United States Government Accountability Office

GAO Report to Congressional Committees

COMPETITIVE 

SOURCING 

Health Benefits Cost 

Comparison Had 

Minimal Impact, but 

DOD Needs Uniform 

Implementation 

Process 

December 2005 

 

GAO-06-72 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

December 2005

COMPETITIVE SOURCING 

Health Benefits Cost Comparison Had 

Minimal Impact, but DOD Needs Uniform 

Implementation Process 

Highlights of GAO-06-72, a report to 

congressional committees 

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 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. 

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) 

Source: GAO analysis of DOD data.

14 in-progress competitions; sourcing decisions pending 

and health benefit cost provision not yet applied

Health benefit cost provision not applicable (no cost 

proposal submitted by private offerors in 1 competition)

Health benefit costs not considered in 14 streamlined 

competitions where decision was to retain work 

within agency 

Health benefit cost provision applicable to 

12 sourcing decisions

Health benefit cost provision not applicable to 

13 competitions that involved 10 or fewer 

full-time equivalent employee positions

11

14

13

12

14

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. 
Contents 

Letter 1

Results in Brief 2

Background 4

In General, DOD Implemented Health Benefit Cost Provision Based 

on Standard A-76 Cost Factor 8 

Health Benefit Cost Provision Had Minimal Impact 14 

Conclusions 19

Recommendation For Executive Action 19 

Agency Comments and Our Evaluation 19 

Appendix I Health Benefits in the Private Sector and the 

Transitional Benefit Corporation Concept 22 

Appendix II Scope and Methodology 27 

Appendix III Legislative Provision for Health Benefit Cost 

Comparability 29 

Appendix IV Fiscal Year 2005 Competitions in Which Health 

Benefit Costs Were Not a Factor 31 

Appendix V Comments from the Department of Defense 35 

Appendix VI Comments from the Office of Management and 

Budget 38 

Tables 

Table 1: Components of Circular A-76 Civilian Position Fringe 

Benefits Cost Factor 5 

Table 2: Hypothetical Illustration of DOD’s Preferred Health 

Benefit Cost Comparability Process 10 

Page i GAO-06-72 DOD Competitive Sourcing
Table 3: Competitions Where DOD Component Determined That 

Health Benefit Cost Data Were Not Needed 16 

Table 4: Competitions Where Private Offerors Submitted Health 

Benefit Cost Data 16 

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 32 

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 33 

Table 7: Competitions Involving 10 or Fewer FTEs and Health 

Benefit Cost Comparability Was Not Applicable 34 

Figures 

Figure 1: Application of Health Benefits Cost Provision in DOD’s 

Competitive Sourcing Program as of June 30, 2005 15 

Figure 2: Percentage of Private-Sector Employers That Contributed 

Toward Health Insurance in 2003, by Number of 

Employees 23

Figure 3: Private Employers Percentage Share Contributed Toward 

Employee Health Insurance Premiums in 2003, by Number 

of Employees 24 

Page ii GAO-06-72 DOD Competitive Sourcing
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 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page iii GAO-06-72 DOD Competitive Sourcing
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-76,1

 which was revised in 2003 to reflect the recommendations 

of the congressionally chartered Commercial Activities Panel.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 20053

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 

 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. 

Page 1 GAO-06-72 DOD Competitive Sourcing
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.4

The conferees for the fiscal year 2005 National Defense Authorization Act5

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. 

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 

Results in Brief 

 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. 

Page 2 GAO-06-72 DOD Competitive Sourcing
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 

Page 3 GAO-06-72 DOD Competitive Sourcing
comments from DOD and OMB are reprinted in appendices V and VI, 

respectively. 

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 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.6

 

Background 

Circular A-76 Processes for 

Conducting Public-Private 

Competitions 

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 

 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. 

Page 4 GAO-06-72 DOD Competitive Sourcing
percent factor consists of 0.2 percent for life insurance and 5.5 percent for 

health benefits.7

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

Standard cost factor Percentage of basic paya

Insurance and health benefitsb 5.7

Standard civilian retirement benefitsc24.0

Medicare benefit 1.45

Miscellaneous fringe benefit 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 

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.

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)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),9

 and evaluate

that response along with the proposals submitted by private offerors. 

 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. 

Page 5 GAO-06-72 DOD Competitive Sourcing
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.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 publicprivate 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 publicprivate 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 

 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. 

Page 6 GAO-06-72 DOD Competitive Sourcing
overseeing DOD-wide policies, procedures, and guidance.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.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).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.14

 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 selfand-family coverage. 

Page 7 GAO-06-72 DOD Competitive Sourcing
The McNamara-O’Hara Service Contract Act (SCA) of 196515 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. 

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. 

In General, DOD 

Implemented Health 

Benefit Cost 

Provision Based on 

Standard A-76 Cost 

Factor 

 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). 

Page 8 GAO-06-72 DOD Competitive Sourcing
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.) 

DOD Developed a 

Preferred Process for 

Implementing the Health 

Benefit Cost Provision, but 

Has Not Mandated Its Use 

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.

Page 9 GAO-06-72 DOD Competitive Sourcing
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 Proposal requiring adjustment No adjustment required

Private offeror’s total proposed cost $1,000,000 $1,000,000

 Direct labor $500,000 $500,000

 Health benefit contribution $15,000 

(3 percent of direct labor) 

$27,500

(5.5 percent of direct labor)

DOD’s adjustment to implement health benefit cost 

provision 

 $12,500 

(Add 2.5 percent to the proposed 

3 percent of direct labor to 

equal 5.5 percent) 

None needed

(Health benefit cost is 5.5 

percent)

Total evaluated cost after adjustment $1,012,500 $1,000,000

Source: GAO analysis using hypothetical data and DOD’s preferred process. 

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 

Page 10 GAO-06-72 DOD Competitive Sourcing
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-toapples” 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. 

Page 11 GAO-06-72 DOD Competitive Sourcing
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 insurance16 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 selfand-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.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: 

 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. 

Page 12 GAO-06-72 DOD Competitive Sourcing
• If the private offeror’s health benefit plan cost equals or exceeds the lesser 

of DLA’s two premium contribution benchmarks,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

 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. 

Page 13 GAO-06-72 DOD Competitive Sourcing
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. 

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. 

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.) 

Health Benefit Cost 

Provision Had 

Minimal Impact 

Few Competitions 

Involved Consideration of 

Health Benefit Costs and 

No Sourcing Decision 

Changed as a Result 

Page 14 GAO-06-72 DOD Competitive Sourcing
Figure 1: Application of Health Benefits Cost Provision in DOD’s Competitive 

Sourcing Program as of June 30, 2005 

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,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. 

1

12

14

14

13

Source: GAO analysis of DOD data.

14 in-progress competitions; sourcing 

decisions pending and health benefit cost 

provision not yet applied

Health benefit cost provision not applicable 

(no cost proposal submitted by private 

offerors in 1 competition)

Health benefit costs not considered in 

14 streamlined competitions where decision 

was to retain work within agency 

Health benefit cost provision applicable 

to 12 sourcing decisions

Health benefit cost provision not applicable 

to 13 competitions that involved 10 or fewer 

full-time equivalent employee positions

 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. 

Page 15 GAO-06-72 DOD Competitive Sourcing
Table 3: Competitions Where DOD Component Determined That Health Benefit Cost Data Were Not Needed 

Public-private 

competition

DOD 

component 

FTEs 

competed

Sourcing 

decision

Cost proposal 

difference 

1 Air Force 191 Private 14.3 percent lower 

2 Marine Corps 265 Private 9.9 percent lower 

3 Marine Corps 16 Public 45.6 percent lower 

4 Navy 11 Private 14.8 percent lower 

5 Navy 290 Private 8.1 percent lower 

Source: GAO analysis of DOD data. 

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

Publicprivate 

competition

DOD 

component 

FTEs

competed

Sourcing 

decision

Private 

offeror a 

small 

business?

Private offeror 

contributes

towards health

benefits? 

Health benefit 

cost as 

percentage

of direct labor

Cost proposal

adjustment

needed for 

health benefit 

comparability 

6 Navy 809 Public No Yes 21.0 No

7 Marine Corps 38 Public Yes Yes 17.0 No

8 Navy 103 Private No Yes 10.0 No

9 Marine Corps 27 Public Yes Yes 2.1 Noa

10 Marine Corps 52 Private Yes No 0.0 Yesb

11 DLA 124 Public No Yes 15.4cYesc

12 DLA 341 Public No Yes Not availabledNo 

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. 

Page 16 GAO-06-72 DOD Competitive Sourcing
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.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. 

Collection of Health 

Benefit Data Was Not 

Unduly Burdensome 

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. 

 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. 

Page 17 GAO-06-72 DOD Competitive Sourcing
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.21

Service Contract Act 

Results in Most Private 

Offerors Paying for Health 

Benefit Costs 

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 

 21 In June 2005, the health and welfare benefit rate was increased to $2.87 per hour. 

Page 18 GAO-06-72 DOD Competitive Sourcing
that employer paying roughly 16.6 percent of its direct labor costs for 

health benefits.22

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. 

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. 

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 

Conclusions 

Recommendation For 

Executive Action 

Agency Comments 

and Our Evaluation 

 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. 

Page 19 GAO-06-72 DOD Competitive Sourcing
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 publicprivate 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. 

William T. Woods, Director 

Acquisition and Sourcing Management 

Page 20 GAO-06-72 DOD Competitive Sourcing
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 

Page 21 GAO-06-72 DOD Competitive Sourcing
Appendix I: 

Sector and

Corporati

Health Benefits in the Private 

 the Transitional Benefit 

on Concept 

Page 22 GAO-06-72 

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. 

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,

1

 81 percent of all individuals aged 18 to 64 years with health 

insurance in 2004 received coverage through employment-based 

insurance. 

Availability of and 

Employer 

Contributions for 

Health Benefits in the 

Private Sector 

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.2

 This decline is 

largely due to the decline in the percentage of small firms3

 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 Survey4

 (MEPS), which indicates that as establishment 

 1

 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). 

2

 The Kaiser Family Foundation and Health Research and Educational Trust, Employer 

Health Benefits 2005 Summary of Findings (Menlo Park, Calif.: 2005) 

3

 In Kaiser’s survey, small firms had between 3 and 199 employees. 

4

 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.

 DOD Competitive Sourcing
Appendix I: Health Benefits in the Private 

Sector and the Transitional Benefit 

Corporation Concept 

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 

0

10

20

30

40

50

60

70

80

90

100 xxxx xx

<10 10-24 25-99 100-999 1000+

Percentage of Employers Offering Health Benefits

Source: GAO analysis of MEPS data for 2003.

Number of Employees

36

66

81

94

99

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.5

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-andfamily coverage. (See fig. 3.) 

 5

 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. 

Page 23 GAO-06-72 DOD Competitive Sourcing
Appendix I: Health Benefits in the Private 

Sector and the Transitional Benefit 

Corporation Concept 

Figure 3: Private Employers Percentage Share Contributed Toward Employee 

Health Insurance Premiums in 2003, by Number of Employees 

0

20

40

60

80

100

<10 10-24 25-99 100-999 1000+

Percent of Premium Paid by Employer

Source: GAO analysis of MEPS data from 2003.

Number of Employees

Self

Family

88

78

85

71

82

69

82

72

82

78

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 notfor-profit entities. 

Transitional Benefit 

Corporation Concept 

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 

Page 24 GAO-06-72 DOD Competitive Sourcing
Appendix I: Health Benefits in the Private 

Sector and the Transitional Benefit 

Corporation Concept 

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, 6 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 

 6

 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). 

Page 25 GAO-06-72 DOD Competitive Sourcing
Appendix I: Health Benefits in the Private 

Sector and the Transitional Benefit 

Corporation Concept 

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.

Page 26 GAO-06-72 DOD Competitive Sourcing
Appendix II: Scope and Methodology 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 publicprivate 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.1 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.2

 

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. 

 1

 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). 

2

 DOD, Office of Inspector General, Defense Infrastructure: DOD Reporting System for the 

Competitive Sourcing Program, D-2006-028, Nov. 22, 2005. 

Page 27 GAO-06-72 DOD Competitive Sourcing
Appendix II: Scope and Methodology 

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. 

Page 28 GAO-06-72 DOD Competitive Sourcing
Appendix III: Legislative Provision for Health Appendix III: Legislative Provision for Health Benefit Cost Comparability 

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 

Page 29 GAO-06-72 DOD Competitive Sourcing
Appendix III: Legislative Provision for Health 

Benefit Cost Comparability 

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. 

(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. 

Page 30 GAO-06-72 DOD Competitive Sourcing
Appendix IV: Fiscal Year 2005 Competitions 

in Which Health Benefit Costs Were Not a Appendix IV Factor : 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. 

Page 31 GAO-06-72 DOD Competitive Sourcing
Appendix IV: Fiscal Year 2005 Competitions 

in Which Health Benefit Costs Were Not a

Factor 

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

Competition and location FTEs competed

Air Force competitions

Multi-Support Functions, Keesler Air Force Base, Miss. 291

Multi-Support Functions, Keesler Air Force Base, Miss. 19

Army and Corps of Engineers competitions

Information Management, Army Corps of Engineers, all locations agencywide 1,460

Base Support Services, Walter Reed Army Medical Center, Washington D.C. 161

Base Support Services, Walter Reed Army Medical Center, Washington D.C. 534

Public Works, Army Corps of Engineers, Vicksburg, Miss. and Hanover, N.H. 55

Finance Center, Army Corps of Engineers, Millington, Tenn. 80

Navy competition

Satellite Operations, Norfolk, Va. 54

Defense Logistics Agency competitions

Distribution Operations, Defense Distribution Depot, Oklahoma City, Okla. 576

Installation Services, Defense Depot, Tracy, Calif. 67

Installation Services, Defense Depot, New Cumberland, Pa. 136

Distribution Operations, Defense Supply Center, Richmond, Va. 115

Department of Defense Education Activity competitions 

Logistics, Fort Knox, Ky. 48

Logistics, Fort Benning, GA and Robins Air Force Base, Ga. 43

Source: GAO analysis of DOD data. 

Page 32 GAO-06-72 DOD Competitive Sourcing
Appendix IV: Fiscal Year 2005 Competitions 

in Which Health Benefit Costs Were Not a

Factor 

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 

Competition and location FTEs competed

Defense Contract Management Agency streamlined competitions

Information Technology Support Services, Boston, Mass. 17

Information Technology Field Support Services, Philadelphia, Pa. 19

Information Technology Field Support Services, Warren, Mich. 16

Information Technology Field Support Services, Denver, Colo. 14

Information Technology Field Support Services, Boston, Mass. 19

Information Technology Field Support Services, Hazelwood, Mo. 14

Information Technology Field Support Services, Picatinny, N.J. 13

Information Technology Field Support Services, Carson, Calif. 23

Information Technology Field Support Services, Orlando, Fla. 21

Information Technology Field Support Services, Dallas, Tex. 20

Department of Defense Education Activity streamlined competitions

Minor Construction, Maintenance and Repair of Buildings and Structures other than Family Housing, 

Quantico, Va. 

17

Custodial Services, Minor Construction, Maintenance and Repair of Buildings and Structures Other Than Family 

Housing, Fort Stewart, Ga. 

26

Custodial Services, Maintenance, Repair and Minor Construction of Other Real Property, Fort Rucker, Ala., 

and Maxwell Air Force Base, Ala. 

12

Building Management, Retail Supply Operations, Pacific Region 13

Source: GAO analysis of DOD data. 

Page 33 GAO-06-72 DOD Competitive Sourcing
Appendix IV: Fiscal Year 2005 Competitions 

in Which Health Benefit Costs Were Not a

Factor 

Table 7: Competitions Involving 10 or Fewer FTEs and Health Benefit Cost Comparability Was Not Applicable 

Competition and location FTEs involved

Defense Contract Management Agency competitions

Computing Services and/or Data Base Management, Columbus, Ohio 6

Information Technology Support Services, Carson, Calif. 10

Department of Defense Education Activity competitions 

Grounds Maintenance, Fort Benning, Ga. 5

Custodial Services, West Point, N.Y. 7

Grounds Maintenance, Fort Knox, Ky. 5

Grounds Maintenance, Quantico, Va. 5

Air Force competition

Information Systems, Randolph Air Force Base, Tex. 3

Army competitions 

Specialized Skill Training, Fort Monroe, Va. 0a

Combat Development Evaluations and Experimentation, Army Training and Doctrine Command, 

Fort Monroe, Va. 

0a

Military Training, Fort Monroe, Va. 0a

Military Training, Fort Monroe, Va. 0a

Military Training, Fort Monroe, Va. 0a

Marine Corps competition

Manpower Administration, Camp Lejeune, N.C. 8b

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). 

Page 34 GAO-06-72 DOD Competitive Sourcing
Appendix V: Comments from the Department Appendix V of Defense : Comments from the Department 

of Defense 

Page 35 GAO-06-72 DOD Competitive Sourcing
Appendix V: Comments from the Department 

of Defense 

Page 36 GAO-06-72 DOD Competitive Sourcing
Appendix V: Comments from the Department 

of Defense 

Page 37 GAO-06-72 DOD Competitive Sourcing
Appendix VI: Comments from the Office of Appendix VI: Comments from the Office of Management and Budget 

Management and Budget 

Page 38 GAO-06-72 DOD Competitive Sourcing
Appendix VI: Comments from the Office of

Management and Budget 

(120399) Page 39 GAO-06-72 DOD Competitive Sourcing
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