Defense Base Act Insurance: Review Needed of Cost and		 
Implementation Issues (29-APR-05, GAO-05-280R). 		 
                                                                 
Since the Iraq conflict began in March 2003, the Departments of  
Defense (DOD) and State, the U.S. Agency for International	 
Development, and other federal agencies have issued contracts to 
perform reconstruction activities in Iraq. The large number of	 
contractors working amid continued violence has raised concerns  
over the use of contractors to support U.S. military and civilian
operations overseas, including the cost of workers' compensation 
insurance provided to contractor employees in Iraq under the	 
Defense Base Act (DBA). We have received requests from over 100  
members of Congress asking us to review a number of Iraq-related 
issues, including issues associated with DBA insurance. Because  
of the level of interest in issues dealing with Iraq, the	 
Comptroller General initiated this review under his statutory	 
authority. The objectives of our review were to identify the cost
to the U.S. government of insurance coverage purchased under DBA 
and to assess the act's implementation. DBA provides disability  
and medical benefits for contractors' and subcontractors'	 
employees injured on the job and death benefits to survivors when
those employees are killed.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-280R					        
    ACCNO:   A22960						        
  TITLE:     Defense Base Act Insurance: Review Needed of Cost and    
Implementation Issues						 
     DATE:   04/29/2005 
  SUBJECT:   Americans employed abroad				 
	     Data collection					 
	     Data integrity					 
	     Department of Defense contractors			 
	     Insurance						 
	     Insurance companies				 
	     Insurance cost control				 
	     Insurance regulation				 
	     Subcontractors					 
	     Workers compensation				 
	     Employee survivors benefits			 
	     Cost analysis					 
	     Iraq						 

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GAO-05-280R

United States Government Accountability Office Washington, DC 20548

April 29, 2005

The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Duncan Hunter
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

Subject: Defense Base Act Insurance: Review Needed of Cost and
Implementation Issues

Since the Iraq conflict began in March 2003, the Departments of Defense
(DOD) and State, the U.S. Agency for International Development, and other
federal agencies have issued contracts to perform reconstruction
activities in Iraq. The large number of contractors working amid continued
violence has raised concerns over the use of contractors to support U.S.
military and civilian operations overseas, including the cost of workers'
compensation insurance provided to contractor employees in Iraq under the
Defense Base Act (DBA).1 We have received requests from over 100 members
of Congress asking us to review a number of Iraq-related issues, including
issues associated with DBA insurance.

Because of the level of interest in issues dealing with Iraq, the
Comptroller General initiated this review under his statutory authority.
The objectives of our review were to identify the cost to the U.S.
government of insurance coverage purchased under DBA and to assess the
act's implementation. DBA provides disability and medical benefits for
contractors' and subcontractors' employees injured on the job and death
benefits to survivors when those employees are killed.

We are limited at this time in what we can conclude about the cost of DBA
insurance. Recent investigations by several states into a number of
insurance companies and brokers during the

1 42 U.S.C. 1651-1654.

Page 1 GAO-05-280R Defense Base Act Insurance

course of our review raise questions over the reliability of information
that we obtained from the insurance industry, a primary source of data in
our review.

Additionally, we found that it is difficult to aggregate reliable data on
the cost of DBA insurance due in part to the large number of contractors
and the multiple levels of subcontractors performing work in Iraq. Lacking
reliable aggregate data, we were unable to calculate the total cost of DBA
insurance to the government or the impact of DBA insurance costs on
reconstruction activities in Iraq.

This report explains DBA requirements; discusses DBA insurance rates,
which are higher for DOD than for other agencies; identifies challenges
and concerns that federal agencies face when implementing DBA; and
suggests that Congress consider requiring that the Director of the Office
of Management and Budget (OMB) determine, in coordination with DOD, the
Departments of Labor and State, and the U.S. Agency for International
Development, what actions should be taken to address issues that came to
light during our review. We provided a draft of this report to OMB; DOD;
the Departments of State, Justice, and Labor; and the U.S. Agency for
International Development. OMB agreed with our assessment of the
challenges agencies face, and DOD took no exception to the factual
information in our report, but neither agency agreed with our
recommendation. State had no comments. Justice and Labor provided
technical comments. Labor and the U.S. Agency for International
Development expressed willingness to work with other agencies to identify
needs, options, and risks associated with DBA insurance.

DBA Overview

Congress enacted DBA in 1941 to provide workers' compensation protection
to employees of government contractors working at U.S. defense bases
overseas. If employees incur injuries during the course of employment, DBA
provides them with uniform levels of disability and medical benefits or-in
the event of death-provides death benefits to their eligible dependents.
Workers' compensation insurance had previously been unavailable or deemed
inadequate in some countries where the employees performed work.
Subsequent amendments to DBA extended coverage to other classes of
employees, such as those working under public work contracts.2 The
Department of Labor administers DBA. Labor's role is to ensure that
workers' compensation benefits are provided for covered employees.

2 Under DBA, the term "public work" means "any fixed improvement or any
project, whether or not fixed, involving construction, alteration,
removal, or repair for the public use of the United States or its allies,
including but not limited to projects or operations under service
contracts and projects in connection with the national defense or with war
activities, dredging, harbor improvements, dams, roadways, and housing, as
well as preparatory and ancillary work in connection therewith at the site
or on the project."

Page 2 GAO-05-280R Defense Base Act Insurance

Under DBA, contractors working in Iraq, including all levels of
subcontractors, are required to obtain DBA insurance for all employees,
including foreign nationals.3 The cost of DBA insurance premiums is passed
on to the government. Under the War Hazards Compensation Act,4 the
government also reimburses insurance carriers for DBA benefits paid if the
injury or death is caused by a "war-risk hazard,"5 provided that the
insurance carrier did not charge its customer a war-risk hazard premium.
In addition to disability and death payments, war-risk hazard benefits
include funeral and burial expenses, medical expenses, and reasonable
costs necessary to process the claims.

Increasing Use of Contractors and Continued Concerns over Cost Pose
Challenges for Agencies Implementing DBA

When Congress passed DBA, the military's reliance on contractors for
direct support was not as great as it is today. Contractors have been
involved in every major U.S. military operation since the Persian Gulf War
in 1991,6 and military officials believe there has been a significant
increase since then in the use of contractors to support a downsized
military using more sophisticated weapons. While agencies have made some
changes in implementing DBA over the years, large numbers of contractors
in Iraq and conditions in that country have renewed concerns over the cost
and administration of DBA.

Large Numbers of Contractors in Iraq Have Led to Concerns over the Cost of
DBA Insurance

The number of employees required to be covered under DBA while working in
Iraq is significant. Work performed under U.S. contracts and subcontracts
in Iraq includes rebuilding clinics, schools, and other institutions;
restoring oil infrastructure; restoring electricity, water, and other
essential services; providing security; and strengthening local governance
institutions. We could not locate any reliable U.S. government agency
estimate of the total number of U.S. or foreign nationals employed under
U.S. government contracts in

3 DBA covers the following types of contractor employment: work for U.S.
government contractors on U.S. military bases or on any land used by the
U.S. for military purposes outside the United States, work on public work
contracts with any U.S. government agency, work on contracts approved and
funded by the United States under the Foreign Assistance Act, and work for
American employers providing welfare or similar services outside the
United States for the benefit of the armed services.

4 42 U.S.C. 1701-1717.

5 "War-risk hazard" means any hazard from certain specified causes that
arise "during a war in which the United Stated is engaged; during an armed
conflict in which the United States is engaged, whether or not war has
been declared; or during a war or armed conflict between military forces
of any origin, occurring within any country in which a person covered by
the Act;" See 42 U.S.C. 1711.

6 GAO, Military Operations: Contractors Provide Vital Services to Deployed
Forces but Are Not Adequately Addressed in DOD Plans, GAO-03-695
(Washington, D.C.: June 24, 2003).

Page 3 GAO-05-280R Defense Base Act Insurance

Iraq. Additionally, while State reported that as of March 16, 2005, over
150,000 Iraqis were performing work in Iraq on U.S.
government-administered projects, we could not validate these numbers, and
agency officials told us there is no consistent or coordinated method for
tracking employment figures.

We reported on concerns over the cost and implementation of DBA and
related insurance in 1971 and 1980.7 Since that time, the Department of
State and the U.S. Agency for International Development have instituted
single-insurer programs that require all contractors performing work
overseas for these agencies to purchase DBA insurance from a specified
insurance carrier at a set rate negotiated by the agencies. During the
course of our review, contractors working for the Department of State and
the U.S. Agency for International Development paid approximately $2 to $5
for every $100 of salary cost for DBA insurance in all locations.

In contrast, DOD contractors must independently acquire their own
insurance. The eight DOD prime contractors we contacted reported that they
were paying DBA insurance rates between approximately $10 and $21 per $100
of salary cost for work in Iraq during the period of our review. While the
government has limited visibility into how DBA insurance rates are set,
agency officials at the Department of State and U.S. Agency for
International Development told us the lower rates under their
single-insurer programs are due to such factors as the pooling of work
done in Iraq with work done in other places in the world, the less risky
nature of the work they perform, and a low number of claims.

DOD completed a congressionally directed study in 1996 on the feasibility
and desirability of initiating a single-insurer program. While DOD
concluded at that time that such a program would not lead to cost savings,
the DBA insurance rates defense contractors are now paying have led to
concerns among DOD officials over the cost of DBA insurance. To address
these concerns, DOD, through the U.S. Army Corps of Engineers, issued a
solicitation on March 7, 2005, for a 1-year pilot contract to a single
insurer for DBA insurance for all Army Corps of Engineers contractors
performing work overseas. The solicitation originally required offers be
submitted by April 7, 2005. The deadline was extended indefinitely to
allow DOD to prepare responses to questions received from prospective
offerors.

Agencies Face Challenges Implementing DBA in Iraq

According to agency officials, conditions in Iraq, such as mixed-funding
sources for contracts and language barriers, have led to complications in
implementing DBA. Implementation challenges include clarifying when DBA
applies, providing adequate and accurate

7 GAO, Opportunity for Savings in Providing War Risk Insurance for
Contractor Property and Employees, B72699 (Washington, D.C.: November
1971) and GAO, AID Needs Clarification on Defense Base Act Insurance
Requirements, B-162408 (Washington, D.C.: October 1980).

Page 4 GAO-05-280R Defense Base Act Insurance

information to companies and workers, monitoring compliance, and
processing claims. Despite actions taken by agencies, many challenges
remain unresolved.

Department of Labor officials have reported, and GAO has observed,
confusion among federal agencies and contractors over DBA.8 One source of
confusion relates to when DBA is required. Some agency officials initially
believed they could apply existing waivers granted by Labor for DBA
insurance in Iraq, but Labor officials clarified that waivers do not apply
in that country because of the absence of a local workers' compensation
system. Subsequently, in December 2004, the Department of State issued a
proposed change to its acquisition regulation to clarify when DBA
insurance coverage is and is not required. However, new questions about
when DBA applies have arisen. For example, while Labor has taken the
position that DBA requirements do not cover work performed under grants,
officials from other agencies recently expressed confusion over what
benefits would be provided if grantees purchase DBA insurance. In
addition, it is unclear to many agency officials whether DBA applies in
cases where non-U.S. appropriated funds are mixed with U.S.
appropriations.

In addition to questions over DBA, a number of other implementation
challenges have surfaced. Labor and State officials told us that language
and literacy barriers present a challenge when providing DBA information
to companies and workers in Iraq. Labor officials told us that enhancing
enforcement of DBA would require reports of coverage to be sent to Labor
on every contract and subcontract in Iraq. Labor officials also informed
us that the department is limited in the actions it can directly take for
noncomplying contractors. Adding to the implementation challenges, Labor
officials told us that the processing of claims has been slowed by
difficulty in obtaining medical and other personal information because of
conditions in Iraq and the need to respect local customs. Additionally, at
a recent Department of Labor seminar, attorneys involved in DBA issues
reported difficulty in obtaining necessary documentation, including
contracts and marriage records, to file and report claims.

Conclusion

It is difficult to determine whether all DBA insurance is purchased in a
cost-effective manner or if agencies' implementation challenges hinder
their effectiveness in providing workers' compensation coverage under DBA.
Lack of reliable information on numbers of contractors and cost of DBA
insurance restricts the ability of agencies to make informed decisions on
purchasing strategies for DBA. Additionally, confusion over when DBA
applies and difficulty in enforcing DBA and processing claims remain
largely unresolved problems, despite actions taken by agencies. Finally,
new challenges, such as growing numbers of contractors, have arisen since
1941, when DBA was passed. These factors highlight the need for a
coordinated effort among affected agencies to identify actions that can
address such challenges.

8 We previously reported on the confusion over when DBA is applicable in
1980 (GAO, B-162408).

Page 5 GAO-05-280R Defense Base Act Insurance

Matter for Congressional Consideration

To ensure that DBA cost and implementation issues are adequately
addressed, we suggest that Congress consider requiring the Director of OMB
to determine, in coordination with DOD, the Departments of Labor and
State, and the U.S. Agency for International Development, current and
future needs, options, and risks associated with DBA insurance. The
agencies involved in this coordinated effort should identify actions,
including any necessary legislative changes, to address the following
issues:

o  identifying cost-effective options for acquiring DBA insurance;

o  	developing methods for coordinating data collection efforts among
agencies and contractors on the cost of insurance and other relevant
information to make informed decisions;

o  facilitating consistent, collective, and collaborative application of
DBA across agencies by

o  developing and disseminating guidance on when and to whom DBA applies,

o  	improving communication within and among agencies about the
implementation of DBA and associated difficulties through such means as an
informal network, interagency working groups, conferences, forums, or Web
sites;

o  identifying actions to address difficulties with administering DBA,
such as

o  identifying potential means to address enforcement challenges,

o  collecting data from contractor employees to facilitate claims
processing,

o  	collecting and reporting to Labor information on contractors
performing overseas and whether they have DBA insurance.

Agency Comments and Our Evaluation

DOD and OMB provided written comments on a draft of this report. Both
disagreed with our recommendation, which is now included in the report
with minor clarifications as a matter for congressional consideration. OMB
agreed with our assessment of the challenges agencies face but points to
actions already taken by the administration. OMB states that our
recommendation is overly broad and said a targeted approach would be
preferable in light of the need to give immediate attention to specific
issues in Iraq. DOD took no exception to the factual information contained
in our report but said that ongoing actions address the issues in our
report. DOD also contends that the cost of undertaking an interagency
effort will outweigh potential benefits.

We agree that agencies are taking actions to address some of the
challenges discussed in our report. However, it was clear during our
review that increased coordination among all affected agencies will be
needed to identify actions to address DBA cost and implementation
challenges. For example, we found that the conditions in Iraq make it
difficult to enforce DBA and process claims. We also found that an
informal interagency working group addressing insurance issues was not
focused on issues related to DBA. And the working group did not include
Labor officials, who play a key role in claims processing and

Page 6 GAO-05-280R Defense Base Act Insurance

administration of DBA insurance. Furthermore, at a Labor seminar on DBA
held in April 2005, we observed confusion among attendees over when DBA
applies.

Our review also revealed the agencies lacked reliable data on how many
contractors and subcontractors are in Iraq, costs to the government of DBA
coverage for contractors, and whether all contractors operating in Iraq
provided their employees required DBA insurance coverage. Without such
information, the agencies are not in a position to make informed decisions
about implementing DBA. DOD stated that it believes costs of interagency
efforts will outweigh potential benefits. DOD officials told us, however,
they do not have cost estimates or other data to support their statement,
but that they believe challenges with implementing DBA in Iraq are being
addressed and data collection and reporting efforts would be expensive and
would divert limited resources. We do not believe our recommendation is
overly broad; rather it provides flexibility to agencies to deal with the
full range of issues we identified and allow them to proactively address
the government's growing use of contractors in overseas situations now and
in the future. We continue to believe a more coordinated and comprehensive
approach, involving all of the affected agencies, is necessary to address
DBA cost and implementation issues. OMB's and DOD's comments are included
in enclosures I and II, respectively.

Labor indicated its willingness to work with other agencies and provided
technical comments that are incorporated as appropriate (see enclosure
III). Justice also provided technical comments, which were incorporated as
appropriate. State had no comments. The U.S. Agency for International
Development indicated, via e-mail, that it looked forward to working with
OMB and the other agencies on the recommendation.

Scope and Methodology

To address our objectives, we obtained rates spent on DBA insurance for 21
contracts held by 13 prime contractors performing work in Iraq under
cost-reimbursable contracts. These contracts represent 69 percent of
U.S.-appropriated contracting dollars awarded for ongoing work as of May
2004. We selected companies of different 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 conducted interviews with officials from the selected
contractors and DOD, the Departments of State, Labor, and Justice, and the
U.S. Agency for International Development, as well as representatives from
11 insurance companies and brokers. We were unable to verify numbers
provided by the Department of State for the total numbers of Iraqi
employees working on U.S. governmentadministered reconstruction projects.
Additionally, in light of recent investigations into the insurance
industry, we did not rely on information obtained previously from
insurance industry representatives. We performed our review between May
2004 and April 2005 in accordance with generally accepted government
auditing standards.

Page 7 GAO-05-280R Defense Base Act Insurance

If you have any questions, please contact me at (617) 788-0555 or at
[email protected] or
John K. Needham, Assistant Director, at (202) 512-5274 or
[email protected] Other major
contributors to this report include Lily Chin, Christina Cromley, Jeff
Hartnett, Bill McPhail,
Lisa Simon, and Shannon G. Simpson.

Sincerely,

David E. Cooper
Director
Acquisition and Sourcing Management

Page 8 GAO-05-280R Defense Base Act Insurance

Page 9 GAO-05-280R Defense Base Act Insurance

                 Page 10 GAO-05-280R Defense Base Act Insurance

             Enclosure II: Comments from the Department of Defense

Enclosure II: Comments from the Department of Defense

              Enclosure III: Comments from the Department of Labor

Enclosure III: Comments from the Department of Labor

(120377) Page 14 GAO-05-280R Defense Base Act Insurance

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