DRAFT 

 GAO-06-87R Circular A-76 Cost Factor 

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States

November 17, 2005 

Congressional Committees 

Subject: Review of OMB Circular A-76 Health Benefit Cost Factor Needed 

Determining whether to obtain required services using government employees or 

through contracts with the private sector is an important economic and strategic 

decision for agency managers. In this regard, Office of Management and Budget 

(OMB) Circular A-76 prescribes policies and procedures for use by agencies as they 

select service providers through competitions among public and private-sector 

sources.1

 The Circular is intended to ensure that the competitive sourcing process is 

conducted as fairly as possible, and that the estimated cost of government 

performance reflects all of the costs of performing the work in house. 

The purpose of this letter is to convey an issue we identified during the course of an 

ongoing review of how the costs of health benefits for federal and private-sector 

employees are reflected in public-private competitions conducted by the Department 

of Defense.2

 We have determined that the health benefit cost factor prescribed in 

Circular A-76 may not reflect the current cost to the government of providing health 

insurance under the Federal Employees Health Benefits Program (FEHBP). The cost 

to the government of providing health benefits under the FEHBP has risen by more 

than 65 percent between 1999 and 2005. Yet the health benefit cost factor prescribed 

in A-76 has not been changed at all in that time. In view of the increased cost of 

providing health insurance since the cost factor last was revised, we recommend that 

OMB review the health benefit cost factor to determine if an adjustment is needed 

and establish a process to update it periodically, as OMB does for other cost factors. 

Standard Costing Factors for Estimating Personnel

Costs Include Employee Benefits

Circular A-76 establishes standard costing factors that agencies must use to estimate 

the costs of in-house performance. When preparing these estimates, agencies use cost 

 

1

OMB Circular A-76, Performance of Commercial Activities, revised in May 2003, establishes federal policy and procedures for 

determining whether commercial activities should be performed in-house, by another federal agency, or by the private sector. 

Circular A-76 contains procedures agencies must use in calculating and comparing the costs of performance by in-house, 

private, or public reimbursable sources.

2

In response to direction in the conference report on the Ronald W. Reagan National Defense Authorization Act, House Rep. No. 

108-767, we are reviewing the implementation of section 8014 of the Department of Defense Appropriations Act, 2005, Public 

Law No. 108-287. Section 8014 contains requirements concerning the costs of health benefits in public-private competitions 

conducted by the Department of Defense. 
Page 2 GAO-06-87R Circular A-76 Cost Factor 

factors that are in effect as of the solicitation closing date, revised to reflect projected 

changes to these factors during the performance period. To estimate personnel costs, 

for example, agencies add to basic pay a standard overall 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 insurance and health 

benefits, as shown in table 1. 

Table 1: Components of Circular A-76 Civilian Position Full Fringe Benefits Cost Factor

Standard cost factor Percentage of basic paya

Insurance and health benefits b 5.7 

Standard civilian retirement benefit c24.0 

Medicare benefit 1.45 

Miscellaneous fringe benefits 1.7 

Total 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 Employees 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 post-retirement health benefits. 

According to OMB staff, the 5.7 percent cost factor reflects 0.2 percent for life 

insurance and 5.5 percent for health benefits. The current insurance and health 

benefit cost factor is based on actuarial estimates made in 1999. 

Health Benefit Factor Not Revised during

Period of Substantial FEHBP Cost Growth

Certain factors used in Circular A-76 calculations for computing the government’s 

non-pay and personnel costs are routinely reviewed and adjusted by OMB. These 

include the standard inflation factor for supplies and equipment and annual federal 

pay raise assumptions. This periodic review helps to ensure that the cost factors are 

up to date in order to reflect accurately the full estimated cost of performance. 

Nonetheless, our discussions with competitive sourcing officials and review of OMB’s 

transmittal memoranda indicate that the insurance and health benefits cost factor has 

not been reviewed and adjusted with the same frequency as other factors, but rather 

has been set at 5.7 percent of a position’s basic pay since 1999.3

 

 

3

Circular No. A-76 (Revised), Transmittal Memorandum No. 19, Performance of Commercial Activities, March 24, 1999. In this 

memorandum, OMB revised the then 5.6 percent cost factor for insurance and health benefits up by 0.1 percentage points (on 

the health insurance side) to 5.7 percent. 
Page 3 GAO-06-87R Circular A-76 Cost Factor 

In contrast, our review of the federal budget costs for FEHBP and the annual average 

premium increases announced for FEHBP health insurance plans indicates that 

civilian employee health benefit costs have increased substantially since OMB last 

revised this cost factor. Our analysis of federal budget data shows that the 

government’s FEHBP costs in fiscal year 2005 have increased by more than 

65 percent relative to fiscal year 1999.4

 (See table 2.) 

Table 2: Federal Government Gross Outlays for FEHBP,a Fiscal Years 1999 to 2005 

Dollars In billions (then-year dollars)

1999 2000 2001 2002 2003 2004 2005b

Gross 

outlays $18.5 $19.6 $20.8 $22.7 $25.0 $27.4 $30.7 

Source: Budget of the U.S. Government. 

a

The FEHBP fund provides for the cost of health benefits for (1) active employees; (2) employees who retired 

after June 1960 or their survivors; (3) those annuitants transferred from the Retired Employees Health Benefits 

fund program; and (4) the related expenses of the Office of Personnel Management in administering the 

program. 

b

2005 outlays are estimated.

Additionally, the annual open-season enrollment announcements from the Office of 

Personnel Management (OPM) indicate that average FEHBP premium increases have 

ranged between 7.9 and 13.3 percent per year during the period from 1999 to 2005.5

(See table 3.) The government-paid portion of FEHBP premiums averages 71 

percent.6

 

Table 3: Average FEHBP Premium Increases, 1999 to 2005 

1999 2000 2001 2002 2003 2004 2005 

Average percentage 

increase 

9.5 9.3 10.5 13.3 11.1 10.6 7.9 

Source: OPM announcements of FEHBP open season premium changes. 

Despite these changes in federal employee health benefit costs under FEHBP, the 

Circular A-76 health benefits cost factor, which is designed to reflect the health care 

 

4

This increase reflects both the increase in premiums paid by active federal employees and retirees and the increase in the 

amount paid by the government for all participants. However, the insurance and health benefit cost factor used in Circular A-76 

is based only on the costs borne by the government (not enrollee premiums) and only on behalf of active federal employees (not 

retirees). Increases in government costs for retirees are reflected in the standard civilian retirement benefit cost factor. 

5

OPM develops two figures for annual FEHBP premium changes: one in the fall prior to open season enrollment, when 

negotiations with the plans are complete, and the second after enrollment has occurred. The difference is that there may be 

some change in enrollment following the open season, with some people leaving plans with higher premium cost increases and 

joining plans with lower cost increases. In October 2005, OMB provided us OPM’s post-open season enrollment FEHBP 

premium changes between 1999 and 2005 which showed that premium increases ranged between 7.4 and 12.7 percent. 

6

The implications of higher government-paid costs from increased FEHBP premiums since 1999 will have to be determined 

through actuarial analyses based on other related changes over time, such as changes in the average salaries of active federal 

employees and their participation rates in the FEHBP. 
Page 4 GAO-06-87R Circular A-76 Cost Factor 

cost to the government for in-house performance, has not been adjusted by OMB at 

all during that time. 

Conclusion 

Health care costs are a large and growing consideration both for the private sector 

and for government operations. Yet despite recent increases in the government’s cost 

of health care premiums, the cost factor in Circular A-76 designed to reflect these 

costs has not been adjusted in the past 6 years. We recognize that an adjustment of 

this factor could result in higher estimates of the total cost of government 

performance, and in some cases this could affect the outcome of public-private 

competitions. Nevertheless, the sourcing principles adopted by the Commercial 

Activities Panel,7

 call for competitions between government and private-sector 

sources to be conducted as fairly as possible. In our view, fairness requires that any 

cost factor used in estimating the cost of performance, whether by private or public 

sector sources, be as accurate and current as possible in order to protect the integrity 

of the process. 

Recommendations for Executive Action

In order to ensure the health benefit cost factor appropriately reflects up-to-date and 

accurate assumptions, we recommend that the Director of OMB take the following 

two actions: 

• Reevaluate the health benefit cost factor to determine if an adjustment is 

necessary, based on the most current federal health insurance costs under 

FEHBP. 

• Establish procedures to provide for periodic updates of the health benefit cost 

factor in view of changes over time to the government’s costs associated with 

FEHBP benefits. 

Agency Comments

We provided a draft of this letter to OMB for review and comment. OMB did not 

provide official agency comments, but OMB staff provided technical suggestions, 

which we incorporated as appropriate. The staff also stated that OMB is working with 

OPM in reviewing the health benefit and insurance cost factors and is looking at 

options for reviewing these factors on a more regularized cycle. 

* * * * * * * * * * * * * * * 

 

7

Commercial Activities Panel, Improving the Sourcing Decisions of the Government (Washington, D.C.: Apr. 30, 2002).
Page 5 GAO-06-87R Circular A-76 Cost Factor

Scope and Methodology

The information in this letter is based on ongoing GAO work and limited additional 

work conducted from February through October 2005, in accordance with generally 

accepted government auditing standards. In conducting our work, we reviewed 

federal budget data and OPM announcements regarding FEHBP costs between 1999 

and 2005, and A-76 policies and procedures for preparing personnel cost estimates for 

in-house performance, including the personnel health benefit factor used in making 

estimates for government cost. We also held discussions with competitive sourcing 

officials at the Department of Defense and OMB. 

We are sending a copy of this letter to the Director for the Office of Management and 

Budget and other interested congressional committees. We will provide copies to 

others upon request. This letter will also be available on GAO’s home page at 

http://www.gao.gov. If you have any further questions or would like to discuss this 

matter in more detail, please call me or Katherine Schinasi, Managing Director, 

Acquisition and Sourcing Management (ASM), who may be reached at (202) 512-4841. 

Contact points for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. This letter was prepared under the direction of 

Bill Woods, Director, ASM. GAO staff who made contributions to this letter were 

Carolyn Kirby, Assistant Director; John Dicken; Rosa Johnson; Charles Perdue; Russ 

Reiter; Sylvia Schatz; Natalie Schneider; Robert Swierczek; and Tony Wysocki. 

David M. Walker 

Comptroller General 

 of the United States 

(120491) 
Page 6 GAO-06-87R Circular A-76 Cost Factor 

List of Congressional Committees 

The Honorable Susan M. Collins, Chairman 

The Honorable Joseph I. Lieberman 

Ranking Minority Member 

Committee on Homeland Security 

 and Governmental Affairs 

United States Senate 

The Honorable Thomas M. Davis, Chairman 

The Honorable Henry A. Waxman 

Ranking Minority Member 

Committee on Government Reform 

House of Representatives 

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 
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