[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





 
  IMPLEMENTING THE FEHBP DEMONSTRATION PROJECT FOR MILITARY RETIREES: 
              GOOD FAITH EFFORT OR ANOTHER BROKEN PROMISE?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE CIVIL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 30, 1999

                               __________

                           Serial No. 106-62

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                     U.S. GOVERNMENT PRINTING OFFICE
61-494 CC                  WASHINGTON : 2000




                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                   Subcommittee on the Civil Service

                   JOE SCARBOROUGH, Florida, Chairman
ASA HUTCHINSON, Arkansas             ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland       ELEANOR HOLMES NORTON, Washington, 
JOHN L. MICA, Florida                    DC
DAN MILLER, Florida                  THOMAS H. ALLEN, Maine

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                   George Nesterczuk, Staff Director
                          Garry Ewing, Counsel
                         John Cardarelli, Clerk
            Tania Shand, Minority Professional Staff Member






                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 30, 1999....................................     1
Statement of:
    Carrato, Thomas F., Rear Admiral, USPHS, Director, Military 
      Health Systems Operations, Tricare Management Activity, 
      Department of Defense; and William E. Flynn III, Associate 
      Director for Retirement and Insurance, Office of Personnel 
      Management.................................................    78
    Hickey, Sydney T., associate director, government relations, 
      National Military Families Association; Charles C. 
      Partridge, Col., U.S. Army (Retired), legislative counsel, 
      National Association of Uniformed Services; Kristen L. 
      Pugh, deputy legislative director, the Retired Enlisted 
      Association; and Stephen W. Gammarino, senior vice 
      president, Federal employee program, Blue Cross Blue Shield 
      Association................................................    26
    Moran, Hon. James P., a Representative in Congress from the 
      State of Virginia; Hon. Carlos Romero-Barcelo, a 
      Representative in Congress from Puerto Rico; and Hon. Randy 
      ``Duke'' Cunningham, a Representative in Congress from the 
      State of California........................................     6
Letters, statements, et cetera, submitted for the record by:
    Carrato, Thomas F., Rear Admiral, USPHS, Director, Military 
      Health Systems Operations, Tricare Management Activity, 
      Department of Defense, prepared statement of...............    80
    Flynn William E., III, Associate Director for Retirement and 
      Insurance, Office of Personnel Management:
        Information concerning legal authority...................   117
        Prepared statement of....................................    98
    Gammarino, Stephen W., senior vice president, Federal 
      employee program, Blue Cross Blue Shield Association, 
      prepared statement of......................................    62
    Hickey, Sydney T., associate director, government relations, 
      National Military Families Association, prepared statement 
      of.........................................................    28
    Moran, Hon. James P., a Representative in Congress from the 
      State of Virginia, prepared statement of...................     9
    Partridge, Charles C., Col., U.S. Army (Retired), legislative 
      counsel, National Association of Uniformed Services, 
      prepared statement of......................................    44
    Pugh, Kristen L., deputy legislative director, the Retired 
      Enlisted Association, prepared statement of................    52
    Romero-Barcelo, Hon. Carlos, a Representative in Congress 
      from Puerto Rico, prepared statement of....................    16
    Scarborough, Hon. Joe, a Representative in Congress from the 
      State of Florida, prepared statement of....................     3


  IMPLEMENTING THE FEHBP DEMONSTRATION PROJECT FOR MILITARY RETIREES: 
              GOOD FAITH EFFORT OR ANOTHER BROKEN PROMISE?

                              ----------                              


                        WEDNESDAY, JUNE 30, 1999

                  House of Representatives,
                 Subcommittee on the Civil Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:09 a.m., in 
room 2203, Rayburn House Office Building, Hon. Joe Scarborough 
(chairman of the subcommittee) presiding.
    Present: Representatives Scarborough, Miller, Cummings, and 
Norton.
    Staff present: George Nesterczuk, staff director; Garry 
Ewing, counsel; John Cardarelli, clerk; Tania Shand; minority 
professional staff member; and Earley Green, minority staff 
assistant.
    Mr. Scarborough. Good morning. I would like to welcome 
everybody to this hearing before the Civil Service 
Subcommittee.
    Today our subcommittee is going to examine the 
implementation of the demonstration project established in last 
year's defense authorization bill to allow Medicare-eligible 
military retirees and certain others to enroll in the Federal 
Employees Health Benefits Program. The purpose of this project 
is to test the FEHBP as an option for providing military 
retirees and others with high-quality, affordable health 
benefits.
    This is a high priority for me since I represent more 
military retirees than any other Member of Congress. I have 
seen first-hand some problems that have plagued TRICARE, the 
military health care system for military families and some 
retirees, in my district and throughout the country. I know how 
hard I had to work to persuade doctors in my district to even 
join up in the TRICARE system and I know that many of them, 
even after our initial rounds of hearings, rejoined and then 
left again.
    Military retirees who are eligible for Medicare are 
particularly ill-served by the current military health care 
system. The vast majority of them are locked out of TRICARE and 
the dwindling number of military treatment facilities. They are 
the only retired Federal employees who are expelled from their 
employer's health benefits program after a lifetime of 
dedicated service. Members of Congress are not, nor are retired 
civilian employees. In my opinion, this is unconscionable.
    When I assumed the chairmanship of this subcommittee, I 
said early on that I hoped one of the my highest priorities 
would be to improve the health care available to the families 
of the men and women who serve or have served our Nation under 
arms. For that reason, this subcommittee will closely monitor 
the implementation of this demonstration project.
    Unfortunately, the actions of DOD and of OPM, the two 
agencies charged with conducting this project, have raised 
serious concerns in some people's eyes. As a result of their 
decisions, many believe that it seems very unlikely that the 
demonstration project will be as large as the U.S. Congress had 
first intended. Congress intended that 66,000 military retirees 
would be able to participate in FEHBP. Whether to save money or 
for other reasons, DOD and OPM have limited the total 
population of eligible beneficiaries in the test site to about 
69,000.
    Few really believe that almost 100 percent of those 
eligible will alter their current health care arrangements to 
enroll in a temporary, 3-year program. As a result, we are 
likely to have a demonstration project that is much smaller 
than what the U.S. Congress originally expected it would be. 
The small size of the demonstration project may deprive 
military retirees of the wide range of choices available to 
civilian retirees and to Members of Congress. It may drive up 
the premiums they will have to pay.
    As a result of these decisions, the demonstration project 
may not provide an adequate test of the FEHBP. Unfortunately, 
many retirees will conclude that, despite their years of 
sacrifice to serve this country, the government has broken yet 
another promise to them. I want to pledge to them, as I know 
other members of this committee want to pledge also, that we 
will continue to work with other Members, military 
organizations, and all interested parties to improve the 
quality of health care available for military families and 
military retirees. I believe this is going to be the first of 
many hearings and much effort by this committee to ensure that 
Congress does not break their promise to the men and women who 
have served this country so proudly for so many years.
    [The prepared statement of Hon. Joe Scarborough follows:]
    [GRAPHIC] [TIFF OMITTED] T1494.001
    
    [GRAPHIC] [TIFF OMITTED] T1494.002
    
    Mr. Scarborough. With that, I would like to turn it over to 
the distinguished ranking member, Elijah Cummings from 
Maryland, Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman. And I--the 
last words you echoed, I agree wholeheartedly we cannot--I see 
so often where promises are made but not kept and I, too, agree 
that we must keep our promises. I also extend a warm welcome to 
the witnesses, particularly our congressional colleagues on the 
first panel who will be testifying before this subcommittee in 
a few minutes.
    Non-active duty military beneficiaries, those over 65, are 
finding it difficult to get access to military health care 
system TRICARE. Retirees over 65 can obtain military health 
care only if space is available and after TRICARE enrollees and 
other active-duty members and their dependents receive care. In 
addition, when they are able to access TRICARE, they face high 
out-of-pocket costs and limited, if any, pharmacy benefits. 
Military beneficiaries are desperate for a solution to the 
inadequacies of TRICARE and want to be included in the FEHB 
Program.
    The idea of improving access to health care for military 
families through the Government Employees Health Benefits 
Program has been around since 1995, when this subcommittee held 
its first hearing on this issue. During the 105th Congress, 
Representatives Moran and Thornberry, along with other Members 
of Congress, introduced legislation to address some of the 
difficulties with the military health care system.
    Some of the bills would have authorized immediate 
nationwide access to FEHBP for Medicare-eligible military 
beneficiaries. Other bills propose establishing an FEHBP 
demonstration project to better determine government costs and 
beneficiary interest before deciding whether to implement the 
option nationwide. This is the approach that was taken in 
section 721 of the National Defense Act of 1999.
    Section 721 of the National Defense Act calls for the 
Department of Defense and the Office of Personnel Management to 
implement a FEHBP demonstration project for Medicare-eligible 
retirees and dependents. The program should cover up to 66,000 
military health systems beneficiaries, with DOD contributing to 
the premiums; 6 to 10 sites must be chosen with no more than 1 
site per region. The statute also requires that a separate risk 
pool be maintained for military beneficiaries. The FEHBP 
demonstration project is one of three demonstration projects 
that is or will be on the way to examine different ways of 
improving the military health care system for military 
beneficiaries who are over 65.
    Finally, we are here to discuss how the statutory 
requirements of section 721 are to be implemented and how the 
program will be evaluated once the FEHBP demonstration project 
is complete.
    The demonstration projects that are on the way are 
temporary and were put in place to help us come up with a 
permanent solution to the problems facing the military health 
care system. I look forward to the testimony of today's 
witnesses and I thank you again, Mr. Chairman, for holding this 
hearing.
    Mr. Scarborough. Thank you, Mr. Cummings.
    Now it is with great honor we can introduce our first panel 
testifying today. We have Representative Jim Moran of Virginia. 
We have Resident Commissioner Carlos Romero-Barcelo of Puerto 
Rico. And we are expecting to have Representative Randy Duke 
Cunningham to testify before this committee very shortly.
    They have all been very interested in this issue for some 
time. I know I have had numerous military retirees in my 
district telling me to go talk to Jim Moran, over and over 
again, about his FEHBP plan and we have done that. I want to 
thank these gentlemen for what they have done in the past. We 
certainly look forward to their testimony.
    Mr. Moran, would you like to begin?

STATEMENTS OF HON. JAMES P. MORAN, A REPRESENTATIVE IN CONGRESS 
   FROM THE STATE OF VIRGINIA; HON. CARLOS ROMERO-BARCELO, A 
  REPRESENTATIVE IN CONGRESS FROM PUERTO RICO; AND HON. RANDY 
  ``DUKE'' CUNNINGHAM, A REPRESENTATIVE IN CONGRESS FROM THE 
                      STATE OF CALIFORNIA

    Mr. Moran. Fine, Mr. Scarborough. Thank you very much, Mr. 
Chairman and Ranking Member Cummings, for--Hi, Duke; how are 
you--for letting us testify at today's hearing on implementing 
the FEHBP demonstration project for military retirees. And I 
look forward to reading the testimony of your other witnesses.
    As you know, I introduced legislation last Congress which 
established the Federal Employees Health Benefits Program 
demonstration project for military retirees. And, with the help 
of some extraordinarily good original cosponsors, this measure 
received overwhelming bipartisan support, drawing 292 
cosponsors ultimately and illustrating strong interest among 
all the Members in seeing this demonstration project move 
forward.
    I got involved in this issue 4 years ago as a result of the 
difficulties faced by many of my constituents in finding access 
to quality, affordable health care once they retire from the 
military. And as you say, the same thing was happening within 
your constituency. I think that was pretty well experienced. I 
know you do have an extraordinarily large military retiree 
population, so we are particularly sensitive to it.
    We are pleased to see DOD moving forward with the FEHBP 
demonstration project. But I am concerned that its limited 
scope and funding will preclude an accurate demonstration of 
the true effectiveness of the Federal Employees Health Benefits 
Plan to military retirees. I would encourage this subcommittee 
to continue to exercise its oversight of the program because we 
are going to be looking to you to ensure that a full and fair 
demonstration is conducted.
    But the demonstration, I think, was just an attempt to bide 
time to avoid tough decisions and to save money and I think 
this feeling may be shared by many of my colleagues. The 
Congress and the Department of Defense really should be 
expanding FEHBP now to the larger military retiree population 
in this country because now is when the TRICARE program is 
being implemented, now is when military retirees are being 
rejected from military care at the military treatment 
facilities around the country, now is when they need this. And, 
instead, what we have is a very limited demo project. And it 
may be so limited it is not going to give us information that 
is going to be particularly useful. That is why the 
representatives of so many organizations that have worked so 
hard on this are present today.
    FEHBP, as you so very well know and your chief of staff on 
this subcommittee has been working on this program for a long 
time, this is a phenomenally successful health care program, 
when you consider that it covers almost 9 million participating 
Federal employees and their families. With 1.3 million military 
retirees over the age of 65 today and an expectation that we 
are going to have 1.6 million by 2005, FEHBP is the most viable 
program for military retirees who no longer have access to the 
military health care system.
    But the problem with other approaches, even Medicare 
subvention, is that so few military retirees live within a 
military catchment area. So having Medicare subvention at 
military hospitals is just not a reasonable option for regular 
medical for them. The FEHBP is all over the country.
    Now I have also cosponsored other related legislation to 
grant Medicare-eligible military retirees the option of 
participating in this program. There are a number of 
approaches. Randy Cunningham--we call you ``Duke,'' I guess--
has introduced the Health Care Commitment Act, H.R. 205. This 
provides health care once military retirees become eligible for 
Medicare and are prohibited from participating in TRICARE and 
shut out of medical treatment facilities if they are not 
willing to be last on the priority list for receiving care.
    It just seems as though when people need care the most to 
then deny it to them is--what is wrong with this picture? And 
what is wrong is the absence of a program like the FEHBP that 
is available for all civilian retirees.
    You know, when we recruit young men and women to go into 
the Nation's military, we promise them that they will get 
health care for life and that it will be quality health care. 
It may not have been a contract, but there was action as a 
result of that promise. There was a, if not a written contract, 
there was certainly consideration given. And I think you could 
make a strong case that, in fact, within our legal system, it 
could be considered a contract. There was never any mention 
that once they had served their country and turned 65, that DOD 
would ever consider reneging on this promise and turning them 
away from insurance programs and from military treatment 
facilities. DOD is the largest Federal employer in the Nation. 
So to kick its employees out of health insurance programs is an 
irony that cannot be sustained.
    A lot of what I have to say is duplicative. I am not going 
to get into that any more because I am preaching to the choir. 
Everybody in this room understands this argument.
    But in order to achieve a worthwhile demonstration of the 
FEHB Program, DOD and the Office of Personnel Management have 
to ensure that the actual enrollment is as close to 66,000 as 
possible. I think 66,000 is a minimal figure.
    But with the limited scope of sights and, as the chairman 
said, when it is only for 3 years and there may be some 
disadvantage to retirees and then going into subsequent health 
insurance programs if the DOD decides not to sustain this, 
there is a disincentive to go in. So I think it is a real 
stretch to think that we are actually going to get 66,000 
people, based upon the way the demo project is constructed 
right now. I think we are going to need a larger mix of sites 
to the eight locations that were selected earlier this year. We 
need more ample information on the demo program provided for 
military retirees. And we need to incentivize. So that is the 
second thing I want to say.
    The third thing is the Federal funding commitment. Last 
year's Defense Authorization Bill authorized the sale of assets 
from the national Defense stockpile. But now the proceeds of 
these sales, we understand, are not going to be available to 
fund the demonstration. The Federal Government and the Congress 
has an obligation to follow through on this project and ensure 
that it is properly tested. We have to insist that there be 
adequate offset funding and the fact that DOD has decided that 
it is not going to use the proceeds of these sales for this 
purpose, I think it is incumbent upon them to come up with some 
other offset. That should certainly not be an excuse not to 
follow through on this demo project.
    We authorized it. We are anticipating it. There are 
hundreds of thousands of people who need it. So I trust that 
the DOD is going to work with us to ensure that it does go 
forward.
    I addressed Medicare subvention. It works where it is 
possible, but I think we are only talking about less than half 
of the population, at best, even with expanded catchment area 
definitions that possibly take advantage of Medicare 
subvention. So I think we should have it. It is complementary 
to what we are talking about. We should proceed with it. But it 
certainly is not an option to what we are attempting to do in 
making FEHBP available to everyone.
    I have said more than enough and you want to hear from my 
colleagues. But, again, let me conclude where I started. This 
is a needed program. I wish we had gone ahead with it without 
the demo project. It is going to require a great deal of 
oversight from this subcommittee. And I appreciate your having 
this hearing. Thank you, Mr. Chairman.
    [The prepared statement of Hon. James P. Moran follows:]
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    [GRAPHIC] [TIFF OMITTED] T1494.004
    
    [GRAPHIC] [TIFF OMITTED] T1494.005
    
    [GRAPHIC] [TIFF OMITTED] T1494.006
    
    Mr. Scarborough. I appreciate your testimony and your 
efforts in this fight. I would like to recognize next--first of 
all, welcome, Congressman Cunningham and also Congressman 
Miller, both gentlemen who have fought for fairness for our 
military retirees since they have been up here. I would like to 
recognize next for testimony Representative Romero-Barcelo who 
actually represents one of the sites that was selected in this 
demonstration project. Welcome to our subcommittee.
    Mr. Romero-Barcelo. Thank you, Mr. Chairman, Ranking Member 
Cummings, and Congressman Miller. I very much appreciate the 
opportunity to be here to testify at this oversight hearing.
    As Congress and the Federal Government consider the 
alternatives to improve access to health and medical services 
while increasing the effectiveness and the efficiency of these 
services and striving to contain escalating costs, I believe 
that it is essential that we assess and determine the impact of 
the proposals on one of our most vulnerable populations, our 
military retirees. And these citizens have dedicated a 
substantial part of their lives in the defense of our Nation 
and, including those who are also veterans, have selflessly 
safeguarded American democratic values, often at the risk of 
their own lives.
    We must fulfill our promises to them. It is the right thing 
to do. And it also happens to be in the best interests of the 
Nation.
    And, in particular, I welcome the opportunity to appear 
before you today in this hearing to provide a voice for the 
thousands of military retirees in Puerto Rico, whose health 
needs have been neglected when compared with their fellow 
citizens in the 50 States. For instance, in Puerto Rico, it 
took over 12 years for the Veterans Administration to recognize 
that the hospital facilities of the Veterans Administration 
were inadequate, insufficient; and overcrowded. It was 12 years 
before we finally got the funding. I don't think this ever 
happened in any other State. We waited that long for the 
recognition. I think the retirees only have one hospital in 
Puerto Rico where they can go.
    So, I consider Puerto Rico's selection as one of the 
demonstration sites as a most fortuitous and challenging 
opportunity. Indeed, I view it as a turning point in the 
availability of adequate and appropriate health services for 
this here-to-fore poorly served population.
    The demonstration program as proposed would limit the total 
population of eligibles to the test sites to 66,000, of whom 
approximately 9,900 reside in Puerto Rico. And I believe that 
the Puerto Rico site enables the Department of Defense to 
evaluate issues that have not been considered previously.
    The situation for military retirees and their beneficiaries 
in Puerto Rico is most unusual. It is unbelievably limited by 
the status of the territory, when viewed in the context of the 
rights and the benefits of military retirees in any of the 50 
States. For instance, in the 50 States, retirees under the 
level of poverty would be entitled to Medicaid services. In 
Puerto Rico, we don't have Medicaid. We only get about one-
tenth of what we would get if we were treated the same as a 
State.
    Much can be learned from the selection of Puerto Rico as a 
demonstration site, including access to treatment for 
individuals in remote locations and providing treatment to 
military retirees and their beneficiaries with limited English 
language proficiency.
    Hearings in the 104th and 105th Congresses revealed serious 
deficiencies in the military health care system and it is the 
responsibility of the Congress to consider and develop 
alternatives that will improve services, especially in 
situations similar to those experienced by the retirees at 
home. Currently, the military retirees in Puerto Rico 
experience critical barriers to health services that are of 
grave concern to me. Retirees in the island are more likely to 
depend on the treatment and services offered at military 
hospitals, including free prescriptions. Why? Because, as I 
said before, the military indigent retirees do not have access 
to Medicaid.
    I must point out that the only full-service hospital in 
Puerto Rico is in Roosevelt Roads Naval Station in Sabana Seca 
on the eastern coast. So even though military retirees reside 
at cities throughout Puerto Rico, they must travel to the 
remote site of Roosevelt Roads to be provided service on a 
space-available basis.
    Travel from San Juan, the capital, to Roosevelt Roads may 
require anywhere from 1 to 1\1/2\ hours, but travel from 
Mayaguez on the western coast, would require a minimum of 3 to 
4 hours of travel. By any standards, these are unacceptable 
amounts of time in a medical emergency. The remoteness of the 
location plus the availability of treatment strictly on a 
space-available basis, impose serious health hazards and an 
unacceptable risk to patients.
    But it is also a challenge to provide medical care to a 
population that may have limited English language proficiency. 
The language barrier may limit the availability of enrollment 
documents and access to appropriate health services, 
particularly in the case of beneficiaries. I am pleased to note 
that the Department of Defense is developing materials for 
distribution in both English and Spanish.
    An issue of particular concern is that--and I would like to 
point out here that some people object to the fact that they 
have to translate to Spanish. Well, those that served in the 
military, were never asked what language they spoke before they 
were asked to risk their lives. And I would also like to 
mention that, in the time of war, the volunteers have always 
been more than enough to cover the quotas in Puerto Rico.
    An issue of particular concern that I would like to ask the 
Office of Personnel Management to address is the availability 
of the same level of benefits for military retirees in Puerto 
Rico as for retirees in the 50 States. I have been informed 
that the level of service provided to retirees in the island 
are not always comparable to retirees elsewhere in the Nation 
and would appreciate a clarification and detailed information 
on this issue.
    For instance, only TRICARE standard plan is offered in 
Puerto Rico, whereas military retirees in the rest of the 
Nation have access to TRICARE Prime and TRICARE Extra.
    The demonstration program will only be available to 
Medicare-eligible military retirees and their beneficiaries. 
Since there are some issues concerning Federal health programs 
that apply differently in Puerto Rico, I would also like 
clarification in terms of the impact of those programs on this 
demonstration group.
    It is important to note that the U.S. citizens of Puerto 
Rico do not have access to some of the Federal health programs 
that are designed to protect the neediest populations. For 
instance, in Puerto Rico, there is no Federal cost-sharing 
program under Medicare for eligible low-income individuals. 
This means that elderly, indigent individuals cannot receive 
assistance for their Medicare fees and deductibles as elsewhere 
in the Nation, where they would receive Part B assistance. In 
addition, Medicaid is, for all practical purposes, nonexistent 
in Puerto Rico.
    I believe that this demonstration program is a step in the 
right direction and I wish to commend the Department of Defense 
for the opportunity to incorporate the needs of Puerto Rican-
American military retirees and to consider the factors that 
limit their access to adequate health services. While I cannot 
estimate the number of retirees and their beneficiaries that 
will select this plan, I am sure that most will welcome the 
availability of more plan choices. As with any new program, 
there are areas of specific concern that must be considered and 
carefully monitored to ensure the successful implementation of 
a program of this magnitude.
    Mr. Chairman, once again, I thank you for the opportunity 
to bring my concerns to your attention and consideration. 
Throughout the century, the American citizens of Puerto Rico 
have demonstrated their patriotism by upholding American 
democratic values whenever and wherever it has been necessary 
in the world and contributing to the national defense and 
national security concerns. Right now, as a matter of fact, 
there is one area in the whole nation where the Navy is 
bombarding with live ammunition close to where people reside 
and that is right in Puerto Rico at Vieques. No other citizens 
in the Nation are subjected to that kind of concerns and 
anxiety.
    We recently had one bomb explode. It was off-target and a 
civilian guard was killed. He was working for the Navy, but he 
was a civilian. He was killed and three others were wounded.
    However, despite this accomplished record of service, they 
are not receiving the same benefits as the rest of their fellow 
citizens. And particularly the colleagues with whom they serve. 
Puerto Rico's selection as one of the demonstration sites is 
most welcome and I believe that, as a test site, it will 
provide invaluable information concerning the provision of 
benefits to military retirees and the conduct of health 
programs in remote locations.
    In addition, the military faces renewed challenges in the 
recruitment and retention of military personnel and has focused 
a great deal of resources on recruiting minorities. It is 
critical that the needs of that diverse force be foremost in 
Congress' consideration to ensure equality and to ensure that 
we keep our commitment and fulfill the promises made to all the 
men and women who serve our Nation. I urge you to remember that 
Puerto Rico has always responded to our Nation's call. Thank 
you very much.
    [The prepared statement of Hon. Carlos A. Romero-Barcelo 
follows:]
[GRAPHIC] [TIFF OMITTED] T1494.007

[GRAPHIC] [TIFF OMITTED] T1494.008

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    Mr. Scarborough. Thank you, Representative. I appreciate 
you being here to help us better understand this issue and 
certainly do appreciate you stating for the record the 
sacrifices that the people of Puerto Rico have made in the 
past. Again, I appreciate your being here and look forward to 
asking you some questions later.
    Mr. Romero-Barcelo. Thank you, Mr. Chairman.
    Mr. Scarborough. I would like to now welcome Congressman 
Randy ``Duke'' Cunningham, also a champion of military retirees 
and their dependents. I know this because I hear it from my 
grandmother who Duke represents in Solana Beach who tells me I 
need to be more like. [Laughter.]
    So I say, thanks, Grandmom.
    Mr. Cunningham. That is funny because my mom tells me I 
need to be more like you.
    Mr. Scarborough. There you go. There you go. But, anyway, 
we appreciate you being here along with the other gentlemen who 
have been fighting for military retirees.
    Mr. Cunningham. Thank you, Mr. Chairman. I would like to 
associate myself with the comments of my colleagues. I think 
they are right on the money. And I would also let my colleague, 
Romero-Barcelo, know that not many people realize when he talks 
about minding people talking in Spanish, there have been more 
Medal of Honor winners, Hispanic Medal of Honor winners, for 
representation and population, than any other group. And, yes, 
they have paid the price. And their values, their family 
values, their military patriotism is second-to-none. And I 
would like my colleague to know that and I would like to put it 
on the record, as well.
    The subvention bill. When I came to Congress in 1990, it 
was my bill. I didn't write it. My veterans in San Diego had 
tried 4 years prior to that to get it through Congress and they 
couldn't. And we finally got that subvention bill through and 
then we had to even fight to get Balboa Naval Hospital in San 
Diego listed on the group and it was my bill. Somebody in the 
Senate wanted to steal the project, but we didn't allow that to 
happen.
    But it is just a band-aid. And one of the terms that you 
hear from our military over and over again, that there are just 
band-aids out there. And I saw a movie once called Broken 
Arrow. Well, it was because of a broken promise. And for those 
of us that have been in the military that we were promised 
health care for life after that. Now these aren't people that 
are setting back not paying taxes, not working. They make the 
sacrifices and many times the ultimate sacrifice.
    But people don't know that about every 2 years, military 
members are uprooted from their homes. They have to move. They 
can't make investments. That means that their spouses quite 
often can't get a job. Their children are ripped out of the 
schools and it is a very difficult situation for families.
    And right now, there is a strong irony that we are having 
difficulty keeping people in the military. The No. 1 reason is 
family separation and all of the deployments from Haiti to 
Somalia to Bosnia to Kosovo to Iraq to all the rest of them. 
But the No. 2 reason is the erosion of what they consider 
promises made to them. In 1993, the White House cut both 
military and veterans COLAs. And, in a bipartisan way, I saw my 
own party, when we took the majority, in the Budget Committee, 
try and cut veterans COLAs. We stopped that in our conference 
and we got bipartisan support to stop that, thank goodness.
    But those kinds of things, our military that make all these 
sacrifices look back and that is why we are only keeping 23 
percent of our enlisted, only 33 percent of our pilots. Our 
military experience, our quality of personnel is eroding, our 
equipment is being degraded. And, at the same time, while they 
are overseas, they are seeing their families not receive the 
health care that they were promised in active duty.
    And then when they get out--we are losing, every year, 
great numbers of World War II veterans. They are dying. We are 
talking to people that are between 70 and 90 years old. And 
their life expectancy in the last few years, they want some 
health care above 65 years of age.
    There are a lot of military brats that pass on, too. My 
wife is one of them. Her dad is retired Navy. But, usually, 
when those sergeants, when those enlisted and officers get out, 
they talk to their children about how good the benefits are in 
the service. That while they won't ever be rich, at least they 
can serve their country well and when they get out, the 
government is going to honor their pledge. That hasn't been the 
case.
    For example, General Krulack is retiring today as 
commandant of the Marine Corps. He gets out at 65. Here is a 
guy that has been through war. Look at his chest, at the 
sacrifice that he has made. And, yet, General Krulack has 
served 30 years in the U.S. Marine Corps. A secretary in his 
office that works with him at 65 gets FEHBP. He does not. There 
is something wrong with that equation in the fact that, after 
you make all these sacrifices, that a civilian Federal employee 
or they don't get the same benefits that you and I do here in 
Congress. And that is wrong.
    And Mr. Moran and Mr. J.C. Watts, myself, Mr. Romero-
Barcelo have tried to sponsor a bill to make a level playing 
field for our military veterans in this. And it is something we 
feel very passionate about. I think it is very important to 
have a balanced budget. Most of us signed an agreement in 1997. 
The President signed it. And to stay and not break those 
agreements is important. But when we are moving money around in 
allocations, the one area that we ought to sacrifice for is for 
our veterans. And, down the line, by having a balanced budget, 
we are going to get them more money by reducing the debt, so we 
don't have to pay $1 billion a day on the national debt.
    So, two important factors is to stay within a balanced 
budget but, at the same time, make those tough choices in the 
priorities. And those should be our veterans. Thank you.
    Mr. Scarborough. Well, I appreciate it and certainly 
identify myself with your remarks also and everybody on the 
panel's remarks. I have been told the story before that my 
grandfather, who has since passed away, was a member of that 
World War II generation that you were talking about and after 
serving this country for 30 years and serving in World War II 
and the Korean War, he died a very bitter man toward his 
government whom he had given his whole life to, because of 
broken promises.
    Mr. Cunningham. I would like to submit this for the record, 
my complete statement.
    Mr. Scarborough. Without objection. I would like to have 
that.
    Let me recognize Dan Miller. Any comments or questions?
    Mr. Miller. The only comment is we are preaching to the 
choir with our group. I am just interested to hear some of the 
other comments. And so I am just glad you are having the 
hearing. Thank you for having it.
    Mr. Scarborough. Great. Appreciate your being here. Mr. 
Cummings, do you have any questions?
    Mr. Cummings. No, I don't have any questions, but I want to 
thank you all for your testimony and certainly we are all very, 
very sensitive to this issue. And I just hope that we can--I 
always say that we really have to put a face on policy and I 
think sometimes what happens is up on the Hill, we don't put 
the faces, sometimes, with the policy. And I think you all 
helped to bring that to light and we really do appreciate it. 
And so we will hear from these other witnesses and, hopefully, 
they will be able to shed additional light. Thank you very 
much.
    Mr. Scarborough. Thank you. Let me ask one or two questions 
and if other Members have any followup, feel free to do it. 
Congressman Cunningham, let me ask you, what do you think the 
most important thing Congress could do right now to improve 
this demonstration project so when it is over we actually, in 
Congress, have a better understanding of what we have done and 
whether it is going to work in an expanded situation or not?
    Mr. Cunningham. Well, many of us, when the demonstration 
project came out, said that the number of 66,000 is not enough. 
We said it has been interpreted so that you are not even 
filling the quotas that you have and that the numbers that you 
have will offset an unrealistic cost because those are the 
people that are in dire need of it and they are not living long 
and they need, you know, advanced medical care.
    The best thing we could do is to put this across the board 
just like, you know, civilian Federal employees do. You know it 
has been very difficult to get this through. Mr. Moran and Mr. 
Barcelo and myself and I think over 260-some cosponsors 
criticized the project when it first came out, realizing that 
it was just a band-aid. And I think we need full 
implementation. I don't know if the panel agrees. And you are 
going to find cost savings in it because you are not going to 
have these people--just like where we are trying to give 
pharmaceuticals to Medicare recipients, which we support, those 
people that need it.
    I think the only way to really enhance the project is to 
have full implementation of the program and either support Mr. 
Moran's bill or mine. We are both cosponsors of each other's 
bills. Because they add, I think, the best bang for the dollar 
for military active duty and retired personnel. But I think it 
is a little unrealistic what we have set up to make it work and 
I think the cost is going to come out high because of the way 
that it was set up.
    Mr. Scarborough. Representative Romero-Barcelo, you had 
indicated before that you wanted clarification of the impact of 
other Federal health programs on the demonstration project. Can 
you expand on that about what issues you think need to be 
clarified as we go through this project? Also, have you 
approached DOD or OPM to get answers?
    Mr. Romero-Barcelo. No, I have not yet approached the DOD 
or OPM. What I think about is that, in Puerto Rico, I mentioned 
in my testimony, when the veterans or the retirees run into 
hard times and their pension is not enough and they are on the 
poverty line. They do not have access to the same health 
programs that they have in the rest of the Nation. For 
instance, as I mentioned, Medicaid. In Puerto Rico, we only get 
about $171 million in Medicaid. If we were to have the same 
formula, it would be about $1.4 billion.
    Mr. Scarborough. You get $171 million in Medicaid, and what 
is your population?
    Mr. Romero-Barcelo. 3.8 million.
    Mr. Scarborough. OK, thanks.
    Mr. Romero-Barcelo. What we would be getting would be about 
$1.4 billion. That means that the people, all of the veterans, 
any retiree under the poverty quideline does not have access to 
Medicaid because it is nonexistent. The State government gives 
services, but it cannot give services to the same extent as 
Medicaid because we lack the funding.
    An example, for instance, this is a simple case, diabetes. 
Diabetes coverage under Medicaid, you get the equipment and the 
lancets and the strips for taking the blood samples. And, at 
home, that is not available. If you are diabetic, here you have 
access to podiatric services that are not available in their 
programs. A lot of the things that come with the Medicaid and 
are available, because of the funding are not available in the 
health care programs in Puerto Rico.
    So how does that impact--all of that--the same people who 
serve their Nation the same way with the same loyalty and now 
they are retired and they have problems. Their families have 
problems. You have veterans whose children are not covered by 
any health care. So those are the situations which I think 
should also be analyzed at this time.
    And problems with access, at times, that has been solved in 
the veterans hospital. I don't know, I have to find out, how 
that has been solved in the Naval Hospital at Roosevelt Roads. 
One time they had problems because of the language and because 
of the availability of the materials that were printed. Now the 
veteran's hospital has had all the materials for quite a few 
years now printed in both languages, but I am not so sure about 
the hospital being at one end of the island, the naval 
hospital. Those are the issues, I think, that are there and 
many others similar to those.
    Mr. Scarborough. OK. Thanks. Anybody else? Any other 
followup questions?
    Mr. Cummings. Yes. Thank you. Representative Barcelo, let 
me ask you this. Is the FEHB Program--does it meet the needs of 
the civilian population in Puerto Rico now?
    Mr. Romero-Barcelo. No. No. It is not, because of the lack 
of access. It is too far away. I mean, because you have some 
people who live in the west coast of Puerto Rico, as I said, it 
takes 3 or 4 hours because of transportation and everything 
else so they don't take advantage of it. They can't take 
advantage of it.
    Mr. Cummings. Do you expect the 9,000 Medicare-eligible 
participants to enroll in the demonstration?
    Mr. Romero-Barcelo. I think there will probably be many 
more than that will try to enroll, if the program gets enough 
publicity. I am going to help it as much as I can in giving it 
enough publicity, but I don't know yet what the plans are for 
the publicity of the program.
    Mr. Cummings. You know, Representative Cunningham, Mr. 
Moran raised a very interesting issue when you said if you go 
through the demonstration project and it doesn't work, then you 
leave these people hanging. I mean, they have gotten used to 
certain things and then are sort of out there. And I guess what 
happens--and you all have been around here a little longer than 
I have, but I assume that what happens in these demonstration 
projects is that there is a presumption that they will be 
successful. I guess. And then--well, what happens when they are 
not?
    Mr. Cunningham. Well, that is the reason many of us 
criticized just making it a pilot, that we want a full 
implementation. There are plans if it does fail, for those 
individuals on that particular plan to go back. But the problem 
is that we have closed or degraded over 75--just in the United 
States--military treatment centers. And so when you say go 
back, go back to what when there is already a substandard 
system for them and then they go back.
    We are going to make this work, one way or another. There 
isn't any turning around. But what we are asking for is a more 
realistic evaluation and not a limit to the project like it is 
because of the inflated costs that will come out of it and the 
lack of enrollees.
    What we are looking for is competition. Whether it is 
Medicare, whether it is IRAs, whether it is savings accounts, 
whether it is Medi-plus, whatever, you know, the things have. 
It is a competition and even TRICARE, someone is not eligible 
when they are over 65, so this system has got to work and we 
are going to make it work, but we would like a more realistic 
set-up to start with. It is like in a football game. And if you 
go out there and you know the referee is all pulling for the 
other side, you are kind of hesitant and say, we are going to 
win this game regardless, but it is tough. And we are asking 
just for a fair shake and I think that is what this committee 
can give us, Mr. Cummings.
    Mr. Cummings. Thank you very much.
    Mr. Scarborough. Thanks a lot. I appreciate it, gentlemen. 
I would like to now call our second panel. We have four 
distinguished witnesses. We have Sydney Hickey of the National 
Military Families Association; Charles Partridge of the 
National Association of Uniformed Services; and Kristen Pugh of 
the Retired Enlisted Association. These three have been 
forceful advocates for this demonstration project and were 
instrumental in building support for its enactment.
    Our fourth witness is Stephen Gammarino. Mr. Gammarino is a 
senior vice president for the Federal Employees Program and the 
Integrated Health Resources of Blue Cross and Blue Shield 
Association, who is, of course, the largest carrier in the 
FEHBP. I would like to welcome all four of you here. Why don't 
we start on our left by recognizing Ms. Hickey.

STATEMENTS OF SYDNEY T. HICKEY, ASSOCIATE DIRECTOR, GOVERNMENT 
 RELATIONS, NATIONAL MILITARY FAMILIES ASSOCIATION; CHARLES C. 
  PARTRIDGE, COL., U.S. ARMY (RETIRED), LEGISLATIVE COUNSEL, 
 NATIONAL ASSOCIATION OF UNIFORMED SERVICES; KRISTEN L. PUGH, 
DEPUTY LEGISLATIVE DIRECTOR, THE RETIRED ENLISTED ASSOCIATION; 
   AND STEPHEN W. GAMMARINO, SENIOR VICE PRESIDENT, FEDERAL 
      EMPLOYEE PROGRAM, BLUE CROSS BLUE SHIELD ASSOCIATION

    Ms. Hickey. Thank you very much, Mr. Chairman. Mr. Chairman 
and distinguished members of the subcommittee, the National 
Military Family Association is most grateful for your continued 
strong interest in providing quality health care to military 
beneficiaries. We are particularly appreciative of the 
subcommittee's leadership in examining the progress of the 
congressionally mandated FEHBP demonstration program.
    As this subcommittee is well aware, NMFA would prefer that 
the FEHBP option be offered to all military families and 
retirees. Short of that, we firmly believe that at least the 
Medicare-eligible military beneficiaries, those who have been 
left out of TRICARE, the DOD health care program, should be 
offered this opportunity. Nonetheless, we have strongly 
supported the FEHBP demonstration because it was the only act 
in town.
    The purpose of this demonstration is to test the extent to 
which Medicare-eligible military beneficiaries would 
participate in the FEHBP and, therefore, the potential cost to 
the Department of Defense by extending the option to all such 
beneficiaries. However, as implementation plans for the 
demonstration have emerged, NMFA has found cause for great 
concern. First, even though Congress authorized and funded 
66,000 enrollees, DOD limited the selection to only 66,000 
eligibles. Using the subvention demonstration as an enrollment 
model, probably less than 20,000 of the eligible population 
will enroll.
    Second, the bingo drum method of choosing sites resulted in 
the selection of one site that has an FEHBP enrollment pattern 
significantly different than other areas of the country. The 
sole demonstration site has no military hospital, only a 
military clinic and, by far, the fewest number of eligible 
beneficiaries. Neither of these sites will be particularly 
useful in determining potential enrollment patterns when the 
program is offered worldwide.
    Third, if the Office of Personnel Management requires a 
separate reserve fund for the demonstration, premiums for the 
Federal military beneficiaries may be significantly higher than 
those for Federal civilians. If such is the case, this will not 
be a test of enrollment in the FEHBP, but simply a test of 
enrollment in plans offered by some of the same carriers that 
participate in FEHBP.
    Finally, NMFA strongly believes that a significant 
education effort must be made with Medicare-eligible military 
beneficiaries and others who are able to participate in the 
plan. At the present moment, DOD does not plan on publicizing 
even the names of the carriers, much less the rates, until the 
end of October. This short fuse approach for those who will not 
only have to decide whether to participate in the plan, but 
further choose among available plans seems extremely short-
sighted.
    While NMFA remains firmly committed to implementing the 
demonstration program this fall, we believe certain issues must 
be addressed. To overcome the extremely small number of 
expected enrollees and to more accurately test the FEHBP 
option, NMFA strongly urges the addition of other geographic 
areas, if not this year, then at least in the open enrollment 
season of 2000. In order to provide a true test of interest of 
Medicare-eligible military beneficiaries in the FEHBP, premiums 
must be kept in line with those of Federal civilians. DOD 
should accelerate its timetable for providing information and 
expend at least as much effort on marketing this program as it 
did for the subvention demonstration.
    Many military associations and Members of Congress have 
been more than willing to significantly expand the numbers of 
those who can enroll in FEHBP. Many feel strongly that this 
country owes its most elderly and vulnerable military 
population some form of employer-provided health care. DOD 
wanted a more limited test. DOD, therefore, should bend over 
backward to ensure that the test is as fair and representative 
a demonstration as is possible. Thank you, Mr. Chairman.
    [The prepared statement of Ms. Hickey follows:]
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    Mr. Scarborough. Thank you. I appreciate your testimony.
    Next we have Charles Partridge, and Mr. Partridge is of the 
National Association of Uniformed Services and has testified 
for us before. Good to see you again.
    Colonel Partridge. Good to see you again, Mr. Chairman, Mr. 
Cummings, Mr. Miller. It was more fun testifying down in 
Pensacola.
    This testimony, in addition to representing the views of my 
association and the Society of Military Widows, also represents 
that of the National Military Veterans Alliance, with some 20 
military and veterans associations.
    I would like to make four points regarding the FEHBP 
demonstration. But first I want to mention briefly why FEHBP is 
so badly needed for military retirees. And some of that has 
already been said, that they are the only Federal employees 
that lose the benefit at age 65. But, going along with that is 
that the Department of Defense does not have a plan that by a 
certain date all beneficiaries will be covered. There is 
nothing that they are doing now that will guarantee coverage at 
any time in the future by a specified date. There is no light 
at the end of the tunnel that our retirees can see, other than 
FEHBP.
    TRICARE does not meet the needs of all of our 
beneficiaries. In addition to disenfranchising Medicare-
eligibles, the reimbursement rates, the red tape, and the 
bureaucracy have not been solved. Therefore, the families need 
another option. The Secretary of Defense wants to close more 
bases. Sooner or later, there will be another round of base 
closures. We need FEHBP in place now so that when that happens, 
there are reasonable alternatives for people when they no 
longer have those military hospitals and clinics to go to.
    Regarding the FEHBP demonstration, I want to underline what 
has already been said about the small size of the population. 
With 66,000 and 8 sites, it is just not big enough and we are 
not going to get 66,000 people signed up. We would like to go 
ahead and expand it to 10 sites, certainly by next year. And I 
believe the law would allow up to 70,000 eligibles enrolled and 
we would like to see the goal set at that maximum so that we 
end up with 70,000 enrollees rather than just having it as a 
target.
    There is the risk pool and the reserve fund problem that we 
know is being worked between OPM, the Department of Defense, 
the carriers, and this committee. And we know it is a 
complicated issue. But in view, the concept is very, very 
simple. The legislation was certainly not intended to have this 
small risk pool as the only source of reserve funds. There is 
sufficient money to provide a reserve fund that would protect 
the carriers while still ensuring that we can use the same 
premium rates that are used by other enrollees in the Federal 
plan. If we don't have the same premium, then that is going to 
be perceived as a different program. It won't be a true test.
    There are a couple of other points that will require a 
change in the law. One of them is that under the current law 
FEHBP enrollees will be locked out of military treatment 
facilities. We think this works against the program in this 
regard. First of all, occasionally some hospitals are 
overstaffed. They have extra appointments. They should be able 
to invite those people in, give them their appointments, and 
bill the Federal plan for that so that it would, in effect, 
reduce the cost of the program to the Department of Defense.
    And, finally, with the demonstration running from 2000 
through 2002, individuals who enroll in the last year will have 
only 1 year in the program. We believe that should be extended 
for 3 years and that should be done next year so that people 
know that you have a minimum of 3 years in the program because 
asking people to enroll for only 1 year is not much of an 
incentive.
    Mr. Chairman, we appreciate what this committee has done to 
take care of the medical needs of medical retirees and we 
appreciate your support for this program and I will be glad to 
answer any questions.
    [The prepared statement of Colonel Partridge follows:]
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    Mr. Scarborough. Thank you, Mr. Partridge. We appreciate 
you being such a strong advocate for this demonstration project 
from the beginning, as our previous speaker and our next 
speaker have also been.
    Kristen Pugh, who is representative of the Retired Enlisted 
Association. Ms. Pugh.
    Ms. Pugh. Good morning, Chairman Scarborough and 
distinguished members of this subcommittee. Thank you for the 
opportunity for the Retired Enlisted Association to discuss the 
implementation of the FEHBP 65-plus demo.
    TREA has over 100,000 members and auxiliary, representing 
all branches of the Armed Services in which 61 percent of our 
membership are 65 and older and whose continued concern over 
accessing comprehensive, quality health care in the future 
stems from being dropped out of the military health care system 
at 65. With base closures, military treatment facilities 
downsizing, and demographics changing, the need to provide 
access to health care to our ever-growing number of aging 
retirees creates anxiety with those that ``were promised 
lifetime health care.''
    One solution with the support, the strong support of this 
subcommittee, was the passage of the FEHBP 65 demo, a win-win 
to provide a benefit to the men and women who have 
patriotically served this country. The number of 65-and-over 
aged military retirees will not decline, but continue to grow 
in numbers to an estimated 1.6 million in 2004. Today I hope we 
find a solution to administering a ``fair test'' for FEHBP 65 
demo in a timely manner so as not to delay implementation of 
this program this year.
    OPM needs to finalize the operational guidelines with 
approved regulations by OMB for the test. This makes it 
extremely difficult to educate our members on rates, benefit 
guidelines, and participating carriers, as well as answer any 
questions they may have prior to the open enrollment season, 
beginning November 8. Also, this will jeopardize DOD's 
marketing time line for the demo.
    OPM has not implemented regulations for carriers to access 
their own reserves to compensate for possible financial risk of 
enrolling service retirees. This access would control costs for 
the carriers, especially since this is a limited test with a 
limited number of enrollees in each site. Carriers will set 
high premiums over and beyond the costs of current FEHB 
programs in order to protect themselves until they have 
gathered some claims experience for this new group of 
beneficiaries. The consequence is OPM will be creating a 
completely new program, different from FEHBP, even though the 
legislation directs OPM to set up a risk pool as a new rating 
category for FEHBP.
    The intent of title 10 in U.S.C. subsection 1108, ``The 
director of OPM shall require health benefit plans under 
chapter 89 of title 5 that participate in the demo project to 
maintain a separate risk pool for purposes of establishing 
premium rates for eligible beneficiaries who enroll in such a 
plan,'' which means that, for the purpose of this demonstration 
program, OPM needs to set a new rating category in order to 
track the categories of beneficiary groups. This is no 
different than setting a risk category group for self/only and 
self/family under FEHBP, in which rates are based on access to 
service benefit plan reserves. The test should be no different 
than one of the category groups in which premium rates are 
studied and set for that population for rating purposes only.
    Delay in regulations will further delay military retirees 
to enroll in FEHBP November-December open enrollment season 
with reasonable premium rates, comparable to current FEHBP 
rates. As we have told this subcommittee in the past, we know 
that not all military retirees will enroll in this program, but 
we need to give them the option to make that choice in order to 
determine the viability of providing health care through FEHBP.
    The Fiscal Year 1999 Defense Authorization Act defined the 
total number of enrollees for this test may not exceed 66,000. 
This was interpreted by DOD as 66,000 total persons eligible to 
enroll. TREA would like to see the sites expanded for more 
participants to enroll to meet the 66,000-enrollee cap, in the 
future of the test program. By limiting the number of 
beneficiaries eligible to enroll, this will create a scenario 
of more adverse selection, jeopardizing the viability of a 
``fair test.''
    In conclusion, in the past years, TREA has educated their 
members to the concept of FEHBP and that it was not a free 
benefit. The response was simple. TREA members wanted to have 
the option to participate and pay for a comprehensive health 
care benefit equal to their neighbor who served in the civil 
service. In order to accomplish this, the rate structure needs 
to be more in line with those civilian servants pay for their 
health care. If not, then yet again another program and 
inequity for these retirees would be created by the government, 
a program that looks like, smells like FEHBP, but is not FEHBP. 
Let us correct this wrong with a right and provide a fair test 
for FEHBP for those men and women who served in the uniformed 
services.
    Thank you for your attention, by this subcommittee.
    [The prepared statement of Ms. Pugh follows:]
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    Mr. Scarborough. Thank you. I appreciate it.
    Mr. Gammarino from Blue Cross, welcome back and we look 
forward to your testimony.
    Mr. Gammarino. Good morning. I would like my written 
testimony entered into the record. I will be giving an oral 
summary.
    Mr. Scarborough. No objection.
    Mr. Gammarino. Mr. Chairman and members of the 
subcommittee, good morning. I am Stephen Gammarino, senior vice 
president at the Blue Cross and Blue Shield Association and, on 
behalf of the Association, I thank you for the opportunity 
today to discuss the demonstration project for military 
retirees to enroll in the Federal Employees Health Benefits 
Program. We are committed to doing our part to ensure the 
project's success.
    As you know, Blue Cross and Blue Shield sponsors the 
governmentwide Service Benefit Plan in the program today. This 
plan is the plan of choice of approximately 45 percent of all 
Federal employees and annuitants, covering almost 4 million 
members. As the FEHBP's largest carrier, we bear a special 
responsibility to the program. We do not wish to create 
contention, but we must speak up when we have serious concerns 
about particular issues affecting this program. We have such 
concerns about the approach planned for implementing this 
demonstration project.
    My testimony focuses on two areas specified in your letter 
of invitation. First, the difficulties posed by the limited 
size of the eligible population. And, second, the impact of the 
requirement for separate risk pools.
    First, the size of the eligible population. Originally, we 
understood that as many as 66,000 military retirees and other 
qualified individuals would be allowed to enroll in this 
project. Therefore, we were surprised to learn that the total 
eligible population would be limited to only 66,000. With the 
other health coverage options available to these individuals, 
we estimate that fewer than 20,000 will enroll in this program.
    A demonstration involving 66,000 enrollees, not eligibles, 
would have been preferable. Why? A larger group helps in 
spreading risk and increases the likelihood of attracting a 
broad cross-section of individuals. Additionally, the overall 
administrative effort and cost would be essentially the same 
for a larger group, but more people could benefit. Despite this 
projected small size, we believe the demonstration project can 
still be successfully implemented.
    A much greater concern than the size of the group is the 
interpretation by OPM of the law's requirement for a separate 
risk pool and the subsequent determination of how reserves will 
be used to offset any resulting carrier liability. We 
understand that OPM, through an interim regulation, will be 
proposing to pay any deficits carriers incur under the project 
from the unused portion of the administrative reserve. This 
reserve, a 1 percent overlay on each carrier's premium, is 
meant to pay OPM's administrative expenses only. According to 
law, the unused portion is returned to carriers in proportion 
to their share of the total premiums paid.
    We believe OPM is asserting authority to turn this into a 
fungible pool of money that would be returned to carriers based 
upon their operating results. What is wrong with this? First, 
we find no statutory basis for any such action. The statute is 
clear and directive on how moneys from the administrative 
reserve are to be paid to the carriers. Second, diverting 
reserves from one carrier to the competing carrier is totally 
inconsistent with a competitive program in which carriers are 
ultimately at risk.
    The essential point of our objection is not that we may 
lose money, rather that the proposed reallocation among 
competing carriers sets a harmful precedent when it is without 
clear congressional mandate and in the face of contrary 
statutory directive. OPM's immediate purpose may well be 
benign, but its proposed action threatens the basic structure 
of this program. We've shared our views and legal opinions with 
OPM and we are prepared to take all necessary steps, including 
legal action, to protect the integrity of this program.
    Our position is that the law need only be followed as 
written: Treat the DOD enrollees separately for rate-setting 
purposes, but for all other purposes, including carrier 
liability, they should be part of a larger group. Blue Cross 
Blue Shield premiums today for high-option versus standard 
option and for self versus self and family are determined in 
this manner. Each category is rated to stand on its own, but 
the plan's financial reserves are available, if needed, across 
rating categories. This is the only way of implementing the 
demonstration project that is both consistent with the law and 
likely to serve the purpose for which it was enacted.
    Additionally, since January, we have received only oral 
guidance on the project during meetings with OPM. We still 
await the first formal guidance with respect to operational 
issues. Especially as we approach year 2000, details must be 
communicated immediately. Our window of opportunity continues 
to shrink as November's open enrollment period quickly 
approaches.
    In conclusion, let me reiterate that we are committed to a 
fair test of the FEHBP as a viable option for the retired 
military community. As matters now stand, however, the fairness 
of the test is endangered by a course of action that is 
contrary to law and by a delay in addressing operational 
issues. There is still time, if all parties work together, to 
make the demonstration project a success. And we stand ready to 
do so.
    Thank you and I will be pleased to answer any questions you 
may have.
    [The prepared statement of Mr. Gammarino follows:]
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    Mr. Scarborough. Thank you. I appreciate your testimony.
    I wanted to ask all of you a question. To summarize very 
quickly, Mr. Moran stated that the way this project is being 
implemented is nothing more than an attempt to buy time and to 
cut costs. We have had testimony that the education approach 
was a ``short fuse approach,'' and there was bad marketing. We 
heard testimony there is ``no light at the end of the tunnel.'' 
Testimony about the ``lack of fairness'' and how we need a 
``fair program.'' And also testimony that the pool is so small 
that we are not going to have the broad pool necessary to see 
whether this works or not.
    It goes back to what Congressman Cunningham said, that he 
felt like the referee was rooting for the other team. I think 
the question that is central right now to this hearing is do 
you all believe that this demonstration project has been set up 
for failure by DOD and OPM? Or, putting it in Duke's 
terminology, is the referee rooting for the other team? There 
is a referee speaking on the next panel--[laughter]--so you all 
don't be shy because the ref is not going to be shy. The ref 
will probably also accuse me of setting them up for failure 
with these first two panels.
    But, is the referee rooting for the other team? This is 
very important, to get your gut feeling.
    Ms. Hickey. I don't know that I want to characterize that 
any one person, Admiral Carrato or anybody else, is rooting for 
the wrong team. But, from our point of view, when you take a 
look at the problems that are inherent at the moment in the 
demonstration, it certainly looks like you are creating a 
demonstration, for whatever reason and whatever motive, that 
may be doomed to failure. If you are looking at 20,000 
enrollees, I don't know what you are going to find out. 
Particularly when two of the areas are not representative of 
what the test is supposed to be determining.
    Mr. Scarborough. What are those two areas, again?
    Ms. Hickey. Puerto Rico because its enrollment pattern is 
significantly different than the rest of the country. As was 
mentioned, I think 45 percent of most people take the Blue 
Cross Blue Shield standard product. That is not true in Puerto 
Rico. They basically take the--it happens to be a Blues 
product--but it is an HMO product.
    The other one, of course, is the subvention. I mean, Dover 
Air Force Base. Dover doesn't have a military hospital. It has 
only a small clinic. And it has only I think about 4,000 
eligible people that live there. Half of whom or 1,500 of whom 
could enroll in subvention. How are you going to tell--we are 
looking at populations in San Diego of 34,000. That would have 
been a place to test it.
    Mr. Scarborough. OK. Not to nail you down here and 
certainly we all understand--we have been in Washington long 
enough to know--that the people that come and testify aren't 
always the people that make the final decisions, but they are 
doing their job. So certainly you are not characterizing 
anybody in this room. But you said this project may be doomed 
for failure? Can you go back to your members and give them any 
scenario under which this project, as currently framed, is 
going to be a success? What I am saying is I think ``may be a 
failure'' is very generous. And I underline the word ``may.'' 
Is it going to be a failure?
    Ms. Hickey. The only reason I use ``may'' is because I 
firmly believe that we have an awful lot of people out there in 
this age category who are literally desperate for health care. 
So it is conceivable that we may have a higher enrollment in 
some of these areas than enrolled in the subvention areas. I 
don't really know.
    I think there are ways we could fix it. I think, currently 
in the law, we could go up two more sites. They could be picked 
tomorrow. We could go up to 66,000 enrollees by picking 2 sites 
with fairly good eligible populations. I don't think we need 
any legislation in order to do that. If you are really 
committed to a project and this is something that has been 
mentioned by both the carriers and the associations and the 
Members of Congress who worked on this legislation maybe this 
is something that needs to be done tomorrow.
    Mr. Scarborough. OK. You said this may work because there 
are people that are so desperate for health care choices that, 
sadly, as Mr. Gammarino said, with approval this narrow, you 
are going to get the people that are the most desperate for it. 
You are going to have the sickest people in it, because it is 
not broad enough. It is going to be cost-prohibitive.
    Mr. Partridge, have we been set up for failure here?
    Mr. Partridge. Failure in this sense: We are not going to 
get enough data to satisfy the statisticians and the actuaries 
to give them any answers. Our view has always been we are all 
people. And this program is designed for people. So the only 
possible reason for a test is money. There is absolutely no 
reason to test it other than that. Otherwise, why not make it 
an option and let the people who want it enroll in it and 
become part of the pool? So, in that sense, it is set up to say 
we don't have enough information so let us extend the test; let 
us not go forward. That is one of the points that concerns us.
    There is institutional opposition to this. You know, the 
military surgeons general like to have their sheep pen with all 
the military retirees in that sheep pen. And then they reach in 
there and pull out the ones they want for their training 
programs and so forth and then the others get their care where 
they can. If you give people a real option, then they are going 
to have to guarantee care in those hospitals and guarantee that 
the service is top-notch. So you have an institutional problem 
as well.
    Mr. Scarborough. Ms. Pugh, have we been set up for failure?
    Ms. Pugh. I think Ms. Hickey stated it very clearly. I 
think it is a difficult statement to answer, but in three 
regards, we do feel that we are having difficulty implementing 
this program in a fair time. I look at my watch. It is June 30. 
We were going to have a hearing on this back in April. I looked 
at my testimony that I put together in April and none of those 
points have changed. That is frightening. That is frustrating.
    We can debate the subject is it set up for failure. Well, 
we are on a one-way train to failure right now because one 
thing is I can't educate my members. I have members calling in 
on a daily basis trying to get some information.
    I have members who want to enroll, but don't meet the zip 
code requirements because the eligible category they don't 
meet. I have people who are willing to move to those zip codes. 
I mean, I will be quite frank with you. They have heard about 
this. We have educated them. And it would just be a crime at 
this point that we haven't implemented it on a timely basis, 
that the enrollment season will come and go and I will be 
looking at you in the year 2000 and we will be having this same 
discussion and we will have not tested a viable option and we 
have yet failed my beneficiaries and your constituents yet 
again.
    I think there have been a lot of road blocks. One thing is 
even getting the site selection done on a timely basis. How you 
define the eligible category has already been explained. And as 
well as the fact is marketing information. I have started to 
see some time lines from DOD which concern me, to be quite 
honest. But we are going to be educating people. October 30 we 
will be sending out a packet of information.
    These are people who have been Federal employees. These are 
people that are watching the House floor going where is my 
pharmacy benefit? Medicare plus choice is changing. They need 
some more lead-in information prior to making a big decision, 
especially if you don't know how long the test program is going 
to last. You make a change--and we know this from experience 
from the Medicare subvention test program.
    And, again, there has been--and I have not gotten this 
point clarified--but a one-time open enrollment season this 
year would further restrict the number of participants. And 
then, yet again, we would have adverse selection, high rates, 
and we wouldn't have the participants. And, yes, it would fail.
    Mr. Scarborough. You know, you said something about people 
being so desperate they were talking about moving into zip 
codes. I saw some people sort of raise their eyebrows and 
chuckle; it is the truth. I mean, in Pensacola, FL, 32507, 
there are a lot of military retirees. Why? Because they all 
moved to be next to the Navy hospital.
    People from my generation--don't realize that people served 
in the military and believed for 30 years that they were going 
to be taken care of. Some understand the scope of the human 
tragedy to these people who plan their whole lives around this 
only to have it yanked out from underneath them.
    Mr. Gammarino, are we set up for failure? Would you invest 
in a company that set up a project like this?
    Mr. Gammarino. I wouldn't have designed it quite this way. 
[Laughter.]
    Mr. Scarborough. All of you are so diplomatic. God bless 
you.
    Mr. Gammarino. I think we do need a bigger risk pool. 
20,000 doesn't cut it. And it sounds to me, in the previous 
answers to your questions, you do have options to increase that 
pool to a full 66,000. And I would recommend not only that this 
be done, but that it be done in such a way that, 
demographically, you ensure a cross-section of individuals that 
will be representative of the whole eventual pool. And that way 
you can ensure that this small pilot will get the results that 
will provide you the answers about how to proceed going 
forward.
    Mr. Scarborough. Mr. Cummings.
    Mr. Cummings. You keep talking about this 20,000. Can you 
explain that to me? You mentioned it also.
    Mr. Gammarino. Yes. Our actuaries came up with that. And 
let me tell you what we did to provide you with that figure.
    Mr. Cummings. First of all, what is it?
    Mr. Gammarino. Excuse me?
    Mr. Cummings. What does the figure represent? The 20,000.
    Mr. Gammarino. The 20,000, in our estimate, is the number 
of individuals that are actually going to enroll in the FEHBP 
from the 66,000 eligible beneficiaries that have been allowed 
to participate.
    Mr. Cummings. That is what I thought. OK, now, go ahead.
    Mr. Gammarino. There are a couple of things we looked at. 
First of all, we took a look at the actual sites and when we 
took a look at the sites, we took a look at what was available 
to those beneficiaries today in terms of military treatment 
facilities. What do they have available today? In terms of 
coverage, health care coverage. In terms of either MediGap or 
Medicare risk, what is there today? What rates do they pay 
today versus what rates would they expect to pay in this 
particular program?
    So we took a look at each demographic site along those 
specific lines. Then we brought it up to the next level and 
said, one, this is a 3-year demonstration project. There is 
going to be some hesitancy in terms of people jumping into this 
program, not knowing if it is going to be there for them in the 
long run. And so those are some of the factors we used. And it 
is a guesstimate and I can assure you this: It will be either 
slightly higher or slightly lower.
    Mr. Cummings. But there is no way you will get up to 
66,000? Not even close?
    Mr. Gammarino. Not with the way it is designed right now. I 
don't see how that would happen.
    Mr. Cummings. So, I guess going back to you, Ms. Hickey, 
you were talking about increasing the sites. Is that right?
    Ms. Hickey. Yes, sir. I think that we have to get--first of 
all, we have one-fourth of our sites that are not 
representative of either DOD's population or the enrollment 
patterns of the FEHBP in general in this country. So you have 
25 percent of your sites that are not going to tell you a lot 
when you want to overlay it on the rest of the country, that is 
one reason.
    The second reason: We came at the same 20,000, or actually 
a little bit less, because we based it on the people, the same 
group of people, the Medicare-eligible military retirees, who 
were offered the opportunity to enroll in Medicare subvention 
and did not. Using that percentage and applying it to this 
population of 66,000 eligibles, we also came up with a little 
bit less than 20,000.
    The law allows 10 sites; 8 were picked. The law allows 
66,000 enrollees. There are only 66,000 eligibles in those 8 
sites. I don't see why we couldn't extend it to two other 
sites.
    Mr. Cummings. Now, going back to you, specifically 
mentioned Delaware and I think Puerto Rico.
    Ms. Hickey. Yes, sir.
    Mr. Cummings. And said that they were not representative of 
the kind of--well, what you are looking for. I mean, of what 
you would expect, generally, throughout the country.
    Ms. Hickey. Yes, sir.
    Mr. Cummings. So I guess you have two problems. One, you 
have two sites that are not representative that have, I guess, 
a limited number of people that would even be eligible.
    Ms. Hickey. In the Dover site, that is correct sir. Yes, 
sir.
    Mr. Cummings. And then you also have the problem where you 
could pick up two sites that would be representative but we are 
not doing that.
    Ms. Hickey. Yes, sir.
    Mr. Cummings. So, basically, when you net it out--and I 
notice when you answered me you said the Dover site, but then 
you didn't mention the Puerto Rican site.
    Ms. Hickey. Puerto Rico is different because of the 
enrollment pattern for FEHBP. The enrollment pattern in FEHBP 
in Puerto Rico is that the majority enroll in HMOs. That is not 
true anywhere across the country. If the purpose of this is to 
test the number of people that would enroll and in what type of 
program they would enroll in within FEHBP if we opened it up to 
our entire beneficiary category across the United States, then 
overlaying Puerto Rico on the same type of population is not 
going to tell you whether they are going to enroll in a fee-
for-service or an HMO, because the enrollment pattern in Puerto 
Rico is different.
    Mr. Cummings. So, therefore, if you net it out, you come up 
with six, right now, that probably pretty much fit the pattern.
    Ms. Hickey. Yes, sir. And one of those--excuse me, sir--but 
one of those----
    Mr. Cummings. No. No problem.
    Ms. Hickey [continuing]. Is the only site where there is 
any other competitive thing that DOD offers as an employer 
benefit and that is the Medicare subvention. And that only 
competitive site that is in this demonstration is Dover and it 
has a total of 3,900 beneficiaries. We are not going to even 
know, if you are offered subvention, would you rather have that 
then the FEHBP, when you are talking about a total of 4,000 
people, some of whom probably have other health insurance any 
way.
    Mr. Cummings. So when the chairman talks about whether we 
are doomed for failure, all of you seem to indicate that this 
20,000 problem is a major, major problem I guess because, one, 
it is not--I mean, you would think that you would have, if you 
are going to do a pilot, that the pilot is going to be 
representative because the reason why you do a pilot, as I 
understand it, is so that you can get a sample and see how it 
works and how it is going to be used as what we talk about up 
here costs--I mean, effective and cost-efficiency, looking at 
all those kinds of things. But if you don't have a true sample 
to start with, then you have a problem.
    Ms. Hickey. Yes, sir.
    Mr. Cummings. Is that a fair conclusion? Would that be the 
No. 1 problem, you think? When you talk about doomed to 
failure? This whole thing of the----
    Ms. Hickey. I think the first problem and I think we would 
all agree, at least the three of us, would be if the premiums 
were set significantly higher than they offer Federal 
civilians.
    Mr. Cummings. OK.
    Ms. Hickey. Because I think you would have two problems 
there. One would be the problem that the premium is higher, so 
therefore, somebody is going to choose not to enroll because of 
the premium. The other one which, in ways bothers me even more 
is that this group of people already feel they have been shot 
down by their country. They feel that a promise has been broken 
and probably it has. And then to say to them, because that is 
the way they are going to interpret it, you are not as good as 
a retired Federal civilian because we are going to charge you 
more for this program. I think in many ways it could do an 
awful lot of harm.
    Mr. Cummings. So No. 1 would be cost, the premium. No. 2 
would be this whole issue of our numbers. And what is No. 3?
    Ms. Hickey. The fact that I think that this population, as 
Ms. Pugh mentioned, is going to need a lot of education. They 
are making two choices; Federal civilians and Federal civilian 
retirees make one: Which plan do I want to be in next year? Our 
folks are going to have to make two. No. 1, do I want to even 
look at this demonstration that is only going to last 3 years? 
And, No. 2, having made that decision, which one of these plans 
am I going to enroll in?
    So there is a lot of education that has to go on. And if 
DOD is not going to get its brochures out until October 30th 
and open enrollment season starts November 8th, I think that is 
a problem.
    Mr. Cummings. Mr. Partridge, you put up a very good point 
about people possibly enrolling in the last year.
    Mr. Partridge. Yes.
    Mr. Cummings. That is a problem. I guess so this thing is 
structured so that people might join in the first, second, or 
third year. Is that----
    Mr. Partridge. Yes, sir. They will have an open enrollment 
season each year, just like Federal employees have, as I 
understand it. But the last year, since the program ends at the 
end of the last year, they have only 12 months in the program.
    Mr. Cummings. So your proposal is that you extend it so 
that everybody has at least 3 years. Is that right?
    Mr. Partridge. That is it.
    Mr. Cummings. OK. You are not talking about the first year 
people having 2 additional years beyond the 3-years? Do you 
follow what I am saying?
    Mr. Partridge. I understand what you are saying. I would 
say that the people who enroll the first year should be allowed 
to stay for the full length of the demonstration program.
    Mr. Cummings. OK.
    Mr. Partridge. And the people who enrolled in the last year 
should be allowed to stay at least 3 years.
    Mr. Cummings. OK.
    Mr. Partridge. So, yes, you could have people in there 
for--what--6 years.
    Mr. Cummings. I would hope that the next panel would--I 
mean, the reason why I am raising these questions is just so 
that the next panel can effectively, hopefully, can address 
these issues. Because I think you all have done a good job of 
punching holes in this thing.
    But, now, do any of you all have anything good to say about 
it? And I am not trying to be smart. I am just curious. The 
fact that it is there.
    Mr. Partridge. We are delighted it is there and we agree 
with Representative Cunningham, there is no reason why that we 
can't move this more quickly. Because the only thing we are 
talking about here is cost. That is the only thing that is 
holding it back. So we think it is going to be a very cost-
effective program and we should look forward to expanding it 
quickly without waiting for the full time of the demonstration.
    Mr. Cummings. But we have a program, we have a 
demonstration project, I guess you could kind of summarize it 
by saying it probably could use a little fixing up and making a 
few changes here and there to make it the best that it could be 
so that it can accomplish what we all hope that it will 
accomplish. Is that a fair statement?
    Ms. Pugh. Congressman, yes. It is a fair statement. The 
first thing is we have to fine tune the program as it is right 
now, but the second part is we don't want to delay it either. 
That would be the biggest concern. In response to your first 
question, yes, this is a big hope out there for the military 
retiree community. I will attest to the fact that last year 
when we published the fact that the House passed it 120 to 1 
every one of my members was calling in happiness.
    And even though we selected the sites and it wasn't in 
their State or their district, they said, I can't wait for this 
data to get together because I want to enroll. I had a woman 
who called from California 2 days ago who just read about this 
in one of the local newspapers. She said, you know, I signed up 
for the military career for my 20 years--and we are not 
debating about the free health care--but she said, my neighbors 
down the street have this great benefit. When can I see it. And 
I said, time. And she said, I don't have time.
    Mr. Cummings. I think one of the statements that you and 
the chairman, that you made and the chairman reiterated and I 
am going to certainly talk about it when I talk about wherever 
I go is this whole idea of people actually moving to certain 
areas so that they can get health care. I mean, that says a 
lot. And I think the chairman is right. I think a lot of people 
don't even realize how serious this whole question is of health 
care and people being able to get it. And so I want to thank 
you all for your testimony.
    Mr. Scarborough. Thank you, Mr. Cummings. Mr. Miller.
    Mr. Miller. Thank you. I appreciate you all being here. It 
is very concerning these statements you have made because this 
is something that we all want to see succeed. I mean, we really 
do. I have a large number of retirees in my district, not 
military retirees, but close to, probably, in my area of 
southwest Florida. We have beautiful beaches by the way. But 
the concern is how do we make it succeed? And maybe it is 
something that we have to do in Congress. And then, you know, 
we have to look at this. And we still have time to do some 
things as our authorization bills and our appropriation bills 
go through, you know, in the next few months. And so we need to 
have the input for that.
    How much input did you all have, the three military 
organizations plus Blue Cross, in the development of the plan 
to this stage? Have you all been able to provide input that you 
feel comfortable that they are listening to you?
    Ms. Hickey. We got invited to the bingo drum ceremony and 
several of us picked the sites after they rolled the bingo 
drum.
    Mr. Scarborough. Is that your input?
    Ms. Hickey. We have seen, as of last week, I think, the 
potential marketing plan and time lines and have responded to 
that. In the normal scheme of things, I would say if we were 
going back and looking at when we first saw the subvention 
marketing plans, it was well over 6 months before they even 
were going to market on the first site. That is part of my 
concern, is there a commitment at the Department of Defense to 
put as much marketing and other effort in this program as they 
did in their own subvention program, the one that they wanted?
    Mr. Miller. Mr. Gammarino.
    Mr. Gammarino. Well, we are sort of at the back end of 
this, as you can imagine. We are providing the care. I don't 
think we were significantly involved in the beginning. There 
have been some periodic meetings. We have initiated many 
meetings to get clarification both from the administrative 
perspective and also from the issue of underwriting risk.
    And Mr. Cummings asked if there were anything significant 
that would hold this project up and I think, us being the 
largest carrier and I think many of the other carriers also see 
this as an issue as well, and that is ensuring that the 
underwriting risk is patterned after and follows what is there 
today and not to jerry-rig some other administrative mechanism. 
To do that really undermines the credibility of this program in 
the long run.
    So we would have liked more participation. We would still 
like more participation today. And we do stand ready to assist 
both agencies in delivering this program.
    Mr. Miller. Well, thank you very much. You know, we are 
going to do everything we can to make sure this succeeds and if 
there is something we can do in the authorization or 
appropriation bill yet this year, we can do that. But I think 
we are all looking forward to the next panel.
    Ms. Pugh. Can I interject one moment? And I apologize. What 
you could do this year is where we are today is there are no 
operational guidelines so no one can move forward on doing 
anything. So I guess that is my question. If it is being held 
up, so to speak, in OMB, then the rate issue definitely has to 
be figured out or solved. And it is this committee and the 
agencies need to work together because I think as we have 
already stated, that is a very big concern of creating two 
different benefits for two different populations, civil 
servants and retirees. Yet, again, it is a disconnect in 
benefits. Thank you. I apologize.
    Mr. Miller. Thank you, Mr. Chairman.
    Mr. Scarborough. Thank you, Mr. Miller. The representative 
of the district that has the second most beautiful beaches in 
Florida and all of America. We have studies to prove that.
    Ms. Hickey. Aren't you happy Mr. Mica is not here.
    Mr. Scarborough. Well----
    Mr. Miller. He doesn't have any beaches.
    Mr. Scarborough. He doesn't. No. He is not even in the top 
10.
    I want to just followup very briefly two quick points. Mrs. 
Hickey, you keep talking about the short fuse and keep talking 
about October being the time line to get some educational 
mailings out. I wanted to ask you. I have a time line here that 
talks about the first educational mailings going to be going 
out to eligibles and the deadline for that is tomorrow, July 1, 
1999. And I understand that you actually saw--I think saw--
copies of this about a week ago. Are they helpful?
    Ms. Hickey. That was the original time line that those of 
us in the coalition and the Veterans Alliance received as well, 
sir. But we had an updated one about 10 days ago that was e-
mailed out to several of us to make comments on. And that one 
stated that they were not planning on putting stuff in the mail 
until October 30, correct?
    Ms. Pugh. Yes. I have the time line right here, the most 
recent one. And the information to distribute out was starting 
July 15. That was a postcard. But the actual information 
wouldn't be until October 30, they would have the FEHBP 
enrollment and marketing and beneficiary information. This is 
the most recent that I received from DOD.
    Mr. Scarborough. Really?
    Ms. Pugh. I feel like I am on the sidelines sometimes.
    Mr. Scarborough. Well, actually we are----
    Ms. Pugh. Asking for information is a difficult thing in 
this city sometimes.
    Mr. Scarborough. We are actually, I think, further out on 
the sidelines and maybe up in the stands rooting, because we 
have actually got this time line, June 28, 1999, which was a 
day or two ago. Ours is even more dated than yours.
    Ms. Pugh. Well mine says DOD and maybe you had a different 
agency. I don't know if that is OPM's time line.
    Mr. Scarborough. Yes, it is OPM's but they have gone ahead 
and been kind enough to put an X by July 1 for DOD to get it 
out. All right. Well, I want to thank all of you for coming 
and, Ms. Hickey, I want to, once again, take you to task for 
using ``may'' again. You said this ``may'' have been a broken 
promise. Let us be very clear right now. I talked to retiring 
General Charles Krulack and the other joint chiefs in a DOD 
hearing a year or two ago and all four of them testified that 
it was a broken promise.
    Ms. Hickey. I agree.
    Mr. Scarborough. I agree with them and I will guarantee you 
every military retiree in my district believes that Congress 
and this administration and past administrations have not kept 
their promises. So I thank you all for what you do every day to 
make sure that we keep our feet to the fire. Thanks a lot.
    Our final panel, and most popular one today, actually is 
going to be comprised of two distinguished witnesses. One is 
Rear Admiral Thomas Carrato, the Director of Military Health 
Care Systems and Operations at the Department of Defense's 
TRICARE Management Activity. And the second is Ed Flynn III, 
the Associate Director for Retirement and Insurance at the 
Office of Personnel Management, and a regular guest here at our 
subcommittee.
    And I understand, Admiral, that you are going to be up for 
your second star very soon and we certainly congratulate you on 
that accomplishment and certainly know, coming from a Navy 
town, that that is a lifetime of commitment to excellence. So 
we commend you on that and welcome you to our committee. I look 
forward to your testimony.

STATEMENTS OF THOMAS F. CARRATO, REAR ADMIRAL, USPHS, DIRECTOR, 
    MILITARY HEALTH SYSTEMS OPERATIONS, TRICARE MANAGEMENT 
  ACTIVITY, DEPARTMENT OF DEFENSE; AND WILLIAM E. FLYNN III, 
  ASSOCIATE DIRECTOR FOR RETIREMENT AND INSURANCE, OFFICE OF 
                      PERSONNEL MANAGEMENT

    Admiral Carrato. Thank you, Mr. Chairman. I appreciate the 
opportunity to discuss our progress in implementing the FEHBP 
demonstration program. The Department of Defense has worked 
closely with the Office of Personnel Management in preparing to 
implement the demonstration program. We have selected eight 
sites for the program and are preparing to notify eligible 
beneficiaries about the program this summer and conduct an open 
season in coincidence with the usual FEHBP open season in 
November for health care beginning January 2000.
    The statute requires the Secretary of Defense and the 
Director of OPM to jointly identify and select the geographic 
areas in which the demonstration project will be conducted. 
Statute limits the size of the demonstration to no more than 
66,000 participants, 6 to 10 locations, with not more than 1 
site per TRICARE region. Sites must include a catchment area, 
one or more military hospitals, an area that is not located in 
the catchment area of a military hospital, and an area in which 
there is a Medicare subvention demonstration project. Our 
current best estimate is that there are approximately 70,000 
persons eligible for the demo, based on their place of 
residence and their category of eligibility for military health 
system care.
    Two principal factors influenced the Department's decision 
for sizing the demonstration at approximately 69,000 eligible 
beneficiaries. First, DOD wanted to avoid an artificial cap on 
enrollment in the demonstration. And, second, while the demo is 
authorized for up to 66,000 participants, no funding was 
provided. The Department's fiscal year 2000 budget includes 
funding of $79 million for this demonstration and two other 
demonstrations authorized in the Defense Authorization Act for 
Fiscal Year 1999. And this closely matches the CBO pay-as-you-
go estimate for these demonstrations. Based on current 
government contributions and anticipated increases in the FEHBP 
rates, this could result in a cost in excess of $130 million 
for the FEHBP demo alone if 66,000 participated.
    In summary, the Department believes the demo is sized to 
yield statistically relevant data, no requirement to 
artificially cap participation, and is in line with the cost 
estimates done by the CBO for this initiative.
    The Department and OPM have been jointly developing an 
FEHBP demonstration marketing plan. The marketing plan 
describes our approach to educating our eligible beneficiaries 
about the demonstration program. Our strategy will include 
mailings to beneficiaries, which will begin actually July 15. A 
toll-free telephone call center to respond to beneficiary 
inquiries and distribute materials. And this will start in 
September. And participation in health fairs during the open 
season in November.
    During the open season, all eligible beneficiaries will be 
directly mailed a special guide. The guide will list important 
information about participating plans, health benefits offered, 
premium costs, and instructions for requesting individual plan 
brochures. As you can see, the Department has taken numerous 
steps to ensure timely and accurate information is provided to 
the demonstration-eligible population.
    Mr. Chairman, I want to address specifically the issue of 
access to health care for military beneficiaries over the age 
of 65. TRICARE will always be incomplete until we have the 
capability to enroll retirees over the age of 65. Access to 
military health care is a benefit these people have earned, 
based on their years of service to and sacrifice for their 
country. Many of them were promised free care for life if they 
spent a career in the military. DOD feels a sincere and 
enduring responsibility for the health of our retired 
beneficiaries and will do all it can to meet its moral 
commitment to provide health care for our retirees and their 
families. We are committed to finding the best alternative for 
ensuring our older retirees and their families comprehensive 
health care delivery.
    This concludes my statement and I, of course, would be 
happy to answer all of your questions. Thank you.
    [The prepared statement of Admiral Carrato follows:]
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    Mr. Scarborough. Thank you, Admiral. Welcome back, Mr. 
Flynn.
    Mr. Flynn. Thank you, Mr. Chairman.
    Mr. Scarborough. Good to see you again. I look forward to 
your testimony.
    Mr. Flynn. Thank you very much, Mr. Chairman. I want to 
thank you for inviting me to testify today on the Federal 
Employees Health Benefits Program demonstration project for 
Department of Defense Medicare-eligible beneficiaries and 
dependents.
    There has been a lot of testimony today and I will try and 
emphasize just a couple of key points, Mr. Chairman. But first 
let me say at the outset that I firmly believe the 
collaboration between the Office of Personnel Management and 
the Department of Defense on this project has been and 
continues to be strong. Further, our individual work with 
representatives of military retirees and their families, and 
with the health insurance plans affected by the demonstration 
project has been equally extensive. All of this work, in my 
judgment, will lead to an effective rollout of this project and 
will set the stage for a sound assessment of its potential for 
helping to address the health care needs of this particular 
group of military retirees and their families.
    Second, our primary goal in this project has been to 
structure the health care delivery system in ways that mirror 
the Federal Employees Health Benefits Program, departing from 
those practices only where the nature of the demonstration 
project requires a change. We believe this is consistent with 
the intent of the project and will also contribute toward a 
solid evaluation of the project's potential for expansion.
    Mr. Chairman, I would like to address two points that I 
know are of concern to you and other members of the 
subcommittee and which have been addressed in earlier testimony 
today. First, we have now received rate and benefit proposals 
from all of the health insurance plans that will be 
participating in the project in the different test areas. As 
you know, we are still negotiating with them and the other 
plans that will be offering health insurance in the Federal 
Employees Health Benefits Program during the year 2000.
    Nonetheless, I can say to you today that in my judgment, 
military retirees and others who will be able to participate in 
the project will have an adequate number of health plans from 
which to choose. The number of health plan choices available in 
the different test areas will range between 8 and 15 and the 
average number of plans in each area will be 11.
    This is the case for two reasons, one of which leads to my 
second point addressing one of your concerns as well. First, 
however, we deeply appreciate the cooperation we have received 
from the health plans that participate in the Federal Employees 
Health Benefits Program. For many of them, participating in 
this project was a new and somewhat uncharted experience. 
Through their cooperation and willingness to work through 
issues of concern, I believe we have a good number of health 
plan choices to offer affected individuals.
    Second, since this is a startup program with no specific 
utilization experience and a statutory limit currently on its 
duration, we believe that premium rates can be kept competitive 
only if risk experienced by the health insurance plans is 
mitigated. If premium rates are not competitive, it will be 
impossible to accurately compare enrollment trends and 
otherwise assess the project. And I think that was borne out in 
the testimony, particularly by the previous panel. Therefore, 
absent some mechanism to protect health insurance plans that 
might experience smaller enrollments and higher utilization, 
insurers would add risk charges to their premiums. And these 
can produce major distortions in the demonstration project.
    OPM has developed an approach to address this problem that 
we believe is reasonable, logical, and fully supported by the 
law establishing the project. Our proposal is to assure 
participating carriers that we will supplement premium revenues 
with money from the administrative reserve if necessary.
    Now, Mr. Chairman, both you and Congressman Burton 
expressed some concerns about this strategy in a recent letter 
to Director LeChance. Perhaps if I lay out exactly how we plan 
to implement our proposal, we can begin to put these concerns 
to rest.
    By law, the Office of Personnel Management has the 
discretion to distribute excess administrative reserves to the 
contingency reserves of health plans based on their market 
share. Should it be necessary in this project to supplement a 
health plan's revenue from the administrative reserve, we would 
go first to that plan's proportional share of the reserve 
itself. Only if that share were exhausted would we intend to 
use funds that might ultimately go to others and we would 
maintain strict accounts of which plans received what amounts. 
We believe this approach is consistent with the law 
establishing the demonstration project.
    The bottom line, Mr. Chairman, is that our action on this 
matter does three important things. First, it ensures 
competitive premiums. Second, the affected population will have 
more health plan choices than would have been the case 
otherwise. And, finally, it enables the Office of Personnel 
Management and others to see clearly the cost of carrying out 
the demonstration project in order to assess its effectiveness.
    In summary, both the Department of Defense and the Office 
of Personnel Management have worked hard to make this project a 
success and to lay an effective foundation for its assessment. 
We have collaborated with a wide range of interested parties to 
ensure that the design of the project addressed concerns. And 
we are about to embark on a major educational effort leading to 
an open enrollment period this fall for health benefit coverage 
beginning next January. We are excited about the project's 
potential and eager to move forward to carry it out.
    Mr. Chairman, that concludes my statement. I would be happy 
to answer any questions you or other members of the 
subcommittee have.
    [The prepared statement of Mr. Flynn follows:]
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    Mr. Scarborough. All right. Thank you, Mr. Flynn. 
Appreciate it.
    I want to start, Admiral, by saying that I certainly 
appreciate in your opening testimony that you did say that your 
belief is and DOD's belief is that these men and women and 
their families were promised health care for life. That is a 
great place for us to start. I also was pleased that you saw it 
as a moral commitment. Unfortunately many people in past 
administrations have not felt that way.
    I want to start with a couple of clarifying points. First 
of all, there was some question on the first educational 
mailing. We had seen something that said that it was going to 
be July 1. There was also some testimony earlier that they 
received an e-mail saying it wasn't going to be until October. 
You have now stated that it is going to be on July 15. Tell me 
what is going out on July 15 and who is it going to? Will it go 
to all 69,000? How extensive will that be and can this 
committee get a copy of that as soon as possible?
    Admiral Carrato. Yes, absolutely. In my written testimony, 
which I have submitted, I have attached a time line which lays 
it out. Just to start with, I think we recognize what a complex 
educational effort this will be for our retirees, given that 
they aren't Federal employees. So we do have a fairly steep 
learning curve.
    We actually have started in mid-June by posting some 
information on our TRICARE website, some basic information. And 
I apologize for the confusion as to when the first mailing will 
go out. But we are going to distribute the postcard to all 
eligible beneficiaries, a description of the project, and lay 
out information regarding scheduling of the various marketing 
activities, some information on the open enrollment season.
    In September--if you will permit me, I will just walk 
through a couple of the key points which I think are important.
    Mr. Scarborough. Sure. Go ahead.
    Admiral Carrato. In September, September 1, actually, we 
have prepared a trifolder. It is in draft and we are 
coordinating it. September 1, we will distribute an FEHBP demo 
trifold to our information processing center which will then go 
out to all eligible beneficiaries. It will go out to our 
TRICARE service centers at our facilities. It will go to 
retiree affairs offices, public affairs, et cetera.
    On September 7--and I think this is a very, very key 
activity--is we actually are setting up a 1--and, actually, 
they have exhausted 800 and 888--we have a 1-877 FEHBP number 
and there will be a phone system dedicated to answering 
questions, providing information to all our beneficiaries. So I 
think that is actually an excellent effort. Mid-September, we 
will distribute additional press releases. And then on October 
30, we will submit more, fuller information on plans, prices, 
et cetera. And then we will conduct the open season with health 
fairs, beginning in November.
    Mr. Scarborough. So July 15 you are going to be sending out 
a postcard.
    Admiral Carrato. Yes, sir.
    Mr. Scarborough. Just a generalized postcard, explaining 
time lines and what is going to happen.
    Admiral Carrato. Yes, sir.
    Mr. Scarborough. And who is going to be eligible. Your 
trifold is going out in September.
    Admiral Carrato. Yes, sir.
    Mr. Scarborough. Is that going to be something that is 
going to be extensive enough that--and let me get the 
clarification, because you said you are actually going to start 
distributing that on September 15. When are military retirees 
going to be able to get that in their hand and understand what 
is going to be happening within a month's time?
    Admiral Carrato. I guess there are two pieces to it. One is 
the trifold, which will provide some general information. We 
think in this program, premarketing is critical. For example, 
if you enroll in FEHBP, you are not eligible while you are 
enrolled for services at a military treatment facility. That is 
a real important point to make sure people clearly understand 
that. So we have some--the trifold will have some good 
information about all the aspects of the program.
    I think what you may be asking is when will we have 
specific information on the plans and the premium costs? And 
that will not be until the guide goes out in October.
    Mr. Scarborough. That exclusion is statutory, just for the 
record. That exclusion that you are speaking of is statutory, 
not something that you all dreamed up in the middle of the 
night.
    Admiral Carrato. Yes, sir. That is by statute, sir. Helping 
us.
    Mr. Scarborough. A little bit.
    Admiral Carrato. If it wasn't by statute, I probably 
wouldn't have mentioned it.
    Mr. Scarborough. Yes, exactly. Let me ask you--well, 
actually, let me make a statement just for the record and just 
tell you that I guess it was July 1, back in 1996 that TRICARE 
was implemented and they had an 800 number at that time. 
Unfortunately, they didn't spend enough money and man enough 
people on that phone to make that happen. I know that because I 
received a stack of letters about this big from my district.
    Admiral Carrato. Yes, sir.
    Mr. Scarborough. It was an absolute nightmare and Humana 
came down and testified and DOD came down and testified talking 
about this wonderful 800 number. And it was of no practical 
effect other than it made our military retirees and dependents 
even more frustrated. I would just urge you to make sure that 
you all spend enough money on the people who are answering 
those questions, whether it is in Topeka, KS, or Washington, 
DC, or wherever that when somebody calls up they are not put on 
hold for 3 hours or they don't get a recording. First of all, 
are you aware of the problems that we had with the TRICARE 800 
number?
    Admiral Carrato. Yes, sir. Absolutely.
    Mr. Scarborough. OK. I don't want that to happen.
    Admiral Carrato. I am painfully aware of them.
    Mr. Scarborough. OK.
    Admiral Carrato. And, unfortunately, in our most recent 
startups, we also had some similar concerns with telephone 
response rate.
    Mr. Scarborough. Fine.
    Admiral Carrato. Which I am happy to report we cleared up 
in a hurry. But one of the things, I, too, when we have a 1-800 
number, it probably stands to reason that people will call that 
number.
    Mr. Scarborough. Oh, sure.
    Admiral Carrato. And we need to make sure that we do have 
the phones answered. We have paid particular attention to that 
and made it perfectly clear. The phone actually is in Des 
Moines, IA, is where it is going to be.
    Mr. Scarborough. I knew it had to be somewhere in the 
Midwest. I commend you. And I am going to be forwarding all the 
positive responses I get from my constituents when they tell me 
how successful that 877 number is.
    Let me ask you this question. You have heard from the 
previous two panels that a lot of people do not believe that we 
are going to have any more than 20,000 or so participants in 
the program. Do you agree with the testimony of our other two 
panels that we are not going to get anywhere close to the 
66,000 number that Congress originally intended?
    Admiral Carrato. I don't agree with the estimate as low as 
20,000. As we looked to size the program, we relied on a couple 
of reports, actually three reports. Two by CBO, one by GAO. CBO 
in a 1995 report estimated--and, again, it is not completely 
analogous--but as they looked at a nationwide FEHB Program, in 
the 1995 report, CBO estimated that the enrollment, the take 
rate, would be 95 percent for the over 65s. In 1997, GAO 
estimated the enrollment rate at about 83 percent for military 
over 65s. And then in 1998, CBO actually revised their estimate 
and they thought it would be about 70 percent participation 
rate.
    So we actually believe it will probably be in the 83 
percent range is what we believe. I think one of the reasons of 
the demonstration and actually one of the reasons for actually 
keeping the enrollment level at the eligible level at 66,000 is 
we want a true test of who will participate. If we had 
substantially more than that, it could lead to a situation 
where we would have to cutoff enrollment. We wouldn't have a 
true and valid test of the enrollment rate. So I think the 
enrollment rates will be much more significant than 20 percent.
    Mr. Scarborough. Really. Or 20,000.
    Admiral Carrato. Yes, 20,000. I am sorry. 20,000.
    Mr. Scarborough. So you think 85 percent. That is, I think, 
a higher percentage than what FEHBP gets right now from--is it 
about 85? Yes, from their employees. Do you understand what the 
concern is about it being a one-time project? A 3-year project?
    Admiral Carrato. Yes, right.
    Mr. Scarborough. You think 85 percent of the people are 
going to say that they are willing to give up their current 
health plan for a program that may not be around 2 or 3 years 
from now?
    Admiral Carrato. I think they will. And I know in one of 
the earlier panels there was a concern about looking at our 
experience with the TRICARE Senior program, the Medicare 
subvention program. And the fact that there was some 
speculation that enrollment would exceed all expectations. And 
in some locations, the enrollment was below what was expected. 
Now keep in mind that TRICARE Senior was conducted within 
catchment areas. And that some of those areas, on a space-
available basis, large medical center, they have access to the 
MTF and I think that factored into the decision. You know, if 
you have access to a military treatment facility, then perhaps 
you don't have to enroll in a demonstration program. The FEHBP 
sites are in areas where we don't have as robust an MTF as we 
do in some of the TRICARE Senior sites.
    So I expect that we will have significant enrollment, given 
that it is a demonstration program, even given that.
    Mr. Scarborough. Boy, if it is up to 85 percent--and I know 
this sort of puts you in a no-win situation--but if it is up to 
85 percent, isn't that a heck of an indictment against the 
military health care system, as it is right now? That DOD 
believes 85 percent of the people would choose to bail out of 
that system?
    Admiral Carrato. Well, I don't think it is bailing out of 
the system. If you look where these demonstration sites are, 
you know, they are for non-catchment so, by definition, there 
is no MTF in that location and in the sites where we do have 
military treatment facilities, I think, as Mrs. Hickey 
indicated, much smaller capacity and capability of those 
facilities. So I think the judgment that a Medicare eligible is 
making is do they want to continue on a space-available basis 
getting what access they can or would they like to enroll in a 
program and upfront know what benefit they are eligible for and 
it is a little more predictable.
    Mr. Scarborough. One final question before I turn it over 
to the ranking member. I wanted to ask you this because you 
suggest that we could approach that, but in the written 
statement, you say that 66,000 participants in the FEHBP could 
cost the DOD more than $130 million. Now the President budgeted 
about $79 million for this demonstration project and the Senior 
Supplemental Administration project together. So, obviously, 
that is a shortfall of about $50 million.
    I want to ask you, because, again, from my understanding, 
the Senior Supplemental is going to be taking at least as much 
money as this project. How much of the $79 million is budgeted 
for FEHBP for that demonstration project, and the budget for 
Senior Supplemental?
    Admiral Carrato. Sure. And I will round numbers so it won't 
add up exactly, but we have actually budgeted, in the 
President's budget, we have $79 million for three demonstration 
programs that were authorized. For FEHBP, it is about $62 
million that we have allocated. For the TRICARE Senior 
Supplement, it is about $14 million. And for the over 65 
pharmacy, it is about $4 million.
    Mr. Scarborough. So that is $62 million for over what time 
period?
    Admiral Carrato. Fiscal year 2000.
    Mr. Scarborough. Fiscal year 2000. OK. And what number of 
participants or participation rate is the President's budget 
based on?
    Admiral Carrato. We looked at about 80 percent, we 
estimated.
    Mr. Scarborough. 80 percent. So you would agree with our 
friends on the previous panel that if it is lower than that and 
the risk is not as spread out, that those costs could 
skyrocket. Would you agree with that?
    Admiral Carrato. If the participation rate is less?
    Mr. Scarborough. Right. If we have 20,000 instead of, say, 
60,000.
    Admiral Carrato. I think the issue is where will the 
participating plans set their premiums. And I think the largest 
concern is information on our beneficiary population. Now, to 
the extent we have it, we have provided that information to OPM 
and I think they, in turn, have supplied that to the plans. But 
there is some concern on the part of the plans, so I think that 
is the issue, you know, what is the risk level? There is some 
possibility, if it is a lower enrollment rate, that there could 
be some adverse selection. And, you know, I don't know. I don't 
know.
    Mr. Scarborough. Thank you, Admiral. Mr. Cummings.
    Mr. Cummings. Admiral, I have to tell you, when you 
mentioned the 85 percent, people in the audience began to smile 
and I think they share with me--and I can really begin to kind 
of understand their cynicism. If the FEHBP is doing--what did 
you say? 85 percent? And then we look at this program. I mean, 
I don't care what kind of studies we look at. Logic just tells 
you that that doesn't--unless I am missing a factor or some 
factors that you haven't talked about today, I don't see how a 
program that has a big question mark is going to draw the same 
kind of numbers as the FEHB Program. And I think that if 
somebody said that to you based upon what we know, I don't--
maybe I am missing something and you can help educate me. I 
don't see how you would come to that same conclusion either.
    Admiral Carrato. OK.
    Mr. Cummings. I mean, let us set the reports to the side.
    Admiral Carrato. OK.
    Mr. Cummings. Let us just deal with the logic.
    Admiral Carrato. OK.
    Mr. Cummings. I mean, am I missing something?
    Admiral Carrato. Yes. And, setting the reports aside, 
because that was one big factor we looked at, I think some 
factors you have to consider. For our over 65 military 
retirees, they are not eligible to enroll in the TRICARE 
program. They are eligible for space-available care at our 
military treatment facilities. And, as I mentioned with 
downsizing and with the implementation of the TRICARE program, 
some of the capacity is not as readily available for the over 
65s. Plus our over 65 population is growing. It is increasing 
dramatically. So a lot more over 65s. We have less care 
available.
    Now, some of our over 65s, recognizing that limitation, 
have made other arrangements. A large majority have Medicare 
part fee, so they have a Medicare program available to them. 
Some are enrolled in Medicare risk plans. But I think a large 
percentage of them would like to have a predictable health 
plan. The FEHB Program offers a good benefit. So I think there 
will be--based on all those factors--I think there will be 
significant enrollment, even given that it is a demonstration 
program.
    Mr. Cummings. I will come back in a moment. Now, Mr. Flynn, 
you heard the concerns, right? And I am sure you tried to 
address them in your testimony. I didn't hear it all. I 
apologize. I will have to review your testimony.
    Those three problems, you remember them? They talked about 
the premiums.
    Mr. Flynn. Premiums.
    Mr. Cummings. They talked about the information getting 
out. And there was one other thing. The measure--the number, 
right. Thanks. I call these senior moments. [Laughter.]
    So, I mean, just real briefly, can you address those three 
real quick? I mean, without----
    Mr. Flynn. Yes, Mr. Cummings, I will try and do that. In 
the remarks that I made, I tried to indicate that we have taken 
steps that, for this demonstration project, will ensure 
competitive premiums for the military retirees and other 
eligible beneficiaries.
    And, if I might, I want to relate that statement to the 
question that you asked of Admiral Carrato and that had to do 
with the numbers of people who would sign up. Let us just 
assume for a moment that we offered the Federal Employees 
Health Benefits Package of benefits for no cost to the 
individual. I would suspect that if there were 69,000 eligible 
individuals, 69,000 people would line up at the door to be able 
to gain access to that health care.
    The only reason I say that is because, whether it is in the 
Federal Employees Health Benefits Program or anywhere else, 
people are price sensitive--very much so, about the cost of 
their health care. So the fact that premiums are going to be 
competitive, I think, does help in attracting higher numbers of 
people to participate in this demonstration project than might 
otherwise be the case or if there were not a competitive 
premium.
    The other thing that I would say that I think has some 
influence is that when you think of an individual participating 
in the Federal Employees Health Benefits Program, on behalf of 
herself or himself or the family, what they tend to look at is 
what is my out-of-pocket cost? Now, keeping in mind for a 
moment that the typical participant is going to be someone who 
has Medicare, Part A and B, and who pays the $42 a month Part B 
premium, for all practical purposes, what the Federal Employees 
Health Benefits Program enrollment means to them is it wraps 
around Medicare, which is the primary payer.
    Since the typical cost of a MediGap policy for a couple 
runs from roughly $750 to as much as $3,000 a year, and the 
average participant share of the FEHB Program runs from roughly 
$370 to $1,750, you can see that if someone has Medicare and a 
MediGap policy, it is more likely than not that the out-of-
pocket comparison is going to favor joining the FEHBP and 
having it coordinate benefits with Medicare.
    So, again, I think that speaks to the potential for a 
higher number of enrollees than some might have predicted. The 
end of the day, though no one really knows and you have to be 
prepared for the number of people that do enroll, subject to 
whatever statutory limit there is.
    I have listened to the issues about information, and I 
think Admiral Carrato has helped clarify a great deal, the 
information strategy and the information steps that will be 
taken over the course of the next several months to help these 
potential beneficiaries participate in this program. As Mrs. 
Hickey mentioned, there are really two questions that these 
individuals will be asking: (1) Do I want to move to this 
option, compared to the other options that I have? And, (2) 
Assuming I do, what are the choices of health plans that I have 
available?
    And I think the staggered plan for information, the ability 
to get information from a variety of sources that we have 
worked on with the Department of Defense is based on our own 
experience, a reasonable approach to that we are giving people 
information in the order of: What you need to know today is 
whether or not you might want to join; what you will need to 
know just prior to the start of the open enrollment period is 
what choices do you have and of those choices, which seems best 
for you? And I think that is a reasonable approach to the 
information issue.
    Mr. Cummings. Can we hold on that point?
    Mr. Flynn. Sure.
    Mr. Cummings. Assuming you weren't finished.
    What are we doing--and maybe you should--you might want to 
answer this, Admiral--are we working with the National Military 
Families Association? I mean, are we in contact with the 
stakeholders as we process this? I mean, these are the people 
who have folks who they are dealing with every day. I mean, 
that is their job. They do it 60 hours a week. You know? And so 
I am just wondering how much contact we have with them in 
getting the information out. What is the status of that?
    Admiral Carrato. Right. We jointly have met with the 
coalition and alliance organizations and we have shared the 
draft materials with them and they have provided their input, 
comments on those materials. And they have been very helpful in 
all of these demonstrations. They were very instrumental in 
identifying some enhancements we could make to the TRICARE 
Senior program. So they have been involved.
    Mr. Cummings. And you all do listen?
    Admiral Carrato. Yes, sir.
    Mr. Cummings. And the reason why I asked that is that, I 
mean, it gets very frustrating and I am sure Mr. Scarborough 
would agree with me. I mean, we go to these town hall meetings. 
And if people feel that we don't listen to them, then they get 
kind of cynical. And next thing you know, you don't have people 
that would normally participate participating because they 
don't want to waste their time. They would rather be home doing 
something else. And so that means, just from a very practical 
matter, I just was curious.
    And I am curious about this Mr. Flynn. DOD said the 100 
percent enrollment would cost $230 million. The President 
budgeted it at $62 million. Does that create a problem?
    Mr. Flynn. Well, it doesn't create a problem for us. We 
send a bill to the Department of Defense and expect them to pay 
it. [Laughter.]
    Admiral Carrato. Sir, that was----
    Mr. Cummings. Good answer. It is what you call passing the 
buck.
    Admiral Carrato. Yes, sir. The figure we quoted was if we 
had full enrollment at 66,000, that would be the cost of the 
program. And we don't believe we will have, you know, full 
enrollment. We think we will have very significant enrollment. 
But we just added that number just to show you what the 66,000 
at an average premium and with the government's contribution, 
of about, you know, 74 percent, that would be the Department 
estimate.
    Mr. Cummings. Now you know I have to ask you this question. 
You said that you anticipated somewhere in the 80, 85 percent 
range, right? And so I am just dealing with percentages now. 
Let us assume we have 80 percent.
    Mr. Scarborough. 85 percent is $112 million.
    Mr. Cummings. Are you serious? [Laughter.]
    Thank you.
    Mr. Scarborough. I didn't add that. I went to Alabama.
    Mr. Cummings. This is what you call bipartisan cooperation.
    Mr. Scarborough. That is right.
    Mr. Cummings. So, help me. I mean, we have 100--based upon 
your own testimony. I guess we come up with about somewhere in 
the area of $112 million bill and we have--we are dealing 
with--now, again, that is a percentage. We are just dealing 
with percentages. Yes, your percentages. So, help me.
    Admiral Carrato. The fiscal year starts this October and 
then we wouldn't actually start enrollment until--our health 
care delivery begins in January. So that accounts for all of 
it. And the averages of the premiums. We were using averages. 
So that accounts for the difference.
    Mr. Cummings. Let me just say this in summary. I think that 
you--I think that the people who--I mean, I could take that a 
step further, but I am not going to do that. I think you get 
the point.
    Admiral Carrato. Right. [Laughter.]
    Mr. Cummings. The problem is that we have people who really 
feel like they have been set up for failure. And that is not a 
real good feeling. I mean, for us, we don't--and we don't want 
to be a part of that process. We don't want to go to our 
constituents and our constituents say, you know, we thought you 
were doing A but really it didn't turn out to be A, it turned 
out to be something much less. And so we have a responsibility 
and a duty to get into these kinds of issues. And when we have 
the stakeholders' representatives here and they are sitting 
here and they are shaking their heads, I think what it does is 
it causes us a little bit of anxiety. And, you know, they have 
listened to all of this and they are going to go back to their 
folks and say this is what we believe.
    Admiral Carrato. OK, can I respond?
    Mr. Cummings. I am almost finished. But they have set a bar 
and they basically said we don't believe this is going to work. 
And that is what I am hearing. And I believe that, in the end, 
when all the dust settles and everything, it probably will 
work. But right now there is a presumption that it is not going 
to. And, to be frank with you, some of the testimony here today 
hasn't helped. It hasn't helped. I think they will go out 
feeling probably just as they did or worse. And they can speak 
for themselves at some other time. But I do want to hear what 
you have to say, but I just want you to see----
    Admiral Carrato. Sure.
    Mr. Cummings [continuing]. See it from our perspective, 
too. I mean, we want success. That is why we are here.
    Admiral Carrato. OK.
    Mr. Cummings. And I am not saying you don't.
    Admiral Carrato. Yes. And that is basically what I was 
going to start with is that we clearly, and OPM clearly 
believes this, is we want to have a valid demonstration. I 
don't want to be involved with a demonstration program that is 
set up to failure. I just wouldn't operate that way. I think 
the issue we are talking about is participation rates.
    And just to set that aside for a moment, but I think we, 
working closely with OPM, I think we have developed a 
demonstration program that I think will be a very valid test of 
this program. I think we have taken steps to education is a big 
piece. And I think we have taken great steps to educate the 
beneficiaries and educational material never comes out fast 
enough and you can never get enough educational material out 
for any new program. I agree with that.
    The question of take-up rates. I don't think the success of 
this demonstration hinges on, you know, whether we have 60, 70, 
80 percent enrollment. I really don't. I think we have designed 
this, as we went through the site selection, we designed it 
that we would have--and our statisticians, our actuaries have 
also looked at this. And I am confident that we will have a 
statistically valid demonstration program and one that we can 
learn great lessons from.
    So I do not think it is set up to failure. I think it is 
actually going to be very, very successful and I am anxious to 
get the answer to the question of how many people will 
participate. I told you what, you know, our estimates are. We 
have heard others. And so I think that is going to be one of 
the results of this demonstration.
    Mr. Cummings. I think Ms. Pugh said it best. I think she 
said something to the effect that we don't want to be sitting 
here a few years from now looking backward and basically having 
not accomplished what we needed to accomplish. And, in the 
meantime, so many people will have suffered. You see, that is 
the bottom line.
    Admiral Carrato. I agree. I agree.
    Mr. Cummings. Thank you very much.
    Admiral Carrato. Thank you, sir.
    Mr. Scarborough. Thank you, Mr. Cummings. I want to 
followup, briefly, on a few points. Let me say, Admiral, I do 
believe you want this to succeed. It was very interesting when 
you were testifying about working with the groups that you did 
take their input. I looked at them and they were agreeing that 
you had and I commend you for that.
    I will just say this, though. You know, our ranking member 
talked about cynicism. I think we can sit here all day and talk 
about how we are not setting this up for failure and how we 
want this to succeed, but, unfortunately, the people who sent 
you over here to testify in this administration--certainly not 
your doing and Mr. Flynn's doing--set you up for failure today 
by telling you that they believed and the DOD believed that 
there was going to be an 85 participation rate and yet they 
only funded you for 50 percent. And that is about $50 million 
short of that--let us see. You had $112 million for 85 percent 
of what was projected. And then the $62 million cost. So, we 
are about $50 million short and the percentages aren't adding 
up right.
    Now I am confident that we can work together to make this a 
success, but I think we all need to recognize today--and 
certainly I recognize today--that right now the numbers don't 
add up. They don't add up for an 85 percent participation rate. 
And if we do have an 85 percent participation rate, we could 
have the chaos that we had with TRICARE.
    If you want to respond to that, you can, but if not, let me 
just say, again, certainly, I know that you want this to 
succeed. And I am looking forward to all of us working together 
to make sure it does.
    Mr. Flynn, I wanted to ask you a couple of questions. First 
of all, when do you expect that your regulations on the project 
are going to be published and available to carriers and others? 
What is your date?
    Mr. Flynn. I expect they will be available today, sir.
    Mr. Scarborough. Today?
    Mr. Flynn. Yes, sir.
    Mr. Scarborough. Now that is efficiency. Not only do you 
know how to pass the buck on a tough question, you know how to 
give the right answers. Let me ask you this also. We were 
talking before about other deadlines regarding your 
negotiations. According to your guidelines, OPM is going to be 
completing negotiations with the carriers regarding benefits 
and rates by August 15. Are you going to be able to meet that 
deadline?
    Mr. Flynn. We should be able to, Mr. Scarborough. Generally 
speaking, we conclude those between August 15 and the first of 
September. That has been our practice for years. I see no 
reason to think they will be any different.
    Mr. Scarborough. Certainly, well, you certainly don't see 
any circumstances under which that would move into September, 
then?
    Mr. Flynn. Not this year. No, sir.
    Mr. Scarborough. OK, good. As soon as you get those rates, 
could you provide those to this subcommittee?
    Mr. Flynn. Yes, sir. Absolutely. I think, actually, we do a 
pretty big announcement and provide Members of Congress with 
advance notice of that just before that is concluded. 
Typically, that occurs around the first of September.
    Mr. Scarborough. Great. Let me also talk to you very 
briefly about the reserves issue that you talked about in your 
testimony regarding the letter that we sent to you. We 
expressed our strong reservations about the proposed use of the 
administrative reserves because we didn't think it was legal. 
And, in fact, we got a legal opinion from CRS that I would 
like, without objection, to submit for the record.
    [The information referred to follows:]
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    Mr. Scarborough. That says that they concluded the proposal 
was not authorized by statute. I wanted to ask you about do you 
have any documentation with you here or any information 
regarding the legal testimony or the legal information that you 
all received that suggested this would be legal?
    Mr. Flynn. Mr. Scarborough, you ask a very important 
question. We have looked at this from a number of perspectives, 
including a legal perspective. It is, without question, and the 
agency and I know it was part of OMB's review of our proposed 
regulations, something that we do believe is legal. And, 
moreover, it is in the interests of making this demonstration 
project successful. You mentioned an opinion from the 
Congressional Research Service. This is the first I have become 
aware of it. We would certainly like to take a look at that--
take it back to our legal staff and do our own analysis of 
that. And I know that, in our Office of the General Counsel, we 
have some information that I am sure we can provide for the 
record regarding our own review of the matter.
    Mr. Scarborough. That would be great. I will get this CRS 
opinion to you. We got it June 25. I am sorry I didn't get it 
to you before this hearing. But if you could just see whatever 
legal memos you have and provide that to this committee, that 
would be great.
    I wanted to ask you also if you felt comfortable 
guaranteeing to the subcommittee that your proposal was not 
going to create a moral hazard in the FEHB Program that Mr. 
Gammarino fears. You heard Mr. Gammarino's testimony before. 
How do you feel you could prevent that occurring?
    Mr. Flynn. Well, providing an absolute guarantee against a 
moral hazard is something I would not hazard to predict about, 
but let me say this. First of all, this is a demonstration 
project. And, as I said in my prepared statement, we have tried 
to parallel the FEHBP, Federal Employees Health Benefits 
Program operations, every step of the way so that we could have 
a good test. There are several areas where that is just simply 
not possible. You have a situation here where you have a 
special group of individuals who are able to participate in 
selective areas around the country and we had the health plans 
who are planning to participate in this program come to us and 
demonstrate the degree to which they felt they were facing 
potentially adverse risk and that they needed to provide for 
that in their premium.
    And so we looked at the authorizing legislation and, as I 
say, from a variety of standpoints, came up with this as a way 
to deal with it. I think it has been very effective in doing 
that because all of those plans expressing those concerns have 
decided--virtually all of them--have decided to participate. So 
we will have good choice. And we will have competitive 
premiums.
    The second thing that I would say is that, as our actuaries 
have looked at what is the total amount of risk that we are 
potentially facing here, in terms of the size of the program, 
it is quite small, about two-tenths to perhaps three-tenths of 
1 percent. In dollar terms, Mr. Chairman, that amounts to 
perhaps $50 million a year in a program that runs between $18 
billion and $20 billion a year.
    So I don't think we are creating a dangerous precedent, a 
moral hazard, in this program. I think what we are trying to do 
is make competitive premiums available to eligible 
beneficiaries and to give those beneficiaries the widest choice 
of health plans available. That has been our objective all 
along and that is the way that we will continue to work at 
this.
    Mr. Scarborough. OK. Well, I appreciate your testimony and 
I have some more questions but I would prefer to submit them in 
writing to you all if you all could respond within 30 days. If 
that is OK, that would be great. I appreciate your testimony 
and appreciate everybody that has been here to help us out on 
this difficult issue. This hearing is adjourned.
    [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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