U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

44–912 PDF 2008

DEFENSE BASE ACT INSURANCE: ARE TAXPAYERS

PAYING TOO MUCH?

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MAY 15, 2008

Serial No. 110–83

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 15, 2008 ............................................................................... 1

Statement of:

Ginman, Richard, Deputy Director for Defense Procurement and Acquisition Policy, Office of the Deputy Under Secretary of Defense; Shelby

Hallmark, Director, Office of Workers’ Compensation Programs, U.S.

Department of Labor; William H. Moser, Deputy Assistant Secretary

of State for Logistics Management, U.S. Department of State; James

C. Dalton, Chief of Engineering and Construction, U.S. Army Corps

of Engineers, Department of the Army; Joseph P. Mizzoni, Deputy

Auditor General for Acquisition and Logistics, U.S. Army Audit Agency;

and John K. Needham, Director, Acquisition and Sourcing Management

Issues, U.S. Government Accountability Office .......................................... 31

Dalton, James C. ....................................................................................... 61

Ginman, Richard ....................................................................................... 31

Hallmark, Shelby ...................................................................................... 41

Mizzoni, Joseph P. ..................................................................................... 68

Moser, William H. ..................................................................................... 55

Needham, John K. ..................................................................................... 77

Letters, statements, etc., submitted for the record by:

Dalton, James C., Chief of Engineering and Construction, U.S. Army

Corps of Engineers, Department of the Army, prepared statement of ..... 63

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 28

Ginman, Richard, Deputy Director for Defense Procurement and Acquisition Policy, Office of the Deputy Under Secretary of Defense, prepared

statement of ................................................................................................... 34

Hallmark, Shelby, Director, Office of Workers’ Compensation Programs,

U.S. Department of Labor, prepared statement of ..................................... 43

Mizzoni, Joseph P., Deputy Auditor General for Acquisition and Logistics,

U.S. Army Audit Agency, prepared statement of ....................................... 70

Moser, William H., Deputy Assistant Secretary of State for Logistics

Management, U.S. Department of State, prepared statement of ............. 57

Needham, John K., Director, Acquisition and Sourcing Management

Issues, U.S. Government Accountability Office, prepared statement of .. 79

Waxman, Chairman Henry A., a Representative in Congress from the

State of California:

Staff memorandum .................................................................................... 4

Prepared statement of ............................................................................... 20

(1)

DEFENSE BASE ACT INSURANCE: ARE

TAXPAYERS PAYING TOO MUCH?

THURSDAY, MAY 15, 2008

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2154,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Tierney, Watson, Cooper,

Sarbanes, Davis of Virginia, Duncan, and Issa.

Staff present: Phil Barnett, staff director and chief counsel;

Karen Lightfoot, communications director and senior policy advisor;

David Rapallo, chief investigative counsel; Brian Cohen, senior investigator and policy advisor; Margaret Daum, counsel; Mark Stephenson and Denise Wilson, professional staff members; Earley

Green, chief clerk; Jen Berenho Iz, deputy clerk; Caren Auchman

and Ella Hoffman, press assistants; Leneal Scott, information systems manager; Sam Buffone, William Ragland, Lauren Belive, and

Miriam Edelman, staff assistants; Larry Halloran, minority staff

director; Jennifer Safavian, minority chief counsel for oversight and

investigations; Mason Alinger, minority legislative director; John

Brosman, minority senior procurement counsel; Ashley Callen, minority counsel; Emile Monette and Benjamin Chance, minority professional staff members; Patrick Lyden, minority parliamentarian

and member services coordinator; and Ali Ahmad, minority deputy

press secretary.

Chairman WAXMAN. The meeting of the committee will come to

order.

One of the primary issues this committee has tackled, this Congress, has been the waste and abuse of taxpayers’ dollars from crop

insurance in Kansas to an Air Force base on Ramstein, Germany.

We have held over a dozen hearings into Federal programs that

don’t seem to be using taxpayer money wisely.

Today and next week we turn back to Iraq. Our subject today

may seem obscure, insurance payments under the Defense Base

Act of 1941, but the costs to the taxpayers are high.

The Defense Base Act requires contractors operating in Iraq and

Afghanistan to purchase Workers’ Compensation insurance for

their employees. Three agencies—the State Department, USAID,

and the Corps of Engineers—have approached this requirement responsibly. They conducted a competition to select an insurance carrier to offer this insurance at low rates to their contractors.

2

The Defense Department has taken a completely different approach. It allows contractors to negotiate their own individual insurance contracts. This approach has produced a boondoggle for the

insurance companies and the private contractors and saddled the

taxpayer with enormous costs.

Typically, insurers offering Workers’ Compensation pay out as

much in claims and expenses as they take in through premiums.

The carriers make their real money off of investment returns they

earn during the interval between when they receive premiums and

pay claims and expenses.

This has been the experience of the State Department, USAID,

the Corps of Engineers. In fact, the company that won these contracts, CNA, has actually paid out 8 percent more in claims and

expenses than it has received in premiums.

But these contracts represent only 10 percent of the insurance

market in Iraq and Afghanistan. Ninety percent of the DBA market is controlled by the Defense Department, and the experience in

the DOD market has been completely different.

Under the DOD approach, private contractors negotiate with private insurers, but bill the taxpayers for the costs. This arrangement has been exceptionally lucrative for the private insurers and

the contractors. Over the last 5 years, the four largest private insurers have made underwriting profits of nearly 40 percent. That

is almost $600 million in profits.

The LOGCAP troop support contract—the largest single contract

in Iraq—illustrates what is going on. As a series of charts will illustrate—and we will have them on the screen to the right and the

left—KBR paid an insurance company, AIG, $284 million for Workers’ Compensation coverage. Since KBR’s contract is a cost-plus

contract, this $284 million premium plus a markup for KBR of up

to $8 million gets billed to the taxpayers bringing the total costs

to the taxpayers of $292 million. Out of this amount, just $73 million actually goes to injured con- tractors, and AIG and KBR pocket over $100 million as profit.

Well, this is really disgraceful. The taxpayer is paying nearly

$300 million to deliver less than $75 million in benefits to injured

contractors. Rube Goldberg could not design a more inefficient way

to help employees wounded or injured in Iraq.

The Defense Department has argued that the fact that Iraq is a

war zone justified the high costs of the insurance program, but

under the Defense Base Act, the taxpayer, not the insurance company, has to pay the costs when a contractor is wounded in action.

The insurance companies only pay for the types of injuries that

could occur at any work site.

What makes the situation even worse is the people this program

is supposed to benefit—the insured employees working for contractors. They have to fight the insurance company to get their benefits. Delays and denials in paying claims are the rule. Audit after

audit has said that the Defense Department model doesn’t work,

but still the Defense Department won’t change.

When Congress passed a law in 2006 requiring the Defense Department to rethink its approach, the Department reported that it

would be too expensive to collect the necessary data and ‘‘there are

no compelling procurement reasons for DOD to initiate any efforts.’’

3

My staff prepared an analysis of the Defense Base Act, which

has been distributed to the Members as a supplemental memo, and

based on new data from the insurers, it identified 600 million reasons why the Defense Department should care. That is the amount

of the excessive profits that insurance companies have earned at

taxpayer expense in just 5 years.

I would ask that this memorandum and the documents it cites

to be made part of today’s record. Without objection that will be the

order.

[The information referred to follows:]

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

Chairman WAXMAN. In the course of our hearings into Government waste, fraud, and abuse, we have learned to recognize the

recipe for wasteful government spending, and all the key ingredients are here: an obscure Federal program, a procurement approach that leaves Federal taxpayers, not private contractors, liable for the biggest risks, and officials who ignore warning after

warning.

We need to stop this flagrant abuse of taxpayers’ dollars, and

this hearing is an important step in this process.

[The prepared statement of Chairman Henry A. Waxman follows:]

20

21

22

23

24

25

26

Chairman WAXMAN. Mr. Davis, I want to recognize you for an

opening statement.

Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman, for holding

this hearing on the Defense Base Act Insurance Program. The DBA

provides vital insurance coverage for the brave men and woman

employed by the companies performing critical parts of our Government’s overseas operations around the globe.

This once obscure program has dramatically expanded since 2003

with an unprecedented number of contractors working under wartime conditions supporting our efforts in both Iraq and Afghanistan. Thousands of contracts and subcontracts throughout the

world are subject to DBA insurance requirements.

Agencies and the contractors use several models to acquire the

mandatory coverage. In general, Defense Department contractors

purchase DBA insurance on their own and recover their costs

under the terms of the contract. In contrast, the Department of

State preselects one primary insurance carrier to provide the DBA

insurance at a fixed rate for all of its various covered contracts.

A few years ago the Army Corps of Engineers launched a pilot

program based on the State Department model, and the Corps is

here today to discuss that trial effort. Recently, the Congressional

Budget Office suggested DOD adopt that single source method, but

that approach may not be a panacea.

Efficiencies and cost controls possible at lesser levels of operations may be overwhelmed by the vastly increased scale of the

Pentagon’s DBA responsibilities, which dwarf those of the State

and the Corps both in size and the diversity of requirements. The

CBO acknowledged such in an arrangement that presents a number of challenges.

It is not clear that any insurance provider would be willing to

underwrite DBA insurance for all DOD contractors, or the contractors who would be willing to participate on those terms. Concentrating so large a portion of current DBA coverage in the hands

of one carrier could have the perverse effect of driving carriers out

of the market, the resulting loss of competition risks making it

easier to raise rates. The cost of initiating and administering such

a centralized DOD-run program could further endanger any savings for any preselected master contract.

Mandating a single source for all DOD contractors to obtain this

insurance may in fact result in economies of scale and lower cost

for the insurance in Iraq and Afghanistan where risks are higher,

but it doesn’t take into account the myriad places around the globe

where Federal contracts are performed, and the risks are much

lower.

In those places where operational risks are lower, the cost of

DBA insurance will almost certainly go up under a single-source

contract. The effect is like pushing on an inflated balloon. If you

squeeze the balloon in one place, a bulge has to pop out somewhere

else.

This is a good opportunity for us to conduct some real oversight

into whether we are spending the taxpayers’ dollars in the most

costs-effective manner. If there is a better, cheaper way to obtain

DBA insurance, we need to pursue that route.

27

However, Mr. Chairman, I think it is important we conduct balanced oversight, and that means bearing in mind this program covers thousands of contractors performing work in almost every country in the world. Viewing the entire DBA program through the lens

of one audit of one contractors, even if the contractor is KBR, a

former Halliburton subsidiary, risks missing the larger picture.

The problem appears to be as much with Government controls

and oversight of this increasingly expensive program as it does

with any alleged contractor overcharges. Oversight focused on the

general case, not the outlier, is far more likely to yield reforms that

lead to meaningful savings.

Thank you again, and we look forward to today’s testimony.

[The prepared statement of Hon. Tom Davis follows:]

28

29

30

Chairman WAXMAN. Thank you very much, Mr. Davis.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman. I want to congratulate

you and the committee for the latest in the remarkable series of

hearings that really benefit the taxpayer.

Taxpayers are really upset that they don’t feel that they are getting more value for their taxpayer dollars. The latest book reviewed

in the Wall Street Journal said that, on average, taxpayers get

about 24 cents of value for every dollar they pay in taxes. That obviously means 76 cents in something else, and a lot of that is

waste, fraud, and abuse.

So I appreciate your looking into this little known area of the

law. I think that if this were used as a case study in business

school in pretty much any business school in America, the students

would be appalled.

I have been teaching at Vanderbilt Business School now for over

a decade, and I think the students at the ON School of Management in Nashville, TN, would be able to craft a much better system

than the one we have today.

So let’s get the facts out, and let’s see how we can help the taxpayer. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Cooper.

Ms. Watson.

Ms. WATSON. Thank you, Mr. Chairman, for holding today’s

hearing concerning the importance of safeguarding taxpayers from

incurring the costs of high insurance premiums related to the Defense Base Act.

As you all know, DBA insurance is required for all private contractors and subcontractors who do business overseas with any

Government agency currently. Our Nation’s state of affairs has us

occupying Iraq and Afghanistan where we rely heavily on large

numbers of Government contractors which, consequently, has increased the amount spent on DBA insurance by the hundred millions of dollars.

However, both the Federal Government and insurers do accept

the risk of injury or death to contractors, but the Government absorbed the entire cost of injury or death if it is related to war risk

hazards.

Since the start of the wars in Afghanistan and Iraq, there have

been 1,292 contractors killed and another 9,610 wounded as a result of their employment with various Government agencies, although DBA insurance is meant to protect contractors and their

families by providing death, disability, and medical benefits for injuries sustained during the course of employment. This committee

has found that adequate controls weren’t in place to ensure the cost

of DBA insurance were minimized.

In order to make sure that the taxpayer dollar is used wisely and

effectively, potential cost-saving measures should be explored to relieve the burden on the taxpayer from paying unusually high and

unfair insurance premiums.

Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. Thank you very much, Ms. Watson.

Mr. Sarbanes, do you want to pass on the opening statement?

Mr. SARBANES. Yes.

31

Chairman WAXMAN. We will get to the witnesses. Thank you.

We are pleased to have the following people here to testify before

us: Mr. Richard Ginman, Deputy Director of Defense Procurement

and Acquisition Policy, U.S. Department of Defense; Mr. Shelby

Hallmark, Director of Workers’ Compensation Programs, U.S. Department of Labor; Mr. William H. Moser, Deputy Assistant Secretary of Bureau for Administration Logistics Management, U.S.

Department of State; Mr. James Dalton, P.E., Chief, Engineering

and Construction, U.S. Corps of Engineers; Mr. Joseph P. Mizzoni,

Deputy Auditor General for Acquisition and Logistics, U.S. Army

Audit Agency; and Mr. John K. Needham, Director, Acquisition and

Sourcing Management Issues, Government Accountability Office.

We are pleased to welcome all of you to our hearing today. It is

the practice of this committee that all witnesses that testify before

us do so under oath, so if you have no objections, I would like to

ask you to please stand and raise your right hands.

[Witnesses sworn.]

Chairman WAXMAN. Thank you. The record will indicate that

each of the witnesses has answered in the affirmative.

Your prepared statements that have been submitted to us will be

in the record in full. We would like to ask, if you would, to try to

limit the oral presentation to around 5 minutes. We have a clock.

When it is turned on, it will be green for 4 minutes, and then turn

yellow for 1 minute, and after 5 minutes will be red. When you see

the red light, it would be a good time to summarize and conclude.

Mr. Ginman, we are pleased to have you, and there is a button

on the base of the mic, be sure it is on. We are looking forward to

hearing from you.

STATEMENTS OF RICHARD GINMAN, DEPUTY DIRECTOR FOR

DEFENSE PROCUREMENT AND ACQUISITION POLICY, OFFICE OF THE DEPUTY UNDER SECRETARY OF DEFENSE;

SHELBY HALLMARK, DIRECTOR, OFFICE OF WORKERS’ COMPENSATION PROGRAMS, U.S. DEPARTMENT OF LABOR; WILLIAM H. MOSER, DEPUTY ASSISTANT SECRETARY OF STATE

FOR LOGISTICS MANAGEMENT, U.S. DEPARTMENT OF

STATE; JAMES C. DALTON, CHIEF OF ENGINEERING AND

CONSTRUCTION, U.S. ARMY CORPS OF ENGINEERS, DEPARTMENT OF THE ARMY; JOSEPH P. MIZZONI, DEPUTY AUDITOR

GENERAL FOR ACQUISITION AND LOGISTICS, U.S. ARMY

AUDIT AGENCY; AND JOHN K. NEEDHAM, DIRECTOR, ACQUISITION AND SOURCING MANAGEMENT ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF RICHARD GINMAN

Admiral GINMAN. Chairman Waxman, Ranking Member Davis,

distinguished members of the committee, thank you for the opportunity to appear before you today to discuss Defense Base Act insurance. I am Dick Ginman, and I serve as Deputy Director, Defense Procurement of Acquisition Policy in the Office of the Under

Secretary of Defense for Acquisition, Technology, and Logistics. I

have more than 37 years in government and commercial business

in a variety of acquisition positions.

32

Before assuming this job, I held several private sector positions,

including vice president of a line of business at General Dynamics.

I also served in the U.S. Navy for 30 years, retiring as a Rear Admiral, Supply Corps.

In the past, DOD permitted its overseas contractors to purchase

the required DBA insurance from any insurance company approved

for this purpose by the Department of Labor. In our April 1996 Report to Congress, we compared the State Department’s and

USAID’s DBA rates to a sampling of rates paid by DOD contractors. We found that in most cases our rates were lower than those

paid by State and USAID, sometimes significantly lower.

We found that many firms purchased DBA insurance at very favorable rates, as riders to their regular State-side Workers’ Compensation insurance programs. In addition, except for a few isolated instances DOD contractors were not having problems obtaining DBA coverage.

We were concerned that the umbrella contracting approach did

not provide an incentive for improving a company’s safety record.

Since all companies pay the same rate, there is no incentive for a

company to be proactive about keeping rates down through better

safety records, and thus be more competitive in the marketplace.

Further, with a single contract with one rate, we would not be

able to take advantage to the lower premiums available to industry

for the majority of areas to which we were sending contractors at

the time. After 9/11 and during the beginning of the Iraq War,

however, we received complaints from companies doing business in

Iraq concerning DBA insurance. They complained that the rates for

the insurance had increased significantly going from $4 to over $20

per $100 of employee’s salary, and in some cases they could not obtain DBA insurance at all.

Also, minimum premium payments of $15,000 to $25,000 dollars

hit small businesses particularly hard. To determine if a single

mandatory contract approach for DBA would provide cost savings

for DOD, we sponsored a pilot program with the U.S. Army Corps

of Engineers. Although the Corps’ pilot program was competed,

only CNA International submitted an offer. CNA’s initial contract

established worldwide DBA insurance rates of $5 to $8.50 per employee salary for services and construction, respectively. which

were below the range of $10 to $21 GAO cited for contract workers

in Iraq in their 2005 Report.

While the Corps found that several small and local businesses

were now able to obtain lower DBA insurance rates for Iraq and

obtained insurance where they were previously denied, the Corps

also discovered that in certain non-war zone areas, the umbrella

DBA rates were sometimes higher than what individual contractors

were previously obtaining. This is expected under the concept of

risk-pooling where lower risk areas would pay a higher premium

than the higher risk areas.

In April 2008, CNA and the Corps agreed to a contract modification setting up two additional labor categories for security and for

aviation with materially higher rates. This occurred because CNA

was incurring significant losses in the war zone such as Iraq and

that it could no longer continue contract performance at the current rates. They agreed to a $10.30 and a $17.50 rate per $100 of

33

employee’s salary for security in aviation, respectively, which are

similar to the same rates at State.

A pilot program goal is to provide data to build and to present

to our office in the Army a formal business case to determine if the

Pilot should be expanded Army or DOD-wide. To help the Corps develop such a case, the Army Audit Agency recently agreed to review the results of the pilot program to determine if it warranted

permanent placement at the Corps and warrant further extension

into the Army.

To build this business case, the Department will pursue collecting DBA data from the top 50 defense contractors. Once Army’s

audit review is complete and we have collected the additional data,

the Corps will develop the business case, and we will review the

results to determine the Department’s next steps.

Mr. Chairman, I thank the committee for your interest in our efforts, and we would be happy to address any questions.

[The prepared statement of Admiral Ginman follows:]

34

35

36

37

38

39

40

41

Chairman WAXMAN. Thank you very much. We have questions,

but we will wait until all the witnesses have testified first.

Mr. Hallmark.

STATEMENT OF SHELBY HALLMARK

Mr. HALLMARK. Good morning, Mr. Chairman, and Ranking

Member Davis and other Members. I am Shelby Hallmark. I am

the Director of OWCP, the Office of Workers’ Compensation Programs at the Department of Labor. I have served in that position,

or its Deputy, since 1990.

The Longshore and Harbor Workers’ Compensation Program is

the smallest of OWCP’s programs. Our Longshore Division oversees

the Defense Base Act enacted, as we know, in 1941 to provide

Workers’ Compensation protections for employees of Federal contractors overseas. Our Federal Employees’ Compensation Division

runs the War Hazards Compensation Act, providing Federal reinsurance for DBA losses incurred as a result of war.

The DBA is a private sector insurance driven Workers’ Compensation system similar to those run by each State. DOL’s role is

oversight. We assure that Federal contractors overseas procure the

necessary DBA insurance coverage. We oversee insurers’ handling

of claims activities and issuance of payments, and we resolve disputes between insurers and employees when they arise.

DOL has no authority to regulate insurance premiums under the

Longshore and DBA statutes. In effect, the system is self-regulating. The market determines premiums, and purchasers, contractors, or Federal contracting agencies can negotiate for better prices.

Most claims are resolved without Federal intervention.

In 2003, contracting subject to DBA rose dramatically. DOL

launched a major effort to educate the many players in the system,

insurers, contracting agencies, contractors, and attorneys, defense

and plaintiff, on their roles and responsibilities. We sponsored numerous seminars and round tables aimed at clarifying requirements, addressing the special problems arising in the Middle East

environment, and sharing best practices.

Although all participants in the DBA system were challenged by

the unique difficulties presented in Iraq and Afghanistan, we believe compliance assistance effort and the efforts of our stakeholders have improved the extension of DBA coverage and the delivery

of services to workers.

Two of the three major insurers have opened claims processing

offices in the Middle East to over come distance, language, and cultural barriers, and have translated forms and brochures into Arabic. While claims processing is elongated due to distance and war

zone conditions, overall outcomes are improving. Contracting agencies have acted to ensure that contractors and subcontractors have

DBA coverage, and claims filing compliance has risen.

The volume of DBA claims from Iraq and Afghanistan rose quickly from 2003 through 2007. DOL staff are acutely aware of the significant numbers of both American and foreign citizens injured or

killed in the course of DBA employment, and our staff have worked

extremely hard to ensure that the program functions as intended

for these workers.

42

While it appears that Iraq/Afghanistan claimants are somewhat

less successful in obtaining benefits than domestic claimants in the

Longshore program, we believe this discrepancy is largely explained by the unique circumstances involved in implementing an

insurance program in a conflict zone where just finding and communicating with injured workers can be a huge challenge.

I am proud to note, however, that Iraq/Afghanistan cases that do

enter DOL’s dispute resolution system receive very comparable outcomes, indicating that our efforts to reach out to these claimants

are working.

My written testimony provides examples of complex cases involving multiple vests of foreign nationals in which DOL was able to

achieve relatively rapid payment of the large majority of the families involved, despite significant obstacles. Our New York office

worked very hard to get benefits to scores of Nepalese, Iraqi, and

Turkish families in just these three cases.

Mr. Chairman, you voiced a specific interest in post-traumatic

stress disorder, PTSD cases. While the major insurers have generally handled DBA claims the same way they do domestic Workers’ Compensation claims, PTSD presents challenges that are not

normally faced in Workers’ Compensation.

In 2006, we determined that additional focus was needed in this

area, specifically in DBA community. Relatively clear-cut PTSD

cases were being reported but not getting appropriate resolutions

swiftly enough. Employers were not providing counseling services

that military members get, and, of course, these workers did not

receive VA services.

We, of course, push for proper resolutions in the individual cases

we became aware of, but we also took action systemically working

closely with insurers to raise awareness of PTSD issues and encourage best practices.

My written testimony outlines OWCP’s implementation of the

War Hazards Compensation Act. This reinsurance program, paid

from Federal entitlement funds, is being administered effectively.

We have received less than 300 claims for reimbursement from insurers so far. We expect many more to be filed in the coming years.

Thank you for this opportunity, and I will be glad to answer

questions.

[The prepared statement of Mr. Hallmark follows:]

43

44

45

46

47

48

49

50

51

52

53

54

55

Chairman WAXMAN. Thank you very much, Mr. Hallmark.

Mr. Moser.

STATEMENT OF WILLIAM MOSER

Mr. MOSER. Chairman Waxman, Representative Davis, and distinguished members of the committee, thank you for the opportunity to appear before you today to discuss Defense Base Act insurance and the War Hazards Compensation Act program. As the

Deputy Assistant Secretary for Logistics Management, the Department of State’s central contracting authority reports to me, and I

am happy to address the Department of State’s contracting for

DBA insurance.

The Defense Base Act of 1941 mandates that Federal prime and

subcontractors provide and maintain a broad form of Workers’

Compensation insurance coverage for their personnel working on

construction and service contracts outside the United States. The

cost of DBA insurance is ultimately borne by the contracting agency, often, as we have heard here today, as a reimbursable cost. The

Department’s goal, however, is to ensure that all of our contractors,

both large and small, are able to obtain legally compliant coverage

at a manageable cost.

DBA insurance covers U.S. citizens as well as host country and

third country nationals who are working under State Department

contracts. A waiver of DBA insurance is often available for local

national employees who are employed under a Department contract

if they are covered by a local host country Workers’ Compensation

Program that provides effective compensation for work-related illnesses and injuries.

In Iraq and Afghanistan, however, the lack of an effective local

worker compensation program requires that DBA coverage be extended to local nationals. All Iraqi and Afghani citizens working

under State Department contracts in these countries are covered

under the DBA. When any employee working under a Department

of State contract is injured or killed, a determination must be made

by the insurance carrier and, if there is a dispute the Department

of Labor, as to the reason for injury or death and whether it might

be covered by the DBA. The Department of Labor, subsequently,

will determine eligibility for reimbursement under the War Hazards Compensation Act program, which we are very proud to work

with.

Prior to 1990, the Department of State required contractors to

obtain DBA insurance independently, and rates varied based on

the contractor’s number of employees, claims history, and work location. Small businesses with limited overseas experience often

found it difficult to obtain DBA insurance, or were required to pay

very high premiums. The people that were working in our authority at that time really talked about how many times they had to

pay an entry fee, essentially, to get DBA coverage.

In 1990 a State Department Office of Inspector General audit

concluded that the Department’s DBA insurance costs could be significantly reduced if a blanket insurance contract were awarded to

a single insurance provider. Subsequently, in an effort to control

costs and provide uniform DBA insurance rates and coverage for all

our contractors, both large and small, the Department competiVerDate 11-MAY-2000 15:42 Nov 03, 2008 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 C:\DOCS\44912.TXT KATIE PsN: KATIE
56

tively awarded a multi-year contract in 1991 to CIGNA Property

and Casualty Insurance Co.

The follow-on DBA insurance contract was completed in 2000

with four offerors competing: CIGNA, AIU, Ace International, and

CNA. The contract was awarded to CNA in 2001 and remains in

place today. So this is the same contract that we have had since

2001, is the one we are using today in Iraq and Afghanistan.

This blanket contract business model has stabilized rates from

2000 to 2007. Premium rates were unchanged: $3.87 to $6.45 per

$100 of employee salary for services and $5 to $8.34 of employee

salary for construction. In July 2007, the CNA contract was extended for 1 year with two additional specific service categories,

which Mr. Ginman has also addressed, services without aviation

and security services with aviation. Due to the high risk in claims

associated with these categories, CNA proposed higher rates for

these categories: $10.30 per 4100 of employee salary for security

services without aviation and $17.50 for services with aviation.

These rates became effective with the July extension, however,

since most contractor policies are not renewed until June 2008, the

effect of these rates have not yet been realized by our contractors

or by the Department.

In April 2008, the Department issued a synopsis in FedBizOpps

announcing the availability of a fully competitive solicitation to

continue to provide DBA insurance coverage. That solicitation is

expected to be issued later this month.

Mr. Chairman, thank you and the members of the committee for

your interest in DBA insurance, and I would be happy later to address your questions.

[The prepared statement of Mr. Moser follows:]

57

58

59

60

61

Chairman WAXMAN. Thank you very much, Mr. Moser.

Mr. Dalton.

STATEMENT OF JAMES C. DALTON

Mr. DALTON. Chairman Waxman, and members of the committee,

thank you for the opportunity to testify before you today concerning

the methods used by the Corps of Engineers to reduce DBA insurance costs, to the extent which other methods are used and how

successful they have been, and the lessons learned from these efforts.

Due to the increase in DBA insurance in 2003, the Corps of Engineers and the Office of the Secretary of Defense agreed to conduct

a Centrally Managed DBA Insurance pilot program, centralizing

the management and acquisition of Defense Base Act insurance for

Corps contracts worldwide, and modeled the USAID and the Department of State.

The pilot objectives were the following: make DBA insurance affordable through economies of scale; leverage lessons learned under

DBA insurance undertaken by USAID and the State Department;

pool the risk; centrally manage DBA insurance; and develop a business case analysis.

This pilot, which is a series of two contracts, made the DBA insurance carrier the party responsible for dealing directly with

Corps contractors requiring DBA insurance during performance of

their contract. Insurance rates were based on category of labor and

considered all risks and all possible geographic locations of contract

performance, including hostile and non-hostile environments and

safety considerations.

The pilot provided a single entry point for coverage and access

to DBA insurance for all Corps contractors and subcontractors at

all tiers, no matter the business size or location of the firm requiring insurance. Insurance premiums were paid directly to the insurance carrier based on the rates in the Corps DBA insurance contract.

Under the pilot, there were no minimum premiums paid by contract. When contractors independently acquired DBA insurance

coverage, they could expect to pay a minimum premium of $15,000

to $25,000 per contract. This adversely affected overall contract

pricing and likely precluded small and local business firms from

competing on supporting Global War on Terrorism programs.

The first Corps DBA contract was solicited on a competitive best

value basis and was awarded in November 2005 to the sole offeror,

CNA insurance. The terms of the contract was 1 year and provided

a coverage for services and construction labor at a premium of $5

per $100 of employee labor for services, and $8.50 per $100 for construction labor. These rates were well below the 2005 GAO Report

which stated the contractors performing work in Iraq were paying

DBA insurance rates between $10 and $21 per $100 of employee

salary cost.

The Phase I contract premiums proved lower than the GAO’s report, and the Corps continued to a Phase II contract to gather additional data for the business case. The Phase II pilot contract was

competitively solicited on the lowest price technically acceptable

basis, and again one offer was received from CNA Insurance. The

62

proposed Phase II premiums continued to decline with the CNA

premiums now at $3.50 per $100 for services, and $7.25 per $100

for employee labor costs on construction.

A Phase II pilot contract was awarded to CNA on March 31,

2007. During performance of the contract, two additional labor categories were added for security and aviation. The contract also included standard insurance industry definitions of all labor categories. The standard definitions clarify the labor category applicable to the work performed in the contract and the rate applied for

insurance.

In March 2008, the contract was extended with the CNA insurance until 2008 to allow the Corps to solicit and obtain an award

a follow-on DBA contract.

A major success of the Corps’ centralized DBA insurance is the

ability to reach all tiers of subcontractors. The smallest subcontractor in Iraq has access to DBA insurance.

To close, I would like to thank you once again, Chairman Waxman, for allowing the Corps the opportunity to appear before this

committee today. I will be glad to answer any questions you or the

members of the committee may have.

[The prepared statement of Mr. Dalton follows:]

63

64

65

66

67

68

Chairman WAXMAN. Thank you very much, Mr. Dalton.

Mr. Mizzoni.

STATEMENT OF JOSEPH P. MIZZONI

Mr. MIZZONI. Mr. Chairman, Mr. Davis, and distinguished members of the committee, thank you for the opportunity to be here

today to discuss our work related to Defense Base Act insurance for

LOGCAP operations. I have submitted my full statement to the

committee, and I ask that it be made part of the hearing record.

I have been with the U.S. Army Audit Agency for 31 years and

became the Deputy Auditor General for Acquisition and Logistics

in October 2005. The Agency is the Army’s internal audit organization, and throughout our history we have deployed with our troops

in Vietnam and Bosnia, during Desert Shield and Desert Storm,

and lately in support of Operations Iraqi Freedom and Iraqi Enduring Freedom.

In December 2004, General Casey, then Commander of the Multinational Force Iraq, asked us to help him reduce the overall costs

of LOGCAP operations supporting OIF. To help General Casey

achieve his goal, we established two audit objectives. These objectives were to determine if overall management of the LOGCAP program was adequate and determine if LOGCAP operations was providing the needed services in a cost-effective manner.

Our LOGCAP audits have covered many topics to include Defense Base Act insurance. DBA insurance is basically Workers’

Compensation insurance. It provides benefits to contractor and subcontractor employees who are injured or killed as the result of normal working conditions while working on U.S. Government-financed contracts performed outside the United States. Because

DBA insurance is required by law and because a LOGCAP contract

is primarily a cost-reimbursable contract, the cost of this insurance

is openly paid by the U.S. Government.

The objective of DBA audit was to determine if adequate controls

were in place to minimize costs paid for DBA insurance under the

LOGCAP contract. We concluded that the Army was at risk at paying more than needed. Here is what we found: DBA insurance represented a significant cost of the LOGCAP contract. The LOGCAP

contractor paid about $284 million in premiums for DBA insurance

between fiscal year 2003 and fiscal year 2005. The premiums increased steadily each year from about $5 million in fiscal year 2003

to about $165 million in fiscal year 2005.

DBA rates, which were a percentage of the contractor’s total payroll costs for both contractor and subcontractor employees, increased substantially between fiscal year 2003 and fiscal year 2004.

These rates then declined in fiscal year 2005 and fiscal year 2006.

The premium increases and year-to-year rate fluctuations

seemed inconsistent with the risk associated with providing Workers’ Compensation and with the contractor’s good safety record.

The estimated amount of claims expected to be paid was substantially less than the DBA premiums the Army paid. Excessive DBA

premiums may have been paid because DBA rates are applied

against total payroll costs. However, benefits paid under the DBA

program are based on an employee’s average weekly wage and are

69

capped by statute. Many of the contractor’s employees earned

wages that exceeded the cap.

The LOGCAP contractor pays many of its employees danger pay

for working in areas such as Iraq and Kuwait. As a result, the

LOGCAP contractor paid premiums on the danger pay component

of the payroll. To address these issues, we recommended that the

Office of the Assistant Secretary of the Army for Acquisition, Logistics and Technology use more cost-effective means of providing

Workers’ Compensation insurance.

Although the Office didn’t fully agree with all parts of the recommendation, the actions it proposed met the intent of the recommendation.

In closing, I would like to thank you once again, Mr. Chairman,

for inviting me to appear before this committee. DBA insurance

under contracts issued by the United States, we are currently reviewing DBA insurance under contracts issued by the U.S. Army

Command in Kuwait, and we have also recently agreed to review

the cost-effectiveness of the Corps of Engineers DBA pilot program.

We will remain responsive to Army leadership in continuing

working to provide the best possible solution to Army challenges.

I am very proud of my auditors in Southwest Asia. Their dedication

and hard work has provided valuable real-time support to the

Army.

I appreciate the opportunity to testify before you today and

would be glad to answer your questions.

[The prepared statement of Mr. Mizzoni follows:]

70

71

72

73

74

75

76

77

Chairman WAXMAN. Thank you very much, Mr. Mizzoni.

Mr. Needham.

STATEMENT OF JOSEPH K. NEEDHAM

Mr. NEEDHAM. Chairman Waxman, Ranking Member Davis, and

members of the committee, thank you for inviting me here today

to discuss the Defense Base Act and GAO’s observations on the actions by the Departments of Defense and Labor, to address the

findings from our 2005 Report on DBA’s implementation in Iraq.

We initiated our review of DBA in 2004 after concerns were

raised over the cost of Workers’ Compensation insurance provided

under DBA. According to recent DOD data, there were over

163,000 contractor personnel working in Iraq. We obtained the

rates spent on DBA insurance for 21 contracts held by 13 prime

contractors performing work under Iraq under cost-reimbursable

contracts.

These contracts at the time represented 69 percent of U.S. appropriated contracting dollars awarded. We selected companies of difference sizes performing a range of services for DOD, the Department of State, and the U.S. Agency for International Development.

We did not obtain DBA rates from subcontractors in our review.

We were limited in what we can conclude about the cost of DBA

insurance because investigations by several States into the practices of a number of insurance companies and brokerages during

the course of our review, raised questions over the reliability of the

information we obtained from the insurance industry.

In April 2005, we reported that the total cost of DBA insurance

to the Government, or the extent to which Iraq reconstruction

funds were being spent on DBA insurance, could not be calculated

due in part to the difficulty of gathering data on the large number

of contractors and the multiple levels of subcontractors performing

work in Iraq.

There were wide variations in the amounts Federal agencies

were paying for DBA insurance. We reported that eight DOD prime

contractors paid from $10 to $21 per $100 of salary cost, a rate that

was significantly higher than the rates paid by the State Department and USAID contractors, which are at that time $2 to $5 per

$100 of salary costs to their respective and self-insurer programs.

Last, what we found was that there were challenges in implementing the DBA insurance requirements for Iraq, such as the lack

of clarity in DBA requirements, delays in processing claims, and

difficulty in monitoring contractor compliance. As a result of our

work, Congress directed DOD to work with other agencies to address these challenges.

Where do things stand today? As other witnesses have noted this

morning, since the Army Corps implemented its single insurer program in December 2005, its insurance rates have decreased from

what DOD was previously paying. While DOD has taken steps to

reduce DBA insurance rates through the Army Corps’ program, it

has not yet implemented similar efforts Department-wide. DOD

continues to lack reliable aggregate data on the total cost of DBA

insurance.

It should be noted that Congress directed DOD to identify methods to collect data on DBA insurance costs in fiscal year 2006.

78

While State, USAID, and the Army Corps can now obtain aggregate DBA cost data for their single respective insurer programs,

DOD recently reported to us that it had not collected this data Department-wide.

GAO has issued several reports on best practices, noting that

agencies can analyze financial data to leverage their buying power,

reduce costs, and better manage suppliers of goods and services.

This is referred to as strategic sourcing, which calls for an organization to analyze its spending and use that information to make

more effective business decisions about the acquisition of commodity conservatism.

As we have noted on other occasions—and it bears repeating

today—in discussing DBA insurance premiums, DOD needs to be

more strategic, as it has been in the acquisition of other services.

In short, it needs to manage the suppliers of insurance and not

have the suppliers managing DOD.

Turning to Labor’s actions, Department officials told us that they

have taken steps to address several of DBA’s insurance implementation challenges that we identified in our 2005 Report. For example, GAO found that there was uncertainty among Agency officials

regarding when DBA insurance was required as well as problems

in processing claims and monitoring compliance.

Labor officials recently told us they have been receiving fewer

questions after holding seven seminars through 2006 on DBA insurance for contractors, insurance companies, and Agency officials,

as well as attorneys, to clarify what the DBA requirements were.

While Labor officials also noted improvements in processing insurance claims, they still face challenges in verifying that subcontractors in Iraq have obtained DBA insurance.

In conclusion, Mr. Chairman, there is one overriding issue, and

that is DOD’s need to manage the cost of DBA insurance premiums. While DOD has taken steps for the Army’s Corps Insurer

Program to reduce its Dod rates, it does not know what it is spending Department-wide on such insurance. Without this information,

DOD is limited in its ability to make fully informed decisions regarding its options for minimizing Department-wide insurance

costs and limiting its ability to manage its suppliers strategically.

Furthermore, the lack of detailed information on these costs

makes it difficult for Congress to conduct full oversight of the reconstruction funds.

Mr. Chairman, this concludes my statement. I thank you for the

opportunity, and I will be happy to answer any questions.

[The prepared statement of Mr. Needham follows:]

79

80

81

82

83

84

85

86

87

88

Chairman WAXMAN. Thank you very much, Mr. Needham.

I want to thank all of you for your testimony. We are now going

to have questions from members of the panel, and I want to start

off those questions.

To illustrate this program which might seem very complex, I

wanted to focus my questions on a particular example. The insurance purchased by KBR under the Army LOGCAP contract, the

LOGCAP contract is the single biggest contract in Iraq. It is worth

more than $27 billion. Halliburton’s KBR Division won this Cost

Plus Contract in 2001, and this committee has raised a number of

questions about it since then.

Mr. Mizzoni, your agency, the Army Audit Agency, issued a report about KBR’s charges under the LOGCAP contract for DBA insurance, and the committee obtained a copy of the report, and we

are making it public today. I thought your findings were pretty astounding.

KBR hired AIG as its insurance company. Your report, page 5,

says that AIG charged KBR about $284 million for DBA insurance

from——

Mr. MIZZONI. That is correct. One clarification, though, sir. My

understanding is that KBR actually did not buy the insurance. I

am not an insurance expert, but I understand that KBR actually

had to use an insurance broker in the State of Texas, and that insurance broker then bought the insurance for KBR.

Chairman WAXMAN. And did the insurance broker get a fee for

doing that, that purchase?

Mr. MIZZONI. I honestly don’t know, sir.

Chairman WAXMAN. OK. The total cost of providing this insurance is actually higher than the $284 million. KBR has a Cost Plus

Contract so it can add up a markup up to $8 million on top of the

$284 million premium to AIG. This makes a total cost to the taxpayers as much as $292 million, all of which I mentioned in my

opening statement.

Your report, page 8, also says that of that $292 million AIG will

pay out about $73 million in claims after all adjustments and reimbursements. Is that right, $73 million?

Mr. MIZZONI. That is what we found, sir, yes.

Chairman WAXMAN. So looking at it from a taxpayers’ perspective, the purpose of this insurance is to provide injured workers

with benefits, yet under this contract the taxpayer is paying nearly

$300 million, and the injured workers are getting less than $75

million. I am trying to figure out if this makes any sense.

Mr. Needham, you represent GAO. Do you think the taxpayers

are getting a good return on their investment?

Mr. NEEDHAM. Based on the data that has been presented today,

Mr. Chairman, it is not apparent that they are. One of the concerns

that we have had is that DOD needs to be more on top of this in

terms of what it is that we are spending.

DOD took on a practice of doing spend analysis several years ago

after we had issued reports on these best practices. They have done

this for other areas, clerical services, they do it for software, wireless services. This represents an opportunity for DOD to get on top

of that so they could get a better return.

89

Chairman WAXMAN. Well, that is certainly one of the purposes

of the hearing, but we are trying to see where we are before we

push them even harder to get where we should be. KBR and AIG

set the price of the insurance. Neither of them pays the bills.

Mr. NEEDHAM. Right.

Chairman WAXMAN. The taxpayer does. That means they have

no incentive to keep costs low. Because KBR is operating under a

cost plus contract, the higher the premiums it pays AIG the more

money it makes.

Now, Mr. Mizzoni, do you think it makes sense to rely on a contractor like KBR which has a cost plus contract and negotiate its

own insurance premiums?

Mr. MIZZONI. Again, sir, the way I understand it, they did not

negotiate it; it was the insurance broker in Texas.

Chairman WAXMAN. They relied on their broker, but none of

them paid the bills?

Mr. MIZZONI. None of them paid, correct.

Chairman WAXMAN. And they had no reason to hold down the

costs?

Mr. MIZZONI. It is a cost reimbursable contract. We do pay the

cost. One or two things I would like to mention is that KBR safety

record was actually very good, and the safety record is used when

negotiating award fees.

During our audit, when we brought this to the attention to the

KBR as far as the rate increases from fiscal year 2003 to fiscal year

2004, they did question their broker.

Chairman WAXMAN. Well, the concerns about this problem are

not new. Since 2005, auditors and experts have been warning that

the taxpayers are being overcharged, but it has been hard to get

a definitive picture of what is really going on with this program because the administration has not wanted to compile the data. So

that is what we tried to do.

We asked the top four insurance companies that account for

more than 99 percent of the DBA market to provide the committee

with profit and pay out data, and we are now able to see some concrete trends. What the data shows is that from 2002 through 2007

these four insurance companies received $1.5 billion in premiums

under contracts negotiated with private contractors in Iraq and Afghanistan. These companies will pay out $928 million in claims

and expenses, and they will retain net underwriting gains of $585

million. In other words, these four insurance companies have retained as profit 39 percent of the premiums they receive.

Now my time has expired, but I certainly want to pursue this

with Mr. Ginman and others because it seems to me it is quite excessive. But other Members may want to question on this point,

and I think it is well worth going into.

Mr. DAVIS OF VIRGINIA. May I answer your——

Chairman WAXMAN. Well, I had a long series of questions, so

why don’t you go ahead.

Mr. DAVIS OF VIRGINIA. Thank you very much.

Chairman WAXMAN. If not, other Members on the second round.

Mr. DAVIS OF VIRGINIA. Mr. Moser, let me start with you. You

note in your testimony there were four offerors during State’s most

recent DBA competition, is that correct?

90

Mr. MOSER. Yes, that is correct.

Mr. DAVIS OF VIRGINIA. When was that contract awarded?

Mr. MOSER. In 2001.

Mr. DAVIS OF VIRGINIA. Could you speculate for us why State

gets more offers than the Army Corps?

Mr. MOSER. Well, it is very difficult for me to make comments

about any other agency’s contracting activity. I will say for our contracting activity, we very much want to promote as much competition as we can get, so I will turn that over to Mr. Dalton for comments about the Army Corps.

Mr. DALTON. I think maybe one of the reasons why we get fewer

offerors than the State Department is because we concentrate

heavily in more hostile areas than perhaps the State Department.

A large part of our work is in Iraq, is in Afghanistan, and some

over in the Balkans, and so when we get our prices and contractors

take a look at where we are working, there is a higher risk associated with bidding on Corps of Engineer contracts than perhaps

State Department that are more spread out across the world.

Mr. DAVIS OF VIRGINIA. Thank you. Last year the CBO estimated

that creating a single DBA insurance pool for the entire DOD

would save the Government millions of dollars. But the CBO also

warned that due to the increased Government administrative costs

and the uncertainty over whether insurance providers would be

willing to underwrite such a massive policy, the creation of such a

pool would not necessarily result in savings for the Department of

Defense.

Creating a pool would also effectively subsidize contractors in

more dangerous areas by charging inflated rates to those in safer

areas than subsidized contractors—you understand what I am saying. Would the creation of this type of Department-wide insurance

pool result in savings to the Government, let me just ask? I will

start with the GAO.

What effect would it have on contractor safety systems? Would

this type of arrangement result in more contractors moving to selfinsurance model? What is your thought on that?

Mr. NEEDHAM. Mr. Davis, in terms of looking at options, one of

the things we recommended back 3 years ago was that DOD begin

to assess the various options. What they actually did was adopt the

Army Corps single insurer program for the Corps.

What we would like to see them do is to look at possibly—the

Government has a self-insurer, but that is one option—but you

could create multiple pools. There are tradeoffs, and according to

Admiral Ginman, they are going to be looking at these possible

business cases on this and what they can do in terms of what the

risks are with various job categories in various parts of the world.

This is what we are looking for is that they make this kind of

a tradeoff analysis. They haven’t done this yet.

Mr. DAVIS OF VIRGINIA. Let me ask this, Admiral Ginman. Could

you, for example, do a single provider system for Iran and Iraq, another in other regions of the world, and do three or four single provider systems? Would that work, seeing that it is so large and diverse?

Admiral GINMAN. Mr. Davis, I think, as Mr. Needham just said,

there are a lot of options available to us. We, frankly, don’t have

91

the data today, and we have committed that we will go collect the

data. A single contractor for in a risk pool for Iraq/Afghanistan is

certainly an option. The single contract concept that State and

USAID and the Corps are using is an option.

Mr. DAVIS OF VIRGINIA. Well, let me ask you this. Wouldn’t a single contractor for Iraq/Afghanistan make more sense than one

across all regions given the different diversity and risks?

Admiral GINMAN. I think from risk pool perspective, having a

single contractor in Iraq and Afghanistan would make sense to me,

personally, but I am dong that without the benefit of the business

analysis to make that determination behind it.

Mr. DAVIS OF VIRGINIA. Right. How many insurers are there in

Iraq and Afghanistan, do you have any idea?

Admiral GINMAN. Department of Labor has worked with the

Joint Contracting Command in Iraq and Afghanistan. There are

currently three that are being used, and Department of Labor is

working to add a fourth. So that the contractors doing work, particularly the local contractors, have an option of three today and,

hopefully, they will have an option of four soon.

Mr. DAVIS OF VIRGINIA. What generally happens is the contractor

hires the company?

Admiral GINMAN. Absolutely. It is the contractor’s responsibility

to get the insurance.

Mr. DAVIS OF VIRGINIA. And they have to take it off an approved

list?

Admiral GINMAN. Yes. It is approved by the Department of

Labor.

Mr. DAVIS OF VIRGINIA. OK, that is fine.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman. What we are really talking about here, folks, is war profiteering. Private companies making money, profits, off of people who are injured or killed in a war

zone. When Mr. Waxman left off his questioning, he pointed out

that the profit margins are unusually large, 39 percent, whereas a

domestic ratio would be maybe closer to 1 percent.

That is not a pretty picture. Now, I suppose there are a lot of

bureaucratic reasons for this, but, Admiral Ginman, as the DOD

representative here, are you concerned that insurance companies

have made nearly $600 million in profits as a result of the War in

Iraq and Afghanistan?

Admiral GINMAN. Am I concerned. I think any time the Government is taken advantage of, it is a concern.

Mr. COOPER. Can you speak louder?

Admiral GINMAN. I said any time the Government is taken advantage of, it is a concern.

Mr. COOPER. Well, you have been on duty in this assignment

since October 2006.

Admiral GINMAN. Yes, sir.

Mr. COOPER. Has the Government been taken advantage of during your time on duty?

Admiral GINMAN. I don’t have the data that the chairman provided, so based on simply what he said and the data that was

there, if in fact 1 percent, as you provided, is a correct number, and

92

39 percent is in fact the percentage that is being made, that would

certainly be an opportunity to go look in more detail at those specifics.

Mr. COOPER. Admiral Ginman, you are acting like this is a new

issue. This was raised in 2005, 2006, 2007. Congress passed a law

in 2006 requiring the Secretary of Defense to do exactly what the

GAO has been recommending. So this isn’t news.

Admiral GINMAN. And we implemented the pilot program with

the Corps of Engineers to go collect the necessary data so that we

would have the data to do a reasonable business case analysis to

make a determination on a DOD-wide or an Army-wide or servicewide approach.

Mr. COOPER. Who completed those?

Admiral GINMAN. And the pilot program showed $19 million in

savings that DOD did nothing to implement it more broadly. So

here you had a very encouraging result, and we are dragging our

feet. I mean the pilot program has not been completed and has not

reported out all of the analyses, and we are looking for support

from the Army Audit Agency and from the Corps of Engineers to

be able to provide us the data to make that business case analysis.

Mr. COOPER. Mr. Needham, you represent GAO. Don’t you think

these are high-profit levels for these insurance companies and for

the KBR contractor?

Mr. NEEDHAM. Based on what the norm is for the insurance industry, that is what I have been told, that these are high.

I would mention, too, that part of that is driven by what the loss

rate is, and the loss rate that was cited by the Army Audit Agency

for the contract that they looked at was 26 percent. That is pretty

low. The normal is about 68 percent according to AIM. Best that

has done studies of this. So if you have a high rate of losses over

a period of years, you may try to increase your profits in some

years so you can compensate for those losses in those later years.

This is the kind of analysis that needs to be done: What should

we be paying so that we are a smart buyer when it comes to these

kinds of insurance products?

Mr. COOPER. Let’s try to put it in plainer English. If you were

a private insurance contractor and you faced a risk in a war zone,

you would essentially be trying to exaggerate that risk so that you

would protect your ability to make money. You would essentially

be betting against our Government and our servicemen because

you would want to be prepared for the worst possible case. That

puts our private companies in a terribly awkward and unpatriotic

position in anticipating a worst case scenario for the outcome of the

war and for the welfare of our contractors, when there are other

ways to do this.

Mr. Mizzoni mentions one in his testimony talking about retrospective risk analysis rating plans where you can see the actual results in the field, so you are not betting against the Government

and our Army and our military, so you can see what the losses are

and compensate insurance companies appropriately, based on their

actual losses so that they can make a profit but not an extraordinary war profiteering profit.

Mr. Mizzoni, has the retroactive approach been used?

93

Mr. MIZZONI. I believe other parts of the Government have used

it, but certainly the Army has not. Like you say, sir, our recommendations to the Assistant Secretary for Acquisition and Logistics technology gave them several options. One was to use retrospective pricing plans.

In their reply back to us, they indicated they wanted to see the

end of the pilot program, which was supposed to be March 2008,

and decide the success of the program to see if it should be expanded Army-wide.

Our position, or my position, is if that program does not get expanded Army-wide, our recommendations to include retrospective

pricing plans or self-insurings are on the table again.

Mr. COOPER. I apologize, I see my time has expired, but this is

May 2008. The decision was supposed to have been made in March

2008, and that has not been done, right?

Thank you, Mr. Chairman.

Mr. TIERNEY [presiding]. Thank you, Mr. Cooper.

Mr. Sarbanes.

Mr. SARBANES. Thank you, Mr. Chairman. I have a little bit of

a cold so I apologize for my voice.

I am listening to this and I remember the images way after we

invaded Iraq of the terrible looting that occurred. You all may remember that. I saw those images on television. I think Secretary

Rumsfeld ascribed that to the enthusiasm of democracy or something in a way that later didn’t prove out as a particularly sensible

observation.

But listening to this and thinking back over the various hearings

that we have been having about what Congressman Cooper, I

think, has accurately referred to as war profiteering, that initial

spate of looting was immediately followed by another round of

looting. This is kind of white collar looting. It is looting with a tie

sitting in an office someplace.

The definition of looting I just found on my Blackberry is to plunder, to seize booty in a conquered or sacked city. And this one was

interesting: to carry off as plunder, or to secure a prize lawfully by

war. So whatever definition you want to use, I view this as looting:

high-end, upscale, white collar looting.

Now, what is the most troubling, and it is really grotesque, the

whole thing, but what is most troubling is the profit margins that

we have discussed already, and that is troubling for two reasons.

One is it can mean that the premiums are being exaggerated beyond what the risk is so that, in other words, there is a dedicated

effort to make money off the enterprise beyond what is appropriate

or acceptable.

That is bad enough, but there is also evidence that maybe the

profits are the result of not paying out the claims that are deserved, which is even more offensive. I mean in the first instance

you are making more money in a situation in which maybe you are

paying the premiums that people ought to have, so at least those

being injured as being fairly compensated, even if the taxpayers

are being taken advantage of.

But there is evidence that not only were the premiums exaggerated to get some of these profits, but in addition, there was denial

of the claims going on, on the other end to help maximize the profVerDate 11-MAY-2000 15:42 Nov 03, 2008 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 C:\DOCS\44912.TXT KATIE PsN: KATIE
94

its, which is supremely offensive because that means people who

are injured were not getting the compensation they deserve.

I think my time has started but isn’t being accounted for there,

so I wanted to ask about these insurance companies delaying the

benefits because, in the committee’s investigation, the committee

staff spoke with a number of injured employees, their families, physicians, and others who have been engaged first hand in trying to

get their claim satisfied, and they indicated that despite receiving

massive profits under this DBA program, many of the insurance

companies are fighting which are to make claims.

So I guess, Mr. Hallmark provided a briefing on the DOL’s role

in monitoring the DBA claims and told us that the insurance companies are contesting at the outset virtually every DBA claim that

is being filed. Is that essentially correct for substantial numbers of

those claims?

Mr. HALLMARK. I don’t believe I indicated that statistic. The

Longshore DBA process is a complicated one, and there are filings

that occur on many, many cases called contraversions which are

filed oftentimes routinely. They don’t necessarily mean that the insurer is not paying the claim.

So it could be viewed as opposition of claims when it is simply

an ineffective administrative filing.

Mr. SARBANES. Well, I gather we discovered that about, in 45

percent of the claims made by the employees’ insurance companies

were filing formal disputes, and when it goes up the chain to a

judge, the companies are winning those disputes at only a rate of

5 percent.

So this just gets back to the notion of them fighting as hard as

they can to secure profits against these exorbitant premiums that

they are getting.

Then I will just finish up, let me just finish up because I know

I am probably out of time here——

Mr. TIERNEY. That would be appropriate.

Mr. SARBANES [continuing]. By noting—I won’t ask you to answer this question—but I gather that the way the benefit capping

works as it was described, the premium is set against the salary,

and so it can be, if you have a salary of $180,000 versus $90,000,

the premium that is being charged by the insurer can be double,

so they are obviously getting a higher premium. But the payout is

capped by law at $90,000 as it would be for the person making

$180,000. So there is obviously something wrong with that system.

So in any event, clearing insurance companies have been taking

advantage, and setting up these pools seems like a better approach.

Thank you, Mr. Chairman.

Mr. TIERNEY. Mr. Sarbanes.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. Mr. Dalton, if the reports

of widespread fraud by mostly, we will just say, Iraqi-based companies, contractors, who in fact are charging for insurance that is

never purchased and thus the absence of benefits often comes from

the fact that there was no coverage, and the company may selectively decide to take care of their employees.

What are you able to do to end that double-billing, billing for a

service not received?

95

Mr. DALTON. Actually, what we are taking a look at right now

is part of our normal—I will call it the Q/A process of contract,

which is contract administration—is we are requiring contractors

to provide those certificates of insurance prior to us allowing them

to proceed with construction work.

Now, certainly, there are cases where we might miss some, and

we are trying to be a lot more diligent in following up on those. Recently, a case was cited where we had a contractor doing just exactly what you just mentioned. That was found through just part

of our routine oversight of the contracts.

While we don’t have it perfect yet, and we are still learning as

we go with the DBA insurance how to administer it, what we are

doing is making sure that we train our people to watch for those

areas that might be fraudulent. We train folks before they actually

go in the theater, and that is how this particular case got identified.

Mr. ISSA. Mr. Dalton, I served with the Corps of Engineers before

most of the people sitting behind me were born, so we have been

doing contract oversight for a long time, both domestically and

around the world.

If Congress empowered or passed a law, today we seem to be concentrating in some cases on profit made rather than real oversight

and reform, if we in fact said, look, your general contractor must

supply the umbrella for all subs, and then they have to administer

it, and then we have a single point of contractor on each prime,

would that make it easier for you to ensure, one, that there was

insurance, and, two, that there was, in fact, a single point of accountability on multiple contracts, but comparatively few? Would

that make it more possible for your inspectors to actually accurately inspect?

Mr. DALTON. I think it definitely would. I mean, the contracts

that we administer now, as you well know, we have multiple subs,

and to try and reach into and look at all the tiers of subs to verify

they have insurance is not an easy task.

Mr. ISSA. So it would be fair to say that right now the system

is a system in which you only hope to get better, and in fact a

change in the system would be what would allow us to have a confidence that you would be able to get to 100 percent compliance.

Mr. DALTON. I think it is fair to say that if we had the ability

to do, as you described, a one contractor being responsible that it

makes it a lot more easier to administer, and it places the responsibility within that prime contractor.

Mr. ISSA. Mr. Needham, we are supposed to be the committee on

Oversight and Government Reform, and as I was alluding to, once

you find out there is a problem the question is, should we be part

of the reform?

Let me pose a question from my years in business. On the size

contract that we are dealing with, I have to tell you, long before

I got to the size of KBR, and certainly long before I got to the size

of USA, Inc., I would have an administrative-only contract in which

I would bear the responsibility as the Federal Government with no

markups for the actual payouts, effectively realizing that I have

more money as the U.S. Government than any insurance company,

and I would be paying for an administrative-only fee, meaning that

96

$73 million in payout, I would have paid, and whatever the delta

is that was mentioned by the chairman earlier by AIG, that would

be on a fee basis, an administrative cost plus basis, if you will.

Why in the world haven’t we looked at that? That is one-step removed from the scenario I gave Mr. Dalton. That is saying, why is

it, in fact, we don’t treat these contractors under best case scenario

similar to the way we dealt with maneuver damage in Europe

when you ran over a chicken. You didn’t call somebody’s insurance

company. We had active duty personnel whose job it was to go out

and deal with that in order to not have a premium paid over and

above the payout.

Mr. NEEDHAM. Your question being, why haven’t we looked at

that?

Mr. ISSA. Yes. Why wouldn’t you say today in your opening remarks that the system is fundamentally wrong to begin with, that

on these size dollars we should only be paying for administration

because the actual payout, numerically, we don’t—we could absorb

the risk as the Government much easier for less money than AIG

or any other company, even if it was a single contractor is doing

today.

Mr. NEEDHAM. Right. That is one of the options we wanted to

have explored that we talked about with OMB and DOD back in

2005. When that was put into legislation for them to look at options, we expected that there would be a full range of options

looked at: the self-insuring, also the single contractor which—the

idea of a single insurer, though, there is a question about whether

or not any one company would step up and take that on.

Mr. ISSA. And I am not proposing a single insurance company.

I think it is pretty easy for us all to see that the size and scope,

you could split this up into different theaters, different administrative contracts, but the idea that we would essentially not self-insure at the size of our exposure seems to be absurd, considering

this committee regularly sees us self-insuring, if you will, the success of a new destroyer coming out of the Coast Guard. And when

it fails, we pay the bill. By the way, we are paying a big bill on

some of these new ships.

But why? Is it that we failed you, to give you the right, or that

you failed to be able to exercise that, administratively?

Mr. NEEDHAM. The reason this is now an issue is because of the

size of the premiums we are paying. I think the Army Audit Agency mentioned that they were paying $5 million in 2003, and it was

up to $165 million 2 years later.

I mean it is DOD’s responsibility now with this kind of increase

to go back and look at what are the reasonable tradeoffs here, and

what should we be doing—not continuing business as usual, which

is what they have allowed to happen without the—I mean, aside

from the Corps’ program of the single insurer.

DOD-wide, there has not been anything else looked at, and that

needs to be done.

Mr. ISSA. Then I guess I will close by saying, when will this committee know what the comparative cost would have been had we

simply, essentially self-insured and paid administrative costs and

not allowed, whether it is true or not, contractors to essentially go

out and bid a local broker to get an insurance policy on this size.

97

It seems to me like that is a question we would like to have answered coming out of this hearing, if possible. Is that something

you can help us with?

Mr. NEEDHAM. Certainly. I mean, we can begin to look at that.

We looked at this 3 years ago. We stopped the work because we

couldn’t rely on the data we were getting from the insurance industry at that time. So we focused our efforts on what DOD was doing

or not doing in that case.

Mr. TIERNEY. Thank you, Mr. Issa.

Mr. ISSA. Mr. Chairman, I appreciate that, but I hope the record

can indicate that is something that I think, on a bipartisan basis,

the committee should followup on, because this could represent billions of dollars that a system change would have to be implemented to do. That is what we do best is when we ask for system

changes that save America money.

Mr. TIERNEY. Thank you, Mr. Issa.

Mr. Cooper, you are recognized for 5 minutes.

Mr. COOPER. Thank you, Mr. Chairman. I would like to congratulate my friend from California on his line of questioning because

it is a fundamental business point that I had actually hesitated to

bring up in a hearing like this. It is who is the appropriate riskbearing entity? And my friend from California hit the nail on the

head: even a large company can effectively self-insure, but certainly

the U.S. Government is the best insurance company of all, and we

don’t have to pay the premium, the overhead, the stuff like that.

It is an amazingly efficient mechanism if we allow ourselves to use

it.

Sadly, the rhetoric of recent years has called that big government, even though it might save the taxpayer the most money. So

it actually ends up being smaller government than relying on all

sorts of contractors who each have to have their huge profit margins.

But another key point, we have been sold a bill of goods here,

and again my friend from California hit the nail on the head. We

did not need to buy insurance from a private carrier. All we needed

to buy was administrative services only, ASL, maybe a little help

with the paperwork because we, the U.S. Government, are the best

risk-bearing entity. It sounds like the GAO was discouraged from

even seriously considering this first best solution. Instead we have

been paddling around with pooling and things like that are second

or third-best solutions.

But I would join my friend from California, and let’s put all the

solutions on the table because our job is to get the taxpayer the

best deal. But the key point here is clearly seeing what is at stake.

I have seen this over and over in health care. Giant academic

medical centers with billions of dollars in the bank hiring a little

puny insurance company to provide HMO services when they

should have been buying ASO services, not HMO services. So let’s

think large. So that has been one problem, failure to clearly perceive.

Another problem is foot-dragging. Again, Admiral Ginman, you

know, the deadline was March 2008. I know you haven’t been eager

to pursue this topic, but this hearing would have been a great opVerDate 11-MAY-2000 15:42 Nov 03, 2008 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 C:\DOCS\44912.TXT KATIE PsN: KATIE
98

portunity to announce a bold new initiative from DOD to save the

taxpayer money.

Admiral GINMAN. Yes, sir.

Mr. COOPER. That opportunity has not happened.

Admiral GINMAN. One, it is my understanding that the pilot has

been extended out to September 2008.

Mr. COOPER. Can you talk louder?

Admiral GINMAN. I said it is my understanding the pilot has

been extended out to September 2008 and that we don’t have the

data and the business case analysis back. We will happily work

with the GAO to take a look and evaluate the option of, does it

make sense to be a self-insurer in this instance.

Mr. COOPER. Could you repeat that last sentence?

Admiral GINMAN. I said we will happily work with GAO to make

a determination as we look at the business case analysis as to

whether it makes sense as one of the options on the table to look

at being a self-insurer.

Mr. COOPER. Well, here we have a 3-year pilot program that in the first 6 months we knew it saved $19 million, and now the pilot

program has apparently been extended. You don’t seem anxious to

tackle this problem.

If the FDA discovers a new medicine that is clearly superior and

lifesaving, do you know what they do—and doesn’t have bad side

effects? They go ahead and allow the people to buy the new medicine. This is an example like that. We could have saved tens of millions of dollars, but you don’t appear eager to tackle this project.

Admiral GINMAN. I don’t know the impact that decision has on

the rest of the insurance programs that we have around the world

when I go to the single program that has today four rates: one for

construction, one for services, one for aviation, and one for security

services that I am now going to apply not just in Iraq and Afghanistan but to all of the insurance coverages throughout all of the

countries that we operate in.

Mr. COOPER. There are always uncertainties, but can you guarantee this committee you will not be going to work for one of these

companies, because I assume your tour of duty is going to be about

up this fall, right?

Admiral GINMAN. Well, one, I retired in 2000 from the Navy. I

worked in private industry for 6 years, and I made a decision to

come back to the Federal Government. It is my intention to stay

with the Federal Government. I am not a political appointee, I am

a career civil servant.

Mr. COOPER. So you are planning on staying. Well, that is good.

Admiral GINMAN. So I plan to be around to help work this issue.

Mr. COOPER. I would hate to have to educate a new group right

when the Pilot Study is finally completed. Can you help this committee understand? Have you received any memos, phone calls, or

other contacts from superiors asking you to slow-walk this issue?

Admiral GINMAN. We have not been asked to slow-walk this

issue by anyone, sir.

Mr. COOPER. So you have done the slow walking on your own?

[Laughter.]

Admiral GINMAN. Again, I would like to think that we are waiting until we had adequate data to do a significant business case

99

analysis so that we understand the decision we are making, as opposed to making a decision based on information that is not yet

complete.

Mr. COOPER. Well, what was the key factor that requires the

Pilot Study to be extended another 6 months? What information

was lacking? Why wasn’t it wrapped up March 2008 and you have

a great report for us here today?

Admiral GINMAN. I would have to ask the Army the question as

to why it was extended another 6 to 8 months. I know when we

just——

Mr. COOPER. You would have to ask who to know?

Admiral GINMAN. I would have to ask the Army why the pilot

program was extended another 6 months. I do not know the answer

to that question.

Mr. COOPER. Can the Army answer that?

Mr. DALTON. I can answer that. So the reason why we extended

for another 6 months was because we were not necessarily just to

collect the data. The data is something that we have ongoing to try

and provide to OSD so that they can have the business case analysis.

But the reason we extended it for 6 months was because we

needed to have time to actually get a new contract in place because

this contract simply would expire and we would be left with no

DBA central insurer. So it was not to just collect additional data;

it was actually just to maintain continuity in having an insurance

company, single DBA insurance company.

Some of the things that we need to provide to OSD to help approve the business case are things like, for instance, the impact

across the rest of the work that we do. For instance, there have

been claims that if you have DBA insurance and pay higher rates,

or lower rates in places like Iraq/Afghanistan, then—I think it has

been alluded to here—that if there is an increase in places that are

more in a non-hostile environment—we are looking at that now to

try and help us to help OSD with the business case, in the few that

we have found, we haven’t found there has been a substantial increase in those insurance premiums as was certainly mentioned in

the beginning.

Just as an example, in one contract in the Balkans, we only

found it was about a $2,000 increase, I think. So there is information that we are gathering in terms of overall costs on contracts,

subcontracts that we need to provide to prove the business case.

Mr. COOPER. Thank you. Mr. Chairman, I know my time has expired, but foot-dragging seems to be contagious.

Mr. TIERNEY. Well, I think the point is well taken. If you look

back in 2005 when the GAO issued a report, you know, then you

follow that up in 2006 when Congress made a particular ruling on

this; 2007 the Defense Department issued a paper about its pilot

program, did nothing to extend the program, the obvious factor is

the information that you are now looking for is information that

you probably should have started collecting and had mostly done

since 2005.

So the frustration of the committee I hope is appreciated, that

there are just so many times you have to be told to do something

100

before you actually get off the back side of your lap and do it. That

is the frustration that is here.

Mr. Needham, at the Government Accountability Office you

issued a report on the DBA program in 2005. In it you stated that

the agencies lack reliable data on how many contractors and subcontractors are in Iraq, the cost of the Government of DBA coverage of contractors and whether all contractors operating in Iraq

provided their employees required DBA coverage. Is that right?

Mr. NEEDHAM. Yes.

Mr. TIERNEY. Mr. Hallmark, as I understand it, the Department

of Labor has the responsibility to process DBA claims to ensure the

workers get the benefits they are entitled to. You don’t track how

many employees are covered or how DBA rates are determined, or

the overall cost to the employer, is that correct?

Mr. HALLMARK. That is correct. We don’t actually process claims,

we oversee the delivery of those claims through the insurance companies.

Mr. TIERNEY. And, Mr. Ginman, turning to the Department of

Defense, can you tell us the total amount of Pentagon expenditures

on DBA insurance.

Admiral GINMAN. I do not know the answer to that question.

Mr. TIERNEY. Mr. Moser, can you tell us how many State Department contractor employees are covered by DBA insurance?

Mr. MOSER. No, we can’t, but we feel that figure is not really important, because we felt that we got good rates out of our contract

for DBA insurance, and we are satisfied with that contract. Then

the number of employees employed by each of our individual contracts depends on the nature of the work that they are doing.

Mr. TIERNEY. Mr. Dalton, can you tell us how many contract employees are covered by DBA insurance at the Army Corps?

Mr. DALTON. I can’t do that at this point in time. I can tell you

how many contracts we have, but certainly not the number of contracting employees.

Mr. TIERNEY. So, Mr. Needham, it doesn’t look to me like everybody is following your advice here. At least they are not putting the

kind of attention to it that we would have thought would be warranted by that report.

What, exactly, did your report recommend back in 2005? Didn’t

you recommend at that point in time that the Office of Management and Budget, the OMB Office, get involved?

Mr. NEEDHAM. Yes, we did, Mr. Chairman. We met with the Office of Management and Budget prior to—we had been discussing

this with DOD. We then had formulated a recommendation. We

met with OMB, they looked at it, and they said this makes perfect

sense.

We then put the recommendation into the draft report and went

to the Department of Defense. When it came back, there was disagreement from both OMB and DOD as to what we were recommending. At that point we met with Senate Armed Services

Committee, and they took our recommendation and placed it into

legislation.

Mr. TIERNEY. What, specifically, was the White House’s response

to your recommendation?

101

Mr. NEEDHAM. I don’t know if there was any White House response. There was a Department of Defense response.

Mr. TIERNEY. OK. And OMB didn’t make a response?

Mr. NEEDHAM. No.

Mr. TIERNEY. OK.

Mr. NEEDHAM. I don’t think so.

Mr. TIERNEY. Mr. Waxman.

Chairman WAXMAN [presiding]. Thank you very much. Before we

conclude the hearing, I just wanted to say that I am very grateful

for the witnesses that have appeared today to talk about this issue.

I am disappointed, and I have to say it, about what I have heard

from the Department of Defense.

For 3 years Congress, auditors, and other experts have raised

concerns about DOD, about the cost of the Defense Base Act insurance, and we have tried to get this whole issue moved forward. I

don’t think Congress can simply allow a waste of money to continue. I have prepared legislation that would require DOD to establish an agency-wide single insurer risk pool for Defense Base Act

insurance, the same approach successfully used by the Department

of State and the Corps of Engineers, to hold down costs.

We have already submitted it to CBO, and under their analysis it would save taxpayers over $360 million over the next year. I

have determined to end the waste and abuse in the Defense Base

Act Insurance Program. This legislation I think will do that. We

are going to look to both sides of the aisle to see if we can get this

legislation enacted.

This hearing was to be constructive. I hope it will be constructive, and I hope we will get the kind of result that will make sure

we have the insurance we need at a price that the taxpayers can

afford.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. Oh, thank you. Just very quickly, I want

to thank all the witnesses. I know how CBO scored it, I would like

to see GAO take a look at this as well.

Chairman WAXMAN. Yes.

Mr. DAVIS OF VIRGINIA. One of the concerns is when the Corps

of Engineers went out there, they just got one bidder. I don’t know

that you can save money under those circumstances where we have

real competition going on. But I am open on the question.

Let me just particularly thank Admiral Ginman for coming back

into Government service after you retired. I appreciate your service

both before and after and your willingness to step out from the big

salaries in the private sector to come back and serve the public.

Admiral GINMAN. Thank you.

Mr. DAVIS OF VIRGINIA. And to all of you who serve the public,

thank you as well.

Chairman WAXMAN. I thank you all and Admiral Ginman, and

I also want to praise you for your service. My criticisms, of course,

in no way are personal to you. It is the issue that we are looking

at.

Thank you. That concludes the hearing. We stand adjourned.

[Whereupon, at 11:40 a.m., the committee was adjourned.]

Æ