July 27, 2023

ICYMI: Chairing Personnel Subcommittee Hearing, Warren Calls out DoD Losing Billions to Contractor and Health Care Price Gouging

Warren Calls on Pentagon to Step Up, Says Any Supplemental Budget Proposal Must Include Major Reforms to Prevent Price Gouging and Waste

“DoD has failed to safeguard taxpayer money and opened the door to price gouging by government contractors. It is DoD’s job to stop these ripoffs.”

Washington, D.C. – In case you missed it, chairing a hearing of the Senate Armed Services Subcommittee on Personnel, U.S. Senator Elizabeth Warren (D-Mass.) called out the Department of Defense (DoD) for wasting billions in taxpayers dollars due to price gouging by defense contractors for services and  in health care, and identified opportunities for cost savings when DoD buys personnel-related goods and services. 

Pentagon watchdogs and budget experts from the Department of Defense’s Office of the Inspector General, Congressional Budget Office, and Government Accountability Office identified waste in DoD’s personnel-related goods and services. Senator Warren noted that a lack of basic oversight by DoD has ripped off taxpayers and allowed for price gouging in health care. DoD also lacks basic information about how it contracts for services, including failing to know how many contractors it has, missing information on direct labor costs for contractors, and inaction on calculating long-term costs. Senator Warren called on DoD to exercise due diligence to prevent tens of billions of dollars in waste, fraud, and abuse, including following initiatives meant to reform how the Department buys services, which DoD estimated could save $90 billion over 12 years. 

Transcripts and videos from Senator Warren’s opening remarks, three rounds of questions, and closing remarks below:

Transcript: Potential Budgetary Efficiencies Achieved Through Improvement to Management and Planning Processes Within Department of Defense Personnel Programs
U.S. Senate Armed Services Committee, Subcommittee on Personnel
Wednesday, July 26, 2023

Opening remarks below and video HERE: 

Senator Elizabeth Warren: This hearing will come to order. 

Good afternoon, I want to welcome our witnesses for today’s Personnel Subcommittee hearing, and I want to offer a very special thank you to Ranking Member Scott for helping on committee and doing this on rather short notice and also for our other members for joining us as well as we examine opportunities to save money at the Pentagon.

Members of Congress – and this Committee in particular – have a responsibility to root out waste and price gouging in Pentagon spending. We owe it to the men and women of the military who rely on us to fund the equipment activities they need to defend us, and we owe it to the taxpayers who foot the bill. 

I don’t think it will be a surprise to anybody when I tell you – we have a lot of work to do on this front. 

This year the Department of Defense requested $842 billion in funding. And just last month, negotiators had barely agreed – as part of a bipartisan deal to lift the nation and avoid default on the nation’s debt – to limit this year’s Department funding this year only to 100% of the amount the Department actually requested in the budget, while the defense industry howled that $842 billion was simply not enough. 

Some of my colleagues have already pledged that before the end of the year, they will pass a supplemental budget to give the Department of Defense more money and are currently drawing up plans for billions more in spending. If another huge supplemental is approved by Congress, the total could be the largest Pentagon budget since World War II. 

I support funding our military so it can do its job to keep Americans safe. I support making sure that service members have the pay and benefits they deserve and the high-quality equipment they need to do their work safely.  I support adequate resources for the whole Department of Defense to operate without cutting corners. I support ensuring that Ukraine has the support it needs from the United States to resist Russia’s illegal war.

But reports from Pentagon watchdogs and budget experts both inside and outside government have repeatedly shown that there are serious problems at the Department of Defense with wasting taxpayer dollars. 

Reports from 

  • the Government Accountability Office (GAO), 
  • the Department of Defense (DoD) Inspector General, 
  • the Special Inspector General for Afghanistan Reconstruction,
  • the Congressional Budget Office (CBO), 
  • the Cost Assessment and Program Evaluation office, and 
  • the Pentagon’s own auditors. 

have all identified billions and billions and billions of dollars that do nothing more than line the pockets of giant defense contractors, often with little or no oversight from the Pentagon.  

When the Department of Defense comes to Congress to ask for more money, we should be asking why they aren’t putting in place a few basic oversight tools to stop defense industry price gouging.  Before DoD gets another dollar, they need to put checks in place to stop paying $1,500 for a medical device that can be purchased at Walmart for $192 and to stop paying $1,800 for vaccines that everyone else pays $125 for.  

Pentagon officials themselves estimate the savings just from tightening up our practices in hiring contractors—just that one area alone—would be about $44 billion over 10 years.  Before we provide more money to the Pentagon, DoD needs to explain to the American people why it’s failing to implement basic safeguards regularly employed by both families and businesses.

This hearing will focus on a few of the key findings from budget experts. I appreciate their willingness to appear as witnesses. They have identified cost savings across the Pentagon’s work, but because this is the Personnel subcommittee, we’re going to focus today on issues of waste related to how DoD buys personnel-related goods and services. 

I’ll note – as a measure of how little Congressional oversight there has been and how determined Senator Scott and I are to reel this back in that this is only the second time in the last 15 years that the Inspector General has been invited to testify before this Committee.

Before turning to our witnesses, let me briefly highlight two key problems in this subcommittee’s jurisdiction that clearly require congressional oversight. 

First, DoD fails to prevent price gouging by private defense contractors—period. There is no real dispute about this.  One report after another from an independent Inspector General has documented that DoD contracting officers agreed to pay excessive prices without asking companies for justifications and that companies delayed or refused to provide cost data when requested. Without that pushback, the US taxpayer is just a sitting duck for defense industry price gouging.

By now, most people know that over-the-top price gouging occurs on spare parts and weapon systems. 

Earlier this year, I called out Boeing for its failure to provide basic cost data for almost 11,000 items.  In other examples where that price data has been made public, we learned that Boeing charged the Army $71 – $71 – for a pin that should have cost 4 cents.  In another case they charged nearly $1,700 for a ramp gate roller assembly that DoD could have purchased for $8. A recent investigation by 60 Minutes found that even after adjusting for inflation, we are paying seven times more for each missile we send to Ukraine than we paid in the early 1990s. 

But price gouging isn’t limited to spare parts and weapons systems.  It also happens when DoD is paying for healthcare. This week, I wrote a letter to the Defense Health Agency highlighting pricing on health care items. For example, DoD was paying $1,500 for breast pumps that Walmart sold for less than $200.  The agency was paying over $1,800 for vaccines that could be purchased for only $125.  Multiply that price gouging by the high volume of purchasing in the military, and it’s clear that taxpayers are getting seriously ripped off.

Another way that taxpayers get gouged is through its contractor workforce. Our nation’s defense is often supported through contractors who feed our troops, house out military families, transport needed equipment, and perform a wide range of tasks that, in past years, were either done by active duty military or civilian employees. Over the past quarter-century, DoD spending on service contracts has more than doubled, reaching over $205 billion in fiscal year 2022. 

This has created a huge industry of military contractors, turning them into billion-dollar businesses.  But in many cases, hiring a contractor costs more than simply paying a federal employee to perform exactly the same function. At a minimum, DoD should be examining each contract to make certain the prices are reasonable and that the work cannot be done directly by federal employees for a whole lot less money. But that’s not what’s happening. Instead of carefully reviewing each government contract, the GAO has determined that DoD does not even know how many contractors it has and does not effectively analyze long-term costs.  DoD has failed to safeguard taxpayer money and opened the door to price gouging by government contractors. 

It is DoD’s job to stop these ripoffs. As I noted earlier, this hearing will focus on cost savings in the jurisdiction of this subcommittee. We’ll also primarily focus today on places where DoD can use authorities it already has. 

But let me be crystal clear. If the Pentagon wants more funding this year, above the 100% of their budget request that has already been fulfilled by Congress, then Congress should, at a minimum:

  • Give DoD more access to cost and pricing data from contractors;
  • Tie any increases in upfront payments to contractors to requirements that they deliver goods and services on time; 
  • Remove a requirement in current law that military services must send Congress pricey “wish lists” for extra spending on top of their annual budget requests; 
  • Require contractors to disclose changes in average prices and gross margins; and
  • Require any DoD component that fails to pass an audit to return 1% of its budget back to the Treasury. 

For many of these proposals, bipartisan legislation already exists to make these changes.

If other senators want to dump more money into the Department of Defense – on top of fully funding the budget they already have – then they should also support including these commonsense measures to fight back against price gouging.

Round 1 of questions below and video HERE:

Senator Warren: I really appreciate this direction on the conversation, because it’s about what information is available to us. So here we are, we’re talking about civilian employees, service members, and as we see up here, the contractors. And the idea that when we talk about defense contractors, most people think about Lockheed Martin or Boeing – these giant companies that win these huge contracts to build fighter jets or bombs. But, the DoD relies a lot on what are called “service contractors.” These are contractors like Booz Allen, McKinsey, and CACI hired to do things like accounting, legal services, consulting.

Over the past two decades, the Department of Defense has gone from spending about $100 billion a year on service contractors to $205 billion in 2022. And this is the point. It is not quite half of the entire budget that we are spending, but it’s sure starting to crowd in on it. 

Mr. Mosher, you lead the national security division for the Congressional Budget Office and you have decades of experience in budget analysis. We know from public reports that DoD currently employs 2.1 million military personnel and about 770,000 civilian personnel. And I’m going to ask you something I think you answered in your original testimony, but it is important enough here that I want to underscore it.  Do we know how many contractors DoD employs?

David E. Mosher, Assistant Director for National Security, Congressional Budget Office: In a word: No. We just don’t know yet. 

Senator Warren: No, we don’t know. And I think I heard you in talking about the estimates, that the estimates are from here-to-here, it’s not that we don’t know down to the last person, we don’t even know what the ballpark is here, I take it from what you said.

Mr. Mosher: That’s correct. We don’t know what the maximum number is. OMB provides data in their object class analysis that gives the size of the service contractor that contracts themselves. 

One way of cutting it would be about $274B  in 2022, I believe. But, that tells you what the cost of the contract is, it doesn’t tell you either the number of people or how much were paying in labor. So there will be labor and non-labor costs.

One thing that's, you know there are different types of contracts. There are people who mow lawns and much of their costs would probably be labor. There are people who sit in chairs next to civilians and military (personnel) in the Pentagon. Their costs are probably mostly labor. But, there are also service contracts that provide maintenance of tanks, and such like that, where you would expect a much smaller portion of those costs would be labor. And, you know, they’re buying parts and so. 

Senator Warren: So here we are spending more than $200 billion on service contractors. We don’t really know how many people we’re hiring or what we’re paying these people. And we accepted the GAO estimate of $200B. I just want to point out, CBO has said it may be closer to $300B. The inability of government accountants even to estimate how much we’re spending is a sign that the Pentagon contracting is badly broken. 

Now, every time that DoD decides to hire a contractor to perform a service for the Department, they are supposed to, by law, be taking that on because it’s the cost-effective way to get the job done.

Ms. Field, this is right in your wheelhouse. Does DoD collect data that would allow its managers, or allow someone doing oversight, to conduct a cost comparison to figure out whether or not the Department should contract something out or do the work in-house?

Elizabeth Field, Director, Defense Capabilities and Management, Government Accountability Office: No, so it is a source of cost savings, in fact, to in-source position, to convert them from contractor to civilian. The department used to have a database that provided some fairly detailed information about contractors that would potentially help that sort of analysis.  Recently, DoD shifted to a federal government-wide database system that has less data.

Senator Warren: So we now know less than we used to. We spend more and have less information about it. You know, the Department of Defense’s Cost Assessment and Program Evaluation Office found that in some cases defense contractors can cost two or three times as much as a civilian employee doing exactly the same work. As you say, “People sitting side-by-side.”

In other cases there’s outright fraud. In 2014, the Department of Defense Inspector General found that defense contractor Northrop Grumman improperly billed the government more than $100 million for employees to provide training and logistics support for the Counter Narco-terrorism Technology program. Sounds like an important program. Northrop Grumman was charging the government an average – an average – of 100 billable hours a day for a single employee.

Now, Ms. Field, pretty clearly no one can work more than 24 hours in a day, so this is a pretty clear sign that fraud is going on. When you see something like that, right? No one should have any doubt that there’s fraud here. Can DoD or DoD IG easily detect these kinds of overcharges or excessive rates? 

Ms. Field: So I’m not familiar with that particular case, but I can absolutely tell you that it is very hard to detect and to prove fraud. That’s why things like hotlines are so valuable for inspectors general and GAO. I will also note very briefly that GAO has recommended some improvements to DoD’s fraud risk management program. Their guidance department wide currently does not require routine fraud risk assessments. That's something that should be going on.

Senator Warren: Ok so they don’t know how many contractors they employ and they don't have systems in place that will catch even blatant frauds. 

Unfortunately, it gets worse from here. When DoD submits its annual budget, it has to include a projection of the long-term costs of its programs so that we know not just what something is going to cost in year 1, but what it’s going to look like on down the road. 

Ms. Field, can DoD estimate what its future costs are for service contracts that go beyond this fiscal year?

Ms. Field: Not nearly as well as we would like. The Department did not use to include services contracting at all in the fit up that, as you mentioned, the five year future defense program. That was astounding to us because service contracts represent consistently about half of the Department's contracting costs. They have made some improvements in this space, but there are many more they could make. We’ll be issuing a report soon with some recommendations.

Senator Warren: And I appreciate that. In fact, the GAO has reported that the DoD has “limited visibility” into DoD’s future spending plans. And if DoD can’t track this, I don't know how it is the rest of us are supposed to exercise oversight. So let me ask you one more Ms. Field.

The GAO has put DoD service acquisitions – meaning how DoD manages and makes decisions about hiring outside contractors to perform duties like program analysis or engineering advice – on its “high risk” list. That’s what you call it. Your “high risk” list. What does that mean? 

Ms. Field: The High Risk List is a report we put out every two years of the areas of the federal government that are most vulnerable to fraud, waste, and abuse, and or our need of significant management. DoD has more areas on the High Risk List at any other agency.

Senator Warren: Alright. So thank you. I just want to summarize here what you all have all just told me. 

  • DoD doesn’t know how many contractors it hires,
  • DoD can’t track whether those contractors will cost more money or less money than having a federal employee do the same job,
  • DoD does not have systems in place to catch even the most blatant frauds when contractors try to cheat the American taxpayer,  
  • DoD cannot estimate the long-term costs of hiring the contractors; and
  • DoD recognizes that the decisions it makes about service contractors run a high risk – one of the highest risks in government – that the taxpayer is getting cheated. 

The Department of Defense isn’t in a position to make smart decisions about how to spend taxpayer dollars if it doesn’t have basic data about what things cost. And if Congress doesn’t have this information, then we can’t exercise appropriate oversight. 

We should require the Pentagon to put better systems in place to collect these data and then make these data to you and to us.

Round 2 of questions below and video HERE:

Senator Warren: I want to talk a bit more about health care. And, just so everybody who’s watching this knows, service members and their families get their health coverage through TRICARE that we’ve talked about some today. This is the DoD’s managed health care program, and it’s run – you guessed it – by private contractors, including one of the largest health insurance companies in the country. The cost of this health care coverage is shared by taxpayers, and in some cases by service members and their families, who have co-pays on some of the care that they get. 

The Defense Health Agency is responsible for managing these contractors and it provides the reimbursements for medical procedures, services, supplies, whatever is purchased under this. Years of support show that TRICARE is allowing rampant price-gouging by health care providers – driving up costs for beneficiaries and ripping off taxpayers. 

The Department of Defense Inspector General has long warned about the costs of letting TRICARE fraud continue unchecked. 

We’ve talked about two examples today: breast pumps that are for sale at the local Walmart for $192. The federal government, through TRICARE and a private contractor, ends up paying as much as $1,500. Vaccines that everywhere else can be purchased for $127 – what happens through TRICARE? It reimburses $1,848 for exactly the same vaccine.

Medical supply companies make a profit when they can sell items to private insurance companies – that’s how they stay in business. But insurance companies typically set a cap on what they will reimburse for a product. 

Your audit found that the reason DHA was paying these clearly inflated prices was either because the federal government had failed to set price caps, or maximum reimbursement rates, for these products. In other words, DHA had effectively told these companies that they were willing to pay whatever it was the company wanted to charge. 

Even in cases where the DHA has set those rates, the DHA continually failed to enforce the caps or to clawback money when they had been overcharged from the original agreement.

Mr. Roark, when TransDigm overcharged DoD for spare parts – let’s get out of health care for a second – your office recommended that DoD ask for a refund. DoD did. They asked for the refund and the American taxpayer got $16 million back. What did DHA – let’s go back to health care – say when you recommended asking for a refund for TRICARE price gouging – both in areas where they had never set a rate to begin with or where there was a cap, but DoD had not enforced it? What happened when you asked them, go get the money back? Or at least some of it.

Michael J. Roark, Deputy Inspector General, Evaluations Component, Department of Defense, Office of Inspector General:: So, in our two reports, we covered this in two ways. First, we asked them to seek voluntary repayments for instances where very high prices had been charged for services or for items. Then, in other cases, we asked them to recoup money for instances where they did not enforce the cap, as you mentioned. In the end, the DHA recovered about $712 – was kind of the total amount recouped –

Senator Warren: I’m sorry – did you say $712. That’s–

Mr. Roark:  $712,000.

Senator Warren: Oh, okay, alright. $712,000.

Mr. Roark: And in terms of the amount of voluntary repayments, it was zero.

Senator Warren: And voluntary repayments were zero. In fact, I have the quote here from your report. DHA said – this is when they have been overcharged – DHA said “the idea of voluntary payments is not realistic.” In other words, we just aren’t going to do it. So why was it, in many cases here, that DHA didn’t even try to get the money back? You know, it feels like a failure of both oversight and will.  

Interestingly enough, the former head of DHA – the one who made these decisions to not seek voluntary repayments because he said we’re just not going to get anything from that, retired from the agency in 2019 and, a year later, joined the board of the largest TRICARE contractor.

Mr. Roark, how much do you estimate that DoD could save if it just set maximum prices – caps – like ordinary insurance companies do and then actually enforced those caps?

Mr. Roark: So I can’t say across the entire health system because that’s just a lot of different areas, however for these two reports that we’re here discussing today, we calculate that the savings that could be achieved by implementing our recommendations was around $100.7 million – that’s $81.2 million for the breast pumps report and $19.5 million for the second report.

Senator Warren: Ok so I just want to underscore this. It’s $100 million for breast pumps – which are important – but I mean, and vaccines and that’s it. We’ve got $100 million there and we have to assume this problem exists all the way across. I’m very concerned that DHA is failing to protect TRICARE beneficiaries and allowing these companies to rip off taxpayers. 

Yesterday, I sent a letter this morning to both the DoD and DHA, asking both agencies to improve oversight and transparency around current TRICARE spending, and put new rules in place to prevent price-gouging of our military families in the future. I think we’re going to have a lot more work to do in this area.

Round 3 of questions and closing remarks below and video HERE:

Senator Warren: During the Obama administration, Ash Carter, who was then the head of acquisitions at the Pentagon, led an initiative to identify improvements in how DoD contracts for services.

This initiative was called Better Buying Power, and it identified $90 billion in potential savings over 12 years. Let me say that again, $90 billion. One of the biggest recommendations was changing the way that DoD writes contract requirements when it buys services, everything from cleaning buildings to management consultants.

The GAO wrote, and I want to quote what GAO said: determining whether to contract for such services, eliminating duplicative or unnecessary services, and effectively managing and overseeing contractors is vital to DOD achieving its missions.

Ms. Field, help me translate those recommendations into terms that people who don’t do acquisitions policy for a living will understand. Is this the basic idea that you can protect your budget when you’re buying a service by being clear about what you expect from whomever you hire, and that you should probably do an assessment on the front end to determine whether or not you need that work at all? Is that about right? 

Ms. Field: Yeah, that’s exactly right. And maybe to give an example in DoD, this would be for example, one of the services, let’s take the Army, deciding that it needs to figure out how much it’s spending on grounds maintenance, right, which is something that happens at military installations around the world. 

Under this practice, the Army should figure out, how many contracts does it have for grounds maintenance, how many does it need, and how can it cut costs by perhaps consolidating contracts. It’s pretty simple, something we do in our own households. 

Senator Warren: Ask for a volume discount. 

Ms. Field: Right, absolutely. So that's the idea. 

Senator Warren: Okay, okay. You know, it’s a really important insight because we're talking about things that pretty much every businesses in America does and pretty much every family, by figuring out, in advance, what they're getting and what they're paying for it.

So, do you have any idea, Ms. Field, how much money would DoD save if they conducted these reviews before they shoveled the money out the door?

Ms. Field: So I don’t have an across-the-board estimate for you, but I'll offer two points. The first is that we know that when two of the smaller DoD components used this practice, specifically the Defense Logistics Agency and the Defense Threat Reduction Agency, DTRA, when they did this, they saved hundreds of millions of dollars.

Senator Warren: Hundreds of millions for just the smallest.

Ms. Field: Just those two small components. My second point I would offer is if you think about the amount that DoD writ-large is spending on services contracting, $250+ billion, if they were able to save just 1% of that, there's $2 billion right there. So there's a lot of potential.

Senator Warren: And that's in one year.

Ms. Field: That's one year.

Senator Warren: And it compounds over time, as you were talking about, the effects of this. It's great that DLA and other agencies are saving money but it’s the military services who buy the lion’s share of the services here. 

So, I just want to make sure I understand that the military services are not doing similar reviews to the kind you talked about across other areas to eliminate duplicative contracts and save money?

Ms. Field: So originally, they were not doing it, which is problematic because, as you mentioned, they account for about three-quarters of the service contracting dollars for DoD. GAO recommended that the services adopt this practice. They have begun implementing it to varying degrees of success, but we are just about to issue a new report in the coming weeks that will identify some recommendations for the services to do it better, to hopefully get better results.

Senator Warren: Good, you're going to make this recommendation to the same services that you said have the lowest rate of picking up your recommendations, is that right?

Ms. Field: Our hope is that they will take them seriously and implement them.

Senator Warren: Maybe we will find ways to make them take this more seriously. I just want to underscore here about how we’re leaving money on the table here. The Better Buying Power initiative that I talked about a minute ago estimated that sharpening DoD’s pencils on review requirements alone could save $44 billion over 10 years on consulting and research and development contractors.

If we got even a tenth of that savings, we would be talking about real money here. When DoD asks for supplemental funding, we should remind them that following a few basic accounting and oversight practices, they'd have another $44 billion to spend, and ask why, if they really need this money, they haven’t already done that.

This is just one area where DoD could score huge savings. You start to multiply that in other areas and we are talking about significant money here. So, I'm going to make a closing statement, you have a closing statement, anything you want to say?

I just want to thank all of our witnesses. I want to thank you for your service, I want to thank you for your testifying today, I want to thank you for continuing to make recommendations, and to stay on this. I also want to thank Jon Clark, and Gary Leeling, and Andy Scott, and Sofia Kamali, and Noah Sisk, and Sean O’Keefe, and Katie Magnus, and Brendan Gavin for their work in helping put together today’s hearing. I really appreciate your contributions. I'm looking forward to working with all of you.

We are committed to ensuring service members and their families receive all of the resources and all of the support that they need. It is clear from today’s hearing that DoD has a lot of work to do to make sure we have the right cost-efficient mix of federal employees, military personnel, and contractors. Those failures add up, DoD’s own estimates say that we could save $90 billion over the next 12 years.

And our witnesses today have identified other areas where we can say, and we know there are more reports coming on this. I remain concerned that the Pentagon is too focused on increasing its budget and neglecting to exercise due diligence to prevent waste and fraud in the money that we have already allocated.

###