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. 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. 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. The private offeror involved in DLA’s process we  contacted raised no concern with us about any burden. 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. (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.
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. 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.