Competitive Sourcing
Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform Implementation Process Gao ID: GAO-06-72 December 9, 2005Competitive sourcing is a management tool where federal agencies conduct competitions between federal employees and private companies to determine the best source to provide commercially available services. Concerns have been raised in the Congress that differences in the costs of federal and private health insurance benefits could disadvantage the federal workforce in public-private competitions. A health benefit cost comparability provision in the 2005 Defense Appropriations Act prohibited any advantage for private offerors that provide no health benefits or contribute less for them than the Department of Defense (DOD) contributes for its civilian employees. Legislation is pending to extend the provision for another year. GAO, in response to a mandate, determined (1) how DOD implemented the provision, and (2) what impact the provision had on DOD's fiscal year 2005 competitive sourcing program.
Most DOD components implemented the health benefit cost provision using a process designed to ensure that private sector proposals include an amount for employee health benefits at least equal to the amount that Office of Management and Budget Circular A-76 requires to be added to agency cost estimates to account for employee health benefits. Under Circular A-76, this amount is 5.5 percent of direct labor costs. The Defense Logistics Agency (DLA), however, used a different process designed to determine whether a private sector offeror's monthly health benefit premium contributions are at least equal to DOD's. While DOD's and DLA's processes are both reasonable approaches, the use of different processes could result in different competitive sourcing outcomes in some cases. The health benefit cost provision had minimal impact on DOD's fiscal year 2005 competitive sourcing program. Of the 54 public-private competitions we reviewed, the health benefit provision was applicable in only 12 sourcing decisions. In 7 of these 12 competitions, DOD collected health benefit cost data from private sector offerors and found that most of their health benefit costs exceeded 5.5 percent of direct labor costs. This is largely due to the requirements of the Service Contract Act--which mandates minimum wages and fringe benefits (which could include health insurance) for employees on government service contracts. Although the processes used by DOD and DLA resulted in increasing two private offerors' cost proposals, the adjustments did not alter the outcome of the competitions. Contracting officials and the private sector offerors told us that complying with the health benefit cost provision was not unduly burdensome.
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-06-72, Competitive Sourcing: Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform Implementation Process
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2005:
Competitive Sourcing:
Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs
Uniform Implementation Process:
GAO-06-72:
GAO Highlights:
Highlights of GAO-06-72, a report to congressional committees:
Why GAO Did This Study:
Competitive sourcing is a management tool where federal agencies
conduct competitions between federal employees and private companies to
determine the best source to provide commercially available services.
Concerns have been raised in the Congress that differences in the costs
of federal and private health insurance benefits could disadvantage the
federal workforce in public-private competitions. A health benefit cost
comparability provision in the 2005 Defense Appropriations Act
prohibited any advantage for private offerors that provide no health
benefits or contribute less for them than the Department of Defense
(DOD) contributes for its civilian employees. Legislation is pending to
extend the provision for another year. GAO, in response to a mandate,
determined (1) how DOD implemented the provision, and (2) what impact
the provision had on DOD‘s fiscal year 2005 competitive sourcing
program.
What GAO Found:
Most DOD components implemented the health benefit cost provision using
a process designed to ensure that private sector proposals include an
amount for employee health benefits at least equal to the amount that
Office of Management and Budget Circular A-76 requires to be added to
agency cost estimates to account for employee health benefits. Under
Circular A-76, this amount is 5.5 percent of direct labor costs. The
Defense Logistics Agency (DLA), however, used a different process
designed to determine whether a private sector offeror‘s monthly health
benefit premium contributions are at least equal to DOD‘s. While DOD‘s
and DLA‘s processes are both reasonable approaches, the use of
different processes could result in different competitive sourcing
outcomes in some cases.
The health benefit cost provision had minimal impact on DOD‘s fiscal
year 2005 competitive sourcing program. Of the 54 public-private
competitions we reviewed, the health benefit provision was applicable
in only 12 sourcing decisions (see figure). In 7 of these 12
competitions, DOD collected health benefit cost data from private
sector offerors and found that most of their health benefit costs
exceeded 5.5 percent of direct labor costs. This is largely due to the
requirements of the Service Contract Act”which mandates minimum wages
and fringe benefits (which could include health insurance) for
employees on government service contracts. Although the processes used
by DOD and DLA resulted in increasing two private offerors‘ cost
proposals, the adjustments did not alter the outcome of the
competitions. Contracting officials and the private sector offerors
told us that complying with the health benefit cost provision was not
unduly burdensome.
Application of Health Benefits Cost Provision in DOD‘s Fiscal Year 2005
Competitive Sourcing Program (as of June 30, 2005):
[See PDF for image]
[End of figure]
What GAO Recommends:
To avoid the potentially inconsistent treatment within DOD of private
offerors‘ cost proposals, GAO recommends that DOD use a uniform and
consistent process to implement the health benefit cost provision. DOD
concurred with the recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-06-72.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William T. Woods, 202-512-
4841, woodsw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
In General, DOD Implemented Health Benefit Cost Provision Based on
Standard A-76 Cost Factor:
Health Benefit Cost Provision Had Minimal Impact:
Conclusions:
Recommendation For Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Health Benefits in the Private Sector and the Transitional
Benefit Corporation Concept:
Appendix II: Scope and Methodology:
Appendix III: Legislative Provision for Health Benefit Cost
Comparability:
Appendix IV: Fiscal Year 2005 Competitions in Which Health Benefit
Costs Were Not a Factor:
Appendix V: Comments from the Department of Defense:
Appendix VI: Comments from the Office of Management and Budget:
Tables:
Table 1: Components of Circular A-76 Civilian Position Fringe Benefits
Cost Factor:
Table 2: Hypothetical Illustration of DOD's Preferred Health Benefit
Cost Comparability Process:
Table 3: Competitions Where DOD Component Determined That Health
Benefit Cost Data Were Not Needed:
Table 4: Competitions Where Private Offerors Submitted Health Benefit
Cost Data:
Table 5: Competitions In Progress as of June 30, 2005 Where Health
Benefit Cost Comparability Had Yet to Be Considered, and Competitive
Sourcing Decision Was Pending:
Table 6: Streamlined Competitions Where DOD's Market Research
Determined the Agency Was the Lowest-Cost Source and Health Benefit
Cost Comparability Was Not a Factor:
Table 7: Competitions Involving 10 or Fewer FTEs and Health Benefit
Cost Comparability Was Not Applicable:
Figures:
Figure 1: Application of Health Benefits Cost Provision in DOD's
Competitive Sourcing Program as of June 30, 2005:
Figure 2: Percentage of Private-Sector Employers That Contributed
Toward Health Insurance in 2003, by Number of Employees:
Figure 3: Private Employers Percentage Share Contributed Toward
Employee Health Insurance Premiums in 2003, by Number of Employees:
Abbreviations:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
FEHBP: Federal Employees Health Benefits Program:
FTE: full-time equivalent:
SCA: McNamara-O'Hara Service Contract Act:
MEO: most efficient organization:
OMB: Office of Management and Budget:
United States Government Accountability Office:
Washington, DC 20548:
December 9, 2005:
Congressional Committees:
Competitive sourcing is a management tool used by federal agencies to
determine whether commercial activities, such as maintenance of
facilities or information technology support, should be performed by
federal employees or by contractors. Agencies use competition between
the public and private sectors to determine the best source.
Competitive sourcing is intended to encourage innovation and improve
efficiency and performance. Competition between the two sectors is
conducted under procedures prescribed in Office of Management and
Budget (OMB) Circular A-76,[Footnote 1] which was revised in 2003 to
reflect the recommendations of the congressionally chartered Commercial
Activities Panel.[Footnote 2]
Concerns have been raised in Congress about whether the differing costs
of providing health insurance benefits to the federal workforce and to
private sector employees may create a competitive advantage for
contractors. The Department of Defense Appropriations Act of
2005[Footnote 3] included a health benefit cost comparability provision
effective for fiscal year 2005 that prohibits an advantage in public-
private competitions for a private sector source that does not offer
employee health benefits or that pays less towards health benefits than
the Department of Defense (DOD) pays for its civilian employees. On
several occasions, DOD, the Small Business Administration, and OMB have
sought repeal of this provision on the basis that it is difficult to
administer and a disincentive to private sector participation--
particularly by small businesses--in DOD's competitive sourcing
program. Legislation is pending in the Congress that, if enacted, would
extend the provision for another year.[Footnote 4]
The conferees for the fiscal year 2005 National Defense Authorization
Act[Footnote 5] directed that we review the implementation of the
appropriations health benefits cost provision. After providing a
preliminary briefing on our work in April 2005, we agreed with the
congressional defense committees to determine (1) how DOD has
implemented the provision, and (2) what impact the provision had on
DOD's fiscal year 2005 competitive sourcing program. In addition, we
agreed to summarize recently published research on the availability of
employee health benefits and employer contributions in the private
sector and provide information on a concept for assisting displaced
federal employees known as the transitional benefit corporation.
Information on these additional topics is included in appendix I.
To determine how DOD has implemented the health benefits cost provision
and the impact the provision is having on its fiscal year 2005
competitive sourcing program, we reviewed the 54 DOD public-private
competitions that were in progress or completed from October 1, 2004,
through June 30, 2005. We also interviewed and obtained information
from DOD, OMB, and private offeror officials. We conducted our review
between February and October 2005 in accordance with generally accepted
government auditing standards. More information on our scope and
methodology is contained in appendix II.
Results in Brief:
Most DOD components implemented the health benefits cost provision
using a process designed to ensure that private sector proposals
include an amount for employee health benefits at least equal to the
amount that Circular A-76 requires to be added to agency cost estimates
to account for employee health benefits. Under Circular A-76, this
amount is 5.5 percent of direct labor costs. The Defense Logistics
Agency (DLA), however, used a different and more complicated process
designed to determine whether a private sector offeror's monthly health
benefit premium contributions are at least equal to DOD's maximum
monthly premium contributions for civilian employees' health benefits.
While the processes used by DOD and DLA are both reasonable approaches
to implementing the legislative health benefits cost provision, the use
of different approaches within DOD could result in different
competitive sourcing outcomes in some cases and is not in keeping with
the sourcing principle of the Commercial Activities Panel that
advocated the consistent application of clear and transparent
competitive sourcing procedures.
The health benefits cost provision had minimal impact on DOD's fiscal
year 2005 competitive sourcing program. Of the 54 public-private
competitions we reviewed as of June 30, 2005, the health benefit
provision was applicable in only 12. The provision was not applicable
in 42 competitions for various reasons, such as when the use of
streamlined competitions showed that the performance by government
employees would be less expensive even without adjusting for any
difference in the cost of employee health benefits. In 5 of the 12
competitions where the provision applied, obtaining data on health care
costs was unnecessary because either the agency cost estimate was the
lowest or DOD components determined that adding a 5.5 percent
evaluation factor to the low private sector proposal would not have
made a difference. In 7 remaining competitions, DOD collected health
benefit cost information from private sector offerors and found that
most of their health benefit costs exceeded 5.5 percent of direct labor
costs. This is mostly due to the requirements of the Service Contract
Act--which mandates minimum fringe benefits (which could include health
insurance) for employees on government service contracts. Although
DOD's and DLA's processes resulted in increasing two private offerors'
cost proposals, the adjustments did not alter the outcome of the
competitions. Contracting officials and the private sector offerors
told us that complying with the health benefit cost provision was not
unduly burdensome.
To avoid the potentially inconsistent treatment within DOD of private
offerors' cost proposals in the future, this report includes a
recommendation to DOD to use a uniform and consistent process to
implement the health benefit cost provision in its competitive sourcing
program.
In comments on a draft of this report, DOD concurred with the
recommendation. Both DOD and OMB said they remain concerned that the
health care cost provision may harm small business participation in
DOD's competitive sourcing program. As such, both agencies said they
will continue to seek elimination or amendment of the provision.
Written comments from DOD and OMB are reprinted in appendices V and VI,
respectively.
Background:
Competitive sourcing is a process under which federal agencies subject
the performance of their commercial activities to competition among
public and private sector sources. It is intended to contribute to cost
savings, improved performance, and a better alignment of the agency's
workforce to its mission. OMB's Circular A-76, Performance of
Commercial Activities, establishes federal policy and prescribes the
procedures to be used in determining whether commercial activities
should be performed by a federal agency or by the private sector.
Circular A-76 Processes for Conducting Public-Private Competitions:
Circular A-76 contains uniform procedures to be used by agencies for
calculating costs so that cost comparisons between private sector
proposals and government estimates are fair. The Circular mandates use
of a standard and consistent process designed to ensure that evaluated
costs reflect the full cost of performance by public and private sector
sources. This is consistent with the Commercial Activities Panel's
final report, which recommended that these competitions should be
conducted on as nearly equal terms as possible, using clear,
consistent, and transparent processes for all offerors. As part of this
process, the Circular is intended to help ensure that the estimated
cost of government performance fairly reflects all of the personnel and
non-pay costs of an agency source performing the work.[Footnote 6]
When preparing estimates of government performance, agencies are
required to use standard cost factors that are in effect as of the
solicitation closing date and make adjustments to reflect changes
projected to occur during the performance period. To estimate personnel
costs for example, agencies add to basic pay (for full-time and part-
time permanent civilian positions) a standard overall costing factor of
32.85 percent to account for fringe benefits. This overall factor is
comprised of several components, including a standard cost factor of
5.7 percent to account for life insurance and health benefits as shown
in table 1. According to OMB officials, the 5.7 percent factor consists
of 0.2 percent for life insurance and 5.5 percent for health
benefits.[Footnote 7]
Table 1: Components of Circular A-76 Civilian Position Fringe Benefits
Cost Factor:
Standard cost factor: Insurance and health benefits[B];
Percentage of basic pay[A]: 5.7.
Standard cost factor: Standard civilian retirement benefits[C];
Percentage of basic pay[A]: 24.0.
Standard cost factor: Medicare benefit;
Percentage of basic pay[A]: 1.45.
Standard cost factor: Miscellaneous fringe benefit;
Percentage of basic pay[A]: 1.7.
Standard cost factor: Total;
Percentage of basic pay[A]: 32.85.
Source: Circular A-76, Attachments C and D.
[A] Circular A-76 defines basic pay as a civilian employee's annual
salary plus other applicable employee pay entitlements, such as premium
pay for civilian law enforcement officers.
[B] In addition to FEHBP, employees may receive life insurance benefits
through the Federal Employee's Group Life Insurance program.
[C] The standard civilian retirement benefit cost factor includes the
government share for pension benefits (Social Security, Thrift Savings
Plan, Federal Employees or Civil Service Retirement Systems) and the
accruing costs for postretirement health benefits.
[End of table]
To conduct public-private competitions under Circular A-76, agencies
may use either a standard or a streamlined competition process,
depending on the number of positions involved. Agencies must use a
standard competition process for activities with more than 65 full-time
equivalent (FTE)[Footnote 8] positions. As part of the standard process
agencies issue solicitations with a performance work statement
describing the work to be performed, appoint an agency tender official
to prepare a response to the solicitation based on a "most efficient
organization" (MEO),[Footnote 9] and evaluate that response along with
the proposals submitted by private offerors. Also, under the standard
competition process, unless contractor performance would save the
government $10 million or 10 percent of agency personnel-related costs
(whichever is less), the work will be retained within the agency. This
ensures that an agency does not convert to contract performance in
cases where only marginal savings are anticipated.[Footnote 10]
For activities with 65 or fewer FTEs, agencies may use a streamlined
competition process. Streamlined competitions are based only on a
comparison of public and private sector costs. Private sector costs are
obtained either from documented market research or soliciting cost
proposals in accordance with the Federal Acquisition Regulation. Use of
the streamlined process enables agencies to complete the comparison
more quickly.
The Circular was revised in May 2003 based largely on the Commercial
Activities Panel's sourcing principles and recommendations for
improving the government's competitive sourcing processes. Among other
things, the panel recommended that the government's sourcing decisions
be based on a clear, transparent, and consistently applied competitive
sourcing process. This principle is key to ensuring the integrity of
the process, as well as to creating trust in the process on the part of
those it most affects: federal managers, users of the services, federal
employees, the private sector, and the taxpayers. The revised Circular
A-76 states that agencies should centralize oversight responsibility to
foster fairness in their public-private competitions, and effectively
apply a consistent process based on lessons learned and best practices.
DOD's Competitive Sourcing Program:
The Department of Defense has a long-established competitive sourcing
program and is the leader among federal agencies in terms of the number
of public-private competitions conducted and positions competed. In
fiscal year 2004, DOD reported that it made sourcing decisions in 58
public-private competitions, with projected net savings of
approximately $740 million. DOD has a centralized management structure
to oversee its competitive sourcing program and those of the DOD
components. The Deputy Under Secretary of Defense (Installations and
Environment) in the Office of the Secretary of Defense has
responsibility for establishing and overseeing DOD-wide policies,
procedures, and guidance.[Footnote 11] DOD components--such as the
Army, Navy, Marine Corps, and Air Force--as well as the defense
agencies and DOD field activities have their own centralized management
structures to operate their competitive sourcing programs based on
DOD's policies, procedures, and guidance.
Under legislation applicable only to DOD for activities with more than
10 FTEs, unless contractor performance would save the government $10
million or 10 percent of agency personnel-related costs (whichever is
less), the work will not be converted to contractor
performance.[Footnote 12]
Health Benefits Available to Federal and Service Contract Act
Employees:
Federal employees and the employees of the government's service
contractors may receive health insurance benefits based on different
statutory requirements. The Federal Employees Health Benefits Act of
1959 established the framework for government civilian employees'
health insurance benefits through the Federal Employees Health Benefits
Program (FEHBP).[Footnote 13] Participation in FEHBP is voluntary for
civilian employees and their dependents and retirees. This statute sets
the government's share of each participant's health insurance premium
cost at an amount equal to 72 percent of the weighted average of the
premiums of all FEHBP plans, but caps the government's share at 75
percent of any individual plan's premium. This formula is applied to
the self-alone and self-and-family plans separately. For example, in
fiscal year 2005, the government's annual share of FEHBP premiums for
two major FEHBP plans ranged between $2,600 to $3,400 for self coverage
and $5,900 to $7,800 for self-and-family coverage.[Footnote 14]
The McNamara-O'Hara Service Contract Act (SCA) of 1965[Footnote 15]
requires minimum wages and fringe benefits for employees working on
government service contracts that exceed $2,500. The Department of
Labor administers the SCA and determines the prevailing wages in
geographic localities for various job categories. In June 2005, the
department increased the standard SCA health and welfare minimum
benefit rate to $2.87 per hour from $2.59 per hour. Government
contractors have flexibility in the types of health and welfare
benefits they provide, as long as they meet or exceed the $2.87 minimum
health and welfare requirement. For example, contractors can meet their
SCA benefits obligations by providing health insurance benefits, by
allowing their employees to place some or all of the SCA benefits in a
retirement plan, or by providing cash payments.
In General, DOD Implemented Health Benefit Cost Provision Based on
Standard A-76 Cost Factor:
Most DOD components implemented the health benefit cost provision by
ensuring that private sector proposals included an amount for health
insurance benefits at least equal to the amount that Circular A-76
requires to be added to agency cost estimates to account for health
benefit costs. Under Circular A-76, this amount is 5.5 percent of
direct labor costs. The Defense Logistics Agency (DLA), however, used a
process based on the monthly premium contributions DOD is required to
make towards civilian employees' health insurance plans under the
FEHBP. Either of the processes used by DOD or DLA provides a reasonable
approach for ensuring that private offerors do not receive a
competitive advantage for less costly health benefits. Use of two
different processes, however, results in health benefit costs being
treated inconsistently within DOD and could even result in different
competitive sourcing outcomes.
DOD Developed a Preferred Process for Implementing the Health Benefit
Cost Provision, but Has Not Mandated Its Use:
The health benefit cost requirement established for DOD's public-
private competitions in section 8014(a)(3) of the Department of Defense
Appropriations Act, 2005 requires that a private offeror not receive a
competitive advantage by not offering health insurance for its
employees, or by paying less for employee health benefits than the
government contributes for civilian employee health benefits. (See app.
III for the text of Section 8014.)
To implement this legislation, DOD's competitive sourcing officials
told us they consulted with officials from OMB's Office of Federal
Procurement Policy, DOD's Office of General Counsel, and DOD
components' competitive sourcing offices to develop their
interpretation of the legislation and a process for implementation.
Officials from OMB advised DOD that the Circular A-76 standard
insurance and health benefits cost factor of 5.7 percent consisted of
0.2 percent to account for the cost of federal employees' life
insurance benefits and 5.5 percent to cover health benefit costs. DOD
decided to use the Circular A-76 standard health benefits cost factor
as the benchmark for ensuring that the costs of health benefits
provided by private offerors are sufficient to comply with the
legislation. In November 2004, DOD communicated this approach as the
preferred process throughout the department, but gave discretion to the
competitive sourcing program offices of the DOD components to use
alternate processes, as long as they consulted with DOD's competitive
sourcing office.
Under DOD's process, contracting officials are to follow a multistep
approach to implement the health benefit cost comparability provision.
First, for competitions conducted subsequent to the issuance of DOD's
guidance, contracting officials should obtain data from the private
offeror regarding the company's costs for contributions to employee
health insurance (i.e., benefits) as well as its proposed direct labor
costs for the performance of the competed commercial activity. Second,
the contracting officials calculate the private offeror's costs of
employee health benefits as a percentage of direct labor costs.
Finally, contracting officials make any necessary adjustments to their
calculation of the private offeror's proposed costs using the following
criteria:
* If the health benefit cost percentage is lower than 5.5 percent, then
the private offeror's proposed cost is adjusted upward by the amount
necessary to make the contribution equal 5.5 percent.
* If the percentage contribution is equal to or greater than 5.5
percent, no adjustment is necessary.
Hypothetical examples of this process are shown in table 2.
Table 2: Hypothetical Illustration of DOD's Preferred Health Benefit
Cost Comparability Process:
Proposal costs and adjustments: Private offeror's total proposed cost;
Proposal requiring adjustment: $1,000,000;
No adjustment required: $1,000,000.
Proposal costs and adjustments: Direct labor;
Proposal requiring adjustment: $500,000;
No adjustment required: $500,000.
Proposal costs and adjustments: Health benefit contribution;
Proposal requiring adjustment: $15,000 (3 percent of direct labor);
No adjustment required: $27,500 (5.5 percent of direct labor).
Proposal costs and adjustments: DOD's adjustment to implement health
benefit cost provision;
Proposal requiring adjustment: $12,500 (Add 2.5 percent to the proposed
3 percent of direct labor to equal 5.5 percent);
No adjustment required: None needed (Health benefit cost is 5.5
percent).
Proposal costs and adjustments: Total evaluated cost after adjustment;
Proposal requiring adjustment: $1,012,500;
No adjustment required: $1,000,000.
Source: GAO analysis using hypothetical data and DOD's preferred
process.
[End of table]
According to DOD officials, any health benefit cost adjustment made to
the private offeror's proposed costs is for evaluation and cost
comparison purposes only. For work currently performed within the
agency, if contracting officials determine that the private offeror has
a higher priced proposal than the agency's cost estimate, either before
or after any adjustments for health benefit contributions, DOD will
retain the work within the agency. If a private offeror selected for
award under the solicitation's evaluation criteria has a lower cost
proposal after any adjustment for health benefit contributions--and
contractor performance would save DOD at least $10 million or 10
percent of the agency team's personnel-related costs--the offeror will
be awarded a contract at its original proposed amount. Section 8014
does not compel DOD officials to reject a private offeror's proposal
based solely on the cost or extent of the company's health benefit
coverage. Nor does it require the private offeror to match the DOD's
health benefit costs, since according to DOD officials this would in
effect have to be subsidized by DOD through higher awarded costs.
DOD officials told us that using the 5.5 percent Circular A-76 cost
factor to implement the health benefit cost legislation accomplishes
several objectives. First, the approach is consistent with the
requirement of the statute that private sector offerors not receive a
competitive advantage by offering to pay less for health benefits than
what the government pays. Second, DOD officials believe the approach is
fair because it ensures that proposals from both the public and private
sectors have an equal health benefit cost component of at least 5.5
percent. Third, the approach is consistent with the standard adjustment
agency sources already make to account for health benefit costs when
preparing agency cost estimates. Fourth, DOD officials said that the
process reduces the chances of human error and miscalculations inherent
in alternative approaches that might attempt to compare the quality of
public and private health benefits. DOD officials commented that it
would be difficult to do a true "apples-to-apples" comparison of
federal and private sector health benefit plan costs because of the
wide variation among federal civilian and private sector plan benefits
and employee participation. Finally, according to DOD officials, this
process avoids the problem of comparing aggregate employer contribution
costs for health benefits, and better accounts for differences in
proposed staffing across offers without penalizing a smaller company
that may pay less for health benefits overall than the agency source.
Most DOD Components Adopted DOD's Health Benefit Cost Comparability
Process:
Except for DLA, which implemented its own process, the DOD components
we reviewed adopted DOD's preferred process to implement the health
benefit cost comparability provision. Competitive sourcing program
officials in the Air Force, Navy, Marine Corps, and Army Corps of
Engineers told us that they have taken actions to implement the DOD
process in their fiscal year 2005 competitive sourcing programs.
According to these officials, implementation actions ranged from
offering instructions to contracting staff about incorporating the DOD
preferred process in ongoing competitions to more formal actions such
as incorporating the preferred process in competitive sourcing manuals.
For example, the Marine Corps' competitive sourcing program officials
added a section with guidance for implementing the health benefit cost
provision in its draft competitive sourcing program manual, which
contracting officers will use to run Marine Corps public-private
competitions.
Early in fiscal year 2005, some components took steps to implement the
health benefit cost provision in advance of communication from DOD
about its preferred process because these components had immediate
needs to comply with the requirement in several pending public-private
competitions. These early implementation efforts were generally
consistent with the preferred process that DOD later communicated in
November 2004. For example, Navy and Marine Corps contracting officials
told us they issued amendments to ongoing solicitations in which they
requested information from private offerors to implement the health
benefit provision. This information included whether the offeror would
provide an employer-sponsored health insurance plan, the total cost of
the employer's contribution to the plan on behalf of employees, and
their direct labor costs to perform the commercial activity being
competed. Navy and Marine Corps contracting officials told us that they
collected this information in order to compare this offeror information
against the standard Circular A-76 insurance and health benefit cost
factor.
Because of a pending competitive sourcing decision early in fiscal year
2005, DLA also moved ahead and implemented the health benefit cost
comparability provision before DOD communicated its preferred process.
DLA's process, which it continues to use, differs from DOD's and is
based on using the monthly premium contributions DOD is required to
make under the FEHBP towards civilian employees' health
insurance[Footnote 16] as the benchmark for comparing private offerors'
health benefit coverage and costs. DLA's process requires detailed data
collection and the use of a complex benefit and cost comparison method.
Specifically, for a private offeror to demonstrate that it meets DLA's
health benefit cost comparability benchmark, the company first must
provide data showing that:
* its health insurance plan allows employees to enroll either self-
alone or self-and-family, and:
* the amount the company contributes towards the plan's premium cost is
at least the lower of the following two benchmarks: (1) the monthly
maximum amount of DOD's premium contribution for self-alone and self-
and-family coverage under FEHBP--$298.23 and $646.17, respectively, or
(2) 75 percent of the cost of the company plan's monthly premium, which
is the same cap set for any government contributions under the
FEHBP.[Footnote 17]
Next, DLA's process requires that the contracting officer calculate the
offeror's health benefit costs for self-alone and self-and-family
coverage, and compare those costs with the agency's health benefit cost
benchmarks under FEHBP, and make any cost adjustments based on the
following criteria:
* If the private offeror's health benefit plan cost equals or exceeds
the lesser of DLA's two premium contribution benchmarks,[Footnote 18]
no upward adjustment is made to its cost proposal.
* If the private offeror's health plan cost does not meet one of DLA's
two premium contribution benchmarks, a "health benefit cost factor" is
added to the private offeror's proposal cost to make up the shortfall.
As with DOD's process, such adjustments, if necessary, are made by DLA
only for the purpose of determining compliance with the health benefit
cost provision. If the private offeror still has the lower costs after
such adjustment and completion of the cost comparison--and meets the
minimum $10 million or 10 percent savings margin required for
contractor conversion--the private offeror may be awarded a contract at
its original proposal amount.
In explaining the rationale for this process, DLA officials told us
that their interpretation of section 8014 focused on determining that
private offerors not receive a competitive advantage when they
contribute less towards the premium share than the amount that is paid
by DOD for civilian employees' health benefits under FEHBP. DLA
consulted in advance with DOD's competitive sourcing office, which
concurred with DLA's proposed process for implementation. DOD's
competitive sourcing officials told us that they consider DLA's process
to be more complicated to administer than the preferred process of
using the 5.5 percent health benefit cost benchmark. Nevertheless, they
told us that DLA's process is consistent with DOD's current guidance
which allows the use of an alternative process to implement the
requirement for a health benefit cost comparison, as long as components
consult in advance with DOD.
Either of the processes used by DOD or DLA provides a reasonable
approach for ensuring that private offerors do not receive a
competitive advantage for less costly health benefits. Use of two
different processes, however, results in health benefit costs being
treated inconsistently within DOD and could even result in different
competitive sourcing outcomes.
For example, in one of the competitions we reviewed, the company's
contribution for health benefits totaled about 15 percent of its total
direct labor costs. Under DOD's preferred process for determining
health benefit cost comparability, the company's cost proposal would
have required no adjustment since the offeror contributes substantially
more than the 5.5 percent benchmark. Under DLA's process, however, the
contracting officer found that the private offeror's share of the
health insurance premium fell short of DLA's benchmark for self-and-
family coverage. As a result, the contracting officer added about
$280,000 to the private offeror's cost proposal to make up for the
shortfall. Ultimately, because the agency cost estimate was lower,
regardless of the health care addition, this adjustment did not change
the competitive sourcing decision. Had the cost competition between the
public and private sources been closer, however, the use of a different
cost comparison approach could have resulted in a different outcome.
Health Benefit Cost Provision Had Minimal Impact:
The health benefit cost comparability provision has had minimal impact
on DOD's fiscal year 2005 competitive sourcing program and the offerors
that participated. Of the 54 public-private competitions we reviewed,
the health benefit provision was applicable in only 12 sourcing
decisions. In 7 of these 12 competitions, DOD collected health benefit
cost information from private sector offerors and found that most of
their health benefit costs exceeded 5.5 percent of direct labor costs.
This is mostly due to the requirements of the Service Contract Act--
which mandates minimum wages and fringe benefits (which could include
health insurance) for employees on government service contracts. DOD
contracting officials and the private sector offerors told us that
complying with the health care cost provision was not unduly
burdensome. Implementation of the health care provision did not alter
the outcome of any of the competitions.
Few Competitions Involved Consideration of Health Benefit Costs and No
Sourcing Decision Changed as a Result:
We reviewed the 54 public-private competitions that were either in
progress or completed between October 1, 2004, and June 30, 2005. As
shown in figure 1, only 12 public-private competitions that reached a
sourcing decision involved some consideration of the requirements of
the health benefit cost provision. Also as shown in figure 1, in the
remaining 42 of the 54 competitions, the health benefit cost provision
was not a factor for various reasons. For example, DOD contracting
officers did not need to implement the health benefit cost
comparability provision in 13 competitions that involved 10 or fewer
FTEs since the requirement applies only to competitions involving more
than 10 FTEs. (See app. IV for more information on the remaining 42
competitions where the health benefit cost provision was not yet
applied or not a factor in sourcing decisions.)
Figure 1: Application of Health Benefits Cost Provision in DOD's
Competitive Sourcing Program as of June 30, 2005:
[See PDF for image]
[End of figure]
The DOD component conducting the public-private competition determined
that there was no need to collect data on health benefit costs in 5 of
the 12 competitions for which the legislative provision was applicable.
As shown in table 3, in one of those competitions, the work was
retained for agency performance. In that case, the cost estimate for
agency performance was about 45 percent lower than the private offer.
In the remaining four cases, a private offeror submitted a lower cost
proposal than the agency's cost estimate,[Footnote 19] and the
difference was so great (ranging between 8.1 and 14.8 percent less)
that even adding the full health cost factor of 5.5 percent would not
have made a difference.
Table 3: Competitions Where DOD Component Determined That Health
Benefit Cost Data Were Not Needed:
Public-private competition: 1;
DOD component: Air Force;
FTEs competed: 191;
Sourcing decision: Private;
Cost proposal difference: 14.3 percent lower.
Public-private competition: 2;
DOD component: Marine Corps;
FTEs competed: 265;
Sourcing decision: Private;
Cost proposal difference: 9.9 percent lower.
Public-private competition: 3;
DOD component: Marine Corps;
FTEs competed: 16;
Sourcing decision: Public;
Cost proposal difference: 45.6 percent lower.
Public-private competition: 4;
DOD component: Navy;
FTEs competed: 11;
Sourcing decision: Private;
Cost proposal difference: 14.8 percent lower.
Public-private competition: 5;
DOD component: Navy;
FTEs competed: 290;
Sourcing decision: Private;
Cost proposal difference: 8.1 percent lower.
Source: GAO analysis of DOD data.
[End of table]
In the remaining 7 of the 12 competitions, DOD components collected and
assessed health benefit data from private offerors. As shown in table
4, most private offerors' proposed costs for health benefits far
exceeded DOD's 5.5 percent benchmark.
Table 4: Competitions Where Private Offerors Submitted Health Benefit
Cost Data:
Public-private competition: 6;
DOD component: Navy;
FTEs competed: 809;
Sourcing decision: Public;
Private offeror a small business? No;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: 21.0;
Cost proposal adjustment needed for health benefit comparability: No.
Public-private competition: 7;
DOD component: Marine Corps;
FTEs competed: 38;
Sourcing decision: Public;
Private offeror a small business? Yes;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: 17.0;
Cost proposal adjustment needed for health benefit comparability: No.
Public-private competition: 8;
DOD component: Navy;
FTEs competed: 103;
Sourcing decision: Private;
Private offeror a small business? No;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: 10.0;
Cost proposal adjustment needed for health benefit comparability: No.
Public-private competition: 9;
DOD component: Marine Corps;
FTEs competed: 27;
Sourcing decision: Public;
Private offeror a small business? Yes;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: 2.1;
Cost proposal adjustment needed for health benefit comparability:
No[A].
Public-private competition: 10;
DOD component: Marine Corps;
FTEs competed: 52;
Sourcing decision: Private;
Private offeror a small business? Yes;
Private offeror contributes towards health benefits? No;
Health benefit cost as percentage of direct labor: 0.0;
Cost proposal adjustment needed for health benefit comparability:
Yes[B].
Public-private competition: 11;
DOD component: DLA;
FTEs competed: 124;
Sourcing decision: Public;
Private offeror a small business? No;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: 15.4[C];
Cost proposal adjustment needed for health benefit comparability:
Yes[C].
Public-private competition: 12;
DOD component: DLA;
FTEs competed: 341;
Sourcing decision: Public;
Private offeror a small business? No;
Private offeror contributes towards health benefits? Yes;
Health benefit cost as percentage of direct labor: Not available[D];
Cost proposal adjustment needed for health benefit comparability: No.
Source: GAO analysis of DOD and private offeror data.
[A] Contracting office did not need to adjust the private offeror's
cost proposal since agency's cost estimate was lower.
[B] Proposal cost adjustment was not documented in the source selection
file.
[C] GAO calculation using DOD process and private offeror data.
Contracting officer used DLA's process for comparison and private
offeror's health benefit cost fell short of DLA's health benefit cost
benchmarks.
[D] Private offeror's health benefit cost as percentage of direct labor
was not available and GAO was unable to calculate health benefit cost
as percentage of direct labor. Contracting officer used DLA's process
for comparison, and private offeror's cost proposal met DLA's health
benefit cost benchmarks.
[End of table]
Collection of Health Benefit Data Was Not Unduly Burdensome:
According to DOD component contracting officers and our review of
competitive sourcing documents, the administrative steps taken to
collect health benefit data were not unduly burdensome and generally
did not significantly delay competition schedules. For the seven
competitions in which cost data were obtained from the offerors, the
components usually obtained the data through solicitation amendments.
This step was necessary because the solicitations had been issued prior
to the health benefit cost provision becoming effective. Component
contracting officers generally told us that collecting the health
benefit data imposed neither unusual burden nor unacceptable
delays.[Footnote 20] In one case, instead of a solicitation amendment,
the contracting officer simply contacted the offeror and asked the
company to submit the health care cost data. Contracting officers told
us that they plan to include the health benefit cost provision in the
future solicitations.
Our discussions with the offerors in the public-private competitions
also indicated the process created little difficulty for them, and
required minimal efforts. The health benefit data needed were readily
available and generally maintained in the company accounting systems.
This was the case for both small and larger companies. According to the
offerors we interviewed (including one firm that submitted to DLA
detailed data about health benefits), submitting the health benefit
data was not considered unusually burdensome. The private offeror
involved in DLA's process we contacted raised no concern with us about
any burden. Our review of DLA's competition documents, however,
indicated that much more documentation about health benefits and costs
is expected to be submitted by a private offeror participating in a DLA
public-private competition than what is expected of private offerors
participating in other competitions following DOD's preferred process.
Service Contract Act Results in Most Private Offerors Paying for Health
Benefit Costs:
In all seven competitions we reviewed where DOD obtained health
benefits data, private offerors were subject to the Service Contract
Act (SCA). At the time DOD reviewed their health benefit costs, the SCA
required that these offerors pay at least $2.59 per hour for employees'
fringe benefits.[Footnote 21]
We contacted 6 of the 7 private offerors who submitted health benefit
data for these competitions. Four of these offerors allowed their
employees to use all of the SCA minimum benefit rate towards the cost
of the health insurance, and they easily met the 5.5 percent health
benefit cost benchmark. The fifth offeror allowed its employees to use
a portion of the SCA benefits towards health insurance cost and receive
the remainder as an increased hourly wage. As a result, this company's
offer fell short of the 5.5 percent benchmark for health benefit costs.
No adjustment was made, however, because the agency cost estimate was
lower.
The sixth private offeror's proposal included the cost of the required
SCA fringe benefits, but the company notified DOD and also told us that
it does not offer to pay for employee health insurance. Company
officials told us that because most of their employees are former
military or civilian employees with military or federal retiree health
benefits, the company's business decision under the SCA fringe benefit
requirement is not to contribute towards employee health benefits.
Instead, company officials told us they contribute towards a retirement
benefit. Even after adjusting the offeror's cost proposal by adding the
5.5 percent health benefit cost factor, the offeror had the lowest cost
proposal and won the contract.
DOD competitive sourcing and legal officials told us that they did not
consider the availability or cost of SCA minimum requirements for
health and other fringe benefits when they developed their approach for
implementing the health benefit provision. DOD competitive sourcing
officials acknowledged most private offerors will be able to match or
exceed the 5.5 percent health benefit cost benchmark simply by meeting
existing SCA fringe benefit requirements. Our analysis of established
SCA rates for wages and benefits indicates that the ratio of benefit
costs to labor costs is usually much greater than the 5.5 percent
health benefit cost comparability benchmark under DOD's process. For
example, a general maintenance worker paid $17.28 an hour and receiving
the current SCA benefit of $2.87 an hour for employer-paid health
insurance would result in that employer paying roughly 16.6 percent of
its direct labor costs for health benefits.[Footnote 22]
Conclusions:
The Department of Defense is currently using two different processes to
implement the legislative health benefit cost provision. Although both
are reasonable approaches for ensuring that private offerors do not
gain a competitive advantage from lower health benefit costs, and
neither one has yet affected the outcome of any public-private
competition, the use of two different processes is problematic. The
lack of a consistent DOD-wide process may--in future competitions where
agency and private offerors' proposal costs are close--result in
different competitive sourcing outcomes depending on which approach is
used. Such a result would be inconsistent with the purpose of Circular
A-76, which is to provide for greater consistency in the competitive
sourcing process and with the sourcing principles adopted by the
Commercial Activities Panel. DOD currently lacks a uniform process for
implementing the health benefit cost comparability provision that is in
keeping with the sourcing principle that public-private competitions be
guided by clear, transparent, and consistently applied processes. With
legislation pending to extend this health benefit cost comparability
provision through fiscal year 2006, DOD should not continue to permit
this inconsistency to persist.
Recommendation For Executive Action:
To align DOD's competitive sourcing program more fully with
governmentwide policy contained in Circular A-76 and the sourcing
principles of the Commercial Activities Panel, we recommend that if the
health benefit cost provision is extended, the Secretary of Defense
should direct the Deputy Under Secretary of Defense for Installations
and Environment to require use of a uniform and consistent process for
the DOD components in evaluating the health benefits costs of private
sector offerors in public-private competitions.
Agency Comments and Our Evaluation:
In comments on a draft of this report, DOD concurred with the
recommendation. Both DOD and OMB said they remain concerned that the
health care cost provision may harm small business participation in
DOD's competitive sourcing program. As such, both agencies said they
will continue to seek elimination or amendment of the provision.
Written comments from DOD and OMB are reprinted in appendices V and VI,
respectively.
DOD and OMB also commented that the report is based on very limited
data involving only 12 competitions and that our finding of minimal
impact cannot be used to predict the impact on future competitions.
However, we did not focus on assessing what impacts the provision could
potentially have on DOD's competitive sourcing program in the future.
Rather, we assessed the impacts the health benefits provision was
having on DOD's fiscal year 2005 competitive sourcing program. Our
finding that the provision had minimal impact is based not only on the
12 competitions in which the provision was applicable, but also on
analysis of 42 other public-private competitions where the provision
did not come into play for various reasons. In addition, we reviewed
other information and obtained the views of DOD officials involved with
the competitions and representatives for private offerors who submitted
health benefit cost data for DOD's consideration.
We are sending copies of this report to interested congressional
committees, the Secretary of Defense, and the Director of OMB. We will
also provide copies to others on request. In addition, the report will
be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please
contact me at (202) 512-8214; or WoodsW@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report were
Carolyn Kirby, Assistant Director; John Dicken, Rosa Johnson, Charles
Perdue, Russ Reiter, Sylvia Schatz, Natalie Schneider, Bob Swierczek,
Ann Marie Watt, and Anthony Wysocki.
Signed by:
William T. Woods, Director:
Acquisition and Sourcing Management:
List of Congressional Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable C.W. Bill Young:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Health Benefits in the Private Sector and the Transitional
Benefit Corporation Concept:
This appendix provides information on the availability of and employer
contributions for health benefits in the private sector based on our
review of recently published research. Information is also presented on
the transitional benefit corporation concept that has received
attention as a mechanism for minimizing the loss of health insurance
and other benefits for civilian federal employees affected by
conversion of commercial activities performed by government employees
to private sector performance.
Availability of and Employer Contributions for Health Benefits in the
Private Sector:
Recent government and private sector studies indicate that a variety of
changes have taken place with employer-sponsored health insurance plans
in the last 5 years, including a decrease in the percentage of small
firms offering health benefits and an increase in the cost of the
health benefit premiums for all employers. According to recent Current
Population Survey data[Footnote 23], 81 percent of all individuals aged
18 to 64 years with health insurance in 2004 received coverage through
employment-based insurance.
From 2000 through 2005, the percentage of all firms offering health
benefits fell from 69 percent to 60 percent according to the Kaiser
Family Foundation's annual survey in 2005 of employer
benefits.[Footnote 24] This decline is largely due to the decline in
the percentage of small firms[Footnote 25] that offer health insurance
because small firms represent the majority of all employers. However,
nearly all larger firms (with 200 or more employees) offer employer-
paid health benefits--98 percent in 2005 according to Kaiser's survey.
This is consistent with government data from the 2003 Medical
Expenditure Panel Survey[Footnote 26] (MEPS), which indicates that as
establishment size increases in terms of the number of employees, the
percentage of employers offering health insurance increases. (See fig.
2.)
Figure 2: Percentage of Private-Sector Employers That Contributed
Toward Health Insurance in 2003, by Number of Employees:
[See PDF for image]
[End of figure]
According to Kaiser's annual survey in 2005, the cost of health
insurance premiums has increased dramatically from 1999 to 2005, rising
by over 97 percent. Average annual premiums for employer-sponsored
health insurance rose to $4,024 for self-only and $10,880 for self-and-
family.[Footnote 27] Analysis of 2003 MEPS data indicates that private
industry generally contributes at least as much towards employees'
health insurance plan premiums as the 72 percent average that the
government contributes towards civilian employees' health insurance
premiums under FEHBP. According to MEPS, all size categories of private
sector employers on average paid greater than 80 percent of the health
benefit premiums for self -alone coverage and between 69 percent and 78
percent for self-and-family coverage. (See fig. 3.)
Figure 3: Private Employers Percentage Share Contributed Toward
Employee Health Insurance Premiums in 2003, by Number of Employees:
[See PDF for image]
[End of figure]
Transitional Benefit Corporation Concept:
Under the transitional benefit corporation concept, if an agency
determines that one of its commercial activities could be performed by
nongovernmental employees, the employees currently performing that
activity would be given the opportunity to incorporate as a new, more
efficient business organization outside of the federal agency to
continue performing the same type of activity. This new employee-formed
corporation could obtain business by contracting with the private
sector or partnering with other governmental, private sector,
educational, or not-for-profit entities.
The transitional benefit corporation concept includes a mechanism
intended to minimize the immediate loss of federal health insurance and
retirement benefits for those former government employees affected by
the agency's decision to convert work to private sector performance.
Specifically, under the concept, the former government employees could
temporarily keep their participation in federal health insurance and
retirement benefit programs while transitioning from federal government
to private sector employment status. Under this concept, during this
transition, an agreement may be established allowing the government
agency to continue to pay for the employee's federal retirement and
health insurance benefits, with the new private corporation eventually
paying for those benefits.
The concept has been suggested as an alternative to the government's
conducting Circular A-76 competitions for commercial activities.
According to one analysis of this topic,[Footnote 28] the benefits of a
transitional benefit corporation include:
* Economic development and savings: The government would realize
savings more quickly than through the A-76 competition process. For
example, the estimated time period to develop a transitional benefit
corporation is 6 months, with savings realized shortly thereafter. The
current A-76 process may be much longer and therefore would not provide
savings as quickly. Also, savings to the government would also result
from no longer needing to maintain underutilized assets and personnel.
* Surge capability/readiness: The government could contract with the
transitional benefit corporation in order to expand its workforce
rapidly and draw on the former employees during times of increased
government workload. Because the transitional benefit corporation is a
private organization, it would be able to hire staff outside the
constraints of traditional government hiring, which can slow the hiring
process.
* "Soft landing" for former government employees: Government employees
who would become part of the transitional benefit corporation would be
guaranteed their job and allowed to retain their government benefits,
such as pension and health insurance, for a certain time period.
According to one analyst, for the transitional benefit corporation
concept to be a viable alternative to A-76 and for the government to
realize its potential benefits, three conditions must exist. First,
displaced federal employees must have the appropriate skills to compete
in private sector. Second, private sector competitors must be present
within the same business area. Third, the agency proposing the creation
of a transitional benefit corporation must have adequate knowledge
about the current market conditions and whether or not workload would
be sufficient for the new organization to be viable and maintain
revenue.
DOD competitive sourcing officials told us that they do not consider
the concept as a viable alternative to competing commercial activities
under the A-76 competitive sourcing process. DOD officials commented
that the A-76 process is more appropriate because it emphasizes a
competitive process to select a service provider, while the
transitional benefit corporation concept would use a sole-source
approach that preserves specific jobs and benefits for affected
employees. DOD officials also questioned the feasibility of allowing
former employees to retain and accrue federal benefits when they are no
longer employed by the government. An OMB competitive sourcing official
told us that while OMB officials are aware of the concept, they have no
current plans to conduct an analysis for governmentwide implementation.
[End of section]
Appendix II: Scope and Methodology:
To determine how DOD has implemented the health benefit cost
comparability provision and the impact the provision is having on its
fiscal year 2005 competitive sourcing program, we interviewed
competitive sourcing officials with overall responsibility in the
Office of the Deputy Undersecretary of Defense (Installations and
Environment). We also interviewed DOD component competitive sourcing
program and contracting officials in the Army, Air Force, Navy, Marine
Corps, Army Corps of Engineers, Defense Logistics Agency, Defense
Contract Management Agency, and the Department of Defense Education
Activity involved with fiscal year 2005 public-private competitions
involving the health benefit comparability provision.
To determine the impact of the provision, we reviewed the 54 DOD public-
private competitions that were in progress or completed (i.e.,
tentative or final sourcing decision announced) between October 1,
2004, and June 30, 2005. We identified and obtained data on these 54
competitions from DOD's automated system used to manage the program
across the department--the Commercial Activities Management Information
System (CAMIS). CAMIS contains certain data elements for individual A-
76 cost comparisons, including numbers and length of individual
competitions; numbers of positions to be affected; comparisons of
agency and contractor estimated costs; and solicitation, sourcing
decision, and contract award dates. We have previously reported some
concerns about the accuracy and completeness of data contained in
CAMIS.[Footnote 29] A recent DOD Office of Inspector General report
concluded that DOD has not effectively implemented its CAMIS system to
track and assess the cost of the performance of functions under the
competitive sourcing program.[Footnote 30] To check the quality of the
CAMIS data on the 54 competitions we identified that were in progress
or completed between October 1, 2004, and June 30, 2005, we asked
cognizant DOD and competitive sourcing officials in the components to
verify the accuracy and completeness of the CAMIS data we used for each
of the 54 competitions. Based on the results of our verification of the
data with these cognizant officials, we believe that the data are
sufficiently reliable for purposes of this report.
We reviewed Circular A-76 policies and procedures regarding agency cost
estimates for personnel and benefits in public-private cost
comparisons. We also discussed DOD's implementation of the health
benefit comparability provision with OMB officials responsible for
governmentwide competitive sourcing policy and procedures under
Circular A-76. We reviewed DOD's policies, procedures, and guidance and
analyzed public-private competitive sourcing and other documents
pertaining to the implementation of the health benefit comparability
provision in DOD's fiscal year 2005 competitive sourcing program. We
reviewed this material to document actions taken by DOD to implement
the health benefit comparability provision in fiscal year 2005 public-
private competitions and the impact the provision had in terms of
administrative difficulty, competitive sourcing decision outcomes
between agency or contractor performance, and any disincentives for
private sector participation in DOD's competitive sourcing program.
We also obtained views and information about the implementation and
impact of the health benefit comparability provision by interviewing
representatives for six private offerors that submitted health benefits
cost data for a public-private competition where DOD reached a sourcing
decision between October 1, 2004, and June 30, 2005. We reviewed DOD
competitive sourcing documents and interviewed contracting officials
for another competition, but did not contact the offeror for an
interview due to a pending appeal of the agency's tentative sourcing
decision. For background purposes to gather information on the health
benefit comparability provision, we also interviewed representatives of
a federal labor union, government contractor associations, and
researchers on government competitive sourcing.
To provide information on the availability of health benefits and
employer contributions in the private sector, we reviewed recently
published research from selected government and nongovernmental health
benefits research organizations. To provide information on the
transitional benefit corporation concept, we reviewed relevant
literature. We interviewed one legal analyst who has published an
article about governmentwide adoption of the transitional benefit
corporation concept as an alternative to Circular A-76 public-private
competitions. We also interviewed DOD and OMB competitive sourcing
policy officials to obtain their views on the concept and prospects for
implementation as an alternative to conducting A-76 public-private
competitions for commercial activities.
We conducted our review from February 2005 through October 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix III: Legislative Provision for Health Benefit Cost
Comparability:
The health benefit cost comparability provision is a requirement for
DOD under Section 8014 of the Department of Defense Appropriations Act,
2005 (Public Law 108-287, enacted August 5, 2004). See italicized text
below for the Section 8014 (a)(3) provision.
SEC. 8014. (a) LIMITATION ON CONVERSION TO CONTRACTOR PERFORMANCE.--
None of the funds appropriated by this Act shall be available to
convert to contractor performance an activity or function of the
Department of Defense that, on or after the date of the enactment of
this Act, is performed by more than 10 Department of Defense civilian
employees unless--
(1) the conversion is based on the result of a public-private
competition that includes a most efficient and cost effective
organization plan developed by such activity or function;
(2) the Competitive Sourcing Official determines that, over all
performance periods stated in the solicitation of offers for
performance of the activity or function, the cost of performance of the
activity or function by a contractor would be less costly to the
Department of Defense by an amount that equals or exceeds the lesser
of:
(A) 10 percent of the most efficient organization's personnel-related
costs for performance of that activity or function by Federal
employees; or:
(B) $10,000,000; and:
(3) the contractor does not receive an advantage for a proposal that
would reduce costs for the Department of Defense by:
(A) not making an employer-sponsored health insurance plan available to
the workers who are to be employed in the performance of that activity
or function under the contract; or:
(B) offering to such workers an employer-sponsored health benefits plan
that requires the employer to contribute less towards the premium or
subscription share than the amount that is paid by the Department of
Defense for health benefits for civilian employees under chapter 89 of
title 5, United States Code.
(b) EXCEPTIONS.--(1) The Department of Defense, without regard to
subsection (a) of this section or subsections (a), (b), or (c) of
section 2461 of title 10, United States Code, and notwithstanding any
administrative regulation, requirement, or policy to the contrary shall
have full authority to enter into a contract for the performance of any
commercial or industrial type function of the Department of Defense
that:
(A) is included on the procurement list established pursuant to section
2 of the Javits-Wagner-O'Day Act (41 U.S.C. 47);
(B) is planned to be converted to performance by a qualified nonprofit
agency for the blind or by a qualified nonprofit agency for other
severely handicapped individuals in accordance with that Act; or:
(C) is planned to be converted to performance by a qualified firm under
at least 51 percent ownership by an Indian tribe, as defined in section
4(e) of the Indian Self-Determination and Education Assistance Act (25
U.S.C. 450b(e)), or a Native Hawaiian Organization, as defined in
section 8(a)(15) of the Small Business Act (15 U.S.C. 637(a)(15)).
(2) This section shall not apply to depot contracts or contracts for
depot maintenance as provided in sections 2469 and 2474 of title 10,
United States Code.
[End of section]
(c) TREATMENT OF CONVERSION.--The conversion of any activity or
function of the Department of Defense under the authority provided by
this section shall be credited toward any competitive or outsourcing
goal, target, or measurement that may be established by statute,
regulation, or policy and is deemed to be awarded under the authority
of, and in compliance with, subsection (h) of section 2304 of title 10,
United States Code, for the competition or outsourcing of commercial
activities.
[End of section]
Appendix IV: Fiscal Year 2005 Competitions in Which Health Benefit
Costs Were Not a Factor:
This appendix presents information on the 42 competitions in which the
health benefit cost comparability provision was not a factor in
sourcing decisions between October 1, 2004 and June 30, 2005, for
various reasons. In one competition decided in October 2004, the health
benefit comparability provision was not a factor (and is not included
in the tables below). In this case, the Navy decided to retain the
Naval Education and Training Command support services (involving 276
FTEs) within the agency because no cost proposals were submitted by
private offerors in response to the Navy's solicitation.
Table 5 presents information on the 14 competitions that were in
progress as of June 30, 2005. In these competitions, DOD had yet to
make a sourcing decision, and thus DOD contracting officers had not yet
needed to implement the health benefit cost comparability provision.
Table 6 presents information on 14 streamlined competitions that--as a
result of market research completed through June 30, 2005--contracting
officers determined that the agency cost estimate was the lowest. Thus,
in these decisions, DOD contracting officers did not need to request
health benefit data because no private offerors were being considered
for the work. Finally, table 7 presents information on 13 competitions
involving 10 or fewer FTEs. In these cases, contracting officers did
not need to implement the health benefit cost comparability provision,
since the requirement applies only to competitions involving more than
10 FTEs.
Table 5: Competitions In Progress as of June 30, 2005 Where Health
Benefit Cost Comparability Had Yet to Be Considered, and Competitive
Sourcing Decision Was Pending:
Air Force competitions.
Competition and location: Multi-Support Functions, Keesler Air Force
Base, Miss;
FTEs competed: 291.
Competition and location: Multi-Support Functions, Keesler Air Force
Base, Miss;
FTEs competed: 19.
Army and Corps of Engineers competitions.
Competition and location: Information Management, Army Corps of
Engineers, all locations agencywide;
FTEs competed: 1,460.
Competition and location: Base Support Services, Walter Reed Army
Medical Center, Washington D.C;
FTEs competed: 161.
Competition and location: Base Support Services, Walter Reed Army
Medical Center, Washington D.C;
FTEs competed: 534.
Competition and location: Public Works, Army Corps of Engineers,
Vicksburg, Miss. and Hanover, N.H;
FTEs competed: 55.
Competition and location: Finance Center, Army Corps of Engineers,
Millington, Tenn;
FTEs competed: 80.
Navy competition.
Competition and location: Satellite Operations, Norfolk, Va;
FTEs competed: 54.
Defense Logistics Agency competitions.
Competition and location: Distribution Operations, Defense Distribution
Depot, Oklahoma City, Okla;
FTEs competed: 576.
Competition and location: Installation Services, Defense Depot, Tracy,
Calif;
FTEs competed: 67.
Competition and location: Installation Services, Defense Depot, New
Cumberland, Pa;
FTEs competed: 136.
Competition and location: Distribution Operations, Defense Supply
Center, Richmond, Va;
FTEs competed: 115.
Competition and location: Department of Defense Education Activity
competitions.
Competition and location: Logistics, Fort Knox, Ky;
FTEs competed: 48.
Competition and location: Logistics, Fort Benning, GA and Robins Air
Force Base, Ga;
FTEs competed: 43.
Source: GAO analysis of DOD data.
[End of table]
Table 6: Streamlined Competitions Where DOD's Market Research
Determined the Agency Was the Lowest-Cost Source and Health Benefit
Cost Comparability Was Not a Factor:
Defense Contract Management Agency streamlined competitions.
Competition and location: Information Technology Support Services,
Boston, Mass;
FTEs competed: 17.
Competition and location: Information Technology Field Support
Services, Philadelphia, Pa;
FTEs competed: 19.
Competition and location: Information Technology Field Support
Services, Warren, Mich;
FTEs competed: 16.
Competition and location: Information Technology Field Support
Services, Denver, Colo;
FTEs competed: 14.
Competition and location: Information Technology Field Support
Services, Boston, Mass;
FTEs competed: 19.
Competition and location: Information Technology Field Support
Services, Hazelwood, Mo;
FTEs competed: 14.
Competition and location: Information Technology Field Support
Services, Picatinny, N.J;
FTEs competed: 13.
Competition and location: Information Technology Field Support
Services, Carson, Calif;
FTEs competed: 23.
Competition and location: Information Technology Field Support
Services, Orlando, Fla;
FTEs competed: 21.
Competition and location: Information Technology Field Support
Services, Dallas, Tex;
FTEs competed: 20.
Department of Defense Education Activity streamlined competitions.
Competition and location: Minor Construction, Maintenance and Repair of
Buildings and Structures other than Family Housing, Quantico, Va;
FTEs competed: 17.
Competition and location: Custodial Services, Minor Construction,
Maintenance and Repair of Buildings and Structures Other Than Family
Housing, Fort Stewart, Ga;
FTEs competed: 26.
Competition and location: Custodial Services, Maintenance, Repair and
Minor Construction of Other Real Property, Fort Rucker, Ala., and
Maxwell Air Force Base, Ala;
FTEs competed: 12.
Competition and location: Building Management, Retail Supply
Operations, Pacific Region;
FTEs competed: 13.
Source: GAO analysis of DOD data.
[End of table]
Table 7: Competitions Involving 10 or Fewer FTEs and Health Benefit
Cost Comparability Was Not Applicable:
Defense Contract Management Agency competitions.
Competition and location: Computing Services and/or Data Base
Management, Columbus, Ohio;
FTEs involved: 6.
Competition and location: Information Technology Support Services,
Carson, Calif;
FTEs involved: 10.
Department of Defense Education Activity competitions.
Competition and location: Grounds Maintenance, Fort Benning, Ga;
FTEs involved: 5.
Competition and location: Custodial Services, West Point, N.Y;
FTEs involved: 7.
Competition and location: Grounds Maintenance, Fort Knox, Ky;
FTEs involved: 5.
Competition and location: Grounds Maintenance, Quantico, Va;
FTEs involved: 5.
Air Force competition.
Competition and location: Information Systems, Randolph Air Force Base,
Tex;
FTEs involved: 3.
Army competitions.
Competition and location: Specialized Skill Training, Fort Monroe, Va;
FTEs involved: 0[A].
Competition and location: Combat Development Evaluations and
Experimentation, Army Training and Doctrine Command, Fort Monroe, Va;
FTEs involved: 0[A].
Competition and location: Military Training, Fort Monroe, Va;
FTEs involved: 0[A].
Competition and location: Military Training, Fort Monroe, Va;
FTEs involved: 0[A].
Competition and location: Military Training, Fort Monroe, Va;
FTEs involved: 0[A].
Marine Corps competition.
Competition and location: Manpower Administration, Camp Lejeune, N.C;
FTEs involved: 8[B].
Source: GAO analysis of DOD data.
[A] At the time of Army's A-76 competition processes for this
commercial activity, the work was being performed by contract employees
and no federal employees' positions were being competed:
[B] The Marine Corps contracting officer did collect health benefit
cost data from a private offeror involved in this competition. However,
we included this competition in this category in which health benefit
costs do not need to be considered (because Section 8014's health
benefit cost comparability provision is not applicable to competitions
involving 10 or fewer FTEs).
[End of table]
[End of section]
Appendix V: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:
Mr. William T. Woods:
Director, Acquisition and Sourcing Management:
Government Accountability Office:
Washington, DC 20548:
December 2, 2005:
Dear Mr. Woods:
This letter is the Department of Defense (DoD) response to the GAO
draft report, "COMPETITIVE SOURCING: Health Benefit Cost Comparison Had
Minimal Impact, But DOD Needs Uniform Implementation Process," dated
November 10, 2005, (GAO Code 120399/GAO-06-72). The report evaluates
the health benefit cost comparability provision in section 8014 of the
Department of Defense Appropriations Act, 2005. Section 8014 prohibits
the Department from giving an advantage in public-private competitions
to a private sector source that either does not offer employee health
benefits or pays less towards health benefits than the government pays
for Federal civilian employees. Our concurrence with the report's
recommendation is enclosed and general comments follow.
While the draft report finds that DoD's initial implementation of
section 8014 has not been unduly burdensome, we believe it is premature
to conclude that it will not present future problems. The report's
findings are based on a very limited data set of twelve cost
comparisons that were performed under the provisions of the previous
OMB Circular A-76, not the current Circular. DoD's limited experience
with this new legislative requirement, as well as the new public-
private competition process of the revised Circular, make it difficult
to predict the full impact of the legislation at this time.
We also remain concerned that section 8014 may harm small business
participation in the Department's Competitive Sourcing Program.
Although the report evaluated competitions involving small businesses
that were in-progress when section 8014 became effective, there is no
reliable way of determining how many small businesses may have been
discouraged from participating in these competitions as a result of
this new statutory requirement.
Moreover, the report offers no evidence that section 8014 promotes
healthcare for a contractor's employees. We will continue to support
either elimination of section 8014 or, at a minimum, amendment of the
provision to acknowledge the variety of tools the private sector uses
to provide health care to their employees.
The DoD primary action office for this report is Mrs. Annie L. Andrews,
703-602-2608 or email annie.andrews@osd.mil.
Signed by:
Joseph K. Sikes:
Director, Housing and Competitive Sourcing:
Enclosure: As stated:
GAO DRAFT REPORT - DATED NOVEMBER 10, 2005 GAO CODE 120399/GAO-06-72:
"COMPETITIVE SOURCING: HEALTH BENEFIT COST COMPARISON HAD MINIMAL
IMPACT, BUT DOD NEEDS UNIFORM OMPLEMENTATION PROCESS"
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that if the health benefit cost
provision is extended, the Secretary of Defense direct the Deputy Under
Secretary of Defense (Installations and Environment) to require use of
a uniform and consistent process for the DoD Components in evaluating
the health benefit costs of private sector offerors in public-private
competitions. (p. 19/GAO Draft Report):
DOD RESPONSE: Concur.
[End of section]
Appendix VI: Comments from the Office of Management and Budget:
EXECUTIVE OFFICE OF THE PRESIDENT:
OFFICE OF MANAGEMENT AND BUDGET:
DEPUTY DIRECTOR FOR MANAGEMENT:
WASHINGTON, D.C. 20503:
December 1, 2005:
Mr. William T. Woods:
Director:
Acquisition and Sourcing Management:
Government Accountability Office:
Washington, DC 20548:
Dear Mr. Woods:
This responds to your November 10, 2005 request for comment from the
Office of Management and Budget (OMB) on your draft report "COMPETITIVE
SOURCING: Health Benefit Cost Comparison Had Minimal Impact, But DOD
Needs Uniform Implementation Process." The report evaluates the health
benefit cost comparability provision in section 8014 of the FY 2005
Department of Defense (DOD) Appropriations Act.
Section 8014 prohibits DOD from giving an advantage in public-private
competitions to a private sector source that either does not offer
employee health benefits or pays less towards health benefits than DOD
pays for its civilian employees. Your report states that most DOD
components are taking steps to ensure that private sector proposals
include an amount for employee health benefits at least equal to the
amount that Circular A-76 adds to public sector proposals to account
for employee health benefits (i.e., 5.5 percent of direct labor costs).
Members of Congress and the Administration, as well as industry and
small business representatives, have raised strong concerns regarding
section 8014. These concerns include the potential harm to small
businesses' ability to compete for government contracts and increased
costs to taxpayers through the elimination of incentives for
contractors to provide cost-effective health benefits. (See, for
example, the Administration's Statement of Administration Policy, dated
September 30, 2005, on the Department of Defense Appropriations Bill,
FY 2006, H.R. 2863, available at
http://www.whitehouse.gov/omb/legislative/sap). The GAO draft report
finds that DOD's initial implementation of section 8014 has had minimal
effect on the Department's competitions and has not been unduly
burdensome. These findings notwithstanding, OMB believes there remains
cause for concern about the long-term effects of section 8014.
In particular, the report's findings are based on very limited data.
DOD's limited experience with this new requirement makes it difficult
to accurately predict the full impact this provision will have on
private sector participation in the Department's future competitions.
We remain especially troubled that section 8014, in its current form,
will harm small businesses, the innovative engine of our economy.
Although the report looked at several competitions involving small
businesses that were in-progress when section 8014 became effective, we
do not know how many small businesses may be discouraged from
participating in future competitions as a result of this new
requirement. As acknowledged in Appendix I of the report, the number of
small firms offering health benefits has decreased. This trend suggests
that small businesses may have difficulty competing for federal
contracts, especially if the A-76 health care factor that DOD uses to
benchmark what contractors must pay in health care costs is adjusted
upward in the future. At a minimum, as stated in our November 14, 2005
letter to the Defense conferees on the FY 2006 Department of Defense
Appropriations bills, section 8014 should be modified to allow
consideration of more efficient health care tools, such as health
savings and medical savings accounts, that small businesses are more
likely to be able to offer to their employees.
Moreover, based on our review, the report appears to offer no evidence
that section 8014 is beneficial. Imposing a requirement for the
ostensible purpose of ensuring health care for workers that then fails
to recognize the various ways contractors can effectively provide this
benefit to their employees moves us further from, not closer to, a more
effective and efficient government.
For these reasons, OMB will continue to urge Congress either to
eliminate section 8014 or, at a minimum, to amend the provision to
acknowledge the variety of tools contractors use to make health care
accessible to their employees. We will also work to ensure that a
provision identical to the current section 8014 is not extended to
civilian agencies. In the meantime, we hope your report will emphasize
that its findings are based on very limited data.
I appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
Clay Johnson III:
Deputy Director for Management:
FOOTNOTES
[1] OMB's Circular A-76 establishes federal policy and standard
procedures for determining whether commercial activities should be
performed by the agency, by another federal agency, or by the private
sector. It contains procedures for calculating public and private
sector costs to ensure that the comparison reflects the full cost of
performance.
[2] Commercial Activities Panel, Final Report: Improving the Sourcing
Decisions of the Government (Washington, D.C.: April 2002). The
Congress mandated a study of the government's competitive sourcing
process under A-76--a study conducted by the Commercial Activities
Panel, chaired by the Comptroller General of the United States. The
panel included representatives from OMB, DOD, the Office of Personnel
Management, private industry, academia, a trade association, and
federal employee unions.
[3] Public Law 108-287, section 8014(a)(3), enacted August 5, 2004.
Under a continuing resolution enacted November 19, 2005 (Public Law 109-
105), this provision remains in effect through December 17, 2005.
[4] H.R. 2863, Department of Defense Appropriations Bill, 2006, passed
the House on June 20, 2005, and the Senate on October 7, 2005.
[5] Section 327, Conference Report 108-767, to accompany H.R. 4200,
Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, October 8, 2004.
[6] Circular A-76 requires agencies to use a software program called
COMPARE to calculate, compare, and document the cost proposals in
public-private competitions. COMPARE incorporates the standard costing
procedures and factors contained in Circular A-76 to help ensure that
agencies are calculating and documenting such costs uniformly.
[7] OMB has not examined the extent to which the Circular A-76 standard
insurance and health benefits cost factor of 5.7 percent--which has not
been revised since 1999--has kept pace with increases in Federal
Employees Health Benefits Program (FEHBP) costs over the last 6 years.
Federal budget costs to provide health insurance under FEHBP climbed 65
percent between fiscal years 1999 and 2005. In view of this growth in
FEHBP costs, we recommended that OMB's Director review and update as
necessary the health benefits cost factor. See GAO, Review of OMB
Circular A-76 Health Benefit Cost Factor Needed, GAO-06-87R
(Washington, D.C.: Nov. 17, 2005).
[8] Full-time equivalent (FTE) is a measure of federal civilian
staffing. Circular A-76 defines FTEs in terms of 1,776 annual
productive work hours.
[9] OMB defines a most efficient organization (MEO) as the staffing
plan of the agency, developed to represent the agency's most efficient
and cost-effective organization.
[10] The same conversion differential applies when there is contractor-
performed work the government might wish to bring back within the
agency for government performance.
[11] Within the Office of the Deputy Under Secretary of Defense
(Installations and Environment), the Department of Defense Housing and
Competitive Sourcing Office has overall responsibility for managing
DOD's competitive sourcing program.
[12] Unlike the Circular A-76 streamlined competition process
established for the rest of the government for activities with 65 or
fewer FTEs, annual DOD and consolidated appropriations laws have, in
effect, required DOD to use aspects of the standard process anytime
more than 10 FTEs are involved because (1) agency employees must be
allowed to form MEOs to compete with the private sector, and (2)
savings realized from outsourcing the work must exceed specific
monetary targets.
[13] The Federal Employees Health Benefits Act of 1959, Pub. L. No. 86-
382 73 Stat. 708, established the program. The act, as amended, is
codified at 5 U.S.C. §8901 et seq.
[14] For these two major plans, the non-postal federal employee's
annual share of FEHBP premiums ranged between $865 to $2,322 for self-
coverage and $1,964 to $4,716 for self-and-family coverage.
[15] 41 U.S.C. 351, et seq. The Service Contract Act applies to
contracts that involve primarily the delivery of services in the United
States and are valued at more than $2,500. In a GAO report due to be
released in January 2006, information is presented on how the
Department of Labor establishes locally prevailing wages and fringe
benefits and enforces SCA. See GAO, Service Contract Act: Wage
Determination Process Could Benefit From Greater Transparency, and
Better Use of Violation Data Could Improve Enforcement, GAO-06-27
(Washington, D.C.: Dec. 7, 2005).
[16] 5 U.S.C. 8906(b) establishes the percentage formula of monthly
premium contributions DOD is required to make under FEHBP towards
civilian employees' health insurance.
[17] Under 5 U.S.C. 8906(b)(1), the Office of Personnel Management
(OPM) annually sets the FEHBP governmentwide weighted average of
premiums, for self-only and self-and-family participation. To implement
the health benefit cost comparability requirement, DLA used as its
benchmark the maximum monthly premium contribution set by OPM for the
government-paid portion for fiscal year 2005 for self-alone coverage
($298.23 per month) and self-and-family coverage ($646.17 per month).
In addition, OPM has capped the monthly premium contributions under the
FEHBP at 75 percent.
[18] DLA's two premium benchmarks are (1) $298.23 and $646.17 per month
for self-alone and self-and-family participation, respectively or (2)
75 percent of the premium for the company's health benefit plan.
[19] The private offerors' cost proposals were lowest cost even after
DOD's cost comparison adjusted for the minimum savings margin of $10
million or 10 percent (whichever is less) needed before the work can be
converted to contractor performance.
[20] In one case however, DLA officials told us that they did
experience a delay for a competition that was nearing source selection
just after the new fiscal year would start. It was at that time that
DLA officials realized that the health benefit cost comparability
provision was about to take effect before they could complete their
source selection process for this competition. As a result, DLA
extended the source selection by about a month to establish a new
process for implementing the requirement and to amend the solicitation
in order to collect and compare needed health benefit data from both
agency and private offerors.
[21] In June 2005, the health and welfare benefit rate was increased to
$2.87 per hour.
[22] General maintenance worker hourly rate obtained from the
Department of Labor's May 23, 2005, Wage Determinations for the
District of Columbia and surrounding areas.
[23] Carmen DeNavas Walt, Bernadette D. Proctor, and Cheryl Hill Lee,
Income, Poverty, and Health Insurance Coverage in the United States:
2004, U.S. Census Bureau (Washington, D.C.: August 2005).
[24] The Kaiser Family Foundation and Health Research and Educational
Trust, Employer Health Benefits 2005 Summary of Findings (Menlo Park,
Calif.: 2005)
[25] In Kaiser's survey, small firms had between 3 and 199 employees.
[26] Agency for Healthcare Research and Quality (AHRQ), Department of
Health and Human Services, conducts the Medical Expenditure Panel
Survey (MEPS). According to AHRQ, the survey collects data on the
specific health services that Americans use, how frequently they use
them, the cost of these services, and how they are paid for, as well as
data on the cost, scope, and breadth of private health insurance held
by and available to the U.S. population.
[27] Employees on average contributed $610 of the $4,024 annual cost of
self-only coverage and $2,713 of the $10,880 annual cost of the self-
and-family coverage.
[28] Stephen M. Sorett, Brad P. Bender, and Lorraine T. Mullings,
Public Contract Law Journal, The Crossroads of the A-76 Costs Debate:
Cost Comparisons and Some Attractive Alternatives, (Washington, D.C:
Fall 2001).
[29] GAO, DOD Competitive Sourcing: Savings Are Occurring, but Actions
Are Needed to Improve Accuracy of Savings Estimates, GAO/NSIAD-00-107
(Washington, D.C.: Aug. 8, 2000).
[30] DOD, Office of Inspector General, Defense Infrastructure: DOD
Reporting System for the Competitive Sourcing Program, D-2006-028, Nov.
22, 2005.
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