Review of OMB Circular A-76 Health Benefit Cost Factor Needed	 
(17-NOV-05, GAO-06-87R).					 
                                                                 
Determining whether to obtain required services using government 
employees or through contracts with the private sector is an	 
important economic and strategic decision for agency managers. In
this regard, Office of Management and Budget (OMB) Circular A-76 
prescribes policies and procedures for use by agencies as they	 
select service providers through competitions among public and	 
private-sector sources. The Circular is intended to ensure that  
the competitive sourcing process is conducted as fairly as	 
possible, and that the estimated cost of government performance  
reflects all of the costs of performing the work in house. The	 
purpose of this letter is to convey an issue we identified during
the course of an ongoing review of how the costs of health	 
benefits for federal and private-sector employees are reflected  
in public-private competitions conducted by the Department of	 
Defense.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-87R 					        
    ACCNO:   A41781						        
  TITLE:     Review of OMB Circular A-76 Health Benefit Cost Factor   
Needed								 
     DATE:   11/17/2005 
  SUBJECT:   Competition					 
	     Competitive procurement				 
	     Federal procurement				 
	     Fringe benefits					 
	     Procurement planning				 
	     Procurement policy 				 
	     Procurement practices				 
	     Regulatory agencies				 
	     Policy evaluation					 
	     Health care costs					 
	     Cost estimates					 
	     Policies and procedures				 
	     Federal Employees Health Benefits			 
	     Program						 
                                                                 

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GAO-06-87R

November 17, 2005

Congressional Committees

Subject: Review of OMB Circular A-76 Health Benefit Cost Factor Needed

Determining whether to obtain required services using government employees
or through contracts with the private sector is an important economic and
strategic decision for agency managers. In this regard, Office of
Management and Budget (OMB) Circular A-76 prescribes policies and
procedures for use by agencies as they select service providers through
competitions among public and private-sector sources.1 The Circular is
intended to ensure that the competitive sourcing process is conducted as
fairly as possible, and that the estimated cost of government performance
reflects all of the costs of performing the work in house.

The purpose of this letter is to convey an issue we identified during the
course of an ongoing review of how the costs of health benefits for
federal and private-sector employees are reflected in public-private
competitions conducted by the Department of Defense.2 We have determined
that the health benefit cost factor prescribed in Circular A-76 may not
reflect the current cost to the government of providing health insurance
under the Federal Employees Health Benefits Program (FEHBP). The cost to
the government of providing health benefits under the FEHBP has risen by
more than 65 percent between 1999 and 2005. Yet the health benefit cost
factor prescribed in A-76 has not been changed at all in that time. In
view of the increased cost of providing health insurance since the cost
factor last was revised, we recommend that OMB review the health benefit
cost factor to determine if an adjustment is needed and establish a
process to update it periodically, as OMB does for other cost factors.

Standard Costing Factors for Estimating Personnel

Costs Include Employee Benefits

Circular A-76 establishes standard costing factors that agencies must use
to estimate the costs of in-house performance. When preparing these
estimates, agencies use cost factors that are in effect as of the
solicitation closing date, revised to reflect projected changes to these
factors during the performance period. To estimate personnel costs, for
example, agencies add to basic pay a standard overall 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 insurance and health benefits, as shown in table 1.

1OMB Circular A-76, Performance of Commercial Activities, revised in May
2003, establishes federal policy and procedures for determining whether
commercial activities should be performed in-house, by another federal
agency, or by the private sector. Circular A-76 contains procedures
agencies must use in calculating and comparing the costs of performance by
in-house, private, or public reimbursable sources.

2In response to direction in the conference report on the Ronald W. Reagan
National Defense Authorization Act, House Rep. No. 108-767, we are
reviewing the implementation of section 8014 of the Department of Defense
Appropriations Act, 2005, Public Law No. 108-287. Section 8014 contains
requirements concerning the costs of health benefits in public-private
competitions conducted by the Department of Defense.

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

              Standard cost factor                      Percentage of basic paya 
      Insurance and health benefits b                                        5.7 
      Standard civilian retirement benefit c                                24.0 
      Medicare benefit                                                      1.45 
      Miscellaneous fringe benefits                                          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 Employees Group Life Insurance program.

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

      According to OMB staff, the 5.7 percent cost factor reflects 0.2
      percent for life insurance and 5.5 percent for health benefits. The
      current insurance and health benefit cost factor is based on actuarial
      estimates made in 1999.

      Health Benefit Factor Not Revised during

      Period of Substantial FEHBP Cost Growth

      Certain factors used in Circular A-76 calculations for computing the
      government's non-pay and personnel costs are routinely reviewed and
      adjusted by OMB. These include the standard inflation factor for
      supplies and equipment and annual federal pay raise assumptions. This
      periodic review helps to ensure that the cost factors are up to date in
      order to reflect accurately the full estimated cost of performance.
      Nonetheless, our discussions with competitive sourcing officials and
      review of OMB's transmittal memoranda indicate that the insurance and
      health benefits cost factor has not been reviewed and adjusted with the
      same frequency as other factors, but rather has been set at 5.7 percent
      of a position's basic pay since 1999.3

      3Circular No. A-76 (Revised), Transmittal Memorandum No. 19,
      Performance of Commercial Activities, March 24, 1999. In this
      memorandum, OMB revised the then 5.6 percent cost factor for insurance
      and health benefits up by 0.1 percentage points (on the health
      insurance side) to 5.7 percent.

      In contrast, our review of the federal budget costs for FEHBP and the
      annual average premium increases announced for FEHBP health insurance
      plans indicates that civilian employee health benefit costs have
      increased substantially since OMB last revised this cost factor. Our
      analysis of federal budget data shows that the government's FEHBP costs
      in fiscal year 2005 have increased by more than 65 percent relative to
      fiscal year 1999.4 (See table 2.)

      Table 2: Federal Government Gross Outlays for FEHBP,a Fiscal Years 1999 to
      2005