Report: OMB should increase health care cost estimates for job competitions

The Office of Management and Budget should increase the amount it requires agencies running public-private job contests to factor in for federal employee teams' health care-related costs, congressional auditors recommended in a letter published Friday.

For the past six years, OMB has asked agencies to use a standard cost factor of 5.7 percent of basic pay to estimate the amount they would spend on employee insurance and health benefits, should they decide to keep work in-house as the result of a public-private job competition. This cost factor is based on actuarial estimates from 1999.

But Federal Employees Health Benefits Program costs have escalated by more than 65 percent since then, Comptroller General David Walker wrote in a Nov. 17 letter to leaders of the House and Senate government reform, appropriations and armed services committees.

FEHBP annual premium increases have ranged from 7.9 percent to 13.3 percent from 1999 to 2005, GAO noted.

"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," Walker stated.

"We recognize that an adjustment of this factor could result in higher estimates of the total cost of government performance, and in some cases this could affect the outcome of public-private competitions," Walker added.

But "in our view, fairness requires that any cost factor used in estimating the cost of performance, whether by private or public sector sources, be as accurate and current as possible in order to protect the integrity of the process," he wrote.

GAO also recommended that the health care cost percentage be adjusted more regularly. Other standard rates such as pay raise assumptions that are assessed in the process of comparing competitive sourcing bids are updated routinely, GAO noted.

The auditors looked into the health benefit cost factor as part of ongoing research on implementation of a union-backed competitive sourcing requirement in the fiscal 2005 Defense appropriations act.

Under that law, the Pentagon must ensure that contractors don't receive an advantage for a proposal that "would reduce costs . . . by not making an employer-sponsored health insurance plan available to workers . . . under the contract" or by contributing less to health premiums than the Defense Department contributes for civilian employees.

This measure effectively "takes health care [costs] out of the equation altogether," said Jacque Simon, public policy director for the American Federation of Government Employees. Any time an across-the-board percentage is used to calculate costs, there's a risk that the figure will be a "political compromise number," she said.

GAO's assessment of the health benefits cost factor is too simplistic, Simon added. Health costs added to federal employee teams' bids aren't static because they're calculated as a percentage of total payroll costs, which change each year, she said.

Further, over the past 15 years, there has been a gradual shifting of health care costs from the government to beneficiaries, Simon said, meaning that employees are shouldering a substantial portion of increased costs. Federal employees will see a 10 percent jump in premiums for 2006, for example, while agencies will see an increase of about 5 percent, she noted.

The GAO letter misses a "critically important point," said Colleen Kelley, president of the National Treasury Employees Union. "Private sector companies are not required to offer their employees health care coverage. Unquestionably, a growing number of private sector companies are either reducing or eliminating health care benefits for their workers."

Kelley joined AFGE in arguing for rules that "require, at a minimum, that private companies wanting federal work are not advantaged by not providing health coverage to [their] workers."

Preliminary versions of the fiscal 2006 Defense appropriations bill (H.R. 2863) in both the House and Senate contain competitive sourcing health care requirements similar to the one enacted in last year's law. This year's bill has yet to complete the conference negotiations process, however.

Defense officials initially resisted the 2005 measure, and groups representing contractors are opposed to such language.

Cathy Garman, senior vice president of public policy at the Contract Services Association, an industry group, said the provision ties the government's hand. CSA pointed out that the health care cost factor was out of date several years ago, Garman added.

In a Dec. 19, 2002, letter commenting on what at the time were proposed revisions to Circular A-76, the OMB rule book on competitive sourcing, CSA suggested prefacing the standard cost factors for fringe benefits with an advisory note reading: "subject to annual adjustment."

Service contractors must include more current benefits in their bids, Garman noted.

OMB indicated in comments on a draft of Walker's letter that it is working with the Office of Personnel Management to review the cost factor and to look at "options for reviewing these factors on a more regularized basis."