Congressional Budget Office
Robert A. Sunshine, Acting Director
Director’s Blog

Contractors play a substantial role in supporting the United States’ current military, reconstruction, and diplomatic operations in Iraq, accounting for a significant portion of the manpower and spending for those activities.

CBO released a study today, conducted at the request of the Senate Committee on the Budget, on the use of contractors in the Iraq theater to support U.S. activities in Iraq. The webcast of the press briefing is available here.

CBO found:

• From 2003 through 2007, and converting the funding into 2008 dollars, U.S. agencies awarded $85 billion in contracts for work to be principally performed in the Iraq theater, accounting for almost 20 percent of funding for operations in Iraq. Including funding for 2008 itself, the U.S. has likely awarded $100 billion or more for contractors in the Iraq theater.

• More than 70 percent of those obligations were for contracts performed in Iraq itself. The Department of Defense awarded contracts totaling $76 billion, and the U.S. Agency for International Development and the Department of State obligated roughly $5 billion and $4 billion, respectively, over the same period.

• Contractors provide a wide range of products and services in theater. Most contract obligations were for logistics support, construction, petroleum products, or food.

• Although personnel counts are rough approximations, CBO estimates that at least 190,000 contractor personnel, including subcontractors, work on U.S.-funded contracts in the Iraq theater. About 20 percent are U.S. citizens.

• The United States has used contractors during previous military operations, although not to the current extent. According to rough historical data, the ratio of about one contractor employee for every member of the U.S. armed forces in the Iraq theater is at least 2.5 times higher than the ratio during any other major U.S. conflict, although it is roughly comparable with the ratio during operations in the Balkans in the 1990s.

Private security contractors have been a particular focus of attention. Our analysis shows:

• Total spending by the U.S. government and other contractors for security provided by contractors in Iraq from 2003 through 2007 was between $6 billion and $10 billion.

• About 10,000 employees of private security contractors work directly for the U.S. government. Another 15,000 to 20,000 work for the Iraqi government, other contractors, and other customers, bringing the total to approximately 25,000 to 30,000 employees of private security contractors operating in Iraq.

• The costs of a private security contract are similar to those of a U.S. military unit performing similar functions. During peacetime, however, the private security contract would not have to be renewed, whereas the military unit would remain in the force structure.

Regarding the legal issues associated with contractor personnel, CBO finds that military commanders have less direct authority over the actions of contractor personnel than over their military or civilian government subordinates. In addition, the legal status of contractor personnel in Iraq is uncertain, particularly for those who are armed.

CBO’s report was prepared by Daniel Frisk and R. Derek Trunkey of our National Security Division.

Every year in response to a Congressional directive, the Department of the Navy issues reports that describe its plans for ship construction over a 30-year period. In the report released in February 2006, the Navy presented its fiscal year 2007 plan, which called for expanding its fleet from 285 battle force ships in 2006 to 313 by 2020 and beyond. In May 2006, the Congressional Budget Office (CBO) issued a study analyzing that plan and estimating its potential costs. Today CBO released an analysis of the resource implications of the Navy’s fiscal year 2009 shipbuilding plan.

Since May 2006, the Navy has provided two updates to its 313-ship plan, one for fiscal year 2008 and one for fiscal year 2009. The plans differ in several ways. For instance, although the 2007 and 2008 plans both assumed annual costs of $16.1 billion for new construction, the 2008 plan increased the total number of ships scheduled for purchase over the 30-year period to 293, compared with 280 under the 2007 plan. The 2009 plan envisions purchasing three more ships than indicated in the 2008 plan—296—and increases the Navy’s estimate of the costs to implement the plan by about 30 percent. Although the overall number of ships slated for purchase under the 2008 and 2009 plans differs only slightly, the Navy made significant changes in the types of ships it would purchase under the two plans. CBO’s analysis found the following:

• Executing the Navy’s most recent 30-year shipbuilding plan would cost an average of about $27 billion per year (in 2009 dollars), or more than double the $12.6 billion a year that the Navy has spent, on average, since 2003.
• The Navy’s 2009 budget request appears to depart from all of the budgetary assumptions used to develop the service’s 2007 and 2008 shipbuilding plans.
• CBO’s estimates of the Navy’s shipbuilding program through the period covered by the 2009-2013 Future Years Defense Program are about 30 percent higher than the Navy’s estimates.
• For the 2009-2020 “near term” period, CBO estimates that the new-ship construction alone would cost about 13% more than the Navy estimates
• For the “far term” period beyond 2020, CBO estimates that costs would be about 8% greater than the Navy projects.

These estimates are based on a number of assumptions that CBO made about the size and characteristics of various types of ships that the Navy would buy and about the timing of those purchases. Different assumptions could produce different estimates. The analysis was performed by Eric J. Labs of our National Security Division and Raymond Hall of our Budget Analysis Division.

Today CBO released a new study analyzing the increases in funding for military activities in Iraq, Afghanistan, and elsewhere in the war on terrorism over the past several years.

• The United States began combat operations in Afghanistan in fiscal year 2002 and in Iraq in fiscal year 2003. To finance those operations (and others related to the war on terrorism), the Congress provided $18 billion and $76 billion in emergency appropriations in those years, respectively.
• With the exception of a slight decrease in 2004, to $74 billion, funding has increased steadily each year, to a total of $165 billion for 2007.
• If the Administration’s request for 2008 is funded in full, appropriations for military operations in Iraq and Afghanistan, and for activities elsewhere in the war on terrorism will rise to $188 billion this year and to a cumulative total of $752 billion since 2001.
• Most of the spending is concentrated in two categories — operation and maintenance (O&M), which has roughly doubled from 2004 to 2008, and procurement, which has increased tenfold over that period.
• Prior to 2005, funding for military operations was largely limited to the incremental amounts needed to mobilize and deploy troops, transport equipment and supplies, and purchase additional quantities of consumables such as fuel, repair parts, and munitions. War funding also paid for an increase in the number of service members on active duty. About 60 percent of appropriations provided during this period went to O&M accounts and 20 percent went to military personnel accounts.
• Beginning in 2005, as part of its request for war funding, DoD asked for appropriations to “reset” equipment, that is, to repair or replace worn or damaged equipment. Those efforts include major overhauls that restore the item to “like new” condition. At the same time, DoD often added major upgrades to repaired items, returning equipment to the field with significantly enhanced abilities; these upgrades involved much higher costs than simply repairing equipment. Most such efforts are funded through the O&M and procurement accounts. During this phase, O&M funding continued to account for roughly 60 percent of total funding.
• In 2006, DoD began widening its focus from resetting equipment to “reconstituting” the force, an effort that involved purchasing new equipment as well as repairing and replacing damaged systems. Whereas the reset program had required more O&M funding, the shift to reconstitution increased the need for procurement funds.
• In 2007, DoD expanded the list of expenses that could be included in the request for war-time appropriations. In addition to seeking funds to pay for the direct incremental costs of operations in Iraq and Afghanistan, the services were permitted to include costs related to the broader war on terrorism. DoD requested funds to replace damaged equipment with newer models, accelerate planned purchases of new systems, address emerging needs, and enhance the military’s capability not only to continue current operations but also to be better prepared for the longer war on terrorism. Achieving the goals of that expanded reconstitution program required significantly more procurement spending.
• Thus, in 2007 and 2008, procurement funding soared, averaging about 35 percent of total war funding in those years. While O&M funding continued to increase and funds for military personnel held steady, those accounts fell to an average of 52 percent and 10 percent of total war funding, respectively.
• If the Congress provides the remaining $101 billion that DoD has requested for the war in 2008, annual funding levels will have increased by 155 percent since 2004. Increases in procurement and in operation and maintenance account for almost all of that growth. Appropriations for military personnel have changed little, and other DoD appropriations contribute relatively small amounts to the total.

David Newman and Jason Wheelock of the defense unit in our Budget Analysis Division put the analysis together.

CBO just released an interim report on the VA health system. VA’s health care program has attracted lots of attention, and as part of CBO’s ongoing effort to expand our health-related activities, we are examining the evidence on the VA system — along with what lessons, if any, it may hold for other parts of the health care system.

In general, VA’s experience underscores the potential for improving performance in a large and relatively integrated system through a sustained and comprehensive effort that involves indicators of quality, financial incentives that are aligned with those objectives, and the use of health information technology. It is important to note, though, that the combination of these factors — a large, relatively integrated system; well-designed incentives; performance measurement; and health information technology — likely creates much more substantial opportunities for improvement than any of the pieces taken by themselves. The applicability of VA’s experience to other parts of the health system, which often have a much different structure than the VA system, is therefore unclear and will be explored in CBO’s final report (which will be published next year).

A few highlights of today’s interim report:

• On the quality of care delivered, VA tracks the quality of its medical care primarily through various process and satisfaction indicators (e.g., adherence to clinical guidelines and waiting times for access to services). These measures have generally improved in recent years.
  • CBO was unable, however, to identify directly comparable scores for other health care providers because the composite indexes used at the VA are not used elsewhere. In 2008, VA is planning to adopt more quality measures that are used industrywide, making it easier to compare with other parts of the health system.

• The published literature includes a number of studies that analyze the quality of VA’s health care. Although the studies face various challenges in comparing the VA system to other health care providers, they generally conclude that the VA’s performance has improved following the re-engineering of its system during the 1990s — and that it is now relatively good in adherence to clinical guidelines.

• The VA has implemented a capitation-based budget system called Veterans Equitable Resource Allocation (VERA).
  • Under that system, networks were initially given a fixed amount per enrolled veteran for “basic care” patients, and a higher fixed amount per enrollee for “complex care” patients. VERA has since been modified a number of times to define patient groups in greater detail, but retains its basic structure as a capitated budgeting system.
  • VERA was designed to provide managers with incentives to provide care to patients in the most cost-effective and medically appropriate settings. Because the budget allocated to a facility does not depend on the number of procedures performed, facilities do not have incentives to increase their capacity to produce billable services.

• For every patient, VA also has an electronic health record in its Veterans Health Information Systems and Technology Architecture (VistA) health information system. VistA is integral to VA’s system for providing care and its management of providers and executives. VistA is often cited by VA officials as a key to the department’s efforts to achieve high quality ratings and in helping to control medical care costs.
  • VA may be uniquely positioned to take advantage of health IT’s potential. Independent providers, who interact with a variety of insurance systems, may have a harder time realizing those benefits given challenges with interoperability, the standardization of formats and records, privacy, ownership and control, and the education of and compliance by providers.
  • An electronic health record is most useful when it contains all relevant medical information about a patient, including treatments or examinations received by outside providers. And even VistA has only a very limited ability to interact directly with or use information from other EHR systems, despite the fact that many VA patients receive a substantial portion of their care outside the department’s system.

The interim report was written by Allison Percy, a Principal Analyst in the National Security Division of the Congressional Budget Office. Her areas of expertise include military health care, veterans’ medical care, and veterans’ disability compensation.Before joining CBO in 2001, Allison was a postdoctoral fellow with the Department of Veterans Affairs in Philadelphia. She received her Ph.D. in health economics from the Wharton School at the University of Pennsylvania in 2000. Her dissertation examined the effect of regulatory reforms on health insurance markets. While in graduate school, she also conducted research on medical savings accounts and pharmaceutical productivity. Before pursuing her doctorate, she worked as a health financing analyst for John Snow, Inc., an international public health consulting firm, under contracts with the U.S. Agency for International Development, the Asian Development Bank, the World Bank, and others.

CBO released today an updated analysis of the implications of the nation’s long-term defense plans. National defense decisions made today—including those regarding weapon systems, military compensation, and numbers of personnel—can have long-lasting effects on the composition of U.S. armed forces and the budgetary resources needed to support them. What we’re trying to do in this report is evaluate the costs involved.

• In particular, CBO’s analysis evaluates the costs of carrying out the plans in the Administration’s Future Years Defense Program (FYDP), which is prepared by the Department of Defense (DoD) and submitted to the Congress each fiscal year.
  
  • The 2008 FYDP — and therefore also CBO’s projections of its long-term implications — excludes potential future supplemental or emergency appropriations. The President, however, has indicated that at least $189 billion in such appropriations will be needed to pay for military operations in Iraq, Afghanistan, and other locations in the war on terrorism in fiscal year 2008.

• CBO’s projections find that under DoD’s current plans, defense resources will average about $521 billion annually (in 2008 dollars) from 2014 to 2025 — or about 8 percent more than the total obligational authority for defense requested by the Administration for 2008.
  

• Considering potential unbudgeted costs increases the projected long-term demand for defense funding to an annual average of about $621 billion through 2025, or 29 percent more than the Administration’s 2008 request of about $482 billion (excluding funding for war-related activities).
  
  • CBO’s analysis of unbudgeted costs included several possibilities: that the costs of weapon systems now under development would exceed early estimates, as they have in the past; that medical costs might rise more rapidly than DoD has assumed; and that DoD would continue to conduct contingency military operations overseas as part of the war on terrorism, albeit at reduced levels relative to current operations in Iraq and Afghanistan.

CBO’s analysis was led by Adam Talaber in our National Security Division. Adam has played a key role in many of our most noteworthy defense analyses. (One example is our analysis early in the year about the implications of the so-called surge in troop levels in Iraq. For a discussion of CBO’s analysis during a recent Congressional hearing, click here and see the exchange starting at roughly 2 minutes 45 seconds into the clip.)