Competitive Sourcing: Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform Implementation Process
Published: 2005-12-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Competitive sourcing is a management tool where federal agencies conduct competitions between federal employees and private companies to determine the best source to provide commercially available services. Concerns have been raised in the Congress that differences in the costs of federal and private health insurance benefits could disadvantage the federal workforce in public-private competitions. A health benefit cost comparability provision in the 2005 Defense Appropriations Act prohibited any advantage for private offerors that provide no health benefits or contribute less for them than the Department of Defense (DOD) contributes for its civilian employees. Legislation is pending to extend the provision for another year. GAO, in response to a mandate, determined (1) how DOD implemented the provision, and (2) what impact the provision had on DOD's fiscal year 2005 competitive sourcing program.
section_title: What GAO Found
paragraphs: Most DOD components implemented the health benefit cost provision using a process designed to ensure that private sector proposals include an amount for employee health benefits at least equal to the amount that Office of Management and Budget Circular A-76 requires to be added to agency cost estimates to account for employee health benefits. Under Circular A-76, this amount is 5.5 percent of direct labor costs. The Defense Logistics Agency (DLA), however, used a different process designed to determine whether a private sector offeror's monthly health benefit premium contributions are at least equal to DOD's. While DOD's and DLA's processes are both reasonable approaches, the use of different processes could result in different competitive sourcing outcomes in some cases. The health benefit cost provision had minimal impact on DOD's fiscal year 2005 competitive sourcing program. Of the 54 public-private competitions we reviewed, the health benefit provision was applicable in only 12 sourcing decisions. In 7 of these 12 competitions, DOD collected health benefit cost data from private sector offerors and found that most of their health benefit costs exceeded 5.5 percent of direct labor costs. This is largely due to the requirements of the Service Contract Act--which mandates minimum wages and fringe benefits (which could include health insurance) for employees on government service contracts. Although the processes used by DOD and DLA resulted in increasing two private offerors' cost proposals, the adjustments did not alter the outcome of the competitions. Contracting officials and the private sector offerors told us that complying with the health benefit cost provision was not unduly burdensome.

section_title: Letter
paragraphs: Competitive sourcing is a management tool used by federal agencies to  determine whether commercial activities, such as maintenance of facilities  or information technology support, should be performed by federal  employees or by contractors. Agencies use competition between the  public and private sectors to determine the best source. Competitive  sourcing is intended to encourage innovation and improve efficiency and  performance. Competition between the two sectors is conducted under  procedures prescribed in Office of Management and Budget (OMB)  Circular A-76, which was revised in 2003 to reflect the recommendations  of the congressionally chartered Commercial Activities Panel.
Concerns have been raised in Congress about whether the differing costs  of providing health insurance benefits to the federal workforce and to  private sector employees may create a competitive advantage for  contractors. The Department of Defense Appropriations Act of 2005  included a health benefit cost comparability provision effective for fiscal  year 2005 that prohibits an advantage in public-private competitions for a  private sector source that does not offer employee health benefits or that  pays less towards health benefits than the Department of Defense (DOD)  pays for its civilian employees.  On several occasions, DOD, the Small  Business Administration, and OMB have sought repeal of this provision on  the basis that it is difficult to administer and a disincentive to private  sector participation—particularly by small businesses—in DOD’s  competitive sourcing program.  Legislation is pending in the Congress that,  if enacted, would extend the provision for another year.
The conferees for the fiscal year 2005 National Defense Authorization Act  directed that we review the implementation of the appropriations health  benefits cost provision. After providing a preliminary briefing on our work  in April 2005, we agreed with the congressional defense committees to  determine (1) how DOD has implemented the provision, and (2) what  impact the provision had on DOD’s fiscal year 2005 competitive sourcing  program. In addition, we agreed to summarize recently published research  on the availability of employee health benefits and employer contributions  in the private sector and provide information on a concept for assisting  displaced federal employees known as the transitional benefit corporation.   Information on these additional topics is included in appendix I.
To determine how DOD has implemented the health benefits cost  provision and the impact the provision is having on its fiscal year 2005  competitive sourcing program, we reviewed the 54 DOD public-private  competitions that were in progress or completed from October 1, 2004,  through June 30, 2005. We also interviewed and obtained information from  DOD, OMB, and private offeror officials. We conducted our review  between February and October 2005 in accordance with generally  accepted government auditing standards. More information on our scope  and methodology is contained in appendix II.
subsections: section_title: Background
paragraphs: Competitive sourcing is a process under which federal agencies subject  the performance of their commercial activities to competition among  public and private sector sources. It is intended to contribute to cost  savings, improved performance, and a better alignment of the agency’s  workforce to its mission. OMB’s Circular A-76, Performance of  Commercial Activities, establishes federal policy and prescribes the  procedures to be used in determining whether commercial activities  should be performed by a federal agency or by the private sector.
subsections: section_title: Circular A-76 Processes for Conducting Public-Private Competitions
paragraphs: Circular A-76 contains uniform procedures to be used by agencies for  calculating costs so that cost comparisons between private sector  proposals and government estimates are fair. The Circular mandates use  of a standard and consistent process designed to ensure that evaluated  costs reflect the full cost of performance by public and private sector  sources. This is consistent with the Commercial Activities Panel’s final  report, which recommended that these competitions should be conducted  on as nearly equal terms as possible, using clear, consistent, and  transparent processes for all offerors. As part of this process, the Circular  is intended to help ensure that the estimated cost of government  performance fairly reflects all of the personnel and non-pay costs of an  agency source performing the work.
When preparing estimates of government performance, agencies are  required to use standard cost factors that are in effect as of the solicitation  closing date and make adjustments to reflect changes projected to occur  during the performance period. To estimate personnel costs for example,  agencies add to basic pay (for full-time and part-time permanent civilian  positions) a standard overall costing factor of 32.85 percent to account for  fringe benefits. This overall factor is comprised of several components,  including a standard cost factor of 5.7 percent to account for life insurance  and health benefits as shown in table 1. According to OMB officials, the 5.7  percent factor consists of 0.2 percent for life insurance and 5.5 percent for  health benefits.
To conduct public-private competitions under Circular A-76, agencies may  use either a standard or a streamlined competition process, depending on  the number of positions involved. Agencies must use a standard  competition process for activities with more than 65 full-time equivalent  (FTE) positions. As part of the standard process  agencies issue  solicitations with a performance work statement describing the work to be  performed, appoint an agency tender official to prepare a response to the  solicitation based on a “most efficient organization” (MEO), and evaluate  that response along with the proposals submitted by private offerors.
Also, under the standard competition process, unless contractor  performance would save the government $10 million or 10 percent of  agency personnel-related costs (whichever is less), the work will be  retained within the agency.  This ensures that an agency does not convert  to contract performance in cases where only marginal savings are  anticipated.
For activities with 65 or fewer FTEs, agencies may use a streamlined  competition process. Streamlined competitions are based only on a  comparison of public and private sector costs.  Private sector costs are  obtained either from documented market research or soliciting cost  proposals in accordance with the Federal Acquisition Regulation.  Use of  the streamlined process enables agencies to complete the comparison  more quickly.
The Circular was revised in May 2003 based largely on the Commercial  Activities Panel’s sourcing principles and recommendations for improving  the government’s competitive sourcing processes. Among other things, the  panel recommended that the government’s sourcing decisions be based on  a clear, transparent, and consistently applied competitive sourcing  process. This principle is key to ensuring the integrity of the process, as  well as to creating trust in the process on the part of those it most affects:  federal managers, users of the services, federal employees, the private  sector, and the taxpayers. The revised Circular A-76 states that agencies  should centralize oversight responsibility to foster fairness in their public- private competitions, and effectively apply a consistent process based on  lessons learned and best practices.
section_title: DOD’s Competitive Sourcing Program
paragraphs: The Department of Defense has a long-established competitive sourcing  program and is the leader among federal agencies in terms of the number  of public-private competitions conducted and positions competed. In fiscal  year 2004, DOD reported that it made sourcing decisions in 58 public- private competitions, with projected net savings of approximately $740  million. DOD has a centralized management structure to oversee its  competitive sourcing program and those of the DOD components. The  Deputy Under Secretary of Defense (Installations and Environment) in the  Office of the Secretary of Defense has responsibility for establishing and  overseeing DOD-wide policies, procedures, and guidance. DOD  components—such as the Army, Navy, Marine Corps, and Air Force—as  well as the defense agencies and DOD field activities have their own  centralized management structures to operate their competitive sourcing  programs based on DOD’s policies, procedures, and guidance.
Under legislation applicable only to DOD for activities with more than 10  FTEs, unless contractor performance would save the government $10  million or 10 percent of agency personnel-related costs (whichever is less),  the work will not be converted to contractor performance.
section_title: Health Benefits Available to Federal and Service Contract Act Employees
paragraphs: Federal employees and the employees of the government’s service  contractors may receive health insurance benefits based on different  statutory requirements. The Federal Employees Health Benefits Act of  1959 established the framework for government civilian employees’ health  insurance benefits through the Federal Employees Health Benefits  Program (FEHBP).  Participation in FEHBP is voluntary for civilian  employees and their dependents and retirees. This statute sets the  government’s share of each participant’s health insurance premium cost at  an amount equal to 72 percent of the weighted average of the premiums of  all FEHBP plans, but caps the government’s share at 75 percent of any  individual plan’s premium. This formula is applied to the self-alone and  self-and-family plans separately. For example, in fiscal year 2005, the  government’s annual share of FEHBP premiums for two major FEHBP  plans ranged between $2,600 to $3,400 for self coverage and $5,900 to  $7,800 for self-and-family coverage.
The McNamara-O’Hara Service Contract Act (SCA) of 1965 requires  minimum wages and fringe benefits for employees working on government  service contracts that exceed $2,500. The Department of Labor  administers the SCA and determines the prevailing wages in geographic  localities for various job categories. In June 2005, the department  increased the standard SCA health and welfare minimum benefit rate to  $2.87 per hour from $2.59 per hour. Government contractors have  flexibility in the types of health and welfare benefits they provide, as long  as they meet or exceed the $2.87 minimum health and welfare  requirement. For example, contractors can meet their SCA benefits  obligations by providing health insurance benefits, by allowing their  employees to place some or all of the SCA benefits in a retirement plan, or  by providing cash payments.
section_title: In General, DOD Implemented Health Benefit Cost Provision Based on Standard A-76 Cost Factor
paragraphs: Most DOD components implemented the health benefit cost provision by  ensuring that private sector proposals included an amount for health  insurance benefits at least equal to the amount that Circular A-76 requires  to be added to agency cost estimates to account for health benefit costs.  Under Circular A-76, this amount is 5.5 percent of direct labor costs. The  Defense Logistics Agency (DLA), however, used a process based on the  monthly premium contributions DOD is required to make towards civilian  employees’ health insurance plans under the FEHBP.  Either of the  processes used by DOD or DLA provides a reasonable approach for  ensuring that private offerors do not receive a competitive advantage for  less costly health benefits.  Use of two different processes, however,  results in health benefit costs being treated inconsistently within DOD and  could even result in different competitive sourcing outcomes.
subsections: section_title: DOD Developed a Preferred Process for Implementing the Health Benefit Cost Provision, but Has Not Mandated Its Use
paragraphs: The health benefit cost requirement established for DOD’s public-private  competitions in section 8014(a)(3) of the Department of Defense  Appropriations Act, 2005 requires that a private offeror not receive a  competitive advantage by not offering health insurance for its employees,  or by paying less for employee health benefits than the government  contributes for civilian employee health benefits. (See app. III for the text  of Section 8014.)
To implement this legislation, DOD’s competitive sourcing officials told us  they consulted with officials from OMB’s Office of Federal Procurement  Policy, DOD’s Office of General Counsel, and DOD components’  competitive sourcing offices to develop their interpretation of the  legislation and a process for implementation. Officials from OMB advised  DOD that the Circular A-76 standard insurance and health benefits cost  factor of 5.7 percent consisted of 0.2 percent to account for the cost of  federal employees’ life insurance benefits and 5.5 percent to cover health  benefit costs. DOD decided to use the Circular A-76 standard health  benefits cost factor as the benchmark for ensuring that the costs of health  benefits provided by private offerors are sufficient to comply with the  legislation.  In November 2004, DOD communicated this approach as the  preferred process throughout the department, but gave discretion to the  competitive sourcing program offices of the DOD components to use  alternate processes, as long as they consulted with DOD’s competitive  sourcing office.
Under DOD’s process, contracting officials are to follow a multistep  approach to implement the health benefit cost comparability provision.  First, for competitions conducted subsequent to the issuance of DOD’s  guidance, contracting officials should obtain data from the private offeror  regarding the company’s costs for contributions to employee health  insurance (i.e., benefits) as well as its proposed direct labor costs for the  performance of the competed commercial activity. Second, the contracting  officials calculate the private offeror’s costs of employee health benefits as  a percentage of direct labor costs. Finally, contracting officials make any  necessary adjustments to their calculation of the private offeror’s  proposed costs using the following criteria:  If the health benefit cost percentage is lower than 5.5 percent, then the  private offeror’s proposed cost is adjusted upward by the amount  necessary to make the contribution equal 5.5 percent.
If the percentage contribution is equal to or greater than 5.5 percent, no  adjustment is necessary.
Hypothetical examples of this process are shown in table 2.
According to DOD officials, any health benefit cost adjustment made to  the private offeror’s proposed costs is for evaluation and cost comparison  purposes only. For work currently performed within the agency, if  contracting officials determine that the private offeror has a higher priced  proposal than the agency’s cost estimate, either before or after any  adjustments for health benefit contributions, DOD will retain the work  within the agency. If a private offeror selected for award under the  solicitation’s evaluation criteria has a lower cost proposal after any  adjustment for health benefit contributions—and contractor performance  would save DOD at least $10 million or 10 percent of the agency team’s  personnel-related costs—the offeror will be awarded a contract at its  original proposed amount. Section 8014 does not compel DOD officials to  reject a private offeror’s proposal based solely on the cost or extent of the  company’s health benefit coverage. Nor does it require the private offeror  to match the DOD’s health benefit costs, since according to DOD officials  this would in effect have to be subsidized by DOD through higher awarded  costs.
DOD officials told us that using the 5.5 percent Circular A-76 cost factor to  implement the health benefit cost legislation accomplishes several  objectives. First, the approach is consistent with the requirement of the  statute that private sector offerors not receive a competitive advantage by  offering to pay less for health benefits than what the government pays.  Second, DOD officials believe the approach is fair because it ensures that  proposals from both the public and private sectors have an equal health  benefit cost component of at least 5.5 percent. Third, the approach is  consistent with the standard adjustment agency sources already make to  account for health benefit costs when preparing agency cost estimates.  Fourth, DOD officials said that the process reduces the chances of human  error and miscalculations inherent in alternative approaches that might  attempt to compare the quality of public and private health benefits. DOD  officials commented that it would be difficult to do a true “apples-to- apples” comparison of federal and private sector health benefit plan costs  because of the wide variation among federal civilian and private sector  plan benefits and employee participation. Finally, according to DOD  officials, this process avoids the problem of comparing aggregate  employer contribution costs for health benefits, and better accounts for  differences in proposed staffing across offers without penalizing a smaller  company that may pay less for health benefits overall than the agency  source.
section_title: Most DOD Components Adopted DOD’s Health Benefit Cost Comparability Process
paragraphs: Except for DLA, which implemented its own process, the DOD  components we reviewed adopted DOD’s preferred process to implement  the health benefit cost comparability provision. Competitive sourcing  program officials in the Air Force, Navy, Marine Corps, and Army Corps of  Engineers told us that they have taken actions to implement the DOD  process in their fiscal year 2005 competitive sourcing programs. According  to these officials, implementation actions ranged from offering  instructions to contracting staff about incorporating the DOD preferred  process in ongoing competitions to more formal actions such as  incorporating the preferred process in competitive sourcing manuals. For  example, the Marine Corps’ competitive sourcing program officials added  a section with guidance for implementing the health benefit cost provision  in its draft competitive sourcing program manual, which contracting  officers will use to run Marine Corps public-private competitions.
Early in fiscal year 2005, some components took steps to implement the  health benefit cost provision in advance of communication from DOD  about its preferred process because these components had immediate  needs to comply with the requirement in several pending public-private  competitions. These early implementation efforts were generally  consistent with the preferred process that DOD later communicated in  November 2004. For example, Navy and Marine Corps contracting officials  told us they issued amendments to ongoing solicitations in which they  requested information from private offerors to implement the health  benefit provision. This information included whether the offeror would  provide an employer-sponsored health insurance plan, the total cost of the  employer’s contribution to the plan on behalf of employees, and their  direct labor costs to perform the commercial activity being competed.
Navy and Marine Corps contracting officials told us that they collected this  information in order to compare this offeror information against the  standard Circular A-76 insurance and health benefit cost factor.
Because of a pending competitive sourcing decision early in fiscal year  2005, DLA also moved ahead and implemented the health benefit cost  comparability provision before DOD communicated its preferred process.  DLA’s process, which it continues to use, differs from DOD’s and is based  on using the monthly premium contributions DOD is required to make  under the FEHBP towards civilian employees’ health insurance as the  benchmark for comparing private offerors’ health benefit coverage and  costs. DLA’s process requires detailed data collection and the use of a  complex benefit and cost comparison method. Specifically, for a private  offeror to demonstrate that it meets DLA’s health benefit cost  comparability benchmark, the company first must provide data showing  that  its health insurance plan allows employees to enroll either self-alone or  self-and-family, and the amount the company contributes towards the plan’s premium cost is at  least the lower of the following two benchmarks: (1) the monthly  maximum amount of DOD’s premium contribution for self-alone and self- and-family coverage under FEHBP—$298.23 and $646.17, respectively, or  (2) 75 percent of the cost of the company plan’s monthly premium, which  is the same cap set for any government contributions under the FEHBP.
Next, DLA’s process requires that the contracting officer calculate the  offeror’s health benefit costs for self-alone and self-and-family coverage,  and compare those costs with the agency’s health benefit cost benchmarks  under FEHBP, and make any cost adjustments based on the following  criteria:  If the private offeror’s health benefit plan cost equals or exceeds the lesser  of DLA’s two premium contribution benchmarks, no upward adjustment  is made to its cost proposal.
If the private offeror’s health plan cost does not meet one of DLA’s two  premium contribution benchmarks, a “health benefit cost factor” is added  to the private offeror’s proposal cost to make up the shortfall.
As with DOD’s process, such adjustments, if necessary, are made by DLA  only for the purpose of determining compliance with the health benefit  cost provision. If the private offeror still has the lower costs after such  adjustment and completion of the cost comparison—and meets the  minimum $10 million or 10 percent savings margin required for contractor  conversion—the private offeror may be awarded a contract at its original  proposal amount.
In explaining the rationale for this process, DLA officials told us that their  interpretation of section 8014 focused on determining that private offerors  not receive a competitive advantage when they contribute less towards the  premium share than the amount that is paid by DOD for civilian  employees’ health benefits under FEHBP. DLA consulted in advance with  DOD’s competitive sourcing office, which concurred with DLA’s proposed  process for implementation. DOD’s competitive sourcing officials told us  that they consider DLA’s process to be more complicated to administer  than the preferred process of using the 5.5 percent health benefit cost  benchmark. Nevertheless, they told us that DLA’s process is consistent  with DOD’s current guidance which allows the use of an alternative  process to implement the requirement for a health benefit cost  comparison, as long as components consult in advance with DOD.
Either of the processes used by DOD or DLA provides a reasonable  approach for ensuring that private offerors do not receive a competitive  advantage for less costly health benefits. Use of two different processes,  however, results in health benefit costs being treated inconsistently within  DOD and could even result in different competitive sourcing outcomes.
For example, in one of the competitions we reviewed, the company’s  contribution for health benefits totaled about 15 percent of its total direct  labor costs. Under DOD’s preferred process for determining health benefit  cost comparability, the company’s cost proposal would have required no  adjustment since the offeror contributes substantially more than the 5.5  percent benchmark. Under DLA’s process, however, the contracting  officer found that the private offeror’s share of the health insurance  premium fell short of DLA’s benchmark for self-and-family coverage. As a  result, the contracting officer added about $280,000 to the private offeror’s  cost proposal to make up for the shortfall. Ultimately, because the agency  cost estimate was lower, regardless of the health care addition, this  adjustment did not change the competitive sourcing decision. Had the cost  competition between the public and private sources been closer, however,  the use of a different cost comparison approach could have resulted in a  different outcome.
section_title: Health Benefit Cost Provision Had Minimal Impact
paragraphs: The health benefit cost comparability provision has had minimal impact  on DOD’s fiscal year 2005 competitive sourcing program and the offerors  that participated. Of the 54 public-private competitions we reviewed, the  health benefit provision was applicable in only 12 sourcing decisions. In 7  of these 12 competitions, DOD collected health benefit cost information  from private sector offerors and found that most of their health benefit  costs exceeded 5.5 percent of direct labor costs. This is mostly due to the  requirements of the Service Contract Act—which mandates minimum  wages and fringe benefits (which could include health insurance) for  employees on government service contracts. DOD contracting officials  and the private sector offerors told us that complying with the health care  cost provision was not unduly burdensome. Implementation of the health  care provision did not alter the outcome of any of the competitions.
subsections: section_title: Few Competitions Involved Consideration of Health Benefit Costs and No Sourcing Decision Changed as a Result
paragraphs: We reviewed the 54 public-private competitions that were either in  progress or completed between October 1, 2004, and June 30, 2005. As  shown in figure 1, only 12 public-private competitions that reached a  sourcing decision involved some consideration of the requirements of the  health benefit cost provision.  Also as shown in figure 1, in the remaining  42 of the 54 competitions, the health benefit cost provision was not a  factor for various reasons.  For example, DOD contracting officers did not  need to implement the health benefit cost comparability provision in 13  competitions that involved 10 or fewer FTEs since the requirement applies  only to competitions involving more than 10 FTEs.  (See app. IV for more  information on the remaining 42 competitions where the health benefit  cost provision was not yet applied or not a factor in sourcing decisions.)
The DOD component conducting the public-private competition  determined that there was no need to collect data on health benefit costs  in 5 of the 12 competitions for which the legislative provision was  applicable. As shown in table 3, in one of those competitions, the work  was retained for agency performance. In that case, the cost estimate for  agency performance was about 45 percent lower than the private offer. In  the remaining four cases, a private offeror submitted a lower cost proposal  than the agency’s cost estimate, and the difference was so great (ranging  between 8.1 and 14.8 percent less) that even adding the full health cost  factor of 5.5 percent would not have made a difference.
In the remaining 7 of the 12 competitions, DOD components collected and  assessed health benefit data from private offerors. As shown in table 4,  most private offerors’ proposed costs for health benefits far exceeded  DOD’s 5.5 percent benchmark.
section_title: Collection of Health Benefit Data Was Not Unduly Burdensome
paragraphs: According to DOD component contracting officers and our review of  competitive sourcing documents, the administrative steps taken to collect  health benefit data were not unduly burdensome and generally did not  significantly delay competition schedules. For the seven competitions in  which cost data were obtained from the offerors, the components usually  obtained the data through solicitation amendments. This step was  necessary because the solicitations had been issued prior to the health  benefit cost provision becoming effective. Component contracting officers  generally told us that collecting the health benefit data imposed neither  unusual burden nor unacceptable delays. In one case, instead of a  solicitation amendment, the contracting officer simply contacted the  offeror and asked the company to submit the health care cost data.  Contracting officers told us that they plan to include the health benefit  cost provision in the future solicitations.
Our discussions with the offerors in the public-private competitions also  indicated the process created little difficulty for them, and required  minimal efforts. The health benefit data needed were readily available and  generally maintained in the company accounting systems. This was the  case for both small and larger companies. According to the offerors we  interviewed (including one firm that submitted to DLA detailed data about  health benefits), submitting the health benefit data was not considered  unusually burdensome. The private offeror involved in DLA’s process we  contacted raised no concern with us about any burden. Our review of  DLA’s competition documents, however, indicated that much more  documentation about health benefits and costs is expected to be  submitted by a private offeror participating in a DLA public-private  competition than what is expected of private offerors participating in  other competitions following DOD’s preferred process.
section_title: Service Contract Act Results in Most Private Offerors Paying for Health Benefit Costs
paragraphs: In all seven competitions we reviewed where DOD obtained health  benefits data, private offerors were subject to the Service Contract Act  (SCA). At the time DOD reviewed their health benefit costs, the SCA  required that these offerors pay at least $2.59 per hour for employees’  fringe benefits.
We contacted 6 of the 7 private offerors who submitted health benefit data  for these competitions. Four of these offerors allowed their employees to  use all of the SCA minimum benefit rate towards the cost of the health  insurance, and they easily met the 5.5 percent health benefit cost  benchmark. The fifth offeror allowed its employees to use a portion of the  SCA benefits towards health insurance cost and receive the remainder as  an increased hourly wage. As a result, this company’s offer fell short of the  5.5 percent benchmark for health benefit costs. No adjustment was made,  however, because the agency cost estimate was lower.
The sixth private offeror’s proposal included the cost of the required SCA  fringe benefits, but the company notified DOD and also told us that it does  not offer to pay for employee health insurance. Company officials told us  that because most of their employees are former military or civilian  employees with military or federal retiree health benefits, the company’s  business decision under the SCA fringe benefit requirement is not to  contribute towards employee health benefits. Instead, company officials  told us they contribute towards a retirement benefit. Even after adjusting  the offeror’s cost proposal by adding the 5.5 percent health benefit cost  factor, the offeror had the lowest cost proposal and won the contract.
DOD competitive sourcing and legal officials told us that they did not  consider the availability or cost of SCA minimum requirements for health  and other fringe benefits when they developed their approach for  implementing the health benefit provision. DOD competitive sourcing  officials acknowledged most private offerors will be able to match or  exceed the 5.5 percent health benefit cost benchmark simply by meeting  existing SCA fringe benefit requirements. Our analysis of established SCA  rates for wages and benefits indicates that the ratio of benefit costs to  labor costs is usually much greater than the 5.5 percent health benefit cost  comparability benchmark under DOD’s process. For example, a general  maintenance worker paid $17.28 an hour and receiving the current SCA  benefit of $2.87 an hour for employer-paid health insurance would result in  that employer paying roughly 16.6 percent of its direct labor costs for  health benefits.
section_title: Conclusions
paragraphs: The Department of Defense is currently using two different processes to  implement the legislative health benefit cost provision.  Although both are  reasonable approaches for ensuring that private offerors do not gain a  competitive advantage from lower health benefit costs, and neither one  has yet affected the outcome of any public-private competition, the use of  two different processes is problematic.  The lack of a consistent DOD-wide  process may—in future competitions where agency and private offerors’  proposal costs are close—result in different competitive sourcing  outcomes depending on which approach is used.  Such a result would be  inconsistent with the purpose of Circular A-76, which is to provide for  greater consistency in the competitive sourcing process and with the  sourcing principles adopted by the Commercial Activities Panel.  DOD  currently lacks a uniform process for implementing the health benefit cost  comparability provision that is in keeping with the sourcing principle that  public-private competitions be guided by clear, transparent, and  consistently applied processes.  With legislation pending to extend this  health benefit cost comparability provision through fiscal year 2006, DOD  should not continue to permit this inconsistency to persist.
section_title: Recommendation For Executive Action
paragraphs: To align DOD’s competitive sourcing program more fully with  governmentwide policy contained in Circular A-76 and the sourcing  principles of the Commercial Activities Panel, we recommend that if the  health benefit cost provision is extended, the Secretary of Defense should  direct the Deputy Under Secretary of Defense for Installations and  Environment to require use of a uniform and consistent process for the  DOD components in evaluating the health benefits costs of private sector  offerors in public-private competitions.
section_title: Agency Comments and Our Evaluation
paragraphs: In comments on a draft of this report, DOD concurred with the  recommendation.  Both DOD and OMB said they remain concerned that  the health care cost provision may harm small business participation in  DOD’s competitive sourcing program.  As such, both agencies said they  will continue to seek elimination or amendment of the provision.  Written  comments from DOD and OMB are reprinted in appendices V and VI,  respectively.
DOD and OMB also commented that the report is based on very limited  data involving only 12 competitions and that our finding of minimal impact  cannot be used to predict the impact on future competitions.  However,  we did not focus on assessing what impacts the provision could potentially  have on DOD’s competitive sourcing program in the future.  Rather, we  assessed the impacts the health benefits provision was having on DOD’s  fiscal year 2005 competitive sourcing program.  Our finding that the  provision had minimal impact is based not only on the 12 competitions in  which the provision was applicable, but also on analysis of 42 other public- private competitions where the provision did not come into play for  various reasons.  In addition, we reviewed other information and obtained  the views of DOD officials involved with the competitions and  representatives for private offerors who submitted health benefit cost data  for DOD’s consideration.
We are sending copies of this report to interested congressional  committees, the Secretary of Defense, and the Director of OMB. We will  also provide copies to others on request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8214; or WoodsW@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report were Carolyn Kirby,  Assistant Director; John Dicken, Rosa Johnson, Charles Perdue, Russ  Reiter, Sylvia Schatz, Natalie Schneider, Bob Swierczek, Ann Marie Watt,  and Anthony Wysocki.
section_title: Appendix I: Health Benefits in the Private Sector and the Transitional Benefit Corporation Concept
paragraphs: This appendix provides information on the availability of and employer  contributions for health benefits in the private sector based on our review  of recently published research. Information is also presented on the  transitional benefit corporation concept that has received attention as a  mechanism for minimizing the loss of health insurance and other benefits  for civilian federal employees affected by conversion of commercial  activities performed by government employees to private sector  performance.
subsections: section_title: Availability of and Employer Contributions for Health Benefits in the Private Sector
paragraphs: Recent government and private sector studies indicate that a variety of  changes have taken place with employer-sponsored health insurance plans  in the last 5 years, including a decrease in the percentage of small firms  offering health benefits and an increase in the cost of the health benefit  premiums for all employers. According to recent Current Population  Survey data, 81 percent of all individuals aged 18 to 64 years with health  insurance in 2004 received coverage through employment-based  insurance.
From 2000 through 2005, the percentage of all firms offering health  benefits fell from 69 percent to 60 percent according to the Kaiser Family  Foundation’s annual survey in 2005 of employer benefits. This decline is  largely due to the decline in the percentage of small firms that offer health  insurance because small firms represent the majority of all employers.  However, nearly all larger firms (with 200 or more employees) offer  employer-paid health benefits—98 percent in 2005 according to Kaiser’s  survey. This is consistent with government data from the 2003 Medical  Expenditure Panel Survey (MEPS), which indicates that as establishment  size increases in terms of the number of employees, the percentage of  employers offering health insurance increases. (See fig. 2.)
According to Kaiser’s annual survey in 2005, the cost of health insurance  premiums has increased dramatically from 1999 to 2005, rising by over 97  percent. Average annual premiums for employer-sponsored health  insurance rose to $4,024 for self-only and $10,880 for self-and-family.  Analysis of 2003 MEPS data indicates that private industry generally  contributes at least as much towards employees’ health insurance plan  premiums as the 72 percent average that the government contributes  towards civilian employees’ health insurance premiums under FEHBP.  According to MEPS, all size categories of private sector employers on  average paid greater than 80 percent of the health benefit premiums for  self -alone coverage and between 69 percent and 78 percent for self-and- family coverage. (See fig. 3.)
section_title: Transitional Benefit Corporation Concept
paragraphs: Under the transitional benefit corporation concept, if an agency  determines that one of its commercial activities could be performed by  nongovernmental employees, the employees currently performing that  activity would be given the opportunity to incorporate as a new, more  efficient business organization outside of the federal agency to continue  performing the same type of activity. This new employee-formed  corporation could obtain business by contracting with the private sector  or partnering with other governmental, private sector, educational, or not- for-profit entities.
The transitional benefit corporation concept includes a mechanism  intended to minimize the immediate loss of federal health insurance and  retirement benefits for those former government employees affected by  the agency’s decision to convert work to private sector performance.  Specifically, under the concept, the former government employees could  temporarily keep their participation in federal health insurance and  retirement benefit programs while transitioning from federal government  to private sector employment status. Under this concept, during this  transition, an agreement may be established allowing the government  agency to continue to pay for the employee’s federal retirement and health  insurance benefits, with the new private corporation eventually paying for  those benefits.
The concept has been suggested as an alternative to the government’s  conducting Circular A-76 competitions for commercial activities.   According to one analysis of this topic, the benefits of a transitional  benefit corporation include    Economic development and savings:  The government would realize  savings more quickly than through the A-76 competition process.  For  example, the estimated time period to develop a transitional benefit  corporation is 6 months, with savings realized shortly thereafter.  The  current A-76 process may be much longer and therefore would not provide  savings as quickly.  Also, savings to the government would also result from  no longer needing to maintain underutilized assets and personnel.
Surge capability/readiness:  The government could contract with the  transitional benefit corporation in order to expand its workforce rapidly  and draw on the former employees during times of increased government  workload.  Because the transitional benefit corporation is a private  organization, it would be able to hire staff outside the constraints of  traditional government hiring, which can slow the hiring process. “Soft landing” for former government employees:  Government employees  who would become part of the transitional benefit corporation would be  guaranteed their job and allowed to retain their government benefits, such  as pension and health insurance, for a certain time period.
According to one analyst, for the transitional benefit corporation concept  to be a viable alternative to A-76 and for the government to realize its  potential benefits, three conditions must exist.  First, displaced federal  employees must have the appropriate skills to compete in private sector.   Second, private sector competitors must be present within the same  business area.  Third, the agency proposing the creation of a transitional  benefit corporation must have adequate knowledge about the current  market conditions and whether or not workload would be sufficient for  the new organization to be viable and maintain revenue.
DOD competitive sourcing officials told us that they do not consider the  concept as a viable alternative to competing commercial activities under  the A-76 competitive sourcing process. DOD officials commented that the  A-76 process is more appropriate because it emphasizes a competitive  process to select a service provider, while the transitional benefit  corporation concept would use a sole-source approach that preserves  specific jobs and benefits for affected employees. DOD officials also  questioned the feasibility of allowing former employees to retain and  accrue federal benefits when they are no longer employed by the  government. An OMB competitive sourcing official told us that while OMB  officials are aware of the concept, they have no current plans to conduct  an analysis for governmentwide implementation.
section_title: Appendix II: Scope and Methodology
paragraphs: To determine how DOD has implemented the health benefit cost  comparability provision and the impact the provision is having on its fiscal  year 2005 competitive sourcing program, we interviewed competitive  sourcing officials with overall responsibility in the Office of the Deputy  Undersecretary of Defense (Installations and Environment). We also  interviewed DOD component competitive sourcing program and  contracting officials in the Army, Air Force, Navy, Marine Corps, Army  Corps of Engineers, Defense Logistics Agency, Defense Contract  Management Agency, and the Department of Defense Education Activity  involved with fiscal year 2005 public-private competitions involving the  health benefit comparability provision.
To determine the impact of the provision, we reviewed the 54 DOD public- private competitions that were in progress or completed (i.e., tentative or  final sourcing decision announced) between October 1, 2004, and June 30,  2005. We identified and obtained data on these 54 competitions from  DOD’s automated system used to manage the program across the  department—the Commercial Activities Management Information System  (CAMIS). CAMIS contains certain data elements for individual A-76 cost  comparisons, including numbers and length of individual competitions;  numbers of positions to be affected; comparisons of agency and  contractor estimated costs; and solicitation, sourcing decision, and  contract award dates. We have previously reported some concerns about  the accuracy and completeness of data contained in CAMIS.  A recent  DOD Office of Inspector General report concluded that DOD has not  effectively implemented its CAMIS system to track and assess the cost of  the performance of functions under the competitive sourcing program.   To check the quality of the CAMIS data on the 54 competitions we  identified that were in progress or completed between October 1, 2004,  and June 30, 2005, we asked cognizant DOD and competitive sourcing  officials in the components to verify the accuracy and completeness of the  CAMIS data we used for each of the 54 competitions. Based on the results  of our verification of the data with these cognizant officials, we believe  that the data are sufficiently reliable for purposes of this report.
We reviewed Circular A-76 policies and procedures regarding agency cost  estimates for personnel and benefits in public-private cost comparisons.  We also discussed DOD’s implementation of the health benefit  comparability provision with OMB officials responsible for  governmentwide competitive sourcing policy and procedures under  Circular A-76. We reviewed DOD’s policies, procedures, and guidance and  analyzed public-private competitive sourcing and other documents  pertaining to the implementation of the health benefit comparability  provision in DOD’s fiscal year 2005 competitive sourcing program. We  reviewed this material to document actions taken by DOD to implement  the health benefit comparability provision in fiscal year 2005 public-private  competitions and the impact the provision had in terms of administrative  difficulty, competitive sourcing decision outcomes between agency or  contractor performance, and any disincentives for private sector  participation in DOD’s competitive sourcing program.
We also obtained views and information about the implementation and  impact of the health benefit comparability provision by interviewing  representatives for six private offerors that submitted health benefits cost  data for a public-private competition where DOD reached a sourcing  decision between October 1, 2004, and June 30, 2005. We reviewed DOD  competitive sourcing documents and interviewed contracting officials for  another competition, but did not contact the offeror for an interview due  to a pending appeal of the agency’s tentative sourcing decision.  For  background purposes to gather information on the health benefit  comparability provision, we also interviewed representatives of a federal  labor union, government contractor associations, and researchers on  government competitive sourcing.
To provide information on the availability of health benefits and employer  contributions in the private sector, we reviewed recently published  research from selected government and nongovernmental health benefits  research organizations. To provide information on the transitional benefit  corporation concept, we reviewed relevant literature. We interviewed one  legal analyst who has published an article about governmentwide adoption  of the transitional benefit corporation concept as an alternative to Circular  A-76 public-private competitions. We also interviewed DOD and OMB  competitive sourcing policy officials to obtain their views on the concept  and prospects for implementation as an alternative to conducting A-76  public-private competitions for commercial activities.
We conducted our review from February 2005 through October 2005 in  accordance with generally accepted government auditing standards.
section_title: Appendix III: Legislative Provision for Health Benefit Cost Comparability
paragraphs: The health benefit cost comparability provision is a requirement for DOD  under Section 8014 of the Department of Defense Appropriations Act, 2005  (Public Law 108-287, enacted August 5, 2004).  See italicized text below for  the Section 8014 (a)(3) provision.
SEC. 8014. (a) LIMITATION ON CONVERSION TO CONTRACTOR  PERFORMANCE.—None of the funds appropriated by this Act shall be  available to convert to contractor performance an activity or function of  the Department of Defense that, on or after the date of the enactment of  this Act, is performed by more than 10 Department of Defense civilian  employees unless—   (1) the conversion is based on the result of a public-private competition  that includes a most efficient and cost effective organization plan  developed by such activity or function;   (2) the Competitive Sourcing Official determines that, over all  performance periods stated in the solicitation of offers for performance of  the activity or function, the cost of performance of the activity or function  by a contractor would be less costly to the Department of Defense by an  amount that equals or exceeds the lesser of—   (A) 10 percent of the most efficient organization’s personnel- related costs  for performance of that activity or function by Federal employees; or   (B) $10,000,000; and   (3) the contractor does not receive an advantage for a proposal that  would reduce costs for the Department of Defense by—   (A) not making an employer-sponsored health insurance plan available  to the workers who are to be employed in the performance of that activity  or function under the contract; or   (B) offering to such workers an employer-sponsored health benefits plan  that requires the employer to contribute less towards the premium or  subscription share than the amount that is paid by the Department of  Defense for health benefits for civilian employees under chapter 89 of  title 5, United States Code.   (b) EXCEPTIONS.— (1) The Department of Defense, without regard to  subsection (a) of this section or subsections (a), (b), or (c) of section 2461  of title 10, United States Code, and notwithstanding any administrative  regulation, requirement, or policy to the contrary shall have full authority  to enter into a contract for the performance of any commercial or  industrial type function of the Department of Defense that—   (A) is included on the procurement list established pursuant to section 2  of the Javits-Wagner-O’Day Act (41 U.S.C. 47);   (B) is planned to be converted to performance by a qualified nonprofit  agency for the blind or by a qualified nonprofit agency for other severely  handicapped individuals in accordance with that Act; or  (C) is planned to be converted to performance by a qualified firm under at  least 51 percent ownership by an Indian tribe, as defined in section 4(e) of  the Indian Self-Determination and Education Assistance Act (25 U.S.C.  450b(e)), or a Native Hawaiian Organization, as defined in section 8(a)(15)  of the Small Business Act (15 U.S.C. 637(a)(15)).   (2) This section shall not apply to depot contracts or contracts for depot  maintenance as provided in sections 2469 and 2474 of title 10, United  States Code.   (c) TREATMENT OF CONVERSION.—The conversion of any activity or  function of the Department of Defense under the authority provided by  this section shall be credited toward any competitive or outsourcing goal,  target, or measurement that may be established by statute, regulation, or  policy and is deemed to be awarded under the authority of, and in  compliance with, subsection (h) of section 2304 of title 10, United States  Code, for the competition or outsourcing of commercial activities.
section_title: Appendix IV: Fiscal Year 2005 Competitions in Which Health Benefit Costs Were Not a Factor
paragraphs: This appendix presents information on the 42 competitions in which the  health benefit cost comparability provision was not a factor in sourcing  decisions between October 1, 2004 and June 30, 2005, for various reasons.  In one competition decided in October 2004, the health benefit  comparability provision was not a factor (and is not included in the tables  below). In this case, the Navy decided to retain the Naval Education and  Training Command support services (involving 276 FTEs) within the  agency because no cost proposals were submitted by private offerors in  response to the Navy’s solicitation.
Table 5 presents information on the 14 competitions that were in progress  as of June 30, 2005. In these competitions, DOD had yet to make a  sourcing decision, and thus DOD contracting officers had not yet needed  to implement the health benefit cost comparability provision. Table 6  presents information on 14 streamlined competitions that—as a result of  market research completed through June 30, 2005—contracting officers  determined that the agency cost estimate was the lowest. Thus, in these  decisions, DOD contracting officers did not need to request health benefit  data because no private offerors were being considered for the work.  Finally, table 7 presents information on 13 competitions involving 10 or  fewer FTEs. In these cases, contracting officers did not need to implement  the health benefit cost comparability provision, since the requirement  applies only to competitions involving more than 10 FTEs.
section_title: Appendix V: Comments from the Department of Defense
section_title: Appendix VI: Comments from the Office of Management and Budget