Government Contractors: Criteria Needed for Allowable Employee Health Care Costs

GAO discussed efforts to ensure that the employee health care costs that the federal government pays under negotiated contracts are reasonable. GAO found that: (1) in 1985, the government reimbursed its 10 largest contractors about $1.2 billion for their health care expenses, or about $2,344 per employee; (2) these costs exceeded the average per-employee costs that contractors, manufacturers, and the government incurred in providing health insurance to their employees; (3) contractor employees contributed 7 percent of their premium costs, while private-sector employees contributed 39 percent; (4) 62 percent of the differences between government employee health insurance costs and the cost of contractors' coverage was due to differences in employee premium cost sharing; and (5) cost sharing through deductibles and coinsurance could reduce health care costs. GAO also found that: (1) the government has had little success in determining compensation cost reasonableness; and (2) although revised regulations allowed the government to challenge the reasonableness of any single element of compensation and to assess total compensation from a building-block approach, it did not contain the tools needed to achieve this objective. GAO believes that government contracting officers and auditors need specific quantitative criteria for assessing the reasonableness of each element of compensation developed from a uniform database of employers.