Government Operations:

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

GAO-06-87R: Published: Nov 17, 2005. Publicly Released: Nov 17, 2005.

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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.

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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to ensure the health benefit cost factor appropriately reflects up-to-date and accurate assumptions, the Director of OMB should reevaluate the health benefit cost factor to determine if an adjustment is necessary, based on the most current federal health insurance costs under FEHBP.

    Agency Affected: Executive Office of the President: Office of Management and Budget

    Status: Closed - Implemented

    Comments: Consistent with our recommendation, in October 2006, OMB revised its Circular A-76 to raise the insurance and health benefit cost factor to 6.7 percent to account for increases in insurance and health benefits that had taken place since the previous cost factor was set at 5.7 percent. OMB's action was based on a re-evaluation, based on actuarial analyses provided by the Office of Personnel Management (OPM), in which OMB determined that the civilian position full fringe benefit cost factor must be adjusted from 32.85 percent to 36.45 percent to reflect not just increases in insurance and health benefits, but also increases in civilian retirement benefits. OMB Circular A-76 requires agencies to use standard cost factors to estimate certain costs of government performance. OMB's action to update the standard insurance and health benefit cost factor will help ensure that specific government costs are calculated in a consistent manner to reasonably reflect the cost of performing commercial activities with federal employees.

    Recommendation: In order to ensure the health benefit cost factor appropriately reflects up-to-date and accurate assumptions, the Director of OMB should establish procedures to provide for periodic updates of the health benefit cost factor in view of changes over time to the government's costs associated with FEHBP benefits.

    Agency Affected: Executive Office of the President: Office of Management and Budget

    Status: Closed - Implemented

    Comments: Consistent with our recommendation, in March 2008, OMB completed action that demonstrates that OMB is continuing to work with OPM to review the standard civilian benefit factors including insurance and health benefits on a more regularized cycle. Specifically, in a March 2008 memoranda to agencies, OMB updated again the civilian position full fringe benefit cost factor to reflect changes in health insurance costs as well as retirement costs. In March 2008, OMB also published the changes in the Federal Register. According to OMB, the updated health and retirement benefit cost factors are based on OPM's actuarial analyses and the updates have been incorporated into the Department of Defense A-76 "Performance of Commercial Activities" Costing and Compare Software Tables used to calculate the cost of performing commercial activities with federal employees.

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