This is an update to previous posts on health care costs for ineligible dependents. It might be useful to read those before continuing. See Health Benefit Costs and Health Benefit Costs for Non-Eligible Dependents.
Costs for employee health care benefits, pursuant to FAR 31.205-6(m), must be reasonable and required by law, employer-employee agreement or an established policy of the contractor. Some Government contractors' employees claimed costs for health care benefits for dependents that were ineligible for those benefits. This has increased the costs claimed on cost-type contracts and perhaps fixed-priced contracts where histroy was used to project future costs.
Since 2009 at least, Government auditors have been scouring the countryside looking for unallowable health care benefit costs. Many contractors have been feeling the brunt of this audit emphasis. Typically in an audit, auditors will select a sample of transactions to test for allowability, allocability and reasonableness. No so with health benefit costs however. In many case, auditors are requiring that contractors prove to them that there are no health benefit costs paid to ineligible dependents. Contractors are spending significant amounts of money to comply. We know of several cases where contractors have paid tens of thousands of dollars to outside consultants to review medical claims to ensure the propriety of costs and those outside consultants found no instances of payments made for health services to ineligible dependents.
One aspect of this affair has been DCAA's position that any health benefit costs paid to ineligible dependents are not only unallowable, but are expressly unallowable which means that any costs disclosed in an audit carry penalties In a February 2012 memorandum to DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency), DoD's Director of Pricing told the Agencies to knock off the "expressly unallowable" recommendations. It informed the Agencies that the Department will not pursue application of penalties under FAR 42.709.
Although the DoD position was issued in February 2012, it took until March 2013 for DCAA to revise its audit guidance on the matter. In this new guidance, DCAA Headquarters instructed its auditors to cease the practice of citing "expressly unallowable" and computing penalties. Additionally, it instructed its auditors to inform any recipients of reports that contained penalty recommendations, to not relay on those reports any longer.