Government Contractors:

Criteria Needed for Allowable Employee Health Care Costs

HRD-88-27: Published: May 12, 1988. Publicly Released: May 12, 1988.

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GAO evaluated government efforts to ensure that contractors' health care costs under negotiated contracts were reasonable, focusing on: (1) health care costs of selected government contractors compared to those of other manufacturing industries and the government work force; (2) the primary reasons for cost differences; and (3) the adequacy of federal internal controls over allowable compensation costs.

GAO found that: (1) government health care costs under negotiated contracts were high because contractors required less cost-sharing from their employees compared with employees in the manufacturing industries; (2) only 1 of the 10 largest government contractors it reviewed required its employees to share in the cost of their health insurance premiums; (3) the government lacked adequate internal controls to ensure that reimbursements to contractors were reasonable; (4) 1986 revisions to the Federal Acquisition Regulation (FAR) did not specify the criteria for assessing the reasonableness of contractor compensation; and (5) during a 5-year period, the government reimbursed its 10 largest contractors about $4.5 billion for their employee health care costs.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DLA incorporated quantitative criteria in its audit manual and has begun challenging health care costs that exceed these criteria.

    Recommendation: The Director of the Office of Management and Budget (OMB), through the Administrator of the Office of Federal Procurement Policy, should work with the Department of Defense, National Aeronautics and Space Administration and the General Services Administration to develop, and publish in FAR, quantitative criteria for determining the reasonableness of the government's reimbursement of contractor health insurance costs. The Director should develop similar criteria for assessing the reasonableness of other elements of compensation and contractors' total compensation costs.

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


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