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



 
           LIFE INSURANCE: NEW OPTIONS FOR FEDERAL EMPLOYEES

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE CIVIL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 27, 1999

                               __________

                           Serial No. 106-127

                               __________

       Printed for the use of the Committee on Government Reform


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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
65-307 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
             Jennifer Hemingway, Professional Staff Member
                         John Cardarelli, Clerk
            Tania Shand, Minority Professional Staff Member



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 27, 1999....................................     1
Statement of:
    Bartholomew, Michael J., senior counsel, American Council of 
      Life Insurance; Dennis New, second vice president for 
      special risk products, Unum/Provident; and G. Jerry Shaw, 
      general counsel, Senior Executives Association.............    35
    Flynn, William E., III, Associate Director, Retirement and 
      Insurance Services, Office of Personnel Management.........     8
Letters, statements, et cetera, submitted for the record by:
    Bartholomew, Michael J., senior counsel, American Council of 
      Life Insurance, prepared statement of......................    37
    Flynn, William E., III, Associate Director, Retirement and 
      Insurance Services, Office of Personnel Management, 
      prepared statement of......................................    11
    New, Dennis, second vice president for special risk products, 
      Unum/Provident, prepared statement of......................    43
    Scarborough, Hon. Joe, a Representative in Congress from the 
      State of Florida, prepared statement of....................     6
    Shaw, G. Jerry, general counsel, Senior Executives 
      Association, prepared statement of.........................    51



           LIFE INSURANCE: NEW OPTIONS FOR FEDERAL EMPLOYEES

                              ----------                              


                         TUESDAY, JULY 27, 1999

                  House of Representatives,
                 Subcommittee on the Civil Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:25 a.m., in 
room 2154, Rayburn House Office Building, Hon. Joe Scarborough 
(chairman of the subcommittee) presiding.
    Present: Representatives Scarborough, Morella, Mica, 
Cummings, and Allen.
    Staff present: George Nesterczuk, staff director; Garry M. 
Ewing, chief legal counsel; Jennifer Hemingway, professional 
staff member; John Cardarelli, clerk; Tania Shand, minority 
professional staff member; and Earley Green, minority staff 
assistant.
    Mr. Mica [presiding]. I would like to now reconvene the 
Subcommittee on the Civil Service, and we will be taking up the 
question of employee life insurance, FEGLI. I would like to 
start with an opening statement that I have, and thank, first 
of all, Chairman Scarborough for convening this hearing today. 
However, the hearing that is being held today is marking up a 
bill to bring group universal, group variable universal and 
voluntary accidental death and dismemberment insurance to our 
Federal employees. That is what we would be doing if OPM had 
not dragged its feet in the last Congress.
    Last year when I made it clear that these new products 
should be offered to Federal employees, the Office of Personnel 
Management objected. They said it was premature to act because 
the bureaucrats were not ready and were not sure whether 
Federal employees wanted better insurance options.
    Rather than act OPM said we should study the question. But 
we knew, as anyone familiar with FEGLI should have known, that 
many Federal employees would be interested in alternatives to 
term insurance that never builds up a cash value and is not 
portable. I think we also knew that our Federal employees and 
retirees would like to have more competitive rates available 
and, again, additional options in competition in this program. 
They want the same kind of insurance options that increasing 
number of private sector employees enjoy. The members of this 
subcommittee knew that also. That is why the bill passed the 
House and directed OPM to submit a legislative proposal for 
offering these new products. We wanted action, not studies. But 
OPM persuaded the other body, the Senate, to strip out language 
that we had approved and substitute a study instead.
    Well, the Office of Personnel Management completed its 
study this past May, and it confirmed what we already knew, 
that our Federal employees are, in fact, interested in improved 
coverage that these products would provide. Now OPM tells us 
that it and others within the administration are talking about 
making these products available to Federal employees. And OPM 
tells us that it hopes--no promises, mind you--that these talks 
will conclude by October 1st. I hope that that means that the 
administration will submit a legislative proposal in October, 
but I have my doubts.
    In any event, even if OPM presents acceptable legislation 
in October, I doubt employees will be able to purchase these 
group products before this Congress adjourns. It took us more 
than 1 year to get the Federal Employees Life Insurance 
Improvement Act through the last Congress. So even if the House 
passes legislation in October of this year, which is highly 
unlikely, it is even less likely that the Senate would act 
soon, and possibly not until late in the year 2000; at best 
another year for OPM to actually implement this badly needed 
reform.
    As a result, it is very unlikely that Federal employees 
will be able to take advantage of the same kinds of superior 
insurance plans that are already available to many of their 
counterparts in the private sector until possibly late in 2001 
or maybe even 2002.
    In short, after 2 years, some 2 years have passed since I 
introduced the Federal Employees Life Insurance Improvement 
Act, we are still talking rather than acting. If there's any 
light at the end of this tunnel, unfortunately it is very dim.
    I am most disappointed again to be here just acting as 
Chair today and finding that we have not moved forward on this 
badly needed reform to the benefit of both our Federal 
employees and our Federal retirees.
    I'm pleased now to yield to the ranking member, Mr. 
Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman. I want to 
in his absence thank Mr. Scarborough for getting this hearing 
to the point we have it today, to even having it. And the FEGLI 
Act of 1998 was the outgrowth of hearings held by this 
subcommittee in 1997. The act was designed to improve the 
structure and administration of FEGLI in several important 
ways. Enrollees now have the opportunity to continue the full 
extent of their life insurance coverage after they reach age 
65. Enrollees will no longer have to seek out a new insurance 
company from which to purchase insurance, something often 
difficult and expensive to do in the late stages of life.
    I understand, however, that there is some controversy over 
the manner in which the Office of Personnel Management proposes 
to implement this provision. OPM determined that a new premium 
and age band structure would have to be developed. The 
administrative office of the U.S. Courts, U.S. Courts, is 
opposed to this action because it would significantly raise the 
premiums of Federal judges with optional life insurance. I 
trust that OPM will address this unintended consequence in its 
testimony.
    I am pleased to see that employees may increase family 
optional insurance from the current fixed amount of $5,000 for 
a spouse and $2,500 for each dependent child to up to five 
multiples of the current amount. This benefit improvement came 
as a result of an amendment I offered during subcommittee 
consideration of H.R. 2675 in 1997. In 1999, FEGLI open 
enrollment period, which ran from April 24th through June 30th, 
gave Federal employees and retirees the opportunity to take 
advantage of these new benefit improvements. I look forward to 
hearing from OPM just how many did so.
    More improvements are sure to come. As required by the act, 
OPM conducted a study of FEGLI and found that enrollees have an 
interest in a myriad of life insurance products. I would like 
to hear from both panels their recommendation on legislative 
changes that may provide new life insurance options for Federal 
employees. I hope this hearing will be, as was the 1997 FEGLI 
hearings, the catalyst for innovative and progressive 
legislation that will result in even better life insurance 
products for FEGLI employees. Thank you, Mr. Chairman.
    Mr. Mica. Thank the gentleman.
    Mrs. Morella.
    Mrs. Morella. Thank you. And I want to thank you and the 
subcommittee for holding the hearing today to examine the 
recent changes in the Federal Employees Life Insurance Program. 
FEGLI is an important program. It provides basic and optional 
life insurance coverage for almost 2.5 million Federal 
employees and 1.6 million retirees. I think today's hearing is 
a good opportunity to discuss the improvements the Office of 
Personnel Management has made to FEGLI since the President 
signed the Federal Employees Life Insurance Act into law on 
October 30, 1998. This act was intended to provide better life 
insurance benefits to Federal employees under FEGLI.
    Among other provisions, the act provides Federal employees 
with the opportunity to continue the full extent of their life 
insurance coverage after they reach age 65. Under previous 
laws, when Federal employees reached age 65, they ceased making 
premium payments, and the face value of the employees life 
insurance was reduced by 2 percent each month for 50 months. 
This change achieves a significant accomplishment by giving 
Federal retirees the opportunity to continue to purchase life 
insurance benefits at their own cost, rather than seeing the 
their coverage phased out.
    I received many calls from my constituents expressing 
concerns about OPM's implementation of regulations to carry out 
this change, and I hope that today's hearing will give Mr. 
Flynn the opportunity to respond to those concerns on the 
record. I am also interested in having OPM respond to concerns 
several of my constituents raised about recently announced 
premium increases in FEGLI. I understand that certain FEGLI 
enrollees who elected the 50 percent reduction or no reduction 
for basic had premium increases this year. And again, I hope to 
look to Mr. Flynn to touch on the basis for these premium 
increases during his testimony.
    And finally the Employee Life Insurance Act directed OPM to 
submit a legislative proposal to offer group universal life 
insurance and group variable universal life insurance policies 
under FEGLI within 6 months of enactment, and I understand 
today's testimony will cover this. I look forward to hearing 
from OPM on this matter.
    Again, I thank you, Mr. Chairman for conducting today's 
hearing.
    Mr. Mica. Thank you.
    Mr. I would like to recognize Mr. Allen for his statement.
    Mr. Allen. Mr. Chairman, I want to thank you and Chairman 
Scarborough for calling this hearing on the Federal Employees 
Group Life Insurance Program. I commend your efforts to enhance 
the financial security of Federal employees and their families. 
Federal employees should have opportunities and choices in life 
insurance coverage that are equal to workers' in the private 
sector. In the difficult period that follows the death of a 
family member, families deserve the best protections that can 
be provided. We should enable Federal workers to protect their 
families in the event of death.
    I am pleased that we are considering an extension of 
services for Federal employees. OPM's study indicates that 
Federal employees have an interest. These additional life 
insurance options, additional flexibility and choice in life 
insurance plans will enable government workers to protect their 
families in the way that best suits their needs. I hope we soon 
will provide Federal workers with the protections that a 
greater variety of life insurance options offers.
    Again, thank you, Mr. Chairman, for this opportunity to 
hear from the panel and consider life insurance options which 
may become available to Federal employees. I yield back.
    Mr. Mica. I thank the gentleman.
    I'll now recognize the chairman of the subcommittee who's 
just arrived for a statement.
    Mr. Scarborough. Thank you, Mr. Chairman. In the last 
Congress, this subcommittee, as you well know, examined the 
life insurance benefits offered to Federal employees with the 
purpose of providing more choices and a better value. Currently 
the Federal Government offers only term insurance and 
accidental death and dismemberment insurance through FEGLI, the 
Federal Employees Group Life Insurance Program. The hearings 
conducted by the subcommittee last year in the last Congress 
revealed that private employers are increasingly offering their 
employees the opportunity to obtain group universal, group 
variable universal, and voluntary accidental death and 
dismemberment coverage.
    When the first group term coverage was written in this 
country back in 1911, the average age at death was 49. By 1940, 
the average age was 65. Today life expectancy is in the 70's 
and climbing, and over time the price of term insurance has 
come down. Unfortunately increasing lapse rates have also 
increased the likelihood of benefits not being available when 
they are really needed.
    With increasing mobility in the future Federal work force, 
it seems logical for us to follow the lead of the private 
sector employers in offering additional life insurance products 
to Federal employees.
    No one likes to think about life insurance, but most of us 
have chosen to purchase it. Insurance companies are now 
offering a variety of flexible products worthy of 
consideration. The objective is to select appropriate products 
that provide individuals long-term satisfaction. Regrettably, 
for too many years, Federal employees have had only limited 
life insurance options from which they could choose.
    The Metropolitan Life Insurance Co. serves as the primary 
carrier and has done so since the inception of the program in 
1954. MetLife processes all life insurance claims filed and is 
reimbursed by the Federal Government for all claims paid. Under 
this arrangement, the Federal Government assumes all the risks, 
essentially acting as a self-insurer. This is a pertinent fact 
in considering any additional offerings or alternative to the 
existing program.
    Numerous changes to improve the program took effect upon 
the enactment of the Federal Employees Life Insurance 
Improvement Act in October 1998. The Office of Personnel 
Management is here today to provide us with both an update on 
the implementation of the act as well as a review of the study 
conducted on employee interest in additional products. The 
study analyzed employees' interests in group universal life 
insurance, group variable universal life insurance, and 
voluntary accidental death and dismemberment insurance 
products.
    I look forward to the testimony of all of our witnesses in 
today's oversight of the FEGLI program, and as we further 
consider options to expand the insurance benefits available to 
all Federal employees.
    Mr. Mica. Thank you.
    [The prepared statement of Hon. Joe Scarborough follows:]
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    Mr. Mica. At this time there is a vote proceeding. So it's 
quite fitting that we make OPM wait for their testimony as they 
forced thousands of our Federal employees and retirees to wait 
for options on their life insurance. This subcommittee meeting 
is in recess for approximately 15 minutes, and OPM should not 
leave the room until we reconvene.
    [Recess.]
    Mr. Scarborough [presiding]. I call this hearing back to 
order; we have on our first panel Ed Flynn III. He is Associate 
Director of Retirement and Insurance Services for the Office of 
Personnel Management.
    Mr. Flynn, if you could, please stand, and we will 
administer the oath.
    [Witness sworn.]
    Mr. Scarborough. All right. Thank you. Be seated. Welcome 
back.
    Mr. Flynn. Thank you.
    Mr. Scarborough. And I hope that we did not keep you 
waiting as long as Mr. Mica would have liked us to.
    Mr. Flynn. Probably not, Mr. Chairman.
    Mr. Scarborough. Actually, I think he asked me if I wanted 
to take a trip down to Georgia with him when I was over on the 
House floor, but if you could begin your testimony, it would be 
great.

    STATEMENT OF WILLIAM E. FLYNN III, ASSOCIATE DIRECTOR, 
    RETIREMENT AND INSURANCE SERVICES, OFFICE OF PERSONNEL 
                           MANAGEMENT

    Mr. Flynn. Good morning to you and the other members of the 
subcommittee. I want to thank you for your invitation to 
discuss the changes that we're putting into place under the 
Federal Employees Life Insurance Improvement Act, as well as 
provide you with an update on the 1999 open season and possible 
new life insurance products.
    The Federal Employees Life Insurance Improvement Act 
authorized a number of changes to respond to participant needs. 
Numerous changes to improve the life insurance program took 
effect virtually upon enactment. They included things like 
increasing the insurance maximums covering foster children 
under family insurance, the ability to pay premiums directly, 
and provisions to continue insurance after 2 years, even if the 
initial coverage was in error. In addition, individuals are 
able to increase family insurance by substantial amounts, 
retirees have the option to maintain insurance coverage after 
age 65, and eligible employees will have insurance portability 
at group rates during a 3-year demonstration period.
    Now, OPM published interim regulations on April 27th of 
this year. Most premiums have gone down due to improved 
mortality and a change in the effective date for age-based 
premium adjustments. The new opportunities for retirees, 
however, created the need to evaluate the adequacy of existing 
premium age bands. Consistent with industry practice, optional 
life insurance premiums have historically been structured in 5-
year age bands. The top, age 60 and over band, reflected the 
fact that once a participant was retired and attained age 65, 
optional insurance reduced in value by 2 percent a month until 
it reached zero. Enabling retirees to continue their optional 
insurance beyond that age will substantially change the number 
of individuals for whom a substantial benefit will ultimately 
be paid.
    Now, we're required by law to establish premiums for 
optional life insurance so that the program pays for itself in 
each age band. With the passage of the law, we initially 
determined that new premium rates and new age bands were needed 
for age 65 to 69 and for age 70 and above. At age 70 and above, 
our calculations indicated that the premium needed to be 
doubled. The impact of doubling the premium at age 70 and above 
would constitute a significant and unforeseen change for older 
employees, and we can find no evidence that this was 
considered, much less intended, when Congress decided to make 
unreduced optional insurance coverage available to retirees. 
For these reasons, no premium increases for older employees 
will be put into place until we've thoroughly examined 
alternative approaches, including legislative options. The 
earliest any change could take effect is April 24, 2001. Now, 
we'll complete our review well in advance of that date and then 
make proposals for the life insurance programs that flow from 
it.
    However, premiums did increase effective May 1st for 
current retirees who previously elected to continue their basic 
life insurance after age 65 without a reduction or with a 
reduction limited to 50 percent. Because some retirees objected 
to the increase, we have advised them that they may change to a 
75 percent reduction at anytime, and that if they request that 
change by July 30th, we'll refund the extra premiums they have 
paid since May.
    We've also advised annuitants over age 65 whose option B 
insurance has started to reduce already that they have until 
October of this year to elect to freeze their coverage at the 
April 1999 amount and the premium charge necessary to honor 
that election.
    Now, the life insurance open enrollment period did run from 
April 24th through June 30th of this year. Extensive 
information was made available in many different forms, and by 
all accounts interest in the opportunity was high. Agencies 
just did a tremendous job working in cooperation with us to 
make sure that employees and others had all the information 
they needed and to change and alter their systems in ways that 
enabled those open enrollment changes to be accommodated. 
Nonetheless, it will be at least a year before we have any data 
on open season enrollment activity. Employees register their 
life insurance change with their agencies, and the changes 
aren't effective until April 2000. So the earliest we'll see 
any data resulting from the open enrollment period will be in 
September 2000, indicating data as of the end of June of that 
year.
    Besides improving the existing Federal Employees Group Life 
Insurance Program, we were asked to survey and submit a report 
on the desirability of offering new life insurance products. 
These products include a group universal life, variable group 
universal life, and voluntary death and dismemberment 
insurance. About 37 percent of the populations identified 
responded to our survey. While respondents who participate in 
the life insurance program are largely very satisfied with the 
present coverage, they are also interested in new types of 
products, including those that accumulate cash value. Among the 
insured group 42 percent expressed interest in group universal 
life, 23 percent interested in variable group universal life, 
and about 48 percent indicated they would consider voluntary 
accidental death and dismemberment insurance. Significantly 
fewer of the noninsured population indicated interest in new 
group products.
    Now, these overall findings have prompted us to initiate 
discussions within the administration to examine offering each 
of the products we were directed to study, and we hope to 
conclude these discussions by the end of the fiscal year. Life 
insurance is an important component in a well-balanced employee 
benefits package. The new products we are discussing could 
provide substantial benefits to Federal employees who are 
interested in group insurance products that offer maximum 
flexibility to plan for life cycle financial needs.
    We place high priority on working with this subcommittee 
and others to respond to the diverse needs of a Federal work 
force and enable the government to remain a competitive 
employer.
    That concludes my statement, Mr. Chairman, and I'd be happy 
to try and respond to any questions you may have.
    Mr. Scarborough. Thank you, Mr. Flynn.
    [The prepared statement of Mr. Flynn follows:]
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    Mr. Scarborough. According to your testimony, OPM is not 
going to know the results of the open season for another year. 
Tell me, do the results of who signed up for how much insurance 
matter to you, to OPM, at all, and if so, what impact does that 
have on how you administer the program in the future?
    Mr. Flynn. Well, they do matter, Mr. Chairman. There were a 
number of improvements that were offered as a result of the act 
passed last October, but those improvements are law and needed 
to be required. So the actual physical count results of the 
open season, while they do matter, aren't of immediate interest 
right now. If we needed to know a piece of it, we could 
certainly do some surveys and get a rough idea of--of the open 
season activity, but for right now, it's not terribly 
important. The benefit changes are not effective, and your 
premium rates for the open season changes don't go into effect 
for a year or so. So it's not--it's not any difficult--any 
difficulty to administer it.
    Mr. Scarborough. So you're not going around right now from 
agency to agency trying to figure out the number of individuals 
who elected to take these options during the open season?
    Mr. Flynn. No, we are not, and it's similar to the way in 
which we operate the Federal Employee Health Benefits Program. 
We typically don't know what changes occurred during the open 
enrollment period until we get reports from the central 
personnel data file in the spring following the effective date 
of those changes.
    Mr. Scarborough. And again, the reason why you say it is 
just not relevant right now?
    Mr. Flynn. It's not something that we need to know in order 
to administer the program.
    Mr. Scarborough. OK. You know, I and many other Members of 
Congress have heard complaints from Federal employees 
regarding--retirees about the new rates that OPM instituted, 
which you alluded to, especially the rates for the new age 
brackets. Rates for those over 70 doubled, according to your 
testimony, and you have also said that these rates are based 
upon mortality experience, and that the availability of 
unreduced option B coverage will, quote, substantially change 
the composition of the pool of individuals over 65 who will be 
eligible for the benefits.
    Let me ask you, how frequently does OPM review the rates, 
and how frequently do you adjust the rates for FEGLI premiums?
    Mr. Flynn. Well, we have an on-going process of reviewing 
the experience of the program and the experience of the program 
relative to the rates that are being charged. I know that you 
asked in advance of the hearing for information about the 
number of occasions on which rates have been changed, and you 
can see that there is a--there is a history of that. They are 
not on a regular schedule, but every several years you do see 
rates change.
    The important thing here I think is if you look at the 
rates that went into effect coincident with this open season, 
we had for some time a review of the adequacy of rates for all 
of the different options that are available to people under 
way, and with the advent of an open enrollment period, we felt 
it was appropriate to institute the new rates at the same time 
so that people could make choices with an open--with everything 
out in front of them, understanding full well the financial 
implications of those choices as well.
    Mr. Scarborough. Do you negotiate or consult with the 
carrier on setting the FEGLI premiums?
    Mr. Flynn. Mr. Chairman, I'm glad you asked that question, 
because a lot of discussion ensues about the competitiveness of 
this program. Let me try and respond to this very quickly, but 
very simply. Many people believe that rates in the Federal 
Employees Group Life Insurance Program are noncompetitive 
because we have this monopolistic relationship with the 
Metropolitan Life Insurance Co. That is simply not the case.
    There are three components that go to make up the cost of 
this program: the cost of actually paying claims, the 
reimbursement to Metropolitan Life for the administrative 
expenses they incur in paying claims, and a service charge or a 
profit that they are entitled to for their performance under 
the contract. The latter two categories, the administration of 
the program and the service charge, account for $1.73 per 
person per year of cost in this program. The overwhelming 
majority of cost in this program, $1.6 billion in 1998, was 
simply the payment of life insurance claims that were due to 
individuals and estates when people passed on.
    So to assume that, that somehow or another these rates are 
not competitive for that reason, I think, is pretty much set 
aside by those figures.
    Now, it is true that this program, when compared 
selectively to other types of term life insurance products, 
looks like it costs too much, but I will tell you that there 
are two reasons for that. The first is the population that were 
covered and the particular demographic characteristics that 
that population presents, and the second are statutorily 
mandated features of this program in terms of its benefit 
design and in terms of its financing that--that just simply 
make it that way.
    But to somehow create the impression that 4 years of 
working with a particular organization creates noncompetitive 
premiums is just simply not the case, Mr. Chairman.
    Mr. Scarborough. It certainly--if it's 40 years of a 
productive relationship, that obviously can be used to help us 
move forward over the next 40 years. But getting back to the 
question on Met Life, do you negotiate or consult with Met Life 
on setting the premiums?
    Mr. Flynn. We consult extensively with Metropolitan Life, 
though the premiums are OPM's to set.
    Mr. Scarborough. And Mr. Mica would argue, as many others 
would argue, that the disproportionate risk is on OPM and not 
the carrier, while the carrier makes--Mr. Mica I'm sure would 
characterize it as a cash cow or something colorful like that. 
What would you say to such criticism, and is the risk shared 
between carrier and OPM, or does OPM bear the burden?
    Mr. Flynn. Well, ultimately, because of the unique 
legislative structure of this relationship, the Metropolitan 
Life Insurance Co. ultimately carries risk here, but I think as 
was demonstrated in testimony on this program a year or so ago, 
on any long-term relationship like this, sooner or later 
premiums reflect the cost of the program, and risk is reflected 
in the premiums that are charged, and I think that's clearly 
the case with this program.
    Mr. Scarborough. OK. And obviously we can get more 
extensive testimony from representatives from Met Life who can 
help fill in the lines, too, about the risk they do undertake.
    You testified that the composition of the pool was 
substantially changed. What is the basis for that statement? 
And in setting new rates, what assumptions did you make 
concerning the number of employees who will elect to carry the 
full face value of option B insurance well into retirement?
    Mr. Flynn. Well, actually you're absolutely correct, Mr. 
Chairman. When I made that statement, I was talking about the 
number of individuals who will elect option B and carry it 
unreduced beyond the age of 65. When that option becomes 
available, you increase the likelihood that some people will 
find it attractive because it's a new option that was not 
available to them before, and that then increases the 
likelihood that substantial numbers of people beyond the age of 
65 will present full face value claims for life insurance at 
some point, and because of that and the fact that prior to that 
the face value of the insurance began to reduce by 2 percent a 
month, until it reduced to zero, it is important to look at and 
project what we think the new experience will be under that 
option and to set premiums accordingly.
    Mr. Scarborough. You had said something, and this is the 
last question I will ask this round before turning it over to 
Mr. Cummings, but I just wanted you to expand on something for 
me. You had said a few questions back--I'd asked you about the 
risk and why rates were going up, and you talked about the 
challenges, sort of the demographic challenges that are unique 
to this group of insureds. Could you help me out there?
    Mr. Flynn. I don't know that it is demographic challenges, 
but if you look at the Federal work force and contrast it with 
groups that are insured by others, and don't adjust for the 
differences in the two groups and their mortality experience 
and things like that, you can come away with a comparison, one 
relative to the other, that's actually flawed. The Federal 
Government on average is older. People who come to work for the 
Federal Government aren't able to or--or are, in fact, enrolled 
in life insurance from the start. We have 80 percent or 
thereabouts in it, but there is no underwriting initially and 
things like that. Those are the kinds of things that I was 
talking about. You take those into account and look at how 
others may structure the various pools of individuals that they 
insure, you will see differences that cause some of the 
differences in the rates.
    Mr. Scarborough. OK. Thanks.
    Mr. Cummings.
    Mr. Cummings. It's very interesting. I just want to 
followup on what you were just talking about. So the Federal 
Government, other than having older workers, what other factors 
would make our population different and more unique than, say, 
the average population, other than the fact that they are 
older? I take it that what happens is that people in the 
Federal Government come in, and they may--as you were talking, 
I was thinking, trying to compare to the private sector and 
government, and one of the things I thought about was when 
you're talking about the private sector, you have people moving 
from job to job to job, they may not necessarily--especially in 
the last 20 years, they may not stay with that employer, but 
yet still in the government, they may move from job to job to 
job, but they are still staying under the umbrella of the 
Federal Government. I mean, is that part of it?
    Mr. Flynn. That's part of it. I think another part of it, 
and none of these things can ever be considered completely in a 
vacuum, but the other part of it is if you look at the number 
of people who are participating in the life insurance program 
compared to the number of people who work for the Federal 
Government at large, there will be differences between those 
two as well.
    What we have seen, and it's been commented on by various 
observers of this program for some time now, is that with the 
creation of term life insurance products in the private sector 
that--that are themselves age-based, that differentiate between 
risk pools in terms of gender, in terms of health status, that 
require various forms of underwriting, what you quickly find, 
Mr. Cummings, is that Federal employees, generally speaking, 
who are relatively young and relatively healthy can move out of 
the Federal Employees Group Life Insurance Program and purchase 
term life insurance products on the private market at less cost 
than what they would pay in the Federal Government, even with 
the government contribution, particularly true for optional 
insurance. And so when those people begin to leave the Federal 
Employees Group Life Insurance Program, those that remain 
become even more unique in their characteristics and more 
likely to require the payment of additional claims and higher 
costs, which over time results in higher premiums.
    That's a tendency or that's a trend that concerns us very 
much at the Office of Personnel Management. It's one that we've 
watched, but the point I was trying to make earlier was that 
it's not a function of a contractual relationship. It's a 
function of statutory construction of the benefit design of the 
program and the mechanism for financing.
    Mr. Cummings. I want to get to that, but I want to go back 
to what you have just said.
    So do we see a lot of that, that is, Federal employees who 
start off with the Federal life insurance program, and then as 
they mature, they then see that they can do this, get life 
insurance cheaper and move out; do you see a lot of that, and 
how would you know that other than them saying, we no longer--
--
    Mr. Flynn. We have to look at it sort of from our vantage 
point, but if we look at the program, we do see fairly high 
levels of enrollment in basic insurance. And remember, Mr. 
Cummings, there are four different types of life insurance that 
one can buy here, but we have about 80 percent participation in 
basic. It's a level premium regardless of age. In part because 
we were seeing people leave the program at younger ages, we 
created some incentives a few years ago through the Congress to 
keep them in the program, but we have about 80 percent of the 
population eligible to enroll in basic.
    Option A, which is a $10,000 increment additional 
insurance, has about 40 percent of the population that's 
eligible to enroll in it. Option B has about 34 percent. Option 
C, which is--option B, which is multiples of salary, and option 
C has about 33\1/2\ percent. So you can see, once you get away 
from the basic insurance, you get to these age-based premiums 
for optional insurance, there are substantial numbers of people 
in the program, and it serves a vital need for many of them, 
but there are also substantial numbers of people who are 
meeting their insurance needs elsewhere, I suspect in large 
measure because it's financially more advantageous for them to 
do that.
    Mr. Cummings. Then that certainly leads me to this other 
area that you discussed. You said a few years ago we did some 
things to try to make sure we kept people in the program, and 
do you think that those efforts to keep people in the program 
have been successful?
    Mr. Flynn. I think that they are successful, particularly 
if you look at the participation rates in basic insurance. 
Eighty percent is pretty good. I think the real challenge is to 
take steps as an employer to offer benefit options to people 
that are attractive to them, that meet a diverse array of 
needs, and that--and where we do have good participation, and 
that's one of the reasons that we have looked at some of these 
new insurance products to see whether or not we can do that 
with them.
    Mr. Cummings. Now, this $1.73 per person per year----
    Mr. Flynn. Per year, right. Let me give you the absolute 
numbers just to put it perhaps in a little perspective as well.
    As I said earlier, $1.6 billion paid out in life insurance 
claims. That is just simply face value of life insurance to 
beneficiaries. The administrative cost to do that ran $7.1 
million, and the service charge or profit participation was 
$500,000.
    Mr. Cummings. You said if we tried to do some comparisons 
or contrasts, at first one might conclude that, well, maybe the 
Federal employees are paying a bit much more; not a lot more, 
but more. Is that a fair statement, at first glance?
    Mr. Flynn. It is a fair statement, and it's particularly 
fair if you look at the optional insurance, the age-based 
insurance, yes, sir.
    Mr. Cummings. And then you went on to say that you have to 
look a little deeper and a little closer, and you will see that 
because of population and statutory mandated benefits, it's 
probably not as bad as it may look at first glance. Is that a 
fair statement?
    Mr. Flynn. Exactly.
    Mr. Cummings. OK.
    Mr. Flynn. People are getting the benefits that they are 
paying for, and nobody is getting rich or fat off of this 
program.
    Mr. Cummings. That's where I need to get to. If most of the 
money is being paid, the vast majority is being paid for the 
claims, when you say statutorily mandated benefits, I take it 
that there's a direct correlation there between the statutorily 
mandated benefits and the claims that are paid. Is that a fair 
statement?
    Mr. Flynn. Absolutely, direct one for one.
    Mr. Cummings. OK. So then we put that to the side, and then 
we go to the $1.73. I mean, we're trying to figure out whether 
or not--going back to Mr. Scarborough's question about 
Metropolitan and whether you consulted and all that stuff. So 
then we go to back to the $1.73. The $1.73, is that higher 
than, say, if you were to compare it to other groups and you 
took out all of the differences that you talked about a little 
bit earlier?
    Mr. Flynn. Mr. Cummings.
    Mr. Cummings. I'm not saying it is. I'm just trying to get 
down to the bottom line to make sure that we're getting a good 
deal from Metropolitan. I guess that's what I'm trying to get 
to.
    Mr. Flynn. I think we're getting a very good deal. This, 
for all practical purposes, is nothing in the cost, in the 
context of the cost of this program, nothing at all.
    Mr. Cummings. So basically what you're saying is that we 
may be doing--if the mandated benefits correlate with the 
claims that are paid, that's the vast majority of the money 
that is paid that comes in and goes out, and then the $1.73 is 
very, very low, then they may be, when you look at the total 
picture, be getting a better deal than if they were not in this 
system and went to another one; is that a fair statement?
    Mr. Flynn. Yes.
    Mr. Cummings. OK. You hesitated there for a moment. I don't 
want to get stuck on the hesitation.
    Mr. Flynn. No. All I was trying to do was to say it a 
different way, but you're right, Mr. Cummings.
    Mr. Cummings. All right. Let me just ask you a few other 
questions because Jerry Shaw is getting ready to come up and 
testify, and he has a some very interesting feelings and 
concerns. He contends that Federal employees are not getting 
the best price for the FEGLI insurance product they purchased. 
I guess you disagree with that?
    Mr. Flynn. I disagree completely.
    Mr. Cummings. OK. He also said that he has this opinion 
that you should integrate long-term care insurance into the 
FEGLI program. How do you feel about that?
    Mr. Flynn. I have seen that proposal. It needs to be looked 
at. I am not sure that it is something that would make sense, 
but it is worth looking through and making some judgments 
about. As you know, we've talked before this subcommittee about 
the President's long-term care proposal, and we have always 
envisioned, once the legislation is passed, consulting with 
stakeholders on the benefit design itself, and this is clearly 
something we would want to look at. Whether or not it would 
survive to the end or not, I really couldn't say at this point.
    Mr. Cummings. Now, he also has an opinion on--the reason 
why I'm asking you this is because I don't think you will be 
coming back up, and I just found his testimony so interesting, 
I would just like to hear what you have to say.
    Could you assure us that OPM would be able to negotiate a 
lower-cost long-term care premium for Federal employees than 
would otherwise be obtained through a competitive process as 
proposed by Mr. Shaw?
    Mr. Flynn. To be quite honest, Mr. Cummings, I do not 
completely understand the competitive process being 
recommended, but the one thing that I can assure you is that we 
will, once this legislation gets passed, offer long-term care 
insurance at substantially lower prices than people can 
otherwise get.
    Mr. Cummings. So last question. Were participants in your 
survey allowed to express an interest in insurance products 
other than group universal life, variable group universal life 
and voluntary accidental death and dismemberment insurance? If 
so, what other products were they interested in?
    Mr. Flynn. We included questions about those specific 
products because those were the specific products reflected as 
an interest by this subcommittee. We did not ask specifically 
about others. Individuals had a comment section where, if they 
were interested in something, they could tell us, and I am not 
aware that anybody came back and said, we'd like something 
different even from those things. So we didn't ask the 
question, and I don't believe we got any substantial response 
about interest in even other products.
    Mr. Cummings. Would you say overall you felt that, from the 
survey, that the employees were generally satisfied?
    Mr. Flynn. I think it's clear from looking at the survey 
that the individuals who have Federal employee group life 
insurance today are extremely satisfied with the insurance they 
have. They need actually to know more than they do know about 
it, but as the same token, as we indicated earlier, they are 
interested in other products as well.
    Mr. Cummings. Now, what happens if somebody comes along and 
says--another insurance company comes along and says, look, we 
know we can do better than Metropolitan, what happens? I mean, 
if somebody comes in here and says, look, this $1.73, you know, 
we can do this stuff for $1.50 and keep your same structure 
because that doesn't matter, your claims don't matter because 
that's money going in and coming out, we break even there. I 
mean, it's just a wash. I'm just curious, what would be your 
impression?
    Mr. Flynn. My impression would be to actively look at that 
and to consider whether or not we might want to recompete this 
contract in order to achieve additional cost savings, but I 
would also say to you, Mr. Cummings, that it would have no 
effect on premiums whatsoever. It's a question of the high 
levels of customer service and performance that come at a $1.73 
or $1.57, not the adequacy of the premium structure.
    Mr. Cummings. That's an interesting statement. Just one 
more question, two more. So you're saying that even if somebody 
came in and said, look, we can do this for $1.50, and, first of 
all, you probably wouldn't accept them because I guess--in 
other words, what you're saying is you will look at the quality 
of service for $1.50; is that it?
    Mr. Flynn. Absolutely, because that's what we're looking at 
from Metropolitan Life for the same thing.
    Mr. Cummings. And if you saw they had the same or better 
quality of service and----
    Mr. Flynn. For a lower price.
    Mr. Cummings [continuing]. For a lower price, $1.50, you're 
saying the premiums wouldn't change?
    Mr. Flynn. Premiums wouldn't change one iota, sir, not one 
iota. Remember, just take my own situation, these are round 
numbers, and it's off the top of my head, but I'm 52 years old. 
I spend probably in the Federal Employees Group Life Insurance 
Program somewhere in the neighborhood of $100 a month for life 
insurance, not counting what the government contributes toward 
the cost of that. That's $1,200 a year. That's in relation to 
$1.73 per year for essentially administering the program and 
performing well. It has no impact whatsoever on premiums.
    Mr. Cummings. So it makes sense then for Met Life, they are 
going to get their $1.73, and so it makes sense for them, I 
guess if they want to make more money on this effort, and it 
doesn't look like it's going to be a whole, whole lot, but I 
guess if they are lean and mean and able to provide the 
service, you know, the quality of service, then that's the only 
way they make more money on this venture here; is that right? 
You follow what I'm saying?
    Mr. Flynn. I follow exactly what you are saying. The only 
way they will make more money beyond being reimbursed for the 
expenses they incur to administer this program is to satisfy 
performance objectives we set for them and to demonstrate that 
they did, and we would then increase that service fee to them 
because of the satisfactory performance that they achieved. 
That's a negotiated amount, Mr. Cummings.
    Mr. Cummings. Thank you.
    Mr. Scarborough. Thank you. Mrs. Morella.
    Mrs. Morella. Thank you, Mr. Chairman. Mr. Cummings picked 
up on a few of the questions I was going to ask, so I 
appreciate your response.
    I was picking up on Mr. Shaw's testimony with regard to 
offering the universal life insurance with the long-term care 
rider in it, and he also suggested that there be multiple 
carriers, and I know that you don't quite feel that you--I 
mean, you question it; you don't quite feel you can respond to 
it. I just wondered if--behind you is Mr. Titus. Would Mr. 
Titus feel free about responding to that? I mean, the reason I 
said that is because he deals with long-term care.
    Mr. Flynn. And I think I can probably speak to it as well, 
if you would like.
    Mrs. Morella. I would like you to then.
    Mr. Flynn. The question about multiple carriers and the 
parallel to the manner in which the Federal Employees Health 
Benefits Program operates, I think is--is inappropriate for the 
introduction of a long-term care group insurance package. 
Everything that we've seen from the industry, everything we 
have seen from other employer practices, everything we have 
seen that points to successful introductions of group long-term 
care insurance suggests that it needs to be clear, simple to 
understand, offered through one carrier, and that's the most 
effective way to do that because of the fact that, generally 
speaking, in the market this is nowhere near the type of mature 
product that health insurance is, or, you know, life insurance 
for that matter, and presenting individuals with many choices, 
at many different premium levels for something as complicated 
and as complex as this is just simply a prediction for disaster 
for most employers if they want to follow that route.
    Mrs. Morella. I wanted to give you an opportunity to 
comment on it because what happens in committee hearings like 
this, you can't get everybody up at the table at one time, and 
we always feel that we need to get a response from those people 
who are involved.
    Also, on another topic, you have been kind enough to try to 
respond to Mr. Harry Bodansky. I wondered if you would just 
share very briefly what his dilemma is with this subcommittee 
and indicate what the disposition is of a situation like that. 
I think it has a kind of typical component to it.
    Mr. Flynn. I will try and do that as briefly and succinctly 
as I can, Mrs. Morella. In Mr. Bodansky's particular case, 
his--his life insurance began to reduce a few years ago, and as 
I mentioned in my earlier testimony, up until the point of the 
Life Insurance Improvement Act, ordinarily when that reduction 
starts for optional insurance, it goes 2 percent a month for 50 
months until it reaches absolute zero.
    When this bill passed, Mr. Bodansky was in the latter 
stages of that reduction period, and our decision to have an 
open enrollment period where people could elect this option in 
April essentially created for Mr. Bodansky what he felt and 
understandably felt was a hardship, because he was looking to 
have that reduction cease even earlier, but in this case, he 
could only have it cease as of April which in effect reduced 
the value of the insurance in force he could freeze going 
forward, and while I'm very sympathetic to Mr. Bodansky's 
situation, because we've met with him before, I know that there 
any number of other Federal retirees who are in similar 
circumstances, and the only thing I can really say is that when 
you're administering a program like this with 4 million 
policyholders, you've got to draw a line somewhere, and in this 
case, we drew the line in April 1999. People who were before 
that line are under one set of circumstances, people after that 
line under another. It's not, I'm sure, a satisfying answer to 
your constituent, but it's the best one I can give you.
    Mrs. Morella. And the reason it becomes a unique case is 
because he has a disabled son and wanted to have something left 
for that son. I don't know what we can work on in terms of 
trying to resolve something like that, but we would certainly 
be open to whatever we could do to help.
    I wanted to also--with regard to your testimony, you talked 
about the new rates on older employees being delayed, why you 
examined alternative approaches, including legislative options. 
What kind of options are you thinking about legislatively?
    Mr. Flynn. Well, we have had a number of options suggested 
to us. Mrs. Morella. This is a situation where the existing law 
pretty much dictated a course of action, but having taken that 
course of action and seen the result of it in terms of premiums 
for older employees, and having heard from many of those 
employees, we realized that that was not an action that this 
subcommittee or the Congress intended or that anybody did, and 
before we put them into effect, and because we have some time 
within which we can do that, a couple of years, we thought it 
would be good to come back and look at whether or not there is 
a better way to go; i.e., to provide individuals, employees and 
retired former employees the ability to continue substantial 
amounts of life insurance into their latter years, but to 
understand the premium effects of different alternatives on 
that benefit desire.
    As you know, we have just finished a very, very busy 6-
month period, open enrollment period, including the--the report 
that we issued to the Congress. We're just now in the early 
stages of looking at those alternatives. A number have been 
suggested, for example, creating a pool of retirees for 
purposes of setting premiums and a pool of employees, even 
though they may be the same ages. Now, that's something that 
could be considered.
    The only thing that I would say is we talked here just a 
few moments ago about how the statutory construction of this 
program creates premiums that many regard as noncompetitive. 
The more we depart from what is typical private sector 
practice, the more we will do that for some groups of people. 
So it's a question of looking at the alternatives that we and 
others have suggested, understanding the premium impacts of 
those alternatives and making some judgments about the best way 
to move forward.
    Mrs. Morella. You will be doing that in consultation with 
other groups?
    Mr. Flynn. Absolutely, within the administration and with 
the National Association of Retired Federal Employees, the 
Administration Office of the U.S. Courts and others who have 
raised this issue.
    Mrs. Morella. Good. And you'll keep us posted, and you have 
a timeframe, you say about a year?
    Mr. Flynn. Well, as I say, we have, we know, a couple of 
years within which--before these new premiums need to go into 
effect. I'm hopeful that we can get this done within the next 
several months and then move forward.
    Mrs. Morella. Thank you. You're a distinguished civil 
servant, Mr. Flynn. Thank you.
    Mr. Scarborough. I thank the distinguished gentlelady from 
Maryland.
    I wanted to just go back briefly to a couple of comments 
that were made during your exchange with Mr. Cummings. Just for 
the record, and if you disagree with any of these, let me know, 
I think you'd probably agree with the first one, when you were 
talking about Met Life, and you were looking at the quality of 
service, and if somebody underbid Met Life, you wouldn't 
necessarily see that as a reason to change because it wouldn't 
change premiums. I think another thing that a company that's 
going to be taking this on, be it Met Life or anybody else, 
would be stability. Obviously when you're talking about life 
insurance, you're talking about a timeframe that goes well 
beyond 5, 10, 15, 20 years, and obviously, Met Life has that 
stability. So that obviously is something that's important.
    On the other side of it, though, I--you'd agree with that, 
correct?
    Mr. Flynn. I would agree with that.
    Mr. Scarborough. The importance of stability?
    Mr. Flynn. Absolutely, among a range of other factors.
    Mr. Scarborough. Right, among a range of other things.
    Another thing you said, though, and I am glad Mr. Mica was 
not here when you said it, the quote was, ``nobody's getting 
rich or fat over this program.'' If I'm working the numbers 
correctly, Met Life is getting $1.6 billion, a year which would 
be about $16 billion over 10 years.
    Mr. Flynn. To pay claims.
    Mr. Scarborough. Right, right, and even if they're not 
making a profit off of that, they're going to be investing, and 
they're going to be drawing a lot. There are quite a few 
companies that would take that opportunity to----
    Mr. Flynn. Mr. Scarborough, if I could comment on that just 
for a second.
    Mr. Scarborough. If I can just finish, let me finish and 
then comment on that. And just correct me if I'm wrong, if they 
invest at 20 percent on that money, and they're paying off 7 
percent interest on their CDs, they're doing quite well, and 
again, as a Republican, your administration is carrying on the 
proud administration of past Democratic administrations, saying 
that we actually want people to get rich and fat. I mean, 
that's the Republican way. So I have got no problem with Met 
Life making that money. I just want to know----
    Mr. Flynn. Met Life is not making that money, Mr. 
Scarborough, and I think that should be very clear.
    Mr. Scarborough. OK.
    Mr. Flynn. The premium income that they get----
    Mr. Scarborough. That's what I want you to clarify. What 
happens to that $1.6 billion when it comes in?
    Mr. Flynn [continuing]. Which is disbursed monthly largely 
reflects the paid claims for the immediate preceding period, 
largely.
    Mr. Scarborough. OK.
    Mr. Flynn. To the degree that it doesn't and it is 
invested--first of all, the disbursements are from the 
Treasury, so the trust fund is held by the government. It's not 
held outside the government. So those disbursements move to Met 
Life largely for the purpose of paying claims from the previous 
month. To the degree that they are invested in securities, 
equities, what have you, and earn interest, that interest 
accrues to this program and is used to keep premiums lower than 
they otherwise would be.
    Mr. Scarborough. OK. I have got a vote in Judiciary. I'd 
like to ask Mrs. Morella if you wouldn't mind taking the chair, 
and I want to get back to this. Hopefully, I will be back in 
time, because the way it was left hanging, I don't think is 
fair to Met Life or anybody else, but I do think it's important 
for us to get out on the record how much money is being made 
here; do they have some income they can invest that way. These 
are things that we hear quite a bit from Members interested in 
sharing in the system.
    Mr. Cummings.
    Mr. Cummings. I don't have anything else.
    Mr. Scarborough. Mrs. Morella, do you have anything else?
    Mrs. Morella. No, I don't.
    Mr. Scarborough. Why don't we go ahead and dismiss you, and 
we'll go on to our second panel, and I'll tell you what, if you 
don't mind, I'm just going to send you some questions in 
writing on this issue and some other issues, and let's go on to 
our second panel. Thank you, Mr. Flynn.
    Mrs. Morella [presiding]. In our second panel we are going 
to have Mr. Michael Bartholomew, who is the senior counsel for 
the American Council of Life Insurance; Mr. Dennis New, the 
second vice president for special risk products, Unum/
Provident; and Mr. G. Jerry Shaw, general counsel, Senior 
Executives Association.
    Gentlemen, as you know, it's a policy of this committee 
that we swear in all of those who will be testifying. If you 
would stand, raise your right hands.
    [Witnesses sworn.]
    Mrs. Morella. The record will indicate affirmative 
response, and again, if we could ask you to comment, you know, 
again using our timeframe that we have consistently of about 5 
minutes, and your total testimony that we have before us will 
also be verbatim in the record, and we'll start off then with 
Mr. Bartholomew. Is that order OK?

STATEMENTS OF MICHAEL J. BARTHOLOMEW, SENIOR COUNSEL, AMERICAN 
 COUNCIL OF LIFE INSURANCE; DENNIS NEW, SECOND VICE PRESIDENT 
 FOR SPECIAL RISK PRODUCTS, UNUM/PROVIDENT; AND G. JERRY SHAW, 
         GENERAL COUNSEL, SENIOR EXECUTIVES ASSOCIATION

    Mr. Bartholomew. Thank you, Madam Chairman.
    Good morning, members of the committee. I am Michael 
Bartholomew, senior counsel of the American Council of Life 
Insurance, a Washington-based national trade association which 
represents 493 legal reserve life insurance companies. Those 
insurance companies that are our members provide group 
insurance for the American public, which represents more than 
80 percent of the group insurance market.
    On behalf of the ACLI, I want to thank you for the 
opportunity to talk about the success of employer-sponsored 
benefits which supplement those life insurance benefits 
routinely provided to employees. Specifically, I would like to 
share with you what data we have on supplemental coverages for 
group universal life, group variable universal life and some 
small data about additional accidental death and dismemberment 
coverage that's offered to employees as part of an additional 
life insurance program.
    We support the efforts of this Congress to look favorably 
upon programs for Federal employees that will expand the 
availability of life and accident insurance that can be 
purchased on a tax-favored basis. These products help employees 
secure financial protection of their assets due to premature 
death and also to help to enhance their efforts at retirement 
planning by the purchase of products that are linked to the 
performance of our financial markets.
    Group universal life was first introduced in 1985. It 
essentially combines the traditional group term life insurance 
with a cash accumulation feature. Once an employer is issued a 
master group policy for this type of coverage, employees 
receive a certificate as evidence of coverage, as they would in 
the ordinary group life situation--as if has been sold, 
however--and unlike usual group term life insurance, the 
employee usually pays the entire cost.
    The latest figures we have from our own member companies 
show that those life insurance companies issued a face amount 
of $77 billion of this coverage in 1997, which accounted for 
10.5 percent of all the group life insurance written in the 
United States during 1997. That amount of coverage covered over 
4 million certificate holders and brought in a total in force 
at $344 billion.
    Another group policy called variable universal life is a 
much newer product and is being sold by a smaller group of 
companies as of now. It is similar in many respects to the 
group universal life except that employees are given the choice 
of different investment options and specify where the cash 
value of the policy is to be invested. As of 1997, sales of 
this product totaled nearly $26 billion, with face amounts 
totaling $156 billion. In addition to the information that the 
ACLI has compiled, sister organizations are also looking at 
marketing trends for these new and voluntary group products.
    One such study by LIMRA International, which is the life 
insurance marketing and research association, an international 
marketing organization, but is not yet published, looked at the 
types of voluntary benefits offered by employers and broke down 
the results of that study by employer size. The studies done in 
early 1999 show that 35 percent of all employers with 20 to 
5,000 employees offered voluntary supplemental life insurance 
to their employees. More on point to this testimony, 76 percent 
of the largest employers studied, those with 1,000 to 5,000 
employees offered such supplemental life to their employees. 
Twenty-three percent of this segment of the employer population 
offered additional accidental death and dismemberment 
insurance.
    Measuring from 1994, the amount of new group premium for 
group universal life has demonstrated a fairly consistent 
pattern. Starting the study in 1994, they found that in all the 
premium written for group insurance, 13 percent of it, or $2.3 
billion in premium, was for group universal life. In 1998, that 
figure had risen to $4.3 billion.
    As you can see, with the exception of a down period in 
1997, because of what they ascribe to merger and acquisition 
activity, there has been a steady growth in the amount of 
premium written for group universal life on a voluntary 
business.
    Let me just close and say that group universal life and 
variable universal life are becoming more popular options for 
employees looking for alternatives to the usual forms of life 
insurance offered in the past. Innovation in this area to 
access employment markets with a product that was previously 
offered only through individual policies has been shown to be 
very successful for life insurers writing group insurance.
    It is our belief that the introduction of such a program 
for Federal employees will result in similar success. Thank 
you.
    Mrs. Morella. Thank you Mr. Bartholomew, and you were right 
within the timeframe. Bravo.
    [The prepared statement of Mr. Bartholomew follows:]
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    Mrs. Morella. I am now pleased to recognize Mr. New of 
Unum.
    Mr. New. Thank you, Madam Chairperson, members of the 
committee. I appreciate this opportunity to appear before your 
committee today to discuss UnumProvident's experience as a 
provider of Group Voluntary Accidental Death and Dismemberment 
Insurance, sold at the work site to the private sector.
    My name is Dennis New. I am the second vice president of 
special risk products and marketing for UnumProvident. In this 
position, I am responsible for developing products and 
establishing marketing strategies to support our voluntary AD&D 
offering.
    This presentation is intended to inform, educate and 
outline the popularity and demand for voluntary AD&D insurance. 
Today, many of the Fortune 1,000 companies offer a stand-alone 
voluntary AD&D plan to their employees. Employees today want 
more choices in the insurance benefit programs offered to them. 
Employees are asking for voluntary insurance products that are: 
offered at the work site, easy to understand, convenient to buy 
and affordable, and offer family benefit options. Voluntary 
AD&D is a product that fills those needs.
    Also, statistics and trends support the need for voluntary 
AD&D insurance. In fact, according to the National Safety 
Council, accidental deaths are the leading cause of death among 
people under the age of 38 and the fifth leading cause of death 
overall. Also, nearly 9 out of 10 deaths occurred off the job, 
which means people are dying traveling to and from work, while 
on vacation or at home.
    As the global economy expands, so does the increased risk 
of exposure to accidents. Americans are traveling more for 
business and pleasure. A few cited trends impacting the need 
for voluntary AD&D include: Americans are planning a record 
1.32 billion trips over 100 miles in 1999; also the FAA expects 
air travel to leap from 600 million passengers to 1 billion 
passengers a year by the year 2010.
    Accidents can happen at any time, anywhere, to anyone. When 
an individual suddenly dies, is dismembered or suffers a 
disability that causes paralysis in an accident, that family's 
ability to maintain a standard of living or prepare for the 
future can be seriously jeopardized.
    I would like to provide a brief overview of voluntary AD&D 
and its value, benefits and services. Voluntary AD&D is an 
employer-sponsored insurance program paid by the employees. It 
provides coverage against accidents 24 hours a day, 365 days a 
year, on and off the job, worldwide. It allows employees to 
purchase high amounts of insurance at affordable rates. It 
requires no medical history or underwriting and allows 
employees to cover their spouse as well as their children.
    In addition, there are many other benefit features that an 
employer can design which cover more than the core accidental 
death and dismemberment insurance. A few examples would include 
a paralysis benefit which would pay a lump sum benefit if an 
insured becomes paralyzed or partially paralyzed in a covered 
accident. In addition, you can add a home alteration vehicle 
modification benefit which pays an additional benefit if an 
insured suffers an injury which requires the use of wheelchair. 
This additional benefit can be used to help pay for making the 
insured's home or car wheelchair accessible.
    Also, additional service for travel assistance can be added 
to round out the voluntary AD&D offering. As pointed out 
earlier, Americans are traveling for business and vacations 
more frequently within the United States and abroad. Most of 
the time these trips are uneventful; however, emergencies can 
and do happen. This is why many employers today are offering 
travel assistance services with their voluntary AD&D programs. 
The costs are typically built into the voluntary AD&D rate for 
ease of administration. When packaged with voluntary AD&D, 
travel assistance services, are a highly-valued service that 
offers protection for employees and other family members when 
traveling 100 or more miles from their home or outside the 
United States. This aligns well with the travel trends: 
Americans are planning a record 1.32 billion trips over 100 
miles in 1999. Also travel assistance typically provides direct 
access to worldwide assistance in the event of unexpected 
emergencies for accident as well as sickness.
    Finally, enrollment results for voluntary AD&D plans tend 
to be high. UnumProvident's history and results in enrolling 
voluntary AD&D plans average around 35 to 50 percent. Factors 
contributing to the significant participation include: the 
ability to purchase large amounts of insurance at affordable 
cost, family plan options, attractive benefit enhancements and 
travel assistance services, as well as no medical history 
necessary.
    In closing, on behalf of UnumProvident I appreciate this 
opportunity to appear before you today to discuss 
UnumProvident's experience as a provider of voluntary AD&D 
insurance coverage. Considering options available in the 
private sector as well as the mobility of the Federal 
Government's work force, I feel strongly that voluntary AD&D 
insurance will be a welcome benefit option to Federal 
employees.
    Thank you. I would be glad to answer any questions.
    Mrs. Morella. Thank you, Mr. New. I am very impressed with 
the number of benefits that you offer and that you have 
outlined.
    [The prepared statement of Mr. New follows:]
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    Mrs. Morella. It is a pleasure to recognize Mr. Shaw who's 
a regular at this committee.
    Mr. Shaw. Thank you, Madam Chairman and members of the 
subcommittee for the opportunity to testify. As you know, the 
Senior Executive Association represents the interests of career 
Federal executives throughout government.
    The current Federal Employees Group Life Insurance Program 
has served the Federal community well for a number of years. 
However, the recent open season provided an opportunity for 
private insurance carriers to educate employees about the 
options available to them in the private marketplace. Many 
learned they could sometimes secure the same or better coverage 
from private companies for substantially better rates. Many 
others learned that there were additional options they could 
purchase, such as group universal life insurance linked with 
long-term care insurance for their later years.
    My firm issues a free weekly on-line newsletter for Federal 
managers and executives read by well over 50,000 of them. 
During the FEGLI open season, we received substantial feedback 
in the form of e-mails from our readers who were confused and 
upset to learn that they had been paying much higher prices for 
their FEGLI insurance than they would pay in the private 
market. A number told us that they had assumed that, in 
purchasing FEGLI, since it was a Federal Government-sponsored 
program, the government had negotiated the lowest possible life 
insurance rates for them. They expressed dismay to learn 
otherwise.
    We explained to them, in response, that their higher rates 
were helping to pay for other employees who would otherwise be 
uninsurable. Some said that was cold comfort given their own 
limited means. While SEA does not support any particular 
product or program, the SEA board supports greater choice for 
Federal employees generally and senior executives specifically. 
What makes sense for one employee does not always make sense 
for another.
    In the bills which propose to offer long-term care 
insurance to Federal employees and retirees there is a 
dichotomy between two opposing positions; one of a single 
policy in a program operated by OPM, which we see as analogous 
to the FEGLI program; and one of OPM overseeing a variety of 
options offered by a number of companies, but where OPM sets 
the baseline requirements, which we see as analogous to the way 
OPM operates the Federal Employees Health Benefits Program. SEA 
would support the latter.
    The current Federal Employees Health Benefits Program is a 
great example of a benefit which works. OPM establishes the 
ground rules, a number of options are offered, and the costs of 
the program have been consistently less than those in the 
private sector because of competition among the providers. We 
see no reason why the same program would not work for the FEGLI 
program or a long-term care program, either separately or 
combined.
    Some large insurance companies have argued that only one 
long-term care policy, with a consortium of providers would 
result in lower premiums for employees. We believe the 
contrary. The FEGLI program has proven otherwise, instead 
becoming progressively more expensive. We have seen no 
incentive to keep rates down, and the FEGLI program has been 
provided by one carrier for years.
    By contrast, the FEHBP program has provided a number of 
options to employees, and competition has kept the rates lower 
than in the private sector.
    These same insurance companies have said that the cost of 
marketing long-term care policies to Federal employees and 
retirees would cause an increase in premium costs. The FEGLI 
program has had no marketing costs and yet the premiums have 
gone up. In addition, some Federal employees feel they have 
been misled into paying higher prices than what is necessary 
for their life insurance. By contrast, the FEHBP providers have 
had to market their policies and they still have consistently 
beaten the prices and sometimes the quality of services 
provided in the private sector.
    The fact is that in order to sell long-term care policies 
to many employees, if not most, especially those who are 
younger and who generally believe there are better and more 
pressing things to spend their money on, marketing and 
widespread publicity will be a necessity. In addition, 
providing alternatives such as universal life insurance linked 
with long-term care, as well as other options, will increase 
the level of discussion among employees and, we believe, will 
result in an educated employee population which can make 
informed choices.
    We therefore support the maximum choice in programs and 
carriers such as the FEHBP program for employee benefit 
programs generally. With OPM oversight to ensure qualified and 
financially sound providers, and the operation of the 
competitive marketplace, we believe Federal employees and 
retirees will enjoy the best choices and the most competitive 
prices available in life insurance and long-term care products. 
From there, employees should be free to do as they, in their 
individual wisdom, choose.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Shaw follows:]
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    Mrs. Morella. Thank you, Mr. Shaw. You actually did--as Mr. 
Nesterczuk noted, beat the clock. Because we picked up on a few 
of your comments that are in your testimony in talking to Mr. 
Flynn.
    I guess I could start off with Mr. Bartholomew. You say 
that 76 percent of all large employers offer universal or 
variable universal life insurance, mostly at the employees' 
expense, and your products seem to be growing pretty quickly. I 
just wonder, as we look at the Federal Government, what 
features of your policies make them attractive to employees?
    Mr. Bartholomew. The feature that I guess is probably the 
predominant feature with universal life is that it's a contract 
that has cash value. It also has a feature that has a 
requirement that the premium can be altered, the contribution 
be altered by the employee so all they have to do is meet the 
minimum insurance costs, that the premium can be flexible. It 
doesn't have to be scheduled like it would be in the 
traditional group term life insurance contract.
    But I think the primary attraction, from what the 
researchers tell me, is the fact that it has a value that 
exists beyond the straight insurance protection of group term 
life insurance and is portable, so that it would be taken with 
the employee after they leave.
    Mrs. Morella. The portability is something that we feel is 
very important also.
    Does it appeal to certain segments of employees, do you 
find? Can you characterize any groups to which it has a 
particular appeal?
    Mr. Bartholomew. Not that I know of, no.
    Mrs. Morella. We appreciate learning more about it.
    I want to now go on to Mr. New. Because of so many things 
that are offered under the AD&D, I'm curious about what the 
premiums are.
    Mr. New. That's a great question. Typically, the premiums 
or cost of insurance are based on the size of the group, and/or 
the type of industry. With some of the large customers that 
UnumProvident insures today, I would say for groups over 
50,000, cost of insurance can be real attractive to the 
employee and include the extra features like paralysis, the 
seat belt benefit, as well as travel assistance services.
    It would be hard for me to give you what a true cost 
structure could be. However, if an employee or insured wanted 
to purchase $100,000 of insurance, the rates may be $3 a month, 
which would include all those extra features mentioned above. 
If someone wanted to include their family, it may be $3.50 a 
month.
    Mrs. Morella. You also mentioned that the participation 
rate varies from like 30 percent to 50 percent. Why is there 
any disparity?
    Mr. New. Participation rates tend to increase based on the 
support we can get from the employer. The more they can 
communicate the value of it up front, the better our 
participation tends to be. Also certain industries show a 
higher participation than others. Occupational hazards can play 
a part in that.
    Mrs. Morella. Have you ever heard the concept that many 
employers might refrain from AD&D because too many options are 
offered?
    Mr. New. We hear that quite a bit today. What we try to 
position from UnumProvident's standpoint is look at an industry 
and the company and identify what enhancements or features make 
the most sense for that industry. Instead of offering 15 to 20 
enhancements or features, we try and identify the 5 or 6 that 
really make sense to the employee population that are 
purchasing the product.
    Mrs. Morella. And the reason you can keep your premium low 
is because you look at a vast pool, is that one of the reasons?
    Mr. New. Typically, rates are based on the size of the 
group. The larger the group, the better your spread of risk is.
    Mrs. Morella. And the age of the employees that are part of 
that group?
    Mr. New. I'm sorry?
    Mrs. Morella. And the age of those who are part of that 
group, is that a consideration in negotiating premiums?
    Mr. New. Typically, if I understand your question, we do 
not----
    Mrs. Morella. The younger people who are accident prone 
or----
    Mr. New. That is a statistic that is proven, that people 
who are younger are higher risk for accidents.
    For voluntary AD&D, we do not rate by age. We don't have 
age-banded rates, which is a little bit different than a 
voluntary group life product. It's one composite rate.
    Mrs. Morella. I want to thank you, Mr. New.
    Mr. Shaw, you had the benefit or you were here for Mr. 
Flynn's comments with regard to your concept of the universal 
life insurance with the long-term care rider. Would you like to 
make any comments in response to that?
    Mr. Shaw. I think one of the things that struck me about 
his comment was that long-term care insurance is so very 
complicated. And therefore employees, if they had too many 
choices, might get confused.
    We think that FEGLI health benefits, it's about as 
complicated as you can get when you're taking care of your 
family's health, and yet every year the employees manage to 
make rational decisions about which health benefit program 
they're going to participate in. I don't see any reason why 
employees could not make a rational decision about which long-
term care program that they would want to participate in.
    I know that the FEGLI program is a good program. And it has 
a lot of people that participate. There are a lot of premiums 
collected; I don't know how the investment dollar is returned 
or spent. But the fact of the matter is that the rates are 
substantially higher for a substantial number of employees 
under the FEGLI program than they can get in the private 
sector.
    I've not only heard it, I've seen it. I remember one e-mail 
vividly that we received from a manager who said, ``This is the 
first time I ever realized that I could look around and find a 
better rate. I assumed I was getting the best rate. And I saved 
40 percent on my life insurance coverage premiums for my family 
and myself.''
    And it was a tremendous pay raise. I mean, these people 
have not been getting very many pay raises, and for senior 
executives they, like Congress, have had one pay raise in the 
last 5 years. And how they spend their dollars is very 
important to them. FEGLI is more expensive for employees who 
can get insurance elsewhere. Now, the government has made the 
determination that they're going to cover everybody and that's 
fine, but employees have a choice. And once they find out they 
have a choice, they look at that choice, and many of them leave 
the FEGLI program.
    Something's not working. It may be the most efficient, the 
most effective, the most wonderful program in the world. But it 
costs more. Something's not working. I don't know what it is.
    The FEHB program works and there is choice. And the one 
thing I take away from our SEA board meetings is, these people 
want choices. They want long-term care insurance. Most of the 
SES's and the other executives that we represent--and many of 
them are managers, because we're also general counsel to the 
Federal Managers Association--want choices. They are the prime 
target for long-term care insurance. They don't want to have to 
buy a product for which they pay premiums for life which they 
may never use if they're never needed, if they have other 
options.
    If long-term care is tied to a universal life insurance 
program, there are options. The premium dollars can also 
provide a life insurance benefit to their family, and it's a 
pool of money from which they can borrow against for kids' 
education, and for other purposes. It's a choice they would 
like to have, an option they'd like to have.
    Not that it's the right thing for everybody, clearly it is 
not. But why shouldn't the government offer that option to them 
rather than ``one size fits all''? That's their view.
    Mrs. Morella. Thank you very much, Mr. Shaw. I know that 
OPM is listening to what you have to say, too, as they pull 
together whatever alternatives are necessary.
    Thank you, Mr. Chairman.
    Mr. Scarborough [presiding]. Thank you, Mrs. Morella.
    Mr. Cummings.
    Mr. Cummings. Mr. Shaw, I'm just curious about something 
here. You know, in the FEHBP program, you've got quite a few 
carriers, 90 percent of them go for Blue Cross and Blue Shield. 
So the argument of choice to me sort of goes down the tube. 
They're not really making a choice. I mean, in other words, 
it's more like--I'm sorry, 60 percent. But that's still a 
sizable number. But I was just curious. Do you want to comment 
on that?
    Mr. Shaw. Well, if it were 90 percent I would have been 
surprised, but 60 percent sounds more reasonable. But why 
shouldn't they have that choice, Congressman? Because 60 
percent think Blue Cross/Blue Shield is good enough for them, 
does that mean that the other 40 percent have to have it?
    Mr. Cummings. I'm not saying it shouldn't; I'm just saying 
it goes to the argument of choice. In other words, are people 
really--I mean, when you've got quite a few more companies that 
are offering and you've got 60 percent of them and--I mean, 90 
percent makes the argument even stronger, I must concede, but 
60 percent of them taking Blue Cross and Blue Shield, it just 
seems like these are folks who have decided choice is not--I 
mean, that's it. So you take that 60 percent and they probably 
do this every year, and--but anyway----
    Mr. Shaw. Well, most people, once they get into a 
particular program, tend not to change. Many Federal retirees, 
for example, keep High Option Blue Cross/Blue Shield because 
they can afford it even it provides benefits they would never 
use and don't need. But they think, it's the most expensive; 
therefore, it's got the most benefits in it; therefore, they 
want it.
    The fact of the matter is, if they shopped, they don't 
necessarily need that. But that's still a choice they make, and 
at some point, if they do read something and become educated 
about it and decide to get something else--you know, that's 
what the great American marketplace is about.
    Mr. Cummings. As you were talking, I was thinking that if 
you were talking about how much more expensive the program is 
now, the FEGLI program----
    Mr. Shaw. FEGLI program, yes, sir.
    Mr. Cummings. And MetLife, that's basically what we're 
talking about.
    Mr. Shaw. I am not--I only know the facts; I don't know the 
deals within which----
    Mr. Cummings. But you heard the testimony. You were just 
sitting here with me. We heard what Mr. Flynn said.
    Mr. Shaw. I understand. That means something's wrong, 
Congressman, when what you are doing is--there is no profit in 
it, and if the administrative costs and your claims rate is so 
much higher than another person's claims rate, then you're 
doing something wrong. Either you're not investing your money 
right, that's a possibility; or you are attracting a different 
group of people than the other person is, that's a possibility.
    And if so, then shouldn't you look at that? Shouldn't we 
say, rather than just keep raising the premiums and driving 
more and more people out, like is happening, shouldn't we look 
at that and say, what are we doing wrong here, instead of 
saying, this is the only and best program the good Lord could 
make for Federal employees?
    We don't agree with it, because our people are leaving the 
FEGLI program and are buying products in the private 
marketplace. And that is causing the FEGLI program to increase 
in cost. Because the better-risk people leave. And they do that 
because they can get cheaper premiums.
    Mr. Cummings. That leads me to the question that I've been 
just dying to ask you.
    What happens--suppose 90 percent of the FEGLI people went 
into your program. What would happen? Just random, 90 percent?
    Mr. Shaw. I don't have any idea, Congressman.
    Mr. Cummings. That's what bothers me about your argument--
go ahead, I'm sorry.
    Mr. Shaw. No, excuse me. I'm sorry. I'm not sure what 
program we're talking about.
    Mr. Cummings. Well, you say that people can get this kind 
of insurance, the insurance cheaper; that's been your argument.
    Mr. Shaw. No, I don't know that. Oh, I'm sorry. We're 
talking life insurance here. I'm saying that some people are 
getting it cheaper from the private sector than what they have 
to pay for the FEGLI program.
    Could the private sector absorb all the people that are in 
the FEGLI program who want to go to the private sector? I'm 
sure they could.
    Mr. Cummings. But I'm saying--let's say that there was 
another, let's say, Jones Insurance Co., insurance--they're 
over here and basically we've got MetLife over here that's 
handling the FEGLI program right now, OK? I don't want to get 
into it all, but just want to make this distinction.
    I think it's kind of unfair to say that--I mean, you heard 
the arguments of Mr. Flynn. He talked about statutorily 
mandated benefits; he talked about, of course, the claims; he 
talked about a number of things.
    But one of the things he talked about was the population, 
the population that they have in the Federal Government. And I 
think it--you know, I'm Jones Insurance Co., and I've got 10 
other insurance companies over here, and I've got MetLife over 
here, and MetLife, then what happens is that the--those 10 
insurance companies over here are then picking off my best 
people out of MetLife. Then something's got to give.
    Mr. Shaw. Well, MetLife has got to figure out a way to 
compete, because MetLife is not competing now. But if we were 
talking about MetLife--but we're not talking about MetLife, 
we're talking about a statutorily mandated program--maybe the 
statute needs to be changed. Maybe something needs to be done 
to make this FEGLI program competitive. You know, what's going 
to drive that, Congressman, is if you've got more than one 
option and it's part of the FEGLI program. When the program 
that's there that is high priced, it is either going to have to 
compete or somebody else is going to eat their lunch. So we 
have no competition, so why compete? Why change? We've got it.
    Mr. Cummings. So maybe--just hang with me now.
    Mr. Shaw. Yes, sir.
    Mr. Cummings. If I'm one of the companies over here and I'm 
constantly picking off the MetLife people, not only am I, as 
you said, taking some of the better-risk folk, but I'm also 
only taking a certain number of people. You follow what I'm 
saying? In other words, if I had a more random coming from 
MetLife and I was just one of these companies and I was taking 
all of these people from MetLife, you're saying that because 
MetLife's package may be a Cadillac package and may be over 
here, we have more of a--I guess--what's the Pinto--a Pinto 
situation over here, that it doesn't really matter. Is that it?
    Mr. Shaw. Well, no, I don't think I am. The reason is 
because, in that case, the benefits that are over here are 
better than what is being offered in the FEGLI program.
    Now, there is no question but what the FEGLI program has, 
because of the way--I mean, well, let me back up one step.
    When companies, life insurance companies, go in and sell a 
program to a new company, generally they insure everyone that's 
in that company. In the past, the Federal Government had been a 
little bit different because people tend to stay in the Federal 
Government for an entire career, and in a lot of private sector 
companies there is a lot more turnover. We think that's 
changing, there is more turnover now in government, and I think 
there will be increased turnover. So portability becomes more 
and more important to these people who want to take this group 
life insurance with them when they go because they may become 
uninsurable.
    Whereas now there is a much older population in the 
government than before, so if you can't get insurance anywhere 
else, you're not going to leave anyway. So you've got a group 
of people who are in there that you may have to subsidize 
somehow, the government may have to be subsidizing, because 
they can't get insurance anywhere else. And that's fine. The 
reason that the other people are leaving, the healthier ones, 
is because they don't want to provide that subsidy from their 
pockets. So they're not going to.
    If we had options that would help retain those healthier 
people in the current program--and this is my fear for long-
term care, Congressman, too, because if we've only got one-
size-fits-all and you're going to keep, without competition, 
the group in that long-term care program that are the sickest, 
that aren't able to get coverage anywhere else. The people that 
can get it better and cheaper elsewhere are going to gravitate 
away. So you're going to have a group without options that is 
going to stay in, and long-term care premiums are going to go 
up and up and up for Federal employees. It's inevitable because 
the private sector is going to compete for the people that are 
healthier.
    If you have all the options within the umbrella of the 
FEGLI life insurance or the long-term care insurance program, 
then people won't go away. I mean, the employee health benefits 
program has worked for exactly that reason. If people want 
something cheaper, they go get a cheaper one because they're 
younger, they're healthier. As they get older or get a disabled 
child or whatever the case may be, they change to Blue Cross/
Blue Shield and the premiums go up. But people make those 
choices. And yet we're keeping them all in that program because 
it's a lot cheaper than going out and buying an individual 
policy someplace else.
    And FEHBP has worked, in our view, because of competition. 
Some companies have been driven out of FEHBP because they have 
not been able to compete. Aetna comes to mind immediately. But 
competition is a healthy thing, in our view, and options are 
what our membership wants.
    Mr. Cummings. You hope when you throw in that factor of 
people who are uninsurable, that's a key factor because--and 
those are your older folk; I mean, not necessarily, but----
    Mr. Shaw. Right.
    Mr. Cummings [continuing]. Generally that's who you're 
talking about, so they're like a captured audience. I mean, 
they've got to be there pretty much because they can't go 
anywhere else.
    Mr. Shaw. But competition has still--even with that kind of 
a heavily weighted population in the fleeing health benefits 
program because there are a lot of retirees in it--kept those 
rates low enough that there isn't anybody in the private sector 
that can compete even for the healthy group. I mean, they just 
can't.
    And that competition has worked; all the retirees that stay 
in the FEHBP program are doing fine. And they have the option 
every year to change if they want to, too. And many of them, as 
I said, keep high option and are overinsured for more than they 
need. But that's OK.
    Mr. Cummings. This may be an unfair question, but I'm just 
curious when you talk about maybe we need to look at our 
package, what kinds of things would we be looking at? Are you 
following me?
    Mr. Shaw. Yes, sir. I am not enough of a life insurance 
expert to say. In fact, I'm not a life insurance expert of any 
kind. So I can't say.
    One example might be--just something that comes to mind--
you may want to look at where the government subsidy part of 
the FEGLI program goes. The government subsidy part of the 
FEGLI program might go more to the people who can't leave the 
program because of their health, don't have options, to keep 
their premium level down; and for the others, the premiums will 
be beased on competition for the rest of them because they have 
options and the companies are going to have to compete for 
them. That's off the top of my head. I haven't even thought of 
it before.
    Maybe that's how you manage to take care of the group that 
is most at risk and can't go anyplace else versus the others 
who can leave and go to the private sector, and get better 
rates. If they can go to the private sector and get good rates, 
then they ought to be able to get the same kind of rates in the 
FEGLI program if you set up a separate risk pool.
    Mr. Cummings. I have nothing else.
    Mr. Scarborough. Thank you, Mr. Cummings. And I want to 
followup and underline what you said, Mr. Shaw, regarding 
MetLife not being attacked and not being suspect. I mean, we 
have to turn the fingers back toward ourselves; they are doing 
what we provide them by statute. Is this correct?
    Mr. Shaw. That's right.
    Mr. Scarborough. I wanted to ask you, and I got into an 
exchange with Mr. Flynn right before I had to leave for another 
committee and it said that, you know, one of complaints I heard 
was that MetLife was able to get $1.6 billion a year, and they 
were able to hold this money and collect a great deal of 
interest over 20 years or whatever, which again is no problem 
to me if they do that. We were told, though, by Mr. Flynn that 
that's not how this system works; that it's money in, money 
out.
    Let me ask you, Mr. Bartholomew, if that's the case, and I 
suspect it is, it seems to me that that causes a problem for 
MetLife and the government also because is it not true that the 
way you're able to pay your life insurance benefits is a 
combination of premiums and earnings that you make by being 
able to hold money and draw interest. And the way we're doing 
it right now with the Federal Government and MetLife is simply 
getting the money in, taking the money out; is that correct?
    Mr. Bartholomew. That's right. That's the way life 
insurance companies make their living is by receiving premiums 
and investing them and setting up the appropriate reserves to 
pay the benefits that they have promised under the contract.
    Mr. Scarborough. Would you be able to be competitive as a 
life insurance company if you were not able to set aside this 
money?
    Mr. Bartholomew. You probably wouldn't be able to do 
business.
    Mr. Scarborough. You wouldn't be able to survive very long, 
which is, of course, the glory of being in the Federal 
Government--defy the laws of business, which we do regularly.
    Let me ask you one of the things we're having regarding 
long-term health care is whether we have a single provider or 
whether we have multiple providers. That's a question that 
obviously we're asking right here. We've been informed that 
because of the size of our Federal Government work force that 
no single carrier is going to be able to carry the risk of 
insuring it. Do you believe that a single carrier can provide 
group universal or group variable and universal insurance to 
the Federal work force?
    Mr. Bartholomew. Do I think they could?
    Mr. Scarborough. Yes.
    Mr. Bartholomew. Yes, I do.
    Mr. Scarborough. You do. OK.
    Let me ask you, Mr. New, you testified that employees 
actively at work are generally eligible for AD&D insurance, but 
retirees usually are not unless there is a special agreement.
    Why is it that retirees are generally excluded?
    Mr. New. I can only say, by experience, that typically just 
the active employees of the group or of the customer are 
eligible for AD&D insurance. However, carriers are trying to 
address the issues around portability when it comes to 
individuals that want to continue coverage once they've had it 
in place.
    I can only speak on behalf of UnumProvident. We listened to 
our customers and we are now offering true portability, which 
will allow an employee who retires the ability to continue 
coverage at the same group rates.
    Mr. Scarborough. So that's not exclusively an employer 
decision?
    Mr. New. It starts out at the employer level. The employer 
makes a decision when the contract is purchased if they want to 
extend portability to their employees.
    Mr. Scarborough. If the retirees are covered by special 
agreement, are they put in a separate risk pool for rating 
purposes?
    Mr. New. I would say if you were going to look at the 
Federal Government employees, and you're going to have a 
separate classification for retirees, I would say, yes, that's 
a safe bet.
    Mr. Scarborough. Let me ask you this, Mr. Shaw, I have been 
advised that the Senior Executive Association already offers 
its members the opportunity to purchase long-term care 
insurance from a variety of well-known companies at fairly 
attractive discounts.
    How many members does the SEA have?
    Mr. Shaw. About 3,600, I believe.
    Mr. Scarborough. Would you describe how this program works 
and how you can get such attractive premiums while retaining a 
fairly wide range of choices?
    Mr. Shaw. Congressman, what we do is ask insurance 
companies to offer to our members at a discount and they do 
that. They offer it at a discount between 10 and 20 percent, 
because they are given the opportunity to market to this group 
that is sponsored by SEA, or SEA has looked at the company and 
found that it's financially sound, et cetera, and we get those 
kind of discounts.
    I bought long-term care insurance about 2 years ago from 
the United Services Automobile Association, which is an 
insurance company which I went in when I was an officer in the 
military, and only officers at that time could get in it, and I 
got a 20 percent discount. And USAA is getting a piece. SEA is 
not getting a piece, but USAA gets a piece of the policy 
premium for itself for placing the insurance. And they have a 
number of companies that participate that they have to look at 
your application, and give them the best premium rate they can 
give them. And they typically offer 20 percent discounts.
    Mr. Scarborough. OK.
    Mr. Shaw. They didn't have to market to me because I went 
to USAA because I knew them to be a good organization. But 
there are a platform of companies, they call them, where they 
all get to look at the application from an underwriting 
standpoint and make a rate offer; and I get the best rate offer 
from whatever company I choose in the group.
    Mr. Scarborough. Does your organization plan to extend the 
sort of program to group universal or group variable universal 
life insurance?
    Mr. Shaw. The group universal life insurance or variable 
universal--whichever, fixed or variable--with a long-term care 
program is available through one of the organizations that does 
advertise through SEA, I think it's underwritten by First Penn 
Life. And I don't know how many have bought it or how many have 
not, but it's an option that's available to them.
    Mr. Scarborough. So your conclusion would be--I think it's 
safe to say that the Federal Government could obtain favorable 
rates on both long-term care insurance and on these new life 
insurance products while offering the employees an opportunity 
to shop among competing carriers?
    Mr. Shaw. Yes, sir. And if OPM needs to know how it works, 
they should go talk to the American Automobile Association, the 
AARP, the United Services Automobile Association, et cetera, 
who routinely get rate reductions for their members.
    Mr. Scarborough. OK. Do either of you two gentlemen 
disagree with this conclusion?
    Mr. Bartholomew. No.
    Mr. New. No.
    Mr. Scarborough. OK. You can if you want. OK. All right.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman. I regret missing part 
of this hearing, but I wanted to say I was interested, Mr. 
Shaw, to hear your comments about what Ed Flynn had said. So I 
am going to try to go back and recreate this, and eventually I 
have a few comments to make; then I will come back to Mr. New 
for a moment.
    Ed Flynn said that long-term care is complicated, there are 
lots of choices. Your response was that health insurance is 
complicated and employees somehow make rational decisions on 
that. I confess I'm not persuaded that people make rational 
decisions about their health insurance. I know that for me, I 
was given, you know, a certain number of choices and they all 
came with thick booklets. So I called someone in member 
services and I said, what do most people do? She said most 
people sign up for the standard Blue Cross plan in their area. 
So I signed up for the standard Blue Cross plan in my area. But 
I'm healthy.
    I mean, I can sort through different booklets about health 
care insurance and it doesn't mean much to me. I'm healthy. 
That's the difference. Knock on wood. When you get to long-term 
care insurance, all of the options you're provided assume a set 
of circumstances that, by and large, most people have no way of 
knowing. You don't know what kind of coverage you're going to 
need, how long you're going to need it. You just have no way. 
It's just a shot in the dark, I think, for most people who are 
healthy, who are, you know, your age, my age, buying this sort 
of coverage.
    I think part of what, you know, we're really trying to do 
here is to figure out how to drive down the costs for members 
of the work force when we provide an additional benefit, 
because after all we're not funding it, I mean, the discount is 
all they get. And so I guess that puts me in the 60 percent who 
signed up for Blue Cross/Blue Shield.
    I tend to think that people stay in a program because it's 
too hard to change. At least for some of us, it's the same way 
with our telephone companies. There may be competition, we may 
have the option to change, but it's not something we want to 
do. I think there is a difference between, or that it is a 
false choice. On the one hand, we don't want--there is one-
size-fits-all and on the other hand, there is allowing the 
members of the group a very wide range of choices among 
competing companies, letting all companies in or most companies 
in.
    I just don't think those are the two choices. And there has 
got to be something that is more effective.
    Now, Mr. Shaw, we heard from you on that topic. I want to 
go to Mr. New. And I would say this, we've talked about long-
term care insurance today and how we deal with that. I didn't 
understand that was a topic for today. And there might have 
been someone else from Mr. New's company if he had realized 
that we were going to get into long-term care. But with respect 
to AD&D, let's deal with this context of AD&D.
    What kind of structure makes sense to you, Mr. New? A 
structure where the Federal Government, like many employers, is 
basically picking from either one--is getting the best deal it 
can from one company, and there is competition to be the 
provider for that company; or you're picking--you know, you're 
allowing a consortium to come; in or you're letting anyone come 
in.
    I mean, should this be--where do you come out in this 
debate? On the one side, one company picked after a competitive 
process; on the other side, you know, any insurance company 
that wants to come into this market and offer AD&D or something 
in the middle. Where do you come in?
    Mr. New. I think that's a large question to answer. I'll 
try to answer it the best way that I can.
    I would think that when you look at any competitive 
situation, you want to do your due diligence. You want to make 
sure that you're looking at the marketplace to make sure that 
you're getting the best product for your employees. When it 
comes to the Federal employees, with the large population, you 
can go at it a couple of different ways. It really comes down 
to a couple of different factors.
    One, the carriers who are working in this marketplace and 
have worked in this marketplace for a long time know the 
marketplace well. They usually have the product behind what 
they want to offer to the employees.
    It also comes down to what type of administrative 
capabilities the employer will need. There is an enrollment 
process that would have to be applied to this, and you will 
have to customize to the customer to make sure that you can 
adapt to their abilities from an administrative standpoint. You 
can probably consider voluntary AD&D compared to other products 
like long-term care. There is a complexity on the one hand for, 
I believe, long-term care versus voluntary AD&D. You can 
probably do it with a few carriers.
    Mr. Allen. Do which?
    Mr. New. Voluntary AD&D. If everything aligns from the 
customization of the program to the customization of the 
enrollment process, there is a strong possibility that one 
insurance carrier can adapt and fill the need for the Federal 
employees.
    Mr. Allen. Mr. Shaw.
    Mr. Shaw. I really would like to respond.
    Mr. Allen. I was certainly not going to prevent you from 
speaking.
    Mr. Shaw. I appreciate that.
    When you talk about the Federal Employees Health Benefits 
Program, Congressman, there are any number of really good 
publications that are put out that compare every program that 
is offered and allow people to select depending upon their 
circumstances. There are some that are better for families, 
some that are better for retirees, et cetera. So even though 
there are a lot of programs, employees can very easily, for a 
very small investment, of about $5 for the Washington Checkbook 
publication, compare these plans each year.
    Second, when you talked about most companies or all 
companies participate, we don't advocate that. There are two 
programs in the government where companies get to compete to be 
part of the program. One is when the General Services 
Administration puts out a proposal, a contract for bid and 
people can compete to be listed--to be listed on the Federal 
Supply Service Schedule, which means they have to be 
financially qualified and they have to be checked out by GSA to 
make sure that they are capable of providing a quality program, 
and then they have to offer competitive rates.
    What it does is it gives them a license to sell but only 
the best get on that list--get that license. And those 
companies that get on that then go sell their product to the 
Federal Government at what are the most competitive rates that 
are available. That's one way that long-term care could be 
done.
    The other is like the FEHBP program where you pick--OPM 
provides oversight, and would have to decide whether or not 
these were quality companies, and were the best ones to provide 
the products. But there would be a variety of products that 
people could select from. And I'm sure that there would be a 
publication like the Washington Checkbook that would spring up 
overnight to evaluate these products, these long-term care 
products, for employees.
    Mr. Allen. You mentioned that Senior Executive Association 
is 3,600 members and you ask companies to provide long-term 
care as a----
    Mr. Shaw. We have not asked any. We have been approached by 
a variety of companies who have offered to provide it at a 
discount to our members.
    Mr. Allen. Is there some mechanism by which they can do 
that through the association?
    Mr. Shaw. They do that through their advertising through 
the association's newsletter and magazine.
    Mr. Allen. Do you have any idea how many of your members 
have signed up for long-term?
    Mr. Shaw. No, I do not. I'm sorry. I can get that 
information, but I do not know now.
    Mr. Allen. I would be interested. I think the----
    Mr. Shaw. It's very new.
    Mr. Allen [continuing]. Made before, which is that long-
term care insurance needs to be sold.
    Mr. Shaw. Absolutely. And this is very new. That's why this 
has all occurred within the last year or so, because people 
have started to become more and more aware of the need for 
long-term care insurance.
    Mr. Allen. If I could come back to you, Mr. New, and maybe 
Mr. Bartholomew, is AD&D insurance readily acceptable and 
affordable outside of the group? I mean, do you sell to 
individuals? Is there a market there to buy AD&D at a 
reasonable price, or is it really tied mostly to--is it sold 
mostly through employers?
    Mr. New. Typically, it's sold through employers; however, 
everyone in this room probably receives a mailing from their 
credit card, maybe their bank offering high limit AD&D 
protection. The rates tend to be much higher because there are 
a lot of administrative fees applied to it from the bank side.
    But, yes, it could be purchased by an individual through 
their bank or credit card company. But typically the group 
insurance environment is the easiest way to purchase it, as 
well as the most affordable.
    Mr. Allen. Thank you.
    Thank you, Mr. Chairman.
    Mr. Scarborough. Thank you, Mr. Allen.
    I want to thank you gentlemen for coming and testifying 
today. I think this is a continuation of a very important 
process that we provide life insurance to Federal employees and 
give them the best deal that they can get at the most 
affordable price.
    I would like to conclude by just saying for the record, I 
think we had a correction. What was the percentage? OK.
    Blue Cross, just in case it was going to keep anybody awake 
tonight, Blue Cross's market share for Federal employees is 44 
percent.
    With that, we are adjourned.
    [Whereupon, at 1 p.m., the subcommittee was adjourned.]

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