Rating the Per Diem Experience

The lodging industry has recently dealt with several large and quick moving issues that almost exclusively affect hoteliers. From the online hotel booking tax to the Americans with Disabilities Act pool lift requirement, AH&LA has been busy serving as the unified voice of hoteliers. But perhaps the best example of our ability to quickly shift and defend the industry is seen in the response to the U.S. Government Service Administrators’ (GSA) proposal to arbitrarily slash per diem rates in response to an agency-wide directive to reduce costs. While it appeared that GSA had already decided to implement a drastic cut in rates, AH&LA successfully convinced the agency to abandon that approach.

How Per Diems Are Calculated

To begin, it is necessary to understand how per diem rates are determined. Smith Travel Research (STR) has provided GSA with room rate data from hotels throughout the United States for almost a decade. GSA then determines hotel average daily rates (ADR) by including rates from hotels in the four tiers of the mid-price range with GSA omitting rate data from economy and luxury hotels as the agency considers them too low and too high, respectively.

After determining ADR for locations throughout the United States based on market data, GSA then reduces those rates by 5 percent and establishes per diem rates at that discounted level. This system was put in place after an eight-month study by a government commission, which sought to establish an efficient system that would reflect the actual market and allow federal workers to find rooms when traveling.

Per Diem Timeline

In late June, AH&LA learned that GSA was preparing to radically change its methodology and remove an entire tier of mid-priced hotels when calculating ADR. This change would exclude data from most hotels in large cities and would result in an artificially low average rate that would not reflect actual room rates. Although it would vary by market, some estimates indicated that per diem rates would be slashed by 30 percent.

To illustrate how skewed the rates would have been under GSA’s proposed formula, at least 52 percent of the hotels in San Francisco would have been excluded from the calculation as well as 56 percent of the hotels in Atlanta. Perhaps most striking, changes proposed by GSA would have excluded 85 percent of hotels in the key Washington, D.C., market. These instances demonstrate the magnitude of what the industry faced under GSA’s massive cuts.

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AH&LA immediately reached out to our contacts at GSA to express deep concerns over the significant impact of these proposed changes and met with them several times throughout the decision-making process. We provided hard data and evidence of the unintended consequences of making a change to the per diem formula such as lack of room availability for federal travelers, higher federal travel costs due to employees having to stay in hotels far from meetings and paying for taxis or rental cars, as well as how this would jeopardize hotel jobs and lodging revenue. The U.S. Travel Association estimated that the proposed changes could have cost the industry $885 million in revenue and thousands of American jobs. To add additional grassroots pressure, AH&LA asked its partner state associations to contact their GSA regional administrators to express their opposition to the change, and relay their concerns back to the D.C. GSA office.

AH&LA simultaneously engaged the White House Business Council, the Office of Vice President Biden, and several members of Congress. We expressed the industry’s opposition to the proposed changes and demonstrated how these changes would affect their constituents and hurt businesses within their districts.

As a result of our efforts, GSA received hundreds of inquiries from members of Congress, with more than 30 members sending official letters, including House Minority Leader Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.). AH&LA also engaged the Congressional Travel & Tourism Caucus led by Rep. Sam Farr (D-Calif.) and Rep. Jo Bonner (R-Ala.), who mobilized a congressional effort to stop the proposed action by GSA. In short, hoteliers made a significant impact in a very short amount of time.

In response to AH&LA’s concerted activity on behalf of the lodging industry, GSA decided to maintain its market-based methodology and instead freeze per diem rates at the FY2012 level. The lodging industry led a well-coordinated and vocal strategic campaign that targeted the pressure points necessary to make government responsive to a real problem. GSA was about to do significant harm to the lodging industry by radically changing per diem methodology, but AH&LA successfully reached out to every facet of government and demonstrated the value of the current system. While certainly not ideal, the rate freeze is a far less radical approach than the crippling move that GSA contemplated.

Lessons Learned

The lodging industry was successful on this issue, despite the incredibly compressed timeframe, because of our understanding of the way Washington works, our ability to develop and implement a strategic plan of action, and our relationships with the administration, Congress, and the GSA. AH&LA utilized our strong trade association to engage the entire industry and rally member hoteliers to quickly provide data and the real-world consequences of the proposed change. As a result of those actions, GSA did not take the rash action that would have increased federal spending, made federal travel less efficient, and harmed the lodging industry and its employees. This is a victory not only for the lodging industry but also for good public policy.

In the end, GSA worked with the industry and gave our concerns a thorough review. This is an encouraging sign and we look forward to working with them to ensure per diem rates that reflect the market and remain a good value to the federal government.

This is not the last time that the lodging industry will need to respond to a major public policy concern, and much as the industry handled the ADA pool lift requirement, lodging rose to the task and ensured its voice was heard in the per diem debate. Agencies, the administration, and those on Capitol Hill know that lodging is a major force in Washington and will take into account our ability to mobilize a targeted and successful grassroots campaign when making decisions.