The cost of DBA insurance  premiums, if allocable and reasonable, is generally reimbursable under  government contracts. After State received no offers in response to its  solicitation, it withdrew the solicitation 3 days before its existing contract  expired and transitioned to a system requiring contractors to obtain DBA  insurance on the open market. Leading acquisition practices emphasize  the importance of allowing enough time to complete a solicitation,  adequately documenting market research, and collecting and analyzing  data, among other things. As a result, State had to  quickly transition to an open market system without evaluating the relative  costs and benefits involved. State Had Little Time to Complete Its June 2012 Single Insurer Solicitation and Communicate Its Decision to Transition to an Open Market System

State had little time to complete its 2012 single insurer solicitation, and  when it received no offers, State had to withdraw its solicitation only 3  days before its existing DBA contract was due to expire. State Did Not Conduct a Lessons Learned Assessment or Adequately Document Market Research to Inform Its 2012 Solicitation and Transition to the Open Market

State did not conduct a lessons learned assessment to inform its 2012  DBA solicitation, as suggested by leading practices, and though it  conducted market research, it took limited measures to document the   analysis and conclusions. DBA Premiums Rose in the Open Market, but Increases Were in a Similar Range of Those Likely Had State Continued Its Single Insurer Program

Our analysis of a sample of State contractors’ DBA rates during the  transition from a single insurer program to an open market system  showed that the rates increased as State moved to the open market  system, but the increases fell in a similar range of those that were likely to  have occurred if State had continued its single insurer program. Our  analysis also showed that the increase in effective DBA premium rates  after the transition was comparable to the increase in effective DBA  premium rates requested by State’s single DBA insurer, which said it had  lost money under the prior contract. Available Data Do Not Allow for Conclusions as to Whether State’s Transition Affected Small Businesses, but Our Analysis Shows a Potential for Adverse Effects

Our analysis of existing federal procurement data did not show a clear  effect on contractors that are small businesses resulting from State’s  transition to an open market system, but insurers and contractors have  expressed concern that the change has had or could have an adverse  effect. State’s policy calls for it to  maximize opportunities for small businesses. Without conducting an  assessment, State cannot be assured that it is meeting its policy goal of  maximizing opportunities for small businesses. State awarded  $2.1 billion in contracts to small businesses for work performed overseas  in fiscal years 2009 through 2013. While we cannot determine what effect State’s transition had on small  businesses based on our analysis of federal procurement data, our  discussions with insurance industry officials showed that there is a  potential for adverse effects. Incorporate leading practices into any future single insurer  solicitations by determining whether existing guidance could be used,  or by developing guidance based on leading practices in federal and  State Department acquisition regulations and State internal control  standards. Conduct an assessment to determine how State’s transition to an  open market DBA system is affecting small businesses. This report examines (1) how State  managed the transition from a single insurer program to an open market  system, (2) the extent to which this change affected DBA premium rates  paid by State’s contractors, and (3) the extent to which this change  affected small businesses. We reviewed State’s 2008 DBA single insurer contract and  its 2012 solicitation. Appendix II: Technical Appendix for Analysis of Department of State Contractors’ Defense Base Act Insurance Premium Rates

To examine our second objective, the impact of the Department of State’s  (State) transition to the open market system on premiums paid by State’s  contractors, we collected data on contractors’ Defense Base Act (DBA)  insurance premiums, rates, and payroll during State’s single insurer  program and in the open market.
Why GAO Did This Study

DBA requires U.S. government contractors to buy workers' compensation insurance for most employees working overseas. The cost of this insurance, if allowable under federal regulations, is generally reimbursable under government contracts. From 1992 until 2012, State had a contract with a single insurer to supply all State's contractors working overseas with DBA insurance. In July 2012, State's single insurer program ended after State unsuccessfully sought to solicit a new DBA single insurer agreement and State transitioned to a system requiring its contractors to obtain DBA insurance on the open market. However, concerns were raised about the transition and its impact on State's costs and on small businesses' competitiveness. To address these objectives, GAO was asked to review State's transition.
This report assesses (1) State's management of the transition to an open market system, (2) the change's effect on contractors' premium rates, and (3) the change's effect on small businesses. GAO analyzed State documents; reviewed federal and State contracting regulations; analyzed premium rate data and federal contracting data; and interviewed officials from State, the insurance industry, and contracting firms.

What GAO Found

The Department of State (State) did not follow leading acquisition practices in transitioning from a single insurer Defense Base Act (DBA) program to an open market system. Leading practices emphasize adequately documenting market research, allowing enough time to complete a solicitation, and collecting and analyzing data to select among alternatives, but State took limited measures to document the market research it performed and had little time to complete its 2012 solicitation. State included provisions in the solicitation to which insurers strongly objected, received no offers, and had to cancel the solicitation 3 days before its existing single insurer contract was to expire. As a result, State had to quickly transition to an open market system without weighing the relative costs and benefits to determine which insurance system best served its needs. Until State conducts such an evaluation, it cannot be assured that the open market system is the better alternative, and unless State incorporates leading practices into any future single insurer solicitations, it risks a similar outcome.
GAO found that State contractors' DBA premiums increased following the transition, but the increases were in a range similar to those likely to have occurred if State had continued its single insurer program. For example, median DBA premium rates increased by $1.98 per $100 of payroll. GAO analysis also shows that the increase in DBA premium rates after the transition was in a range comparable to the increase in DBA premium rates requested by State's single DBA insurer, which said it had lost money under the prior contract.
Existing data do not show a clear effect on small businesses resulting from State's transition to an open market system, but insurers and contractors have expressed concern that the change has had or could have an adverse effect. GAO analysis of federal procurement data from fiscal years 2009 through 2013 found a decrease in the percentage of contracts awarded to small businesses, but GAO could not link this to State's transition. Information GAO gathered from insurance industry officials and contractors shows that there is a potential for adverse effects, for example, denial of coverage and higher effective premium rates. State's policy is to maximize opportunities for small businesses, but it has not assessed whether its transition to an open market DBA system is affecting those opportunities. Without such an assessment, State cannot be assured that it is meeting its policy goal of maximizing opportunities for small businesses.

What GAO Recommends

State should (1) determine whether an open market system best suits its needs, (2) incorporate leading practices into any future single insurer solicitation, and (3) assess the effects of its transition on small businesses. State concurred with GAO's recommendations.