Pentagon Study Proposes Overhaul of Defense Base Act to Cover Care for Injured Contractors
by T. Christian Miller, ProPublica – September 15, 2009 6:52 pm EDT
WASHINGTON, DC – Congress could save as much as $250 million a year through a sweeping overhaul of the controversial U.S. system to care for civilian contractors injured in war zones, according to a new Pentagon study.
In the most extensive review ever of the taxpayer-financed system, the Pentagon suggested that the government could issue its own insurance to cover the skyrocketing costs of medical care and disability pay for injured civilians.
Currently, the U.S. pays more than $400 million annually to AIG and a handful of other carriers to purchase special workers compensation insurance policies required for overseas civilian contractors by a law known as the Defense Base Act, the study found.
By cutting out insurance company profits as high as 35%, the government could self-insure the contractors for less money, according to a copy of the study obtained by ProPublica . The study is due to be released Friday.
The Pentagon’s suggestion would require a massive legislative revision of the government’s 60-year-old system to care for injured civilians, which has been criticized as expensive and ineffective for modern war zones where civilian contractors account for half the work force.
Despite the possible savings, it remains unclear whether anyone in Congress will champion such a bill. And the Pentagon hedged its bets by saying that it would pursue reforms to the current system of private insurance while “considering” the pursuit of legislative authority to change to a system of self insurance.
Such a proposal could also improve the delivery of care to injured contractors, the report found. Civilian contractors have faced protracted battles with insurance carriers to obtain medical treatment and disability pay, according to an investigation  by ProPublica, the Los Angeles Times and ABC News.
“In the long run, the self-insurance alternative may have the greatest potential for minimizing DBA insurance costs, and it has several administrative and compliance advantages as well,” the report said. A Pentagon spokeswoman declined comment since the report has not yet been made public.
Under the proposed system, the U.S. would pay directly for medical benefits and disability benefits rather than relying upon private insurance providers. The government would hire an outside firm to administer the claims to avoid the expense of training and hiring examiners.
The report makes clear, however, that such a fundamental change to the system would face a battle from the insurance industry. AIG dominates the market for the insurance, which exploded from an $18 million a business to more than $400 million per year after civilian contractors flooded into war zones in Iraq and Afghanistan, the report said.
AIG controls about 75% of the market, followed by Chicago-based CNA and Bermuda-based ACE Group. Together, the three firms collect 97% of all premiums paid by defense contractors for the insurance, the cost of which is reimbursed by the government.
Changing to a self-insurance system “has the potential to have the most financial benefit, if implemented government-wide,” the report found. However, under the heading “Cons,” the report said that legislation to change the current private insurance system “has potential for significant political pressure from those most directly affected by such a change (carriers, brokers, etc.)”
AIG and ACE did not immediately return requests for comment. The industry has said that profits are reasonable and that claims are handled fairly.
CNA said it was examining the recommendations. “We are in the process of carefully reviewing and digesting the DOD report. As previously stated, we welcome changes and improvements to the DBA program,” the company said in a statement.
The chance for such fundamental reform is uncertain. The Obama administration has not put forth a specific bill, though the Pentagon and Labor Dept., which administers claims, worked together in producing the report. A Labor Dept. spokesman said Tuesday that the agency was not prepared to comment on the report.
In the House, Rep. Ike Skelton , (D-Mo.) chair of the House Armed Services Committee, called the report’s findings “interesting, surprising, and worth considering for next year’s defense authorization bill.”
“The House Armed Services Committee will closely examine the report as we seek ways to lower the costs associated with Defense Base Act insurance,” Skelton said in a statement.
The Senate Armed Services Committee, chaired by Sen. Carl Levin , (D-Mich.) would wait for the Defense Dept. to suggest changes in its spring legislative proposal, a spokesman said.
Rep. Elijah Cummings  (D-Md.) has announced plans for cutting costs and improving the delivery of care for contractors, but has yet to offer details. Sen. Bernie Sanders , (I-Vt.) has also called for change.
Sen. Bernie Sanders (I-Vt.) “The current system for providing health insurance and workers compensation for our military contract workers in Iraq and Afghanistan is broken and wasting millions of dollars in payments to companies like AIG,” Sanders said in a statement. “If the Pentagon, the Department of Labor and Congress modernize the current insurance system, we can save up to $250 million and finally give these workers and their survivors the basic health care and support they need and deserve.”
In the absence of a major legislative overhaul in the next three years, the report recommends reforms to the current system of paying private insurance carriers for policies. Chief among them is a proposal that the government collect information on how much such claims cost.
Unlike state workers compensation systems, where rates are regulated and based on years of occupational injury data, the federal system for contractors relies upon individual insurance carriers to set rates. In the early years of the war, rates skyrocketed but the government had no way of determining whether such increases were justified.
The Pentagon tried to reduce rates by creating a umbrella program in 2005 in which one carrier, CNA, won a bidding contest to issue insurance for all contractors working for the U.S. Army Corps of Engineers. The State Dept. and the U.S. Agency for International Development have similar programs.
While initial studies by the Army Corps found significant cost savings, the current Pentagon report said that CNA’s rates in the umbrella program were higher on average than policies purchased by individual defense contractors.
Using a formula which weighed factors such as the size of the contract, CNA charged contractors in the umbrella program 8.3% of payroll costs on average, while individual contractors paid about 5.3% of their payroll for the insurance, the report found. That means the Army Corps paid $8,300 to purchase worker’s compensation insurance for a civilian contractor making $100,000 a year, compared with $5,300 for a civilian working for a different agency.
“The department’s overall conclusion, based on its comprehensive analysis of the current DBA premium data, is that the open market—when it involves adequate price competition among carriers—results in rates that are lower than those in a single-provider program,” the report said.
No matter which program, however, the report found that insurance carriers “may be achieving significant” profit from selling the insurance.
The Pentagon attempted to determine exactly how much money private carriers made from the taxpayer-financed policies, but insurance companies refused to turn over any data, the report said.
Previous investigations by the House Committee on Oversight and Government Reform found that carriers made more than 50% profit from some polices—far in excess of normal workers’ compensation insurance.
Written by the Pentagon’s Defense Acquisition and Technology Office, the report was based on interviews and data from industry players, including two insurance carriers, six brokers and seven defense contractors.
The Pentagon has denied  a Freedom of Information Act request by ProPublica to release documents submitted by the firms as part of the review, claiming that the information is proprietary business data.
A recent insurance industry study  confirmed that companies paid far more for workers compensation insurance in Iraq and Afghanistan than other countries. The higher rates have drawn criticism since the government reimburses carriers for the cost of combat injuries.