overseas and whether they have DBA insurance.
Agency Comments and Our Evaluation:
DOD and OMB provided written comments on a draft of this report. Both
disagreed with our recommendation, which is now included in the report
with minor clarifications as a matter for congressional consideration.
OMB agreed with our assessment of the challenges agencies face but
points to actions already taken by the administration. OMB states that
our recommendation is overly broad and said a targeted approach would
be preferable in light of the need to give immediate attention to
specific issues in Iraq. DOD took no exception to the factual
information contained in our report but said that ongoing actions
address the issues in our report. DOD also contends that the cost of
undertaking an interagency effort will outweigh potential benefits.
We agree that agencies are taking actions to address some of the
challenges discussed in our report. However, it was clear during our
review that increased coordination among all affected agencies will be
needed to identify actions to address DBA cost and implementation
challenges. For example, we found that the conditions in Iraq make it
difficult to enforce DBA and process claims. We also found that an
informal interagency working group addressing insurance issues was not
focused on issues related to DBA. And the working group did not include
Labor officials, who play a key role in claims processing and
administration of DBA insurance. Furthermore, at a Labor seminar on DBA
held in April 2005, we observed confusion among attendees over when DBA
applies.
Our review also revealed the agencies lacked reliable data on how many
contractors and subcontractors are in Iraq, costs to the government of
DBA coverage for contractors, and whether all contractors operating in
Iraq provided their employees required DBA insurance coverage. Without
such information, the agencies are not in a position to make informed
decisions about implementing DBA. DOD stated that it believes costs of
interagency efforts will outweigh potential benefits. DOD officials
told us, however, they do not have cost estimates or other data to
support their statement, but that they believe challenges with
implementing DBA in Iraq are being addressed and data collection and
reporting efforts would be expensive and would divert limited
resources. We do not believe our recommendation is overly broad; rather
it provides flexibility to agencies to deal with the full range of
issues we identified and allow them to proactively address the
government's growing use of contractors in overseas situations now and
in the future. We continue to believe a more coordinated and
comprehensive approach, involving all of the affected agencies, is
necessary to address DBA cost and implementation issues. OMB's and
DOD's comments are included in enclosures I and II, respectively.
Labor indicated its willingness to work with other agencies and
provided technical comments that are incorporated as appropriate (see
enclosure III). Justice also provided technical comments, which were
incorporated as appropriate. State had no comments. The U.S. Agency for
International Development indicated, via e-mail, that it looked forward
to working with OMB and the other agencies on the recommendation.
Scope and Methodology:
To address our objectives, we obtained rates spent on DBA insurance for
21 contracts held by 13 prime contractors performing work in Iraq under
cost-reimbursable contracts. These contracts represent 69 percent of
U.S.-appropriated contracting dollars awarded for ongoing work as of
May 2004. We selected companies of different sizes performing a range
of services for DOD, the Department of State and the U.S. Agency for
International Development. We did not obtain DBA rates from
subcontractors in our review. We conducted interviews with officials
from the selected contractors and DOD, the Departments of State, Labor,
and Justice, and the U.S. Agency for International Development, as well
as representatives from 11 insurance companies and brokers. We were
unable to verify numbers provided by the Department of State for the
total numbers of Iraqi employees working on U.S. government-
administered reconstruction projects. Additionally, in light of recent
investigations into the insurance industry, we did not rely on
information obtained previously from insurance industry
representatives. We performed our review between May 2004 and April
2005 in accordance with generally accepted government auditing
standards.
If you have any questions, please contact me at (617) 788-0555 or at
cooperd@gao.gov or John K. Needham, Assistant Director, at (202) 512-
5274 or needhamjk1@gao.gov. Other major contributors to this report
include Lily Chin, Christina Cromley, Jeff Hartnett, Bill McPhail, Lisa
Simon, and Shannon G. Simpson.
Sincerely,
Signed by:
David E. Cooper:
Director:
Acquisition and Sourcing Management:
[End of section]
Enclosure I: Comments from the Office of Management and Budget:
EXECUTIVE OFFICE OF THE PRESIDENT:
OFFICE OF MANAGEMENT AND BUDGET:
wASHINGTON, DC. 20503:
APR 06 2005:
Mr. David E. Cooper:
Director:
Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Cooper:
Thank you for this opportunity to comment on the GAO draft
correspondence en itled "Defense Base Act Insurance: Review Needed of
Cost and Implementation Issues."
We appreciate GAO's careful review of Defense Base Act (DBA)
implementation and the many challenges faced by both contractors and
agencies as they seek to meet their responsibilities under the law.
As noted in your letter, the recent increase in the use of contractors
to support U. S. military and civilian operations overseas,
particularly in Iraq, has presented numerous challenges with respect to
DBA administration. The Administration has taken a number of steps to
address these challenges. These include an interagency workgroup,
comprised of staff from the Departments of State and Defense, the
Office of Management and Budget, and the U.S., Agency for International
Development, which has met to examine issues surrounding the cost and
availability of DBA insurance coverage. In early April the Department
of Labor (DOL) held its fourth seminar on DBA for contractors, agency
contracting personnel, and other interested parties to provide
information on coverage and requirements. Responding to confusion about
DBA waiver authority, the State Department last December published a
proposed rule in tended to clarify when DOL waivers apply and when
State may waive DBA requirements for contractors performing work on an
intermittent basis. Lastly, as your correspondence notes, the Army
Corps of Engineers has begun work on a pilot single-insurer program for
DBA, which if effective may be expanded Department of Defense-wide.
While we agree with the assessment that challenges remain, we do not
concur wi h GAO's recommendation that the Office of Management and
Budget "determine ... current and future needs, options, and risks
associated with DBA insurance." In our view, this recommendation is
overly broad. We believe a targeted approach to DBA issues would be
preferable in light of the need to give immediate attention to our
specific needs in Iraq. The Administration will continue the efforts it
has begun, and work to solve specific issues as they arise.
Thank you for your efforts to improve the implementation of the DBA and
the opportunity to comment.
Sincerely,
Signed by:
Dean F. Clancy:
Associate Director:
Human Resource Programs:
[End of section]
Enclosure II: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
ACQUISITION TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:
MAR 15 2005:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Cooper:
This is the Department of Defense (DoD) response to the GAO draft
report, "Defense Base Act Insurance: Review Needed of Cost and
Implementation Issues," dated February 28, 2005 (GAO Code 120377/GAO-
05-280R). While we take no exception to the factual information
contained therein, it is not necessary "that the Director of the Office
of Management and Budget determine, in coordination with the
Departments of Defense, Labor, and State and the U.S. Agency for
International Development, current and future needs, options, and risks
associated with DBA insurance." In fact, the costs of undertaking such
a substantial interagency effort to address the issues listed with this
recommendation will outweigh any potential benefits.
For example, the various new DBA data collection and reporting efforts
suggested for federal agencies and contractors would be expensive and
would divert already limited resources, without any clear benefit for
the procurement process. Similarly, the recent communications
initiatives of the Department of Labor (DOL) in this area should be
given sufficient time to achieve their anticipated results before
chartering any additional interagency DBA working groups, conferences,
forums, and/or web sites.
In addition, a number of the issues identified in the recommendation
for an OMB sponsored review are already being addressed by the
appropriate government entities. Clearly, the longstanding DBA
insurance programs at the U.S. Agency for International Development and
the Department of State have been effective in helping control the cost
of this mandatory insurance. Also, as explained in the report, the U.S.
Army Corps of Engineers has an ongoing initiative to examine whether
such a DBA insurance program might also be advantageous for DoD at this
time. Moreover, in the last year and a half, DOL, which has the
statutory responsibility for administering the DBA, has been very
active in sponsoring a series of highly informative seminars and
roundtable meetings on this subject. This DOL initiative has greatly
increased awareness of DBA requirements within both the government
procurement and contractor communities.
I appreciate the opportunity to comment on this draft report.
Sincerely,
Signed by:
Deidre A. Lee:
Director, Defense Procurement and Acquisition Policy:
[End of section]
Enclosure III: Comments from the Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employment Standards:
Washington. D.C. 20210:
March 21, 2005:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Cooper:
This responds to your request for comments from the U.S. Department of
Labor on the draft report, Defense Base Act Insurance: Review Needed of
Cost and Implementation Issues.
We have reviewed the Defense Base Act (DBA) report and our comments are
as follows:
1. The draft report states that "... DBA is administered by the
Department of Labor..." (page 1). This is only partially true, as our
administration and oversight is limited to the claims side of the
system, monitoring timely and accurate benefit payments, and resolving
disputes related to those matters. The department has no authority over
the business side of the system, including insurance availability,
pricing, or purchasing arrangements.
2. The draft report states that "Labor officials also informed us that
they would need enforcement teams in Iraq to monitor compliance..."
(page 5). This statement misconstrues the department's view. Although a
comment to this effect may have been made as part of the general
discussion regarding insurance enforcement, it was made to illustrate
the impossibility of assuring that all contracted employees have
insurance coverage without having someone in Iraq to actually demand to
see proof of coverage for every level of subcontracted work, an
impossible task. In fact, it is the department's perspective that
enforcement of DBA coverage needs to take place before workers are sent
overseas, with reports of coverage sent to the department on every
contract and subcontract let. This is the only way in which accurate
and useful records of insurance coverage can be maintained.
3. The Department of Labor is willing to work with any other agencies
on matters of DBA coverage.
The Department appreciates the opportunity to provide comments on this
report.
Sincerely,
Signed for:
Victoria A. Lipnic:
[End of section]
FOOTNOTES
[1] 42 U.S.C. 1651-1654.
[2] Under DBA, the term "public work" means "any fixed improvement or
any project, whether or not fixed, involving construction, alteration,
removal, or repair for the public use of the United States or its
allies, including but not limited to projects or operations under
service contracts and projects in connection with the national defense
or with war activities, dredging, harbor improvements, dams, roadways,
and housing, as well as preparatory and ancillary work in connection
therewith at the site or on the project."
[3] DBA covers the following types of contractor employment: work for
U.S. government contractors on U.S. military bases or on any land used
by the U.S. for military purposes outside the United States, work on
public work contracts with any U.S. government agency, work on
contracts approved and funded by the United States under the Foreign
Assistance Act, and work for American employers providing welfare or
similar services outside the United States for the benefit of the armed
services.
[4] 42 U.S.C. 1701-1717.
[5] "War-risk hazard" means any hazard from certain specified causes
that arise "during a war in which the United Stated is engaged; during
an armed conflict in which the United States is engaged, whether or not
war has been declared; or during a war or armed conflict between
military forces of any origin, occurring within any country in which a
person covered by the Act;" See 42 U.S.C. 1711.
[6] GAO, Military Operations: Contractors Provide Vital Services to
Deployed Forces but Are Not Adequately Addressed in DOD Plans,
GAO-03-695 (Washington, D.C.: June 24, 2003).
[7] GAO, Opportunity for Savings in Providing War Risk Insurance for
Contractor Property and Employees, B-72699 (Washington, D.C.: November
1971) and GAO, AID Needs Clarification on Defense Base Act Insurance
Requirements, B-162408 (Washington, D.C.: October 1980).
[8] We previously reported on the confusion over when DBA is applicable
in 1980 (GAO, B-162408).
