Competitive Sourcing: Health Benefits Cost Comparison Had Minimal
Impact, but DOD Needs Uniform Implementation Process (09-DEC-05, 
GAO-06-72).							 
                                                                 
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.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-72						        
    ACCNO:   A42938						        
  TITLE:     Competitive Sourcing: Health Benefits Cost Comparison Had
Minimal Impact, but DOD Needs Uniform Implementation Process	 
     DATE:   12/09/2005 
  SUBJECT:   Competitive procurement				 
	     Cost analysis					 
	     Health care costs					 
	     Health insurance					 
	     Source selection					 
	     Public-private competitions			 

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GAO-06-72

Report to Congressional Committees

United States Government Accountability Office

GAO

December 2005

COMPETITIVE SOURCING

Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform
Implementation Process

DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing
DOD Competitive Sourcing DOD Competitive Sourcing DOD Competitive Sourcing

GAO-06-72

Contents

Letter 1

Results in Brief 2
Background 4
In General, DOD Implemented Health Benefit Cost Provision Based on
Standard A-76 Cost Factor 8
Health Benefit Cost Provision Had Minimal Impact 14
Conclusions 19
Recommendation For Executive Action 19
Agency Comments and Our Evaluation 19
Appendix I Health Benefits in the Private Sector and the Transitional
Benefit Corporation Concept 22
Appendix II Scope and Methodology 27
Appendix III Legislative Provision for Health Benefit Cost Comparability
29
Appendix IV Fiscal Year 2005 Competitions in Which Health Benefit Costs
Were Not a Factor 31
Appendix V Comments from the Department of Defense 35
Appendix VI Comments from the Office of Management and Budget 38

Tables

Table 1: Components of Circular A-76 Civilian Position Fringe Benefits
Cost Factor 5
Table 2: Hypothetical Illustration of DOD's Preferred Health Benefit Cost
Comparability Process 10
Table 3: Competitions Where DOD Component Determined That Health Benefit
Cost Data Were Not Needed 16
Table 4: Competitions Where Private Offerors Submitted Health Benefit Cost
Data 16
Table 5: Competitions In Progress as of June 30, 2005 Where Health Benefit
Cost Comparability Had Yet to Be Considered, and Competitive Sourcing
Decision Was Pending 32
Table 6: Streamlined Competitions Where DOD's Market Research Determined
the Agency Was the Lowest-Cost Source and Health Benefit Cost
Comparability Was Not a Factor 33
Table 7: Competitions Involving 10 or Fewer FTEs and Health Benefit Cost
Comparability Was Not Applicable 34

Figures

Figure 1: Application of Health Benefits Cost Provision in DOD's
Competitive Sourcing Program as of June 30, 2005 15
Figure 2: Percentage of Private-Sector Employers That Contributed Toward
Health Insurance in 2003, by Number of Employees 23
Figure 3: Private Employers Percentage Share Contributed Toward Employee
Health Insurance Premiums in 2003, by Number of Employees 24

Abbreviations

DLA Defense Logistics Agency DOD Department of Defense FEHBP Federal
Employees Health Benefits Program FTE full-time equivalent SCA
McNamara-O'Hara Service Contract Act MEO most efficient organization OMB
Office of Management and Budget

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office

Washington, DC 20548

December 9, 2005

Congressional Committees

Competitive sourcing is a management tool used by federal agencies to
determine whether commercial activities, such as maintenance of facilities
or information technology support, should be performed by federal
employees or by contractors. Agencies use competition between the public
and private sectors to determine the best source. Competitive sourcing is
intended to encourage innovation and improve efficiency and performance.
Competition between the two sectors is conducted under procedures
prescribed in Office of Management and Budget (OMB) Circular A-76,1 which
was revised in 2003 to reflect the recommendations of the congressionally
chartered Commercial Activities Panel.2

Concerns have been raised in Congress about whether the differing costs of
providing health insurance benefits to the federal workforce and to
private sector employees may create a competitive advantage for
contractors. The Department of Defense Appropriations Act of 20053
included a health benefit cost comparability provision effective for
fiscal year 2005 that prohibits an advantage in public-private
competitions for a private sector source that does not offer employee
health benefits or that pays less towards health benefits than the
Department of Defense (DOD) pays for its civilian employees. On several
occasions, DOD, the Small Business Administration, and OMB have sought
repeal of this provision on the basis that it is difficult to administer
and a disincentive to private sector participation-particularly by small
businesses-in DOD's competitive sourcing program. Legislation is pending
in the Congress that, if enacted, would extend the provision for another
year.4

1 OMB's Circular A-76 establishes federal policy and standard procedures
for determining whether commercial activities should be performed by the
agency, by another federal agency, or by the private sector. It contains
procedures for calculating public and private sector costs to ensure that
the comparison reflects the full cost of performance.

2 Commercial Activities Panel, Final Report: Improving the Sourcing
Decisions of the Government (Washington, D.C.: April 2002). The Congress
mandated a study of the government's competitive sourcing process under
A-76-a study conducted by the Commercial Activities Panel, chaired by the
Comptroller General of the United States. The panel included
representatives from OMB, DOD, the Office of Personnel Management, private
industry, academia, a trade association, and federal employee unions.

3 Public Law 108-287, section 8014(a)(3), enacted August 5, 2004. Under a
continuing resolution enacted November 19, 2005 (Public Law 109-105), this
provision remains in effect through December 17, 2005.

The conferees for the fiscal year 2005 National Defense Authorization Act5
directed that we review the implementation of the appropriations health
benefits cost provision. After providing a preliminary briefing on our
work in April 2005, we agreed with the congressional defense committees to
determine (1) how DOD has implemented the provision, and (2) what impact
the provision had on DOD's fiscal year 2005 competitive sourcing program.
In addition, we agreed to summarize recently published research on the
availability of employee health benefits and employer contributions in the
private sector and provide information on a concept for assisting
displaced federal employees known as the transitional benefit corporation.
Information on these additional topics is included in appendix I.

To determine how DOD has implemented the health benefits cost provision
and the impact the provision is having on its fiscal year 2005 competitive
sourcing program, we reviewed the 54 DOD public-private competitions that
were in progress or completed from October 1, 2004, through June 30, 2005.
We also interviewed and obtained information from DOD, OMB, and private
offeror officials. We conducted our review between February and October
2005 in accordance with generally accepted government auditing standards.
More information on our scope and methodology is contained in appendix II.

                                Results in Brief

Most DOD components implemented the health benefits cost provision using a
process designed to ensure that private sector proposals include an amount
for employee health benefits at least equal to the amount that Circular
A-76 requires to be added to agency cost estimates to account for employee
health benefits. Under Circular A-76, this amount is 5.5 percent of direct
labor costs. The Defense Logistics Agency (DLA), however, used a different
and more complicated process designed to determine whether a private
sector offeror's monthly health benefit premium contributions are at least
equal to DOD's maximum monthly premium contributions for civilian
employees' health benefits. While the processes used by DOD and DLA are
both reasonable approaches to implementing the legislative health benefits
cost provision, the use of different approaches within DOD could result in
different competitive sourcing outcomes in some cases and is not in
keeping with the sourcing principle of the Commercial Activities Panel
that advocated the consistent application of clear and transparent
competitive sourcing procedures.

4 H.R. 2863, Department of Defense Appropriations Bill, 2006, passed the
House on June 20, 2005, and the Senate on October 7, 2005.

5 Section 327, Conference Report 108-767, to accompany H.R. 4200, Ronald
W. Reagan National Defense Authorization Act for Fiscal Year 2005, October
8, 2004.

The health benefits cost provision had minimal impact on DOD's fiscal year
2005 competitive sourcing program. Of the 54 public-private competitions
we reviewed as of June 30, 2005, the health benefit provision was
applicable in only 12. The provision was not applicable in 42 competitions
for various reasons, such as when the use of streamlined competitions
showed that the performance by government employees would be less
expensive even without adjusting for any difference in the cost of
employee health benefits. In 5 of the 12 competitions where the provision
applied, obtaining data on health care costs was unnecessary because
either the agency cost estimate was the lowest or DOD components
determined that adding a 5.5 percent evaluation factor to the low private
sector proposal would not have made a difference. In 7 remaining
competitions, DOD collected health benefit cost information from private
sector offerors and found that most of their health benefit costs exceeded
5.5 percent of direct labor costs. This is mostly due to the requirements
of the Service Contract Act-which mandates minimum fringe benefits (which
could include health insurance) for employees on government service
contracts. Although DOD's and DLA's processes resulted in increasing two
private offerors' cost proposals, the adjustments did not alter the
outcome of the competitions. Contracting officials and the private sector
offerors told us that complying with the health benefit cost provision was
not unduly burdensome.

To avoid the potentially inconsistent treatment within DOD of private
offerors' cost proposals in the future, this report includes a
recommendation to DOD to use a uniform and consistent process to implement
the health benefit cost provision in its competitive sourcing program.

In comments on a draft of this report, DOD concurred with the
recommendation. Both DOD and OMB said they remain concerned that the
health care cost provision may harm small business participation in DOD's
competitive sourcing program. As such, both agencies said they will
continue to seek elimination or amendment of the provision. Written
comments from DOD and OMB are reprinted in appendices V and VI,
respectively.

                                   Background

Competitive sourcing is a process under which federal agencies subject the
performance of their commercial activities to competition among public and
private sector sources. It is intended to contribute to cost savings,
improved performance, and a better alignment of the agency's workforce to
its mission. OMB's Circular A-76, Performance of Commercial Activities,
establishes federal policy and prescribes the procedures to be used in
determining whether commercial activities should be performed by a federal
agency or by the private sector.

Circular A-76 Processes for Conducting Public-Private Competitions

Circular A-76 contains uniform procedures to be used by agencies for
calculating costs so that cost comparisons between private sector
proposals and government estimates are fair. The Circular mandates use of
a standard and consistent process designed to ensure that evaluated costs
reflect the full cost of performance by public and private sector sources.
This is consistent with the Commercial Activities Panel's final report,
which recommended that these competitions should be conducted on as nearly
equal terms as possible, using clear, consistent, and transparent
processes for all offerors. As part of this process, the Circular is
intended to help ensure that the estimated cost of government performance
fairly reflects all of the personnel and non-pay costs of an agency source
performing the work.6

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.7

6 Circular A-76 requires agencies to use a software program called COMPARE
to calculate, compare, and document the cost proposals in public-private
competitions. COMPARE incorporates the standard costing procedures and
factors contained in Circular A-76 to help ensure that agencies are
calculating and documenting such costs uniformly.

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

Standard cost factor                       Percentage of basic paya 
Insurance and health benefitsb                                  5.7 
Standard civilian retirement benefitsc                         24.0 
Medicare benefit                                               1.45 
Miscellaneous fringe benefit                                    1.7 
Total                                                         32.85 

Source: Circular A-76, Attachments C and D.

aCircular A-76 defines basic pay as a civilian employee's annual salary
plus other applicable employee pay entitlements, such as premium pay for
civilian law enforcement officers.

bIn addition to FEHBP, employees may receive life insurance benefits
through the Federal Employee's Group Life Insurance program.

cThe standard civilian retirement benefit cost factor includes the
government share for pension benefits (Social Security, Thrift Savings
Plan, Federal Employees or Civil Service Retirement Systems) and the
accruing costs for postretirement health benefits.

To conduct public-private competitions under Circular A-76, agencies may
use either a standard or a streamlined competition process, depending on
the number of positions involved. Agencies must use a standard competition
process for activities with more than 65 full-time equivalent (FTE)8
positions. As part of the standard process  agencies issue solicitations
with a performance work statement describing the work to be performed,
appoint an agency tender official to prepare a response to the
solicitation based on a "most efficient organization" (MEO),9 and evaluate
that response along with the proposals submitted by private offerors.
Also, under the standard competition process, unless contractor
performance would save the government $10 million or 10 percent of agency
personnel-related costs (whichever is less), the work will be retained
within the agency. This ensures that an agency does not convert to
contract performance in cases where only marginal savings are
anticipated.10

7 OMB has not examined the extent to which the Circular A-76 standard
insurance and health benefits cost factor of 5.7 percent-which has not
been revised since 1999-has kept pace with increases in Federal Employees
Health Benefits Program (FEHBP) costs over the last 6 years. Federal
budget costs to provide health insurance under FEHBP climbed 65 percent
between fiscal years 1999 and 2005. In view of this growth in FEHBP costs,
we recommended that OMB's Director review and update as necessary the
health benefits cost factor. See GAO, Review of OMB Circular A-76 Health
Benefit Cost Factor Needed, GAO-06-87R (Washington, D.C.: Nov. 17, 2005).

8 Full-time equivalent (FTE) is a measure of federal civilian staffing.
Circular A-76 defines FTEs in terms of 1,776 annual productive work hours.

9 OMB defines a most efficient organization (MEO) as the staffing plan of
the agency, developed to represent the agency's most efficient and
cost-effective organization.

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.

DOD's Competitive Sourcing Program

The Department of Defense has a long-established competitive sourcing
program and is the leader among federal agencies in terms of the number of
public-private competitions conducted and positions competed. In fiscal
year 2004, DOD reported that it made sourcing decisions in 58
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.11 DOD
components-such as the Army, Navy, Marine Corps, and Air Force-as well as
the defense agencies and DOD field activities have their own centralized
management structures to operate their competitive sourcing programs based
on DOD's policies, procedures, and guidance.

10 The same conversion differential applies when there is
contractor-performed work the government might wish to bring back within
the agency for government performance.

Under legislation applicable only to DOD for activities with more than 10
FTEs, unless contractor performance would save the government $10 million
or 10 percent of agency personnel-related costs (whichever is less), the
work will not be converted to contractor performance.12

Health Benefits Available to Federal and Service Contract Act Employees

Federal employees and the employees of the government's service
contractors may receive health insurance benefits based on different
statutory requirements. The Federal Employees Health Benefits Act of 1959
established the framework for government civilian employees' health
insurance benefits through the Federal Employees Health Benefits Program
(FEHBP).13 Participation in FEHBP is voluntary for civilian employees and
their dependents and retirees. This statute sets the government's share of
each participant's health insurance premium cost at an amount equal to 72
percent of the weighted average of the premiums of all FEHBP plans, but
caps the government's share at 75 percent of any individual plan's
premium. This formula is applied to the self-alone and self-and-family
plans separately. For example, in fiscal year 2005, the government's
annual share of FEHBP premiums for two major FEHBP plans ranged between
$2,600 to $3,400 for self coverage and $5,900 to $7,800 for
self-and-family coverage.14

11 Within the Office of the Deputy Under Secretary of Defense
(Installations and Environment), the Department of Defense Housing and
Competitive Sourcing Office has overall responsibility for managing DOD's
competitive sourcing program.

12 Unlike the Circular A-76 streamlined competition process established
for the rest of the government for activities with 65 or fewer FTEs,
annual DOD and consolidated appropriations laws have, in effect, required
DOD to use aspects of the standard process anytime more than 10 FTEs are
involved because (1) agency employees must be allowed to form MEOs to
compete with the private sector, and (2) savings realized from outsourcing
the work must exceed specific monetary targets.

13 The Federal Employees Health Benefits Act of 1959, Pub. L. No. 86-382
73 Stat. 708, established the program. The act, as amended, is codified at
5 U.S.C. S:8901 et seq.

14 For these two major plans, the non-postal federal employee's annual
share of FEHBP premiums ranged between $865 to $2,322 for self-coverage
and $1,964 to $4,716 for self-and-family coverage.

The McNamara-O'Hara Service Contract Act (SCA) of 196515 requires minimum
wages and fringe benefits for employees working on government service
contracts that exceed $2,500. The Department of Labor administers the SCA
and determines the prevailing wages in geographic localities for various
job categories. In June 2005, the department increased the standard SCA
health and welfare minimum benefit rate to $2.87 per hour from $2.59 per
hour. Government contractors have flexibility in the types of health and
welfare benefits they provide, as long as they meet or exceed the $2.87
minimum health and welfare requirement. For example, contractors can meet
their SCA benefits obligations by providing health insurance benefits, by
allowing their employees to place some or all of the SCA benefits in a
retirement plan, or by providing cash payments.

In General, DOD Implemented Health Benefit Cost Provision Based on Standard A-76
                                  Cost Factor

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.

15 41 U.S.C. 351, et seq. The Service Contract Act applies to contracts
that involve primarily the delivery of services in the United States and
are valued at more than $2,500. In a GAO report due to be released in
January 2006, information is presented on how the Department of Labor
establishes locally prevailing wages and fringe benefits and enforces SCA.
See GAO, Service Contract Act: Wage Determination Process Could Benefit
From Greater Transparency, and Better Use of Violation Data Could Improve
Enforcement, GAO-06-27 (Washington, D.C.: Dec. 7, 2005).

DOD Developed a Preferred Process for Implementing the Health Benefit Cost
Provision, but Has Not Mandated Its Use

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:

           o  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.

           o  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.

Table 2: Hypothetical Illustration of DOD's Preferred Health Benefit Cost
Comparability Process

Proposal costs and               Proposal requiring                        
adjustments                              adjustment No adjustment required
Private offeror's total                                                    
proposed cost                            $1,000,000             $1,000,000
Direct labor                               $500,000               $500,000 
Health benefit                $15,000 (3 percent of $27,500(5.5 percent of 
contribution                          direct labor)          direct labor) 
DOD's adjustment to        $12,500 (Add 2.5 percent     None needed(Health 
implement health benefit  to the proposed 3 percent    benefit cost is 5.5 
cost provision             of direct labor to equal               percent) 
                                          5.5 percent) 
Total evaluated cost                                                       
after adjustment                         $1,012,500             $1,000,000

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

According to DOD officials, any health benefit cost adjustment made to the
private offeror's proposed costs is for evaluation and cost comparison
purposes only. For work currently performed within the agency, if
contracting officials determine that the private offeror has a higher
priced proposal than the agency's cost estimate, either before or after
any adjustments for health benefit contributions, DOD will retain the work
within the agency. If a private offeror selected for award under the
solicitation's evaluation criteria has a lower cost proposal after any
adjustment for health benefit contributions-and contractor performance
would save DOD at least $10 million or 10 percent of the agency team's
personnel-related costs-the offeror will be awarded a contract at its
original proposed amount. Section 8014 does not compel DOD officials to
reject a private offeror's proposal based solely on the cost or extent of
the company's health benefit coverage. Nor does it require the private
offeror to match the DOD's health benefit costs, since according to DOD
officials this would in effect have to be subsidized by DOD through higher
awarded costs.

DOD officials told us that using the 5.5 percent Circular A-76  cost
factor to implement the health benefit cost legislation accomplishes
several objectives. First, the approach is consistent with the requirement
of the statute that private sector offerors not receive a competitive
advantage by offering to pay less for health benefits than what the
government pays. Second, DOD officials believe the approach is fair
because it ensures that proposals from both the public and private sectors
have an equal health benefit cost component of at least 5.5 percent.
Third, the approach is consistent with the standard adjustment agency
sources already make to 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.

Most DOD Components Adopted DOD's Health Benefit Cost Comparability Process

Except for DLA, which implemented its own process, the DOD components we
reviewed adopted DOD's preferred process to implement the health benefit
cost comparability provision. Competitive sourcing program officials in
the Air Force, Navy, Marine Corps, and Army Corps of Engineers told us
that they have taken actions to implement the DOD process in their fiscal
year 2005 competitive sourcing programs. According to these officials,
implementation actions ranged from offering instructions to contracting
staff about incorporating the DOD preferred process in ongoing
competitions to more formal actions such as incorporating the preferred
process in competitive sourcing manuals. For example, the Marine Corps'
competitive sourcing program officials added a section with guidance for
implementing the health benefit cost provision in its draft competitive
sourcing program manual, which contracting officers will use to run Marine
Corps public-private competitions.

Early in fiscal year 2005, some components took steps to implement the
health benefit cost provision in advance of communication from DOD about
its preferred process because these components had immediate needs to
comply with the requirement in several pending public-private
competitions. These early implementation efforts were generally consistent
with the preferred process that DOD later communicated in November 2004.
For example, Navy and Marine Corps contracting officials told us they
issued amendments to ongoing solicitations in which they requested
information from private offerors to implement the health benefit
provision. This information included whether the offeror would provide an
employer-sponsored health insurance plan, the total cost of the employer's
contribution to the plan on behalf of employees, and their direct labor
costs to perform the commercial activity being competed. Navy and Marine
Corps contracting officials told us that they collected this information
in order to compare this offeror information against the standard Circular
A-76 insurance and health benefit cost factor.

Because of a pending competitive sourcing decision early in fiscal year
2005, DLA also moved ahead and implemented the health benefit cost
comparability provision before DOD communicated its preferred process.
DLA's process, which it continues to use, differs from DOD's and is based
on using the monthly premium contributions DOD is required to make under
the FEHBP towards civilian employees' health insurance16 as the benchmark
for comparing private offerors' health benefit coverage and costs. DLA's
process requires detailed data collection and the use of a complex benefit
and cost comparison method. Specifically, for a private offeror to
demonstrate that it meets DLA's health benefit cost comparability
benchmark, the company first must provide data showing that

           o  its health insurance plan allows employees to enroll either
           self-alone or self-and-family, and

           o  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.17

           Next, DLA's process requires that the contracting officer
           calculate the offeror's health benefit costs for self-alone and
           self-and-family coverage, and compare those costs with the
           agency's health benefit cost benchmarks under FEHBP, and make any
           cost adjustments based on the following criteria:

           o  If the private offeror's health benefit plan cost equals or
           exceeds the lesser of DLA's two premium contribution benchmarks,18
           no upward adjustment is made to its cost proposal.

           o  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.

           The health benefit cost comparability provision has had minimal
           impact on DOD's fiscal year 2005 competitive sourcing program and
           the offerors that participated. Of the 54 public-private
           competitions we reviewed, the health benefit provision was
           applicable in only 12 sourcing decisions. In 7 of these 12
           competitions, DOD collected health benefit cost information from
           private sector offerors and found that most of their health
           benefit costs exceeded 5.5 percent of direct labor costs. This is
           mostly due to the requirements of the Service Contract Act-which
           mandates minimum wages and fringe benefits (which could include
           health insurance) for employees on government service contracts.
           DOD contracting officials and the private sector offerors told us
           that complying with the health care cost provision was not unduly
           burdensome. Implementation of the health care provision did not
           alter the outcome of any of the competitions.

           We reviewed the 54 public-private competitions that were either in
           progress or completed between October 1, 2004, and June 30, 2005.
           As shown in figure 1, only 12 public-private competitions that
           reached a sourcing decision involved some consideration of the
           requirements of the health benefit cost provision. Also as shown
           in figure 1, in the remaining 42 of the 54 competitions, the
           health benefit cost provision was not a factor for various
           reasons. For example, DOD contracting officers did not need to
           implement the health benefit cost comparability provision in 13
           competitions that involved 10 or fewer FTEs since the requirement
           applies only to competitions involving more than 10 FTEs. (See
           app. IV for more information on the remaining 42 competitions
           where the health benefit cost provision was not yet applied or not
           a factor in sourcing decisions.)

           Figure 1: Application of Health Benefits Cost Provision in DOD's
           Competitive Sourcing Program as of June 30, 2005

           The DOD component conducting the public-private competition
           determined that there was no need to collect data on health
           benefit costs in 5 of the 12 competitions for which the
           legislative provision was applicable. As shown in table 3, in one
           of those competitions, the work was retained for agency
           performance. In that case, the cost estimate for agency
           performance was about 45 percent lower than the private offer. In
           the remaining four cases, a private offeror submitted a lower cost
           proposal than the agency's cost estimate,19 and the difference was
           so great (ranging between 8.1 and 14.8 percent less) that even
           adding the full health cost factor of 5.5 percent would not have
           made a difference.

16 5 U.S.C. 8906(b) establishes the percentage formula of monthly premium
contributions DOD is required to make under FEHBP towards civilian
employees' health insurance.

17 Under 5 U.S.C. 8906(b)(1), the Office of Personnel Management (OPM)
annually sets the FEHBP governmentwide weighted average of premiums, for
self-only and self-and-family participation. To implement the health
benefit cost comparability requirement, DLA used as its benchmark the
maximum monthly premium contribution set by OPM for the government-paid
portion for fiscal year 2005 for self-alone coverage ($298.23 per month)
and self-and-family coverage ($646.17 per month). In addition, OPM has
capped the monthly premium contributions under the FEHBP at 75 percent.

18 DLA's two premium benchmarks are (1) $298.23 and $646.17 per month for
self-alone and self-and-family participation, respectively or (2) 75
percent of the premium for the company's health benefit plan.

                Health Benefit Cost Provision Had Minimal Impact

Few Competitions Involved Consideration of Health Benefit Costs and No Sourcing
Decision Changed as a Result

19 The private offerors' cost proposals were lowest cost even after DOD's
cost comparison adjusted for the minimum savings margin of $10 million or
10 percent (whichever is less) needed before the work can be converted to
contractor performance.

Table 3: Competitions Where DOD Component Determined That Health Benefit
Cost Data Were Not Needed

Public-private                     FTEs         Sourcing    Cost proposal  
competition          DOD component competed     decision    difference     
1                    Air Force     191          Private     14.3 percent   
                                                               lower          
2                    Marine Corps  265          Private     9.9 percent    
                                                               lower          
3                    Marine Corps  16           Public      45.6 percent   
                                                               lower          
4                    Navy          11           Private     14.8 percent   
                                                               lower          
5                    Navy          290          Private     8.1 percent    
                                                               lower          

Source: GAO analysis of DOD data.

In the remaining 7 of the 12 competitions, DOD components collected and
assessed health benefit data from private offerors. As shown in table 4,
most private offerors' proposed costs for health benefits far exceeded
DOD's 5.5 percent benchmark.

Table 4: Competitions Where Private Offerors Submitted Health Benefit Cost
Data

                                                     Private     Health     Cost proposal 
                                                     offeror     benefit    adjustment    
                                           Private   contributes cost as    needed for    
                                           offeror a towards     percentage health        
Public-private DOD       FTEs     Sourcing small     health      of direct  benefit       
competition    component competed decision business? benefits?   labor      comparability 
6              Navy      809      Public   No        Yes         21.0       No            
7              Marine    38       Public   Yes       Yes         17.0       No            
               Corps                                                        
8              Navy      103      Private  No        Yes         10.0       No            
9              Marine    27       Public   Yes       Yes         2.1        Noa           
               Corps                                                        
10             Marine    52       Private  Yes       No          0.0        Yesb          
               Corps                                                        
11             DLA       124      Public   No        Yes         15.4c      Yesc          
12             DLA       341      Public   No        Yes         Not        No            
                                                                 availabled 

Source: GAO analysis of DOD and private offeror data.

aContracting office did not need to adjust the private offeror's cost
proposal since agency's cost estimate was lower.

bProposal cost adjustment was not documented in the source selection file.

cGAO calculation using DOD process and private offeror data. Contracting
officer used DLA's process for comparison and private offeror's health
benefit cost fell short of DLA's health benefit cost benchmarks.

dPrivate offeror's health benefit cost as percentage of direct labor was
not available and GAO was unable to calculate health benefit cost as
percentage of direct labor. Contracting officer used DLA's process for
comparison, and private offeror's cost proposal met DLA's health benefit
cost benchmarks.

Collection of Health Benefit Data Was Not Unduly Burdensome

According to DOD component contracting officers and our review of
competitive sourcing documents, the administrative steps taken to collect
health benefit data were not unduly burdensome and generally did not
significantly delay competition schedules. For the seven competitions in
which cost data were obtained from the offerors, the components usually
obtained the data through solicitation amendments. This step was necessary
because the solicitations had been issued prior to the health benefit cost
provision becoming effective. Component contracting officers generally
told us that collecting the health benefit data imposed neither unusual
burden nor unacceptable delays.20 In one case, instead of a solicitation
amendment, the contracting officer simply contacted the offeror and asked
the company to submit the health care cost data. Contracting officers told
us that they plan to include the health benefit cost provision in the
future solicitations.

Our discussions with the offerors in the public-private competitions also
indicated the process created little difficulty for them, and required
minimal efforts. The health benefit data needed were readily available and
generally maintained in the company accounting systems. This was the case
for both small and larger companies. According to the offerors we
interviewed (including one firm that submitted to DLA detailed data about
health benefits), submitting the health benefit data was not considered
unusually burdensome. The private offeror involved in DLA's process we
contacted raised no concern with us about any burden. Our review of DLA's
competition documents, however, indicated that much more documentation
about health benefits and costs is expected to be submitted by a private
offeror participating in a DLA public-private competition than what is
expected of private offerors participating in other competitions following
DOD's preferred process.

20 In one case however, DLA officials told us that they did experience a
delay for a competition that was nearing source selection just after the
new fiscal year would start. It was at that time that DLA officials
realized that the health benefit cost comparability provision was about to
take effect before they could complete their source selection process for
this competition. As a result, DLA extended the source selection by about
a month to establish a new process for implementing the requirement and to
amend the solicitation in order to collect and compare needed health
benefit data from both agency and private offerors.

Service Contract Act Results in Most Private Offerors Paying for Health Benefit
Costs

In all seven competitions we reviewed where DOD obtained health benefits
data, private offerors were subject to the Service Contract Act (SCA). At
the time DOD reviewed their health benefit costs, the SCA required that
these offerors pay at least $2.59 per hour for employees' fringe
benefits.21

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.22

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

                                  Conclusions

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.

                      Recommendation For Executive Action

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.

                       Agency Comments and Our Evaluation

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.

22 General maintenance worker hourly rate obtained from the Department of
Labor's May 23, 2005, Wage Determinations for the District of Columbia and
surrounding areas.

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 [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report were Carolyn Kirby,
Assistant Director; John Dicken, Rosa Johnson, Charles Perdue, Russ
Reiter, Sylvia Schatz, Natalie Schneider, Bob Swierczek, Ann Marie Watt,
and Anthony Wysocki.

William T. Woods, Director Acquisition and Sourcing Management

List of Congressional Committees

The Honorable John Warner

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

The Honorable Duncan L. Hunter

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

The Honorable Ted Stevens

Chairman The Honorable Daniel K. Inouye Ranking Minority Member
Subcommittee on Defense Committee on Appropriations United States Senate

The Honorable C.W. Bill Young

Chairman The Honorable John P. Murtha Ranking Minority Member Subcommittee
on Defense Committee on Appropriations House of Representatives

Appendix I: Sector andCorporati  Appendix I: Health Benefits in the
Private Sector and the Transitional Benefit Corporation Concept

This appendix provides information on the availability of and employer
contributions for health benefits in the private sector based on our
review of recently published research. Information is also presented on
the transitional benefit corporation concept that has received attention
as a mechanism for minimizing the loss of health insurance and other
benefits for civilian federal employees affected by conversion of
commercial activities performed by government employees to private sector
performance.

 Availability of and Employer Contributions for Health Benefits in the Private
                                     Sector

Recent government and private sector studies indicate that a variety of
changes have taken place with employer-sponsored health insurance plans in
the last 5 years, including a decrease in the percentage of small firms
offering health benefits and an increase in the cost of the health benefit
premiums for all employers. According to recent Current Population Survey
data,1 81 percent of all individuals aged 18 to 64 years with health
insurance in 2004 received coverage through employment-based insurance.

From 2000 through 2005, the percentage of all firms offering health
benefits fell from 69 percent to 60 percent according to the Kaiser Family
Foundation's annual survey in 2005 of employer benefits.2 This decline is
largely due to the decline in the percentage of small firms3 that offer
health insurance because small firms represent the majority of all
employers. However, nearly all larger firms (with 200 or more employees)
offer employer-paid health benefits-98 percent in 2005 according to
Kaiser's survey. This is consistent with government data from the 2003
Medical Expenditure Panel Survey4 (MEPS), which indicates that as
establishment size increases in terms of the number of employees, the
percentage of employers offering health insurance increases. (See fig. 2.)

1 Carmen DeNavas Walt, Bernadette D. Proctor, and Cheryl Hill Lee, Income,
Poverty, and Health Insurance Coverage in the United States: 2004, U.S.
Census Bureau (Washington, D.C.: August 2005).

2 The Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits 2005 Summary of Findings (Menlo Park, Calif.:
2005)

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

4 Agency for Healthcare Research and Quality (AHRQ), Department of Health
and Human Services, conducts the Medical Expenditure Panel Survey (MEPS).
According to AHRQ, the survey collects data on the specific health
services that Americans use, how frequently they use them, the cost of
these services, and how they are paid for, as well as data on the cost,
scope, and breadth of private health insurance held by and available to
the U.S. population.

Figure 2: Percentage of Private-Sector Employers That Contributed Toward
Health Insurance in 2003, by Number of Employees

According to Kaiser's annual survey in 2005, the cost of health insurance
premiums has increased dramatically from 1999 to 2005, rising by over 97
percent. Average annual premiums for employer-sponsored health insurance
rose to $4,024 for self-only and $10,880 for self-and-family.5 Analysis of
2003 MEPS data indicates that private industry generally contributes at
least as much towards employees' health insurance plan premiums as the 72
percent average that the government contributes towards civilian
employees' health insurance premiums under FEHBP. According to MEPS, all
size categories of private sector employers on average paid greater than
80 percent of the health benefit premiums for self -alone coverage and
between 69 percent and 78 percent for self-and-family coverage. (See fig.
3.)

5 Employees on average contributed $610 of the $4,024 annual cost of
self-only coverage and $2,713 of the $10,880 annual cost of the
self-and-family coverage.

Figure 3: Private Employers Percentage Share Contributed Toward Employee
Health Insurance Premiums in 2003, by Number of Employees

                    Transitional Benefit Corporation Concept

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, 6 the benefits of a transitional benefit
corporation include

           o  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.

           o  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.
           o  "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.

           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.1 A recent DOD Office of
           Inspector General report concluded that DOD has not effectively
           implemented its CAMIS system to track and assess the cost of the
           performance of functions under the competitive sourcing program.2
           To check the quality of the CAMIS data on the 54 competitions we
           identified that were in progress or completed between October 1,
           2004, and June 30, 2005, we asked cognizant DOD and competitive
           sourcing officials in the components to verify the accuracy and
           completeness of the CAMIS data we used for each of the 54
           competitions. Based on the results of our verification of the data
           with these cognizant officials, we believe that the data are
           sufficiently reliable for purposes of this report.

           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.

           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.

           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.

6 Stephen M. Sorett, Brad P. Bender, and Lorraine T. Mullings,  Public
Contract Law Journal, The Crossroads of the A-76 Costs Debate: Cost
Comparisons and Some Attractive Alternatives, (Washington, D.C: Fall
2001).

Appendix II: Scope and Methodology  Appendix II: Scope and Methodology

1 GAO, DOD Competitive Sourcing: Savings Are Occurring, but Actions Are
Needed to Improve Accuracy of Savings Estimates, GAO/NSIAD-00-107
(Washington, D.C.: Aug. 8, 2000).

2 DOD, Office of Inspector General, Defense Infrastructure: DOD Reporting
System for the Competitive Sourcing Program, D-2006-028, Nov. 22, 2005.

Appendix III: Legislative Provision for Health Benefit Cost Comparability 
Appendix III: Legislative Provision for Health Benefit Cost Comparability

Appendix IV: Fiscal Year 2005 Competitions in Which Health Benefit Costs
Were Not a Factor  Appendix IV: Fiscal Year 2005 Competitions in Which
Health Benefit Costs Were Not a Factor

Table 5: Competitions In Progress as of June 30, 2005 Where Health Benefit
Cost Comparability Had Yet to Be Considered, and Competitive Sourcing
Decision Was Pending

Competition and location                                     FTEs competed 
Air Force competitions                                       
Multi-Support Functions, Keesler Air Force Base, Miss.                 291 
Multi-Support Functions, Keesler Air Force Base, Miss.                  19 
Army and Corps of Engineers competitions                     
Information Management, Army Corps of Engineers, all                 1,460 
locations agencywide                                         
Base Support Services, Walter Reed Army Medical Center,                161 
Washington D.C.                                              
Base Support Services, Walter Reed Army Medical Center,                534 
Washington D.C.                                              
Public Works, Army Corps of Engineers, Vicksburg, Miss. and             55 
Hanover, N.H.                                                
Finance Center, Army Corps of Engineers, Millington, Tenn.              80 
Navy competition                                             
Satellite Operations, Norfolk, Va.                                      54 
Defense Logistics Agency competitions                        
Distribution Operations, Defense Distribution Depot,                   576 
Oklahoma City, Okla.                                         
Installation Services, Defense Depot, Tracy, Calif.                     67 
Installation Services, Defense Depot, New Cumberland, Pa.              136 
Distribution Operations, Defense Supply Center, Richmond,              115 
Va.                                                          
Department of Defense Education Activity competitions        
Logistics, Fort Knox, Ky.                                               48 
Logistics, Fort Benning, GA and Robins Air Force Base, Ga.              43 

Source: GAO analysis of DOD data.

Table 6: Streamlined Competitions Where DOD's Market Research Determined
the Agency Was the Lowest-Cost Source and Health Benefit Cost
Comparability Was Not a Factor

Competition and location                                     FTEs competed 
Defense Contract Management Agency streamlined competitions  
Information Technology Support Services, Boston, Mass.                  17 
Information Technology Field Support Services, Philadelphia,            19 
Pa.                                                          
Information Technology Field Support Services, Warren, Mich.            16 
Information Technology Field Support Services, Denver, Colo.            14 
Information Technology Field Support Services, Boston, Mass.            19 
Information Technology Field Support Services, Hazelwood,               14 
Mo.                                                          
Information Technology Field Support Services, Picatinny,               13 
N.J.                                                         
Information Technology Field Support Services, Carson,                  23 
Calif.                                                       
Information Technology Field Support Services, Orlando, Fla.            21 
Information Technology Field Support Services, Dallas, Tex.             20 
Department of Defense Education Activity streamlined         
competitions                                                 
Minor Construction, Maintenance and Repair of Buildings and             17 
Structures other than Family Housing, Quantico, Va.          
Custodial Services, Minor Construction, Maintenance                     26 
andRepair of Buildings and Structures Other Than Family      
Housing, Fort Stewart, Ga.                                   
Custodial Services, Maintenance, Repair and Minor                       12 
Construction of Other Real Property, Fort Rucker, Ala., and  
Maxwell Air Force Base, Ala.                                 
Building Management, Retail Supply Operations, Pacific                  13 
Region                                                       

Source: GAO analysis of DOD data.

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

Competition and location                                     FTEs involved 
Defense Contract Management Agency competitions              
Computing Services and/or Data Base Management, Columbus,                6 
Ohio                                                         
Information Technology Support Services, Carson, Calif.                 10 
Department of Defense Education Activity competitions        
Grounds Maintenance, Fort Benning, Ga.                                   5 
Custodial Services, West Point, N.Y.                                     7 
Grounds Maintenance, Fort Knox, Ky.                                      5 
Grounds Maintenance, Quantico, Va.                                       5 
Air Force competition                                        
Information Systems, Randolph Air Force Base, Tex.                       3 
Army competitions                                            
Specialized Skill Training, Fort Monroe, Va.                            0a 
Combat Development Evaluations and Experimentation, Army                0a 
Training and Doctrine Command, Fort Monroe, Va.              
Military Training, Fort Monroe, Va.                                     0a 
Military Training, Fort Monroe, Va.                                     0a 
Military Training, Fort Monroe, Va.                                     0a 
Marine Corps competition                                     
Manpower Administration, Camp Lejeune, N.C.                             8b 

Source: GAO analysis of DOD data.

aAt the time of Army's A-76 competition processes for this commercial
activity, the work was being performed by contract employees and no
federal employees' positions were being competed.

bThe Marine Corps contracting officer did collect health benefit cost data
from a private offeror involved in this competition. However, we included
this competition in this category in which health benefit costs do not
need to be considered (because Section 8014's health benefit cost
comparability provision is not applicable to competitions involving 10 or
fewer FTEs).

Appendix V: Comments from the Department of Defense  Appendix V: Comments
from the Department of Defense

Appendix VI: Comments from the Office of Management and Budget  Appendix
VI: Comments from the Office of Management and Budget

(120399)

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Highlights of GAO-06-72, a report to congressional committees

December 2005

COMPETITIVE SOURCING

Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform
Implementation Process

Competitive sourcing is a management tool where federal agencies conduct
competitions between federal employees and private companies to determine
the best source to provide commercially available services.

Concerns have been raised in the Congress that differences in the costs of
federal and private health insurance benefits could disadvantage the
federal workforce in public-private competitions. A health benefit cost
comparability provision in the 2005 Defense Appropriations Act prohibited
any advantage for private offerors that provide no health benefits or
contribute less for them than the Department of Defense (DOD) contributes
for its civilian employees. Legislation is pending to extend the provision
for another year. GAO, in response to a mandate, determined (1) how DOD
implemented the provision, and (2) what impact the provision had on DOD's
fiscal year 2005 competitive sourcing program.

What GAO Recommends

To avoid the potentially inconsistent treatment within DOD of private
offerors' cost proposals, GAO recommends that DOD use a uniform and
consistent process to implement the health benefit cost provision. DOD
concurred with the recommendation.

Most DOD components implemented the health benefit cost provision using a
process designed to ensure that private sector proposals include an amount
for employee health benefits at least equal to the amount that Office of
Management and Budget Circular A-76 requires to be added to agency cost
estimates to account for employee health benefits. Under Circular A-76,
this amount is 5.5 percent of direct labor costs. The Defense Logistics
Agency (DLA), however, used a different process designed to determine
whether a private sector offeror's monthly health benefit premium
contributions are at least equal to DOD's. While DOD's and DLA's processes
are both reasonable approaches, the use of different processes could
result in different competitive sourcing outcomes in some cases.

The health benefit cost provision had minimal impact on DOD's fiscal year
2005 competitive sourcing program. Of the 54 public-private competitions
we reviewed, the health benefit provision was applicable in only 12
sourcing decisions (see figure). In 7 of these 12 competitions, DOD
collected health benefit cost data from private sector offerors and found
that most of their health benefit costs exceeded 5.5 percent of direct
labor costs. This is largely due to the requirements of the Service
Contract Act-which mandates minimum wages and fringe benefits (which could
include health insurance) for employees on government service contracts.
Although the processes used by DOD and DLA resulted in increasing two
private offerors' cost proposals, the adjustments did not alter the
outcome of the competitions. Contracting officials and the private sector
offerors told us that complying with the health benefit cost provision was
not unduly burdensome.

Application of Health Benefits Cost Provision in DOD's Fiscal Year 2005
Competitive Sourcing Program (as of June 30, 2005)
*** End of document. ***