[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
  RECENT DEVELOPMENTS IN THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE CIVIL SERVICE,
                     CENSUS AND AGENCY ORGANIZATION

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           DECEMBER 11, 2002

                               __________

                           Serial No. 107-221

                               __________

       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


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                             WASHINGTON : 2003


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                     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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

   Subcommittee on the Civil Service, Census and Agency Organization

                     DAVE WELDON, Florida, Chairman
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
CONSTANCE A. MORELLA, Maryland       MAJOR R. OWENS, New York
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
C.L. ``BUTCH'' OTTER, Idaho          ELIJAH E. CUMMINGS, Maryland

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Garry Ewing, Staff Director
                Mary Baginsky, Professional Staff Member
                          Scott Sadler, Clerk
            Tania Shand, Minority Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on December 11, 2002................................     1
Statement of:
    Blair, Dan, Deputy Director, U.S. Office of Personnel 
      Management, accompanied by Ed Flynn, Senior Policy Advisor 
      to the Director............................................    20
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia................................................    16
    Francis, Walton, economist and author; Carroll E. Midgett, 
      chief executive manager, American Postal Worker's Union; 
      Michael Showalter, vice president, Definity Care; Colleen 
      M. Kelley, president, National Treasury Union; Charles L. 
      Fallis, president, National Association of Retired Federal 
      Employees; Bobby L. Harnage, Sr., president, American 
      Federation of Government Employees; and Greg Scandlen, 
      consultant.................................................    37
    Hoyer, Hon. Steny, a Representative in Congress from the 
      State of Maryland..........................................     8
Letters, statements, etc., submitted for the record by:
    Blair, Dan, Deputy Director, U.S. Office of Personnel 
      Management, prepared statement of..........................    23
    Davis, Hon. Danny K., a Representative in Congress from the 
      State of Illinois, prepared statement of...................     5
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statement of.........................    18
    Fallis, Charles L., president, National Association of 
      Retired Federal Employees, prepared statement of...........    77
    Francis, Walton, economist and author, prepared statement of.    41
    Harnage, Bobby L., Sr., president, American Federation of 
      Government Employees, prepared statement of................    97
    Kelley, Colleen M., president, National Treasury Union, 
      prepared statement of......................................    70
    Midgett, Carroll E., chief executive manager, American Postal 
      Worker's Union, prepared statement of......................    62
    Scandlen, Greg, consultant, prepared statement of............   109

  RECENT DEVELOPMENTS IN THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

                              ----------                              


                      WEDNESDAY, DECEMBER 11, 2002

                  House of Representatives,
  Subcommittee on Civil Service, Census and Agency 
                                      Organization,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:05 a.m., in 
room 2247, Rayburn House Office Building, Hon. Dave Weldon 
(chairman of the subcommittee) presiding.
    Present: Representatives Weldon, Davis of Illinois, and 
Norton.
    Also present: Representative Tom Davis of Virginia.
    Staff present: Gary Ewing, staff director; Jim Lester, 
counsel; Scott Sadler, clerk; Mary Baginsky, professional staff 
member; Tania Shand, minority professional staff member; and 
Teresa Coufal, minority staff assistant.
    Mr. Weldon. Good morning. I want to welcome everyone to 
this hearing on the Federal Employees Health Benefits Program.
    During the past year there have been important developments 
in the FEHBP that are of interest to the subcommittee. The 
FEHBP is one of the most important programs this subcommittee 
oversees. In fact, Federal employees, retirees, and their 
families enjoy the widest selection of health plans in the 
country. This year they may choose from 188 plans. Because 
these choices are available, FEHBP participants may compare the 
costs, benefits and features of different plans to make an 
informed choice.
    As a physician and the Representative of Florida's 15th 
District, I am keenly aware of the importance of the FEHBP. 
Over 8 million Federal employees, retirees, and dependents rely 
on the program for high quality health care options at 
affordable prices. I share their concerns about the program and 
look forward to the 108th Congress as an opportunity to improve 
competition and encourage innovation in the program.
    I have spoken before about the need for innovation in the 
FEHBP. In that context, I want to commend the Office of 
Personnel Management and the American Postal Workers Union. 
Unlike the past years, OPM's call letter for 2003, which 
outlines OPM's program guidance for carriers, was not studded 
with new mandates. Indeed, OPM challenged carriers to be 
innovative.
    The American Postal Workers Union accepted that challenge 
and developed its new consumer-driven option plan. The new 
consumer-driven option plan is unlike any other plan currently 
offered to Federal workers and retirees. The plan gives its 
members more control over their health care and provides 
incentives for them to be wise consumers of health care. It 
provides first dollar coverage through personal care accounts. 
If the personal care account is exhausted, there is a 
reasonable deductible before traditional health care insurance 
begins. A major advantage of these accounts is that they roll 
over year-to-year for up to 4 years, so members can save for 
unforeseen medical expenses.
    OPM has approved another new and innovative option, 
flexible spending accounts, which will hopefully be available 
to FEHBP members in the summer of 2003. Under this program 
participants may set aside tax-free dollars from their paycheck 
to pay for certain health care costs.
    Another important development that we saw this past 
September was the continuation of rising premiums for 2003. 
According to the Office of Personnel Management, on average, 
premiums will rise by 11.1 percent. These continuing increases 
are a cause of concern for participants and members alike--
Members of Congress as well.
    To put this increase in context, though, it is estimated 
that health care premiums in the United States could climb by 
an average of 15 percent this year. These increases reflect 
cost drivers such as increased utilization of prescription 
drugs, an aging population, advanced medical technology, and 
hospital costs and consolidation. CALPERS, California Public 
Employees' Retirement System, which provides retirement and 
health benefits and which many consider an exemplary program, 
will experience a 25 percent rate increase for 2003.
    In another important development, the program's most 
popular carrier, Blue Cross/Blue Shield, nearly was forced to 
withdraw from the FEHBP after the House voted to end an 
exemption from cost accounting standards that carriers have 
enjoyed since 1998. Fortunately, OPM granted an administrative 
exemption to the accounting standards that made it possible for 
the Blues to remain in FEHBP.
    Nevertheless, I remain concerned about this issue. It would 
be a tragedy if the most popular carrier in the program, 
especially one that so many of our retirees have chosen, were 
driven from the program by bureaucratic insistence on imposing 
a one-size-fits-all accounting system that would provide not 
one whit of benefits for those who participate in the plan or 
the taxpayer. Therefore, I believe this next Congress should 
seriously consider a permanent statutory exemption.
    I look to our witnesses today for their perspectives on 
these important developments, and I know this subcommittee is 
interested in any recommendations they may have for ways to 
improve the program while preserving competition and consumer 
choice. Market orientation and consumer choice have been 
hallmarks of the program's success. These key features have 
made the FEHBP a widely admired model for employer-sponsored 
health care programs.
    I look forward to hearing the testimony of our 
distinguished witnesses today, and I thank them for appearing.
    And I now yield to the gentleman from Illinois, Mr. Davis, 
for his opening statement.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. 
And, first of all, let me just say that it has been a pleasure 
working with you during this past year, and I look forward to a 
delightful year coming. I also want to take this opportunity to 
wish and you and your family a happy, healthy and peaceful 
holiday season as well as for those who are assembled.
    I want to thank you for scheduling this hearing. I want to 
thank all of the witnesses including the distinguished whip of 
the Democratic Caucus for being with us to testify.
    Last year the Democratic members of the subcommittee 
requested this hearing to give witnesses with varying views on 
medical saving accounts and ideas of how best to reduce the 
FEHBP premiums an opportunity to testify before the 
subcommittee.
    I also may indicate, Mr. Chairman, that this obviously 
would be one of the hardest working subcommittees. We may very 
well be the only committee that's holding a hearing at this 
particular moment and certainly the only one that's well 
attended. Though a year later, this hearing is taking place 
when there are many new developments in the Federal Employees 
Health Benefits premiums, and today's witnesses do indeed have 
varying opinions on how these developments will affect the 
FEHBP.
    Earlier this year, the Office of Personnel Management 
announced that the FEHBP premiums for 2003 will increase an 
average of 11.1 percent. This increase marks the third 
consecutive year that premiums have jumped by more than 10 
percent. Representative Steny Hoyer--who, I am pleased to say, 
will be testifying on our first panel--introduced H.R. 1307, 
which would help keep Federal employees' health care costs 
affordable by increasing the government's contribution to 
premiums. The bill would increase the government's share of the 
FEHBP premiums from 72 percent to 80 percent. This subcommittee 
should give this bill serious consideration next year, 
particularly since a million Federal employees will see their 
pay fall below that of their military counterparts.
    OPM also announced that for the first time executive and 
legislative branch employees will be offered flexible spending 
accounts which allow a pretax payroll deduction for some 
insurance premiums, unreimbursed medical expenses, and child 
care and dependent care expenses. Additionally, beginning in 
2003, the American Postal Workers Union, the APWU, will offer a 
new consumer-driven option to FEHBP participants. Consumer-
driven plans are used to give employees more incentive to 
control the cost of their health benefits and to reduce 
employee spending on health care.
    A report entitled ``Can Consumerism Slow the Rate of Health 
Benefit Cost Increases,'' by Paul Fronstin with the Employee 
Benefit Research Institute, a nonprofit, nonpartisan 
organization, stated, ``A movement to consumer-driven health 
benefits has implications for health benefit costs, utilization 
of health care services, quality of health care, the health 
status of the population, risk selection, and efforts to expand 
health insurance coverage. Ultimately the success or failure of 
consumer-driven health benefits will be measured by its effect 
on the cost of providing health benefits and its effect on the 
number of people with and without health benefits. Time will 
tell what impact the new consumer-driven plan, flexible 
spending accounts, and other new developments will have on 
premium increases and the quality of health care in the 
FEHBP.''
    I expect today's witnesses will help shed some light on 
what is ultimately coming in FEHBP and how they believe it will 
affect plan participants.
    I request also, Mr. Chairman, that the record be kept open 
for 2 weeks so that Professor James Bedingfield, a member of 
the Cost Accounting Standards Board, can submit a statement for 
the record.
    I thank you for this consideration and yield back the 
balance of my time.
    [The prepared statement of Hon. Danny K. Davis follows:]
    [GRAPHIC] [TIFF OMITTED] T7416.001
    
    [GRAPHIC] [TIFF OMITTED] T7416.002
    
    [GRAPHIC] [TIFF OMITTED] T7416.003
    
    Mr. Weldon. I thank the gentleman for his very kind words. 
And let me just add that it's been a pleasure to work with you 
for the past--I guess it's about 18 months--and I am looking 
forward to working with you and your staff in the future. And 
certainly I wish you, as well as your family, a pleasant 
holiday.
    And without objection we will keep the record open for 2 
weeks to allow for the testimony that you are speaking of.
    Our first panel today, we have the distinguished Member 
from the State of Maryland, Mr. Steny Hoyer. Steny represents 
the Fifth District in Maryland, which is home to thousands of 
Federal employees and retirees, both military and civilian. Mr. 
Hoyer just completed his tenth full term, making him the 
longest serving Member of the U.S. House of Representatives 
from southern Maryland in history. For over two decades Mr. 
Hoyer has been very active in working on issues affecting 
Federal employees.
    I want to commend Mr. Hoyer for his commitment to the 
Federal employees, and I want to congratulate him on his recent 
election as minority whip. And I want to thank him for 
testifying, and I look forward to hearing his views.
    Without objection, your written statement will be entered 
into the record. And, Steny, you are recognized for your 
opening statement.

  STATEMENT OF HON. STENY HOYER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MARYLAND

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    And, Mr. Davis, I want to thank you for your comments and 
for your cosponsorship of the legislation to which you 
referred.
    I also want to say to you, Mr. Chairman, I appreciated the 
opportunity to work with you on issues of relevance to Federal 
employees. You undertook this relatively new responsibility, 
and you have undertaken it, I think, with a great deal of 
ability and openness; and I appreciate the opportunity to work 
with you.
    I want to thank you also for inviting me here to testify. 
The purpose of this hearing is to discuss recent developments 
in the Federal Employee Health Benefits Program, and I 
appreciate the opportunity to discuss a few of them with you 
and the committee today.
    Specifically, I'd like to discuss first of all the 
affordability of the Federal Employee Health Benefits package, 
H.R. 1307, legislation to increase the Government's 
contribution for health premiums, premium conversion, flexible 
spending accounts and consumer-driven plans, all of which 
you've referred to. Let me say parenthetically, Mr. Chairman, 
that I served on the post office, civil service committee for 
18 months. That committee no longer exists and essentially this 
subcommittee has undertaken its responsibilities. But a study 
was done in the mid-1980's about the relative worth of health 
benefit programs in the private sector, in the non-Federal 
public sector, and in the Federal sector, and that study, 
interestingly enough, showed that the Federal sector was the 
least generous of the health benefit plans that existed at that 
point in time.
    A stark example of that was, I did not participate in the 
Federal Employee Health Benefit Plan until just a few years ago 
because my wife was an employee of the Prince George's County 
board of education, and the board of education plan was about 
as expensive, a little less expensive, but included dental 
benefits and it included a broader spectrum of benefits than 
was available under the Federal Health Benefit program. So that 
study that showed municipal and State plans to be more 
generous, as well as private-sector plans to be more generous, 
was very real for me because I found that out.
    However, very frankly, over the last 15 years or so that 
situation has changed. It has changed in large part because, as 
health care costs have escalated, private-sector and State and 
municipal plans, not always but sometimes, have increasingly 
diminished the options available to employees and have 
increasingly provided as the only option a health maintenance 
organization, clearly directed at trying to minimize costs.
    Since 1998, the FEHBP premiums have increased by nearly 50 
percent, not including the average 11 percent jump scheduled 
for January 2003. Over the same period, salaries for Federal 
employees have increased by less than 15 percent. While those 
percentages are different bases, the fact of the matter is that 
every year participants of the health benefit program are 
digging deeper and deeper into their pockets to pay for their 
health care and thereby diminishing their take-home pay. For a 
Federal employee choosing Blue Cross/Blue Shield's basic family 
option, he or she pays over $2,000 per year in premium costs 
alone. Those making $30,000 to $40,000 a year are simply priced 
out of receiving coverage from Blue Cross/Blue Shield.
    The rising costs of health care premiums is becoming a 
liability in retaining hard-working Federal employees, as well 
as recruiting those who are considering careers in public 
service. That liability is magnified when you consider that the 
Bureau of Labor Statistics estimates that Federal employees are 
paid 33 percent less than their private-sector counterparts, 
and although that is controversial and not universally 
accepted, particularly by OMB of both parties on a consistent 
basis, nevertheless there is no doubt that the percentage is a 
very substantial one. Nobody denies that.
    Let me speak to the specific legislation that I have 
introduced with Congressman Davis and Congresswoman Morella and 
others. When the 107th Congress began, I introduced a bill to 
increase the Federal Government's premiums an average of 72 
percent. Mr. Chairman, as you know, it is not specifically 72 
percent; it is an average of 72 percent, not more than 75. By 
increasing it to 80 percent, it would bring the share of the 
Federal Government pay more in line with most private and State 
employee pay.
    Hark back to the 1980's study, which Kaiser Permanente 
currently says is approximately 83.1 percent, on average, of 
the employers' contribution, private sector and public sector, 
non-Federal, which is--83, that's for single health care 
coverage. For a family, it is 76.2 percent, so that the 80 
percent would be approximately an average of what the private 
sector and non-Federal public sector is doing.
    There are now 250,000 Federal employees that choose not to 
enroll in the FEHBP; therefore, we should be focusing on 
reducing that number by making quality health care coverage 
available to all of our employees, as well as retirees. I plan 
to reintroduce this legislation when the 108th Congress 
convenes, and hope that this subcommittee, Mr. Chairman, will 
give it an early hearing.
    Briefly, on premium conversion, in October 2000 Federal 
employees were offered what is called ``premium conversion'' as 
you have spoken about in your opening statement. In the midst 
of rising health care costs, premium conversion has become a 
significant benefit for participants in the FEHBP because costs 
for premiums, of course, come out of pretax dollars, saving 
participants an average of $450 annually, a very significant 
benefit. This is a long overdue benefit, which is similar to 
most private-sector plans which have allowed their employees to 
deduct health insurance premiums from their taxable incomes for 
many, many years.
    Unfortunately, the Federal Government does not offer the 
same benefit to retired Federal employees. H.R. 2125, the bill 
sponsored by Representative Tom Davis, and which I have 
cosponsored--and I think there are 200-plus cosponsors on it, 
well over a majority--will allow Federal retirees to use pretax 
earnings to pay their health insurance premiums. I would hope 
the committee will also hold a hearing on that piece of 
legislation.
    Flexible spending accounts: In the spirit of premium 
conversion, I am pleased to see that OPM plans to proceed with 
flexible spending accounts in 2003. FSAs will allow Federal 
employees to contribute to a personal account out of pretaxed 
dollars which they can later tap to pay for uncovered portions 
of qualified medical costs and other expenses. However, to make 
these accounts work most effectively, I would like to see 
Congress consider the President's fiscal year 2003 budget 
proposal to allow up to $500 in remaining balances to be 
carried over. This would provide employees in the public and 
private sector much-needed flexibility.
    Last, consumer-driven plans: As the committee knows, the 
American Postal Workers Union is now offering a new consumer-
driven option in the FEHBP. This plan allows participants to 
receive a health-spending account which you referred to, Mr. 
Chairman, and Mr. Davis did as well. Employees will be able to 
draw from the account to pay for a variety of medical needs. 
While this new option may keep costs down, the Federal 
Government should proceed slowly, in my opinion, on these types 
of plans; not all participants, possibly, will benefit from the 
plan.
    But I think the experiment is a very worthwhile one and 
that we ought to watch closely. While a healthier person will 
benefit, those with greater health care needs could end up 
paying higher premium costs down the road. I know the National 
Association of Retired Federal Employees is opposed to this 
plan, and President Charles Fallis will be addressing the 
problems in depth later today.
    I hope the APWU plan is not a prelude to a more 
comprehensive medical savings account. I know that has been 
discussed and some of us have great reservations for medical 
savings accounts because we believe, as we referred to them, 
the healthy and wealthy will be advantaged by such plans. But 
because you would take the healthy and wealthy out of the 
insurance pool into savings accounts, you will increase the 
risk in the remainder and premiums and costs will go up in the 
remaining pool.
    When the Office of Personnel Management Deputy Director Dan 
Blair testified before the Treasury, Postal Appropriations 
Subcommittee, of which I am the ranking member, I asked him if 
the administration was pursuing medical savings accounts as a 
policy. His answer was that MSAs were, in fact, being 
considered.
    Let me conclude Mr. Chairman, with a word of caution on 
MSAs which frankly I have already given so I will not repeat it 
because my time is up, but I would hope that as that is 
considered, this committee would look very carefully at the 
impact that proposal would have on the insurance pool and the 
consequential increase in premiums of the remainder.
    Thank you, Mr. Chairman. Again, I appreciate this 
opportunity and hope that the committee will seriously consider 
increasing the premium contribution that the Federal Government 
makes. This is a bipartisan piece of legislation reflecting the 
employer's efforts to keep employees insured and whole in terms 
of salary increases.
    Mr. Weldon. I want to thank the gentleman for his 
testimony.
    Your comments about taking your wife's insurance plan 
reminded me that my parents did the same thing. My father was a 
postal worker, my mother was a school teacher, but the family 
was on my mother's plan rather than my father's plan because it 
was more generous.
    Mr. Hoyer. I was surprised--I think it was the Hudson 
Institute that ran the study in the mid-1980's for the post 
office, civil service committee, and frankly I wasn't on the 
civil service committee at that point in time. But I was very 
interested, as you pointed out, because I have a lot of Federal 
employees. But I was surprised at the disparity between both 
the private-sector and municipal and State plans.
    Mr. Weldon. It would be interesting to repeat that study 
today, and I agree with your assessment. I would conjecture 
that the gap is not nearly as it has been in the past----
    Mr. Hoyer. I haven't seen the study, but that is my belief 
because of the fact, as I said, the private-sector plans and 
municipal plans have become less generous because of the 
increasing costs.
    Mr. Weldon. Your piece of legislation is--your 1307 that 
you plan to reintroduce, have you had it scored by CBO as yet?
    Mr. Hoyer. We have not, Mr. Chairman, but it is my belief, 
and just from speculating on what the costs would be as it 
relates to the existing costs at 72 percent, that we are 
talking probably at least a couple hundred million dollars a 
year.
    Mr. Weldon. We did some back-of-the envelope calculations, 
and the mandatory spending increase would be on the order of 
several hundred million dollars a year. So it would be helpful 
to try to come up with some offsets if we are going to try to 
pursue legislation like this.
    Are you concerned at all about raising the government's 
share of the premiums serving as a disincentive for Federal 
employees to shop around for the best value?
    Mr. Hoyer. Mr. Chairman, I have been one who has supported 
the concept of deductibles and the concept of participation by 
the insured in the payment of the premium, as well as some of 
the costs of health care, to avoid overutilization and to 
encourage careful shopping. My view is that frankly the 
difference between 20 percent and 28 percent will not be a 
difference which will undermine the employees still wanting to 
save and get as good a buy from the 20 percent that they are 
contributing, particularly as costs go up.
    I frankly don't perceive there to be a significant savings 
to the Federal employees by this. What I perceive it to be is a 
freezing of--in effect, going backward; so that my view is that 
if you went to 100 percent, or maybe 95 percent or even maybe 
90 percent, that would be a greater problem than simply the 
increase of 8 points. But I don't think that will in any 
meaningful way affect the consumers' judgment.
    Mr. Weldon. Like you, I am concerned about the impact of 
higher premiums on the work force. I held a hearing on 
cafeteria plans last March. Witnesses testified about the 
benefits those plans offer and said they helped employers 
recruit and retain well-qualified employees because they allow 
employees to maximize the value of benefits offered by the 
employer.
    A cafeteria plan could be designed to allow employees to 
use the government contribution to pay for 100 percent of the 
FEHBP premium. Would you be willing to work with me on 
examining cafeteria plans for Federal employees?
    Mr. Hoyer. Mr. Chairman, the answer is, I would certainly 
be willing to work with you. I will be candid in saying that I 
have had grave reservations about cafeteria plans. I am not an 
expert on the cafeteria plans, particularly as they apply in 
the private sector, but I am very worried that cafeteria plans 
will adversely affect senior employees in particular, people 
who have been here for some period of time.
    Newer employees, who have less expense, particularly in the 
health care area, may find them to be more advantageous than 
more senior employees. But the answer to your question is, I 
would certainly look at them with you because obviously in the 
private sector they are being utilized; and there's a lot of 
discussion about applying them in the public sector, but up to 
this point in time, I haven't been very enthusiastic about that 
option.
    Mr. Weldon. I agree with you that Congress should seriously 
consider the President's proposal to allow employees to roll 
over up to $500 in their flexible spending accounts. According 
to many experts, the use-it-or-lose-it feature of flexible 
spending accounts deters many employees, particularly lower-
income employees, from taking advantage of FSAs.
    Permitting rollover would also discourage wasteful end-of-
the-year spending.
    Do you think we can work together on this issue in the next 
Congress?
    Mr. Hoyer. Certainly. I look forward to it.
    Mr. Weldon. Some experts have suggested that even without a 
cafeteria plan, Congress should eliminate the statutory 
requirement that employees pay at least 25 percent of the FEHBP 
premium. They say it is a disincentive for employees and 
retirees to shop for the best value and that employees and 
retirees should be able to use the government contribution to 
pay for 100 percent of premiums.
    Is this something you think the subcommittee should be 
examining in the future?
    Mr. Hoyer. Well, as I said, I tend to adopt the premise 
that a copay plan probably focuses the purchaser, which is the 
employee, notwithstanding the fact that there is either 72 
percent, or in my proposal 80 percent, contribution by the 
Federal Government; and it focuses the purchaser on making the 
best buy because they are in fact expending some of their 
funds. If you, obviously, give the option of 100 percent pay, 
that undermines that.
    On the other hand, as health care costs escalate, there may 
well be families, particularly at the lower level of pay, that 
would be costed out of the market without 100 percent 
contribution. So I think we ought to look at it in terms of 
affordability of health care.
    Frankly, at our level of pay, it really is not a major 
issue for us. But at a GS-3, GS-4, GS-5, GS-6, GS-7, with a 
family, it is a major, major issue, and we ought to look at it 
in that context.
    Mr. Weldon. I was thinking of it not so much in the context 
of copays, but more in premiums; and it is somewhat in line 
with the objectives----
    Mr. Hoyer. I'm sorry, you're talking about 100 percent 
payment of premiums?
    Mr. Weldon. Yes.
    Mr. Hoyer. Yes. And my point is, to go back to your 
question, if you pay 100 percent of premiums, does the 
purchaser therefore not try to make the best buy for it in 
this--and we have 100-some odd alternatives. Obviously, as you 
well know, all of those aren't available to all Federal 
employees; it is a regional thing, and that is the total number 
of plans that are available throughout the country.
    I think in this area--does anybody know? We have maybe 25, 
30--25 or 30 if you are an employee in the Washington 
metropolitan area; Chicago, I don't know how many; or in 
Florida, central Florida, I'm not sure.
    But in any event, I was responding to your concept that can 
apply both to copays and to premium payment because the initial 
amount of premium does, in fact, determine for an employee what 
policy they are going to be able to afford, what policy is best 
for them and their families that is affordable by them. That 
was my point in terms of saying, obviously the less you're 
paid, the more critical becomes the contribution the Federal 
Government makes, the employer makes, to the purchase. The 
lower the employee, the closer I think we ought to get to 100 
percent. That is not what we do now because as we do it at 
every level, an average of 72 percent.
    Mr. Weldon. I believe my time has expired, and I would love 
to explore this more with you. And it is a pleasure to 
recognize the ranking member for questions.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    It was very interesting to hear both you and Mr. Hoyer 
relate experiences that you had with spouses who work for the 
board of education and were members of the teachers union. I 
have a very similar experience--that is, when my wife used to 
work.
    Mr. Weldon. I feel your pain.
    Mr. Hoyer. Let me say on behalf of all the wives that 
aren't getting salaries, they work.
    Mr. Davis of Illinois. They still work. But my question 
really becomes, it looks like they have done pretty good jobs 
of negotiating benefits packages in their contracts.
    Do you feel that OPM has done a competent job, or a good 
job, of negotiating coverage for the Federal employees at the 
best possible cost?
    Mr. Hoyer. Really I don't think the Congressman could say 
that they have done the best job, but clearly if you look at 
the disparity between the private-sector escalation and the 
FEHBP escalation, there is about a 25 percent better buy for 
the Federal employee. That would appear to say that we have 
done a good job.
    On the other hand, it would also be reflective of the fact 
that we have approximately 9 million people who are involved in 
this program between active Federal employees, dependents, and 
retirees. That is a big cohort, so we have a lot of leverage in 
negotiation. So it may simply reflect the savings that we 
effect from having a large number of purchasers.
    On the other hand, I think it would be fair to say that I 
think OPM has been pretty vigorous in trying to negotiate well 
on behalf of Federal employees.
    Let me say in passing, I don't want to get in trouble with 
Mr. Weldon. I don't know his position on this, so I have sort 
of a gut feeling. But essentially what the Clinton health care 
plan recommended in many respects was a replication of FEHBP 
with, in effect, the States serving as OPM and managing the 
market competition with individuals within States buying, as 
they do for FEHBP, from private-sector insurers. I think they 
didn't sell it very well, and it wasn't understood that simply, 
but in some respects that's what they were saying.
    Obviously, that didn't go very well. Harry and Louise took 
care of that. But my answer would be, it is hard for me to 
judge, had they done the best job they could have? Clearly, 
given the bulk of our purchase and the negotiations that we 
involve ourselves in, I think we are getting a pretty good 
deal.
    Mr. Davis of Illinois. And I would be in agreement with 
that. Of course, some of the concern that has been expressed is 
that, in fact, it is kind of difficult for OPM to take the same 
position, let us say, a union might take on behalf of its 
membership and therein might be a little bit of the difference 
in terms of the kind of agreements that ultimately may have 
gotten reached with some of the teachers unions, some of the 
other entities that have had to negotiate contracts; and I 
certainly agree with your thinking there.
    But you mentioned that there were 250,000 Federal employees 
who choose not to enroll in the Federal package, and you also 
mentioned that the rising cost of health premiums is becoming a 
liability to the extent that, in some instances, it prevents us 
from being able to recruit and maintain the kind of work force 
that we need.
    Can you think of any examples of areas where this might 
prove true?
    Mr. Hoyer. I don't have a specific example, Congressman, 
but clearly, as I said, the Kaiser Permanente figure is about 
83 percent in the private sector for a single insured and 76 
percent for family policies. If that is the case, if an 
individual seeks employment at the Federal level and sees a 
disparity, an 11 percent difference, 72 to 83, 11 percent 
difference on what their health premium will pay, I think for 
younger workers it probably won't make any difference. Younger 
workers for the most part are not driven in terms of their 
employment decision by health care benefits and probably not by 
retirement benefits either, but mid-level--recruiting mid-level 
people, skilled people who may be in their late 30's, early 
40's, they have a family, children, children in their teens; 
they are starting to think of that. And although I don't have a 
specific example for you, we are going to be, as you know, 
faced in the next 6 years with approximately half of the 
Federal employees that we have, having the ability to retire.
    Now, if that is the case, we won't be able to replace them 
all with young workers. We will have to replace some of them 
with experienced, skilled workers to replace the skills that we 
are going to lose at that point in time; and at that point in 
time, I think this will become a very important, competitive 
question as it relates to employment.
    Mr. Davis of Illinois. Mr. Chairman, I know that my time is 
up, but with your indulgence, can I just get one additional 
question?
    Mr. Weldon. Without objection.
    Mr. Davis of Illinois. Have you received any outright 
opposition to 1307 in terms of anybody that has just said they 
are opposed to it, and what is your feeling about prognosis? I 
know you have indicated that you hope the committee would take 
a good look at it at the beginning of the year. But what is 
your prognosis in terms of movement of it?
    Mr. Hoyer. Congressman, as I told you and as you know very 
well and as Chairman Weldon knows, this is a bipartisan piece 
of legislation. This is not--this is a judgment call that we 
need to make as the employer, and that judgment call is, how 
much do we contribute to make us competitive and to assure that 
our employees have affordable health care for themselves and 
their families? I think as a model employer, that is very 
basic. We want that for every employee, but certainly we want 
it for our employees.
    Mr. Weldon raised the point of several hundred million 
dollars, a point--and I think we are going to do 4.1 percent, 
by the way; I hope you will support that. Speaker Hastert is 
supporting 4.1 percent. I think when we come back we are going 
to do 4.1 percent.
    The President did 3.1 percent under the law. I think he 
just followed the law and did that. And I think we will do the 
4.1 percent. Having said that, that clearly would be offset by 
the premium increase. So we are going to keep Federal employees 
relatively even.
    Let us say for the sake of argument, it is $250 million. 
One point is about $900 million. So we are talking about a 
quarter of a point on salary. So when you say on an offset, Mr. 
Chairman, obviously the employer's income, whatever you do, 
including the doctor's office, a law office, you have to 
consider, first of all, how do I pay my people because that is 
the critical component of the service organizations that they 
are involved in, and the Federal Government is obviously 
people-driven in terms of its expenses.
    I think $250 million or thereabouts is a relatively small 
cost when you consider the $2 trillion budget for assuring 
affordable availability of health care for our employees and to 
put us in a competitive position. So I don't think it is a 
question of offsets. It is a question of dedicating your 
resources and whatever other incremental increases we will have 
next year. Obviously our revenue will go up, our taxes, and 
hopefully will produce more as the economy comes back. I think 
it is a justifiable cost we ought to spend, and I have not 
heard of any opposition to it, but there will obviously be 
concern about costs, as there ought to be.
    Mr. Davis of Illinois. Thank you.
    Thank you, Mr. Chairman.
    Mr. Weldon. I want to thank Mr. Hoyer for his valuable 
testimony, and I assure you, we will take under consideration 
as we deliberate on these issues in the future. And I am 
certainly interested in trying to work with you on some of the 
issues that you raise in 1307. I think there may be a way for 
us to achieve both of our goals as we work on this issue in the 
future.
    And with that, I will----
    Mr. Hoyer. I look forward to it.
    Mr. Weldon. I will let you go ahead and proceed on. I know 
you have a busy schedule. It has been a pleasure to have you 
here.
    Mr. Hoyer. Thank you, Mr. Chairman. The witnesses--I have 
seen the list. The witnesses that will speak after me are much 
more knowledgeable.
    Mr. Weldon. OK.
    With that, I would like to now ask our second panel to come 
forward. But before I introduce them, we will proceed a little 
bit out of order here.
    Mr. Davis wanted to say some words about one of the 
witnesses.
    Mr. Davis of Virginia. On the third panel.
    Mr. Weldon. On the third panel, OK.

STATEMENT OF HON. TOM DAVIS, A REPRESENTATIVE IN CONGRESS FROM 
                     THE STATE OF VIRGINIA

    Mr. Davis of Virginia. Let me just say, Mr. Chairman, 
thanks. And let me first commend you for holding this hearing 
on a very important issue to me and tens of thousands of my 
constituents in northern Virginia on the Employees Health 
Benefits program. As you know, the FEHBP has become one of the 
most important pieces of the Federal employee benefit package. 
It plays a vital role in our recruitment and retention of good 
people in government, and it is of utmost importance that we 
all work together to ensure that quality and choice are 
maintained while we try to constrain costs.
    But I thank you for the opportunity to introduce to the 
committee somebody who will be on the third panel, and I have 
to unfortunately go out to Loudoun County and speak to Federal 
Government employees out there.
    But we have a newly elected president making his debut 
before this committee today, the new president of the National 
Association of Retired Federal Employees--Charles, do you want 
to get up--and I introduce him to the panel. He just began his 
term as the NARFE president on November 1, after having served 
two terms as the national treasurer. He is a Virginian. He was 
in various leadership posts in the Roanoke Chapter and in the 
Virginia Federation of Chapters.
    Let me just note that he began his 35 years in the Federal 
civilian service as a substitute railway mail clerk, PFS level-
5, rising through the agency ranks to postal inspector, schemes 
and routing officer, district manager for Virginia, officer in 
charge of Washington, DC, and the director of regional 
operations in the Eastern Region. In 1972, he was promoted into 
management with the rank of regional assistant postmaster 
general, Eastern Region, which includes the States of New York, 
Pennsylvania, New Jersey, Delaware, Maryland, Virginia, West 
Virginia, and the District.
    Charlie's history of government service, I think, and his 
many years as an active member and elected leader of NARFE 
makes him an excellent source of information and assistance to 
this committee, as it has been to me for many years. And his 
honesty, his trustworthiness and thoroughness are well known to 
those of us who have known him for years; and I think it will 
be beneficial to the subcommittee's work, as we try to provide 
the best for those who serve our Nation as members of the 
Federal civil service.
    And Charles, I apologize, I will not be here to hear your 
testimony, but I've got your written remarks. They look great. 
You are on an outstanding panel with some of the veterans who 
have been before this committee before, and we welcome you to 
the brotherhood, those of us who are fighting for Federal 
employees. Thank you for being here.
    And, Mr. Chairman, let me just thank you for letting me 
speak out of turn.
    Mr. Weldon. Thank you, Mr. Davis. It is a pleasure to have 
you here.
    [The prepared statement of Hon. Tom Davis follows:]
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    Mr. Weldon. I would like to ask the Honorable Dan Blair to 
come forward. Mr. Blair is the deputy director of the U.S. 
Office of Personnel Management. Mr. Blair is no stranger to the 
Committee on Government Reform or to this subcommittee. He had 
a long and distinguished career on the House staff, including 
on the staff of the Government Reform Committee. He served as 
the staff director for the House Subcommittee on Postal 
Service.
    Before assuming his current post, Mr. Blair served on the 
staff of the Senate Committee on Governmental Affairs, where he 
helped develop a long-term care insurance program for Federal 
employees and the uniformed services, and reforms for the 
Federal Employees Health Benefits program and life insurance 
programs.
    I want to thank you for being here, and as I see, you are 
accompanied by Mr. Ed Flynn who--it is a pleasure to have him, 
as well, and he will be available for responding to questions, 
but does not have a opening statement.
    It is the practice of the Government Reform Committee to 
swear in witnesses at all of our hearings. I ask that you rise 
and raise your right hand.
    [Witnesses sworn.]
    Mr. Weldon. The court reporter will note that they answered 
in the affirmative. You are now recognized for your opening 
statement, Mr. Blair.

    STATEMENT OF DAN BLAIR, DEPUTY DIRECTOR, U.S. OFFICE OF 
 PERSONNEL MANAGEMENT, ACCOMPANIED BY ED FLYNN, SENIOR POLICY 
                    ADVISOR TO THE DIRECTOR

    Mr. Blair. Good morning, Mr. Chairman, Congressman Davis. 
Thank you for that kind introduction. I am accompanied today by 
Ed Flynn, who is Director James's senior policy advisor.
    You have a copy of my prepared testimony before you, and in 
the interest of time, I ask that my complete statement be 
entered for the record and I will be happy to summarize.
    Director James asked me to testify for her today before 
this distinguished subcommittee on developments in the Federal 
Employee Health Benefits Program over the past year. I would 
like to tell you about her four-point strategy to maintain 
quality, to constrain costs in the program, and discuss the 
future direction of the program in the fifth pillar that she 
has added to her results-oriented strategy for the coming year.
    Last March Director James spoke to the FEHBP plan carriers, 
and she warned them that OPM was going to be a tough and 
demanding negotiating partner. She challenged them to bring us 
their best and most innovative proposals. She directed OPM 
staff to negotiate hard for quality coverage at the best 
possible rate.
    She also initiated a comprehensive outside audit to review 
mandates affecting participating plans over the past decade and 
maintained a close and ongoing relationship with OPM's Office 
of Inspector General in support of their joint efforts to 
cultivate a culture of accountability at all levels within the 
program.
    Like all other purchasers, we saw continued premium 
increases for 2003. We were able to announce an overall average 
increase of 11.1 percent, more than 2 percentage points better 
than last year's 13.3 percent increase and well below estimated 
national trends. CALPERS, the second largest employer-purchaser 
in the country and, as you referenced in your opening 
statement, sir, announced a rate increase of up to 25 percent 
for 2003.
    Keeping our program increases to the lowest possible 
translates to tangible dividends of almost $1 billion, and 
these results are directly attributable to the Director's 
strategy.
    Another factor in the program's favorable pay rate increase 
is choice. We don't micromanage the health care plans. We 
encourage and support the creativity and ingenuity of the 
private sector. Giving members a choice of plans promotes 
healthy competition, helps contain costs, and enhances the 
quality of services. We offer greater choice and variety than 
almost any other employer, 188 health plan options for 2003. 
All enrollees will have at least a dozen nationwide fee-for-
service options in addition to local HMOs.
    Among the options available to enrollees is the new 
consumer-driven Standard Option introduced by the American 
Postal Workers Union. It is representative of the innovation 
that Director James talked about and invited from carriers and 
trends in the industry as a whole. We believe this is a very 
promising approach, one which may help to hold down health care 
costs by giving consumers additional control, as well as an 
increased awareness of how they spend their health care 
dollars.
    In addition to concerns about the magnitude of premium 
increases, we face another hurdle for 2003. As a result of 
action taken by the House that deleted from our appropriations 
bill language that waived application of the cost accounting 
standards to FEHBP contracts, Director James had to make a 
crucial decision. In September, she used the administrative 
process authorized for her use under the National Defense 
Authorization Act for fiscal year 2000 to waive the application 
of the CAS for all experience-rated carriers in the program. 
She acted to ensure that we could conduct an orderly and timely 
open season and that members would not face uncertainty about 
any plans' participations in the program for the coming year.
    She also acted with the knowledge that adequate financial 
safeguards are already in place to protect taxpayer and member 
dollars. By acting promptly, she was able to preserve choice 
for members while maintaining fiscal accountability for health 
plans. Director James firmly believes that her action was in 
the best interests of the FEHBP program and the more than 8 
million employees, retirees, and family members who depend on 
it for their health care coverage.
    I'm also pleased to report progress toward implementation 
of the valuable addition to the Federal benefits package that 
will reduce out-of pocket costs for Federal employees. That's 
the implementation of flexible spending accounts. OPM has 
issued a request for a proposal for a third-party administrator 
this fall. Bids are coming in this week. We expect the first 
open season to begin in May and both health care and dependent 
care accounts to be available in July 2003. After that, the FSA 
sign-up season will be aligned with the health care open 
season.
    We will continue to work with other government agencies, as 
well as private-sector and nonprofit organizations, to enhance 
patient safety, improve quality and accountability, and 
constrain costs in the health care system. OPM will strengthen 
these efforts with the addition of greatly enhanced consumer 
education in the coming year. We will work internally and with 
health plans to make sure that the consumers we serve have the 
information they need when they need it, that they understand 
it, and that they make choices based upon it. The payoff for 
this effort will be enhanced quality, more appropriate 
utilization of services, and the adoption of healthy life-
styles and health care choices that will preserve and enhance 
the health status of Federal employees, retirees, and their 
families.
    Again, thank you for this chance to discuss the 
developments of the FEHBP program over the last year and to 
provide some insights into our plans for the year to come. I'm 
very proud of the steps we've taken, but because we recognize 
how important the program is to the government as it seeks to 
recruit and retain the work force we need to keep our country 
safe and secure, we must do more. Director James and I, and the 
OPM team, pledge to work even harder to maintain quality and to 
control costs. We are committed to collaborate with you and 
with our stakeholders to keep the program a model for employer-
provided health care coverage.
    This concludes my summarized statement, and I'm pleased to 
respond to any questions you or the other Members may have. 
Thank you.
    [The prepared statement of Mr. Blair follows:]
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    Mr. Weldon. I thank you very much for your testimony.
    You were here to listen to the testimony of the first 
panel, Mr. Hoyer, and he spoke about his legislation to 
increase the government contribution to FEHBP from 72 percent 
to 80 percent of the weighted average of premiums and to raise 
the cap on the share of premiums that the government can pay.
    Has OPM estimated the cost of this legislation?
    Mr. Blair. We have given initial review of what that cost 
would be, and we've determined it to be $1.7 billion for the 
first year, 900 of which will be mandatory spending for 
annuitants.
    Mr. Weldon. Thank you very much. That was very helpful.
    Mr. Blair. We'd be pleased to provide you with the 
methodology.
    Mr. Weldon. Yes. I think I want to have my staff look at 
that.
    As you know, the committee held a hearing this spring to 
examine cafeteria plans. Witnesses at that hearing told us that 
cafeteria plans can make it easier for employers to recruit 
prospective, well-qualified employees and retain good 
employees, because they allow individual employees to maximize 
the value of the benefits the employer offers. They are also 
becoming more prevalent in the private sector.
    Cafeteria plans can also be designed to allow employees to 
use the government's contribution to pay for 100 percent of the 
health care premiums, if they choose, which is certainly moving 
above and beyond the direction Mr. Hoyer was speaking about.
    Has OPM considered establishing cafeteria plans for Federal 
employees?
    Mr. Blair. We have considered it, sir, and we are actually 
going about doing so in an incremental way. The first step in 
this was a premium conversion which took place in January 2001. 
The second step was the implementation of the flexible spending 
accounts which we will see at the middle of next year.
    I believe further legislation, if we want to move in that 
direction, would be required; and we'd be happy to work with 
you at reviewing and developing plans.
    Mr. Weldon. Can you just give me an idea of what type of 
enabling legislation you're talking about?
    Mr. Blair. I think you--it depends on what benefits we're 
talking about, and there are a whole wide range of benefits 
that you can have under a cafeteria plan. We want to make sure 
that the plans are contemporary, that they provide choice for 
employees. At the same time we would want to contain costs, and 
we would want to make sure that employees are using their 
dollars wisely.
    I think that we need to develop a set of principles on 
which to proceed at first. I think that the first two options 
that I've described regarding premium conversion and FSAs are a 
good start, but we need--we can and we would like to review 
different options as well.
    Mr. Weldon. Several witnesses at today's hearing will 
criticize your decision to allow APWU to establish its 
consumer-driven option. They say it will create adverse 
selection, which, of course, is one of the issues that is 
constantly brought up--medical savings accounts as well.
    How do you respond to this criticism?
    Mr. Blair. I think adverse selection is something we should 
always guard against. The new APWU plan specifically asked for, 
when she asked for new and innovative plans--there is a trend 
in the industry now. We certainly don't want to stifle 
innovation at a time in which we see double-digit increases in 
our health benefits premiums.
    With regards to adverse selection, these are things that we 
can watch out for in our oversight of the program. We would not 
have adopted the consumer-driven plan if we thought it would 
lead to adverse selection. That said, if the trends show over a 
period of years adverse selection is taking place, we have 
options available to us to help us contain and restrain that 
from happening.
    Mr. Weldon. Could you share with the committee what some of 
those options would be?
    Mr. Blair. Every year we send out a call letter in which we 
ask the carriers to come back to us with proposals as to what 
the benefit structure should look like. If we see trends 
developing in which adverse selection is taking place, this is 
the time in which we can nip this in the bud, so to speak, in 
which we can make sure the plans are not going in that 
direction and make sure that adverse selection is minimized.
    Mr. Weldon. Can I get your assurance that you and OPM are 
willing to work with the committee if issues of adverse 
selection arise?
    Mr. Blair. Certainly, sir. Adverse selection is something 
that we don't want to see arise at all. It impacts negatively 
on the plan. It increases overall cost at times and is not good 
for employees. So we will be happy to work with you. We are a 
stakeholder and we certainly share your concerns about that.
    Mr. Weldon. I am pleased to recognize the ranking member 
for questions.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    Mr. Blair, thank you for your testimony and please extend 
my regards to Director James, if you would.
    You indicated in your statement that the Director had 
initiated the comprehensive outside audit to review mandates of 
anticipated plans over the past decade so that you can inform 
Congress about the cost of mandated health care services.
    Could you tell us who is conducting the audit and when will 
it be completed?
    Mr. Blair. The Hay Group is conducting that audit. We 
anticipate it to be completed shortly, probably around the 
first part of the year.
    Mr. Davis of Illinois. Do you anticipate that the audit 
will report health benefits or savings that the plan 
participants may have derived from these mandated----
    Mr. Blair. I have not seen a draft report yet, so I really 
couldn't report on what we anticipate in that.
    Mr. Davis of Illinois. Earlier this year OPM announced that 
the FEHBP premiums would increase 11.1 percent for 2003. You 
stated that the increase was more than 2 percent better than 
last year's 13.3 percent increase.
    Were any benefits cut to achieve the reduction and, if so, 
which benefits were they?
    Mr. Blair. To the best of my knowledge, we had no 
substantial change in the benefit packages this year, and as a 
matter of fact, we also urged all of the carriers to also start 
covering colon cancer screenings as well.
    Mr. Davis of Illinois. So you were able to achieve this 
reduction without reducing benefits?
    Mr. Blair. We were able to minimize the increase without an 
across-the-board reduction of benefits.
    Mr. Davis of Illinois. Which I think is indeed commendable.
    You also stated that the Director's strategy in reducing 
premiums paid tangible dividend in 2003 by saving taxpayers and 
plan participants almost $1 billion.
    Now, will these savings translate into expanded benefits or 
better quality health care for plan participants?
    Mr. Blair. It was a concern that our package was kept 
level. I think you will see the same level of benefits as you 
did last year, just a lower rate of increase than what we saw 
last year.
    Mr. Davis of Illinois. So we actually expect that the level 
of care is going to remain pretty steady, that the individuals 
will not experience any care reduction or difficulty in 
accessing benefits?
    Mr. Blair. There may be some benefit reductions in one of 
the 188 plans that are offered. That said, there were no 
benefit reductions across the board. As a matter of fact, we 
also expanded care in the areas of colon cancer screening, so I 
think that we got a better bang for our buck this year.
    Mr. Davis of Illinois. So individuals, as they choose 
different plans, they may look at the options that exist there 
and make determinations, but you are confident that across the 
board they are actually going to be better off?
    Mr. Blair. I do not want to say ``better off.'' They should 
be at the same position that they are today, currently. There 
may be some cost increases.
    I was looking at my plan under Blue Cross/Blue Shield, and 
the prescription pharmacy benefit, the mail order, did increase 
in price from, I think, $25 to $35, so that is an instance 
where you may be paying higher amounts for a 90-day 
prescription. That said, the benefit that we saw--we said we 
saw tangible benefits of $1 billion--was in terms of a 
comparison to the overall average increase nationwide of about 
15 percent.
    Mr. Davis of Illinois. And you indicated that the new 
developments in the FEHBP were proposed to contain costs while 
maintaining quality and choice in the program?
    Mr. Blair. Yes, sir.
    Mr. Davis of Illinois. I understand the notion that 
consumer-driven plan options contain costs by exposing plan 
participants to more of the costs of the health benefits and 
services they use, like prescription drugs, where the costs may 
go higher than what they were.
    How will we be able to guard against the negative effect of 
adverse selection in consumer-driven plan options?
    Mr. Blair. What you are going to have to do is see if 
trends develop over the first few years. This is a new plan 
being offered by APWU, and we expect to see enrollments of 
anywhere from 2,000 to 10,000, and that is in a universe of 4 
million enrollees. So keep that in mind. We will study that 
closely because if you start see trends involving adverse risk 
selection or adverse selection, we can monitor that and help 
adjust that through our annual call letter proceedings.
    No one wants to see adverse selection develop in this, but 
we are also seeing industry trends in which new plans like the 
APWU and plans similar to that are being offered to private-
sector employees. This may appeal to some. It also appeals to 
people who because of--who may be shopping because of price, 
and it does provide a comprehensive benefit at less cost to the 
enrollee. So this is exactly the kind of innovation we are 
looking for.
    We certainly would not want to stifle it from the 
beginning; rather, we would want to encourage it. And we want 
to encourage such kinds of innovation.
    That said, part of the role of OPM is to monitor and 
oversee the program, and we will be very vigilant that the 
program operates and that it doesn't lead to overall program 
cost increases for either the Government or enrollees.
    Mr. Davis of Illinois. Do you think they will look for a 
decrease in cost as they develop this plan, if that's what they 
were trying to do?
    Mr. Blair. I think they were trying to develop an 
affordable plan in looking at what the industry trends were, 
and in looking at that, they saw that this was the kind of plan 
that had not yet been offered in the FEHBP.
    One of the hallmarks of the FEHBP is choice. We want to 
provide as many choices as possible, and if the industry is 
developing new and innovative products like this, we certainly 
should offer it to our enrollees.
    Mr. Davis of Illinois. Thank you very much.
    Mr. Weldon. I want to thank Mr. Blair, and Mr. Flynn for 
accompanying him. You didn't have to answer any questions which 
I guess is good news. We appreciate all of your testimony and 
we look forward to working with you in the years ahead on these 
very important issues, and you are dismissed.
    Before we bring up the third panel, I have to add some 
chairs to the table, so we will have a very brief recess here 
and then we will call those witnesses up.
    I apologize to our witnesses for the crowded conditions at 
the table.
    I want to extend a welcome to or third panel. Each of these 
witnesses has a great deal of experience with the FEHBP and has 
a great interest in making sure that the program is successful.
    Mr. Walt Francis is an economist and the author of the 
annual Checkbooks Guide to Health Plans for Federal Employees. 
He is a widely acknowledged expert on FEHBP and has testified 
before this subcommittee in the past.
    Mr. Carroll Midgett is the chief operating manager of the 
American Postal Workers Union. The APWU's consumer-driven 
option is one of the most important developments in the FEHBP, 
and I look forward to hearing more about it.
    Ms. Colleen Kelley serves as president of the National 
Treasury Employees Union. Founded over 55 years ago, NTEU 
represents some 155,000 workers in 24 government agencies, 
making it the largest independent nonpostal Federal employees 
union.
    Mr. Charles Fallis serves as president of the National 
Association of Retired Federal Employees. We welcome you to 
your first testimony before this subcommittee. Your 
Congressman, Mr. Davis, did a very nice job, saying kind words 
about you, and I am looking forward to your testimony as well.
    Mr. Bobby Harnage is the president of the American 
Federation of Government Employees. AFGE is the largest Federal 
employee union, representing 600,000 Federal and D.C. 
government workers nationwide and overseas.
    Mr. Greg Scandlen is a consultant on health policy and is 
currently working with the Galen institute of Alexandria, VA. 
He has written widely on health care issues and is a recognized 
expert.
    As you all know, it is customary for the committee to ask 
the witnesses to take the oath. Would you all please rise and 
raise your right hands. I understand we have an expert with 
APWU, and we will swear you in as well.
    [Witnesses sworn.]
    Mr. Weldon. Let the court reporter annotate that all 
witnesses responded in the affirmative.
    It is usually customary to proceed beginning at the 
chairman's left, so we will begin with Mr. Francis, if you 
would like to give your testimony. I guess you will have to 
hand the mic around so the court reporter can clearly hear what 
you are saying. I think you can probably reach that OK.
    You may proceed with your testimony. The committee has 
received your written comments and would ask that you each 
summarize your verbal testimony in 5 minutes.
    You are recognized for 5 minutes, Mr. Francis.

STATEMENTS OF WALTON FRANCIS, ECONOMIST AND AUTHOR; CARROLL E. 
  MIDGETT, CHIEF EXECUTIVE MANAGER, AMERICAN POSTAL WORKER'S 
   UNION; MICHAEL SHOWALTER, VICE PRESIDENT, DEFINITY CARE; 
COLLEEN M. KELLEY, PRESIDENT, NATIONAL TREASURY UNION; CHARLES 
 L. FALLIS, PRESIDENT, NATIONAL ASSOCIATION OF RETIRED FEDERAL 
     EMPLOYEES; BOBBY L. HARNAGE, SR., PRESIDENT, AMERICAN 
    FEDERATION OF GOVERNMENT EMPLOYEES; AND GREG SCANDLEN, 
                           CONSULTANT

    Mr. Francis. Thank you very much, Mr. Chairman, members of 
the subcommittee.
    I want to rain a little bit on the parade today. I think 
the FEHBP is a program in deep trouble. It's got a great 
market-driven model, but there are too many leaks, too many 
places where consumer choices aren't playing the role they 
should, and things are getting worse. I am going to use two 
major examples to make this point. One of them has to do with 
retirees on Medicare.
    There are about a million and a half of those people. Their 
situation is roughly as follows: As a practical matter, they 
are forced to sign up with Medicare Part B upon turning age 65. 
Next year, that is about a $1,400 premium. If that couple 
enrolls in Blue Cross Standard Option, which has about a $2,300 
premium next year, they are going to pay--in fact, I gave you 
the wrong number; it is a total of about $4,000 in premiums 
they will pay next year. That is incredibly expensive, and 
nobody should have to pay that much for health insurance, but 
that is what they do, and the overwhelming majority of them 
sign up for that plan.
    What do they get in return? They get unlimited utilization 
of hospitals, unlimited utilization of doctors, unlimited 
medical tests all for free. What does that mean in practice? It 
means they overuse medical care. I have a friend who got four 
MRI scans last year. He paid zero for those four MRI scans. I 
don't think he would have had four if he'd had to pay a couple 
hundred bucks, but what the heck, it was free.
    So we have--there is no employee choice here. There is no 
choice among plans that's worth talking about in this context. 
There is certainly no consumer driven--you know, do I really 
need this health care benefit? Is there a cheaper alternative, 
etc? Just have an inflation.
    It is a vast expense, and it is an expense that falls not 
just on those retirees, it falls on all the employees in the 
program because they have the same risk pool; it falls on the 
Medicare program and on the taxpayer.
    And why do we have this problem? Because the Medicare 
statute--and you've got a committee, a sister committee, that's 
at fault here--the Medicare statute essentially penalizes 
anyone who postpones buying Part B no matter what their 
circumstance. You have to make an irrevocable decision as a 
financial matter at age 65. You've got a 20- or 25-year life 
span ahead of you; a prudent person will purchase it, and 90-
plus percent of them do.
    There is no reason at all there has to be this 10 percent 
of your pay for failing to join Medicare Part B if you are 
covered by a comprehensive employer-sponsored plan. And it 
would take the stroke of a pen to change one sentence of the 
Medicare statute to let people elect to stay, for example, in 
the Blue Cross plan that they were in before they turned 65. It 
was good enough for 3 million employees. It was good enough for 
them in the first 10 years of their retirement. It is only when 
they turn 65 that they are forced to give up the regular Blue 
Cross plan, and it is all still in the Standard Option, mind 
you, but now a different set of benefits kick in. Yeah, they 
save that $20 a doctor visit and all that, but they are having 
to pay $1,400 a year for the privilege. And it is in no one's 
interest to force that on them.
    Relatedly, the Medicare statute forbids any health plan 
from paying any part of the Medicare Part B premium. The 
Federal Government, or I should say, the OPM, is the only 
retiree health plan sponsor in America that has this 
restriction placed on it. There is just no sense to that.
    There ought to be options in this program where people can 
elect not to take Medicare Part B or to take it as a subsidy 
and be willing to pay something out of pocket to preserve that 
choice mechanism that several have spoken so eloquently about.
    My second example is the savings from prudent plan 
selection. Blue Cross Standard Option is the predominant plan 
in this program today. In the D.C. metro area there are six 
plans that offer significant savings in premium costs over Blue 
Cross Standard Option. They include GEHA Standard, Mail 
Handlers Standard--I am forgetting one or two--and several 
HMO's.
    I calculate that if--and I am taking the six-plan average--
if an employee elects to join one of those plans instead of 
Blue Cross Standard, there is about a $1,900 premium saving. On 
a before-tax basis, $1,000 of that goes to the government and 
$900 for the employee, which is one way of saying that the 
government keeps most of the reward for my frugal plan choice.
    What's worse, with my premium conversion in place, the 
reality of it is that the government saves $1,300 if I move to 
this less expensive plan, and I save only $600. So building in, 
in recent years, is a systematic reduction in the incentives 
created for prudent plan selection. These are easy things to 
fix.
    In the case of the employees, there was some talk earlier 
today of premium reform and increasing the employer's share, an 
80 percent payment perhaps, or even paying 100 percent. The 
right model is a model in which the Federal Government pays 100 
percent of the premium up to a given level which might be the 
75th percentile of the all plan average, OK--that gets you the 
same average 75 percent contribution we have now--but it does 
two important things.
    One is it gives employees 100 percent of the savings from 
choosing a less expensive plan.
    No. 2--and I am delighted to see a number of union members 
in the audience today, because there are 5 percent of the 
Federal work force who choose not to have any health insurance 
coverage at all because it is too expensive. I think this is--I 
won't say the adjective in public. If we were paying 100 
percent of the premium for a frugal plan, for a low-cost plan, 
then those people, many of whom I know and I've counseled, 
would feel they could afford to buy health insurance, and we 
would eliminate that terrible gap and that risk exposure.
    Let me just conclude if I may--and by the way, that can be 
done in a budget-neutral way or with some sweetening of the 
pot. It doesn't really matter; it certainly doesn't have to 
hurt anyone.
    There are many other reforms needed. We need more plans to 
offer. There is adverse selection in this plan. It is 
significant. The reason Blue Cross High Option went out of the 
program was adverse selection. I think it is a systematic 
problem, and it can be reduced.
    Final point, many conservatives, Heritage Foundation and 
others, have extolled the virtues of this program as a model 
for the Nation; a few liberals have. Bill Bradley, 2 years ago, 
offered a solution based on a FEHBP-type model. I was pleased 
as punch last Sunday to hear Al Gore on national television 
saying he was going to develop a health care plan based on the 
FEHBP model.
    I think there is a wide agreement that there is a valuable 
model here across the political spectrum. What is incumbent on 
this Congress and on this committee and on the Ways and Means 
Committee in particular is to take those reform steps that will 
improve the function in this program for all concerned. We all 
gain when employees make frugal choices. It reduces the premium 
for everyone,
and to the taxpayer, and there is no reason not to make those 
improvements.
    Thank you.
    Mr. Weldon. Thank you, Mr. Francis.
    [The prepared statement of Mr. Francis follows:]
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    Mr. Weldon. Our next witness is recognized. Did I pronounce 
your name correctly? Is it Midgett?
    Mr. Midgett. Mr. Chairman, members of the subcommittee and 
other individuals and organizations interested in the health 
benefits of postal and Federal employees and retirees, I am 
testifying before you today on behalf of Mr. William Burrus, 
president of the American Postal Workers Union, its 260,000 
members, and enrollees of the APWU health plan. We are truly 
honored by this invitation to testify on the subject of recent 
developments in the Federal Employees Health Benefits system.
    The APWU health plan covers 120,000 people and has been 
part of the FEHBP program since its inception over 40 years 
ago. We are extremely proud of our record of providing 
protection and service to our members and their families 
throughout these many years. In your letter of invitation, the 
subcommittee has specifically asked us to address the decision 
to offer a new consumer-driven option for 2003 and the 
evolution of that product's development, so that will be the 
focus of my testimony today.
    Although the APWU health plan is still today one of the 
largest health plans participating in the FEHBP program, the 
membership under its Single High Option has been declining 
steadily, though not dramatically, over recent years. In order 
to remain competitive over time and continue to be a benefit to 
the union that sponsors it, the plan determined that it needed 
to explore a new offering in addition to its existing High 
Option. Observing membership trends among other FEHBP fee-for-
service plans convinced us that only marginal results can be 
achieved by introducing a Standard Plan Option with a similar 
benefit designed to our High Option, but with higher 
deductibles and catastrophic limits in exchange for a lower 
premium.
    We began looking for alternative benefit designs to 
evaluate health insurance products that might be attractive and 
price competitive for members of the APWU who are not being 
drawn to our High Option for whatever reasons. Over the past 
year we began following a new concept in the health care 
industry called consumer-driven health care. It seemed to be 
enjoying increasing popularity in the private sector.
    We felt that this product had features that would be 
attractive to members of the American Postal Workers Union and 
to others as well. It was certainly innovative and the 
departure from any benefit design offered through the FEHBP 
program. Among the features we found attractive were the 
concept of the personal care account, a first-dollar, 100 
percent benefit almost entirely under the consumer's control, 
unused benefits which could be rolled over into subsequent 
years.
    We also liked the underlying concept of placing the 
consumer in control of their health care decisions while 
providing incentives for wise decisionmaking, and furnishing 
the consumer with the tools and resources necessary to enable 
them to make effective decisions.
    Simply, this design puts the onus on the individual to shop 
wisely for health care services, rather than the insurance 
company, to try to manage their care for them. The result is a 
new level of consumer freedom that rewards the consumer for 
making wise, cost-conscious decisions.
    Clearly, the APWU health plan could not develop claims 
processing systems and a full range of Internet-based consumer 
resources to self-administer this type of product in so short a 
time and, therefore, had to seek a firm capable of 
administering the product for us. With the assistance of our 
actuarial consultants, we issued a request for proposal to 
firms already experienced in offering consumer-driven health 
care. After thorough analysis of bids, we selected Definity 
Health of Minneapolis, Minnesota, as our partner, based on a 
combination of factors including administrative costs, product 
flexibility, and education assistance.
    A collaborative effort between the APWU health plan, its 
actuarial consultants, Definity Health plan and, later, staff 
at the U.S. Office of Personnel Management refined and 
customized the offering of APWU's proposal and introduction 
into the FEHBP program.
    In the APWU health plan's consumer-driven option for 2003 
there are four components. First, to ensure that everyone has 
access to necessary preventive care, there is an in-network 
preventive care benefit which covers specified routine 
examinations, immunizations, and screenings at 100 percent and 
does not count against the second component, the personal care 
account, or PCA.
    The PCA really sets the consumer-driven option apart from 
other conventional health plan designs. Under our plan, the PCA 
is used to pay for the first $1,000 for an individual 
enrollment, or $2,000 for a family enrollment, in full for 
covered services including dental and vision care up to 
specified limits. Any unused PCA benefits may be rolled over 
into the next year.
    If the PCA is exhausted, consumers pay a member 
responsibility of $600 for an individual or $1,200 for a family 
enrollment. Once the member responsibility is met, the 
traditional health coverage begins. This traditional health 
coverage is a PPO plan with cost-sharing and catastrophic 
protection. Extensive Internet-based tools and resources are 
offered to consumers to help them make wise cost and quality 
decisions about their health care. The same tools and resources 
are also available via the telephone as well.
    The APWU health plan's consumer-driven option offers 
consumers more flexibility and choices in managing their health 
care and also helps contain health care costs by involving the 
consumer in the health care equation through a comparative cost 
awareness.
    In soliciting health plan proposals for 2003, the Director 
of OPM specifically has plans to come to the table with 
innovative ideas that will keep health care costs affordable 
while offering a benefit program that will be attractive to 
current employees and retirees, as well as prospective Federal 
employees, which is consistent with the President's vision of 
health care, patient-centered health care, choice, and quality.
    The APWU health plan believes that its decision to offer 
this new consumer-driven option is absolutely appropriate and 
timely in addressing these objectives and in providing an 
innovative, new, cost-effective choice for our existing and 
prospective members.
    I have brought with me today Michael Showalter, the Vice 
President of Product Development from Definity Health care. At 
this time, we would be happy to respond to any questions that 
committee members might have. And thank you for your time and 
interest.
    Mr. Weldon. Thank you very much.
    [The prepared statement of Mr. Midgett follows:]
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    Mr. Weldon. We will now hear testimony from Ms. Kelley. You 
are recognized for 5 minutes.
    Ms. Kelley. Thank you, Chairman Weldon, Ranking Member 
Davis. NTEU very much appreciates the invitation to appear 
before you today to discuss these important issues surrounding 
the FEHBP plan.
    The average 11 percent premium increase for 2003 marks the 
fifth year in a row for steep increases in the plan. To the 
extent that Federal employees are finding the FEHBP 
increasingly not affordable, and prospective employees consider 
this, it is an issue that we all must deal with and we cannot 
afford to ignore.
    While FEHBP plans are increasing their premiums, they are 
often also increasing their copayments and deductibles, 
limiting services, dropping participating physicians and 
increasing prescription drug copays. In addition, HMOs are 
dropping out and limiting their offerings in certain parts of 
the country.
    While health insurance premiums have risen dramatically in 
the private sector, private-sector employees continue to pay, 
on an average, considerably less than Federal employees for 
their health insurance in terms of both percentage of premiums 
that they pay, as well as their monthly cost.
    The Kaiser 2002 Annual Survey of Employer Health Benefits 
reports that the average private-sector employee pays $38 per 
month for single coverage and $174 a month for family coverage. 
In 2003, a Federal employee choosing Blue Cross/Blue Shield 
Standard Option, Self Only, will pay $98.93 per month, instead 
of the $38 paid in the private sector; and the Federal employee 
choosing Blue Cross Standard, Family coverage, will pay $227.98 
a month.
    This sharp contrast continues when we look at the 
percentage of the premiums that employees pay. As has already 
been discussed, Federal employees pay, on the average, 28 
percent of their health insurance premiums. And the Kaiser 
study points out that, on average, employees in the private 
sector pay only 16 percent of the premium for Self Only 
coverage and 27 percent for Family coverage.
    NTEU supports H.R. 1307, introduced by Congressman Steny 
Hoyer and cosponsored by 94 House Members in the 107th 
Congress, seeking to increase the government's coverage to an 
average of 80 percent. NTEU hopes that this subcommittee will 
consider the bill when it is reintroduced next year and place 
the Federal Government on a somewhat more level playing field 
with private-sector employees, both for current employees and 
for potential employees of the Federal Government.
    NTEU worked very closely with the last administration to 
put the premium conversion in place to permit employees to pay 
their FEHBP premiums with before-tax wages. The average Federal 
employee saves $450 in take-home pay. This was a very positive 
development for current and for potential employees. NTEU is 
also pleased that the current administration will make flexible 
spending accounts available to the Federal work force in late 
2003, allowing employees to set aside a specific amount of 
money to pay health care and independent care expenses on a 
pretax basis. The savings can be considerable for employees.
    Unfortunately, retirees are not currently permitted to 
participate in either program, and NTEU supports extending 
these key health care cost-reducing benefits to retired Federal 
employees.
    On the issue of MSAs, as NTEU has testified in the past, we 
have serious concerns about these or similar insurance products 
entering into the FEHBP. These products have the potential to 
add considerable cost to the Federal health program. They tend 
to attract younger, healthier enrollees, who have minimal 
health care, with cash. Those with higher utilization levels 
tend to be left in the traditional health offerings, and as a 
result, the premiums for those traditional health plans rise.
    While I recognize that the new APWU plan is not an MSA, its 
introduction into the FEHBP and its potential impact on future 
rates is cause for concern. Like MSAs, this consumer-driven 
plan is expected to be most attractive to younger and healthier 
FEHBP enrollees. The impact of this plan on future rates is 
obviously unknown at this time, but NTEU wants to make the 
subcommittee aware of our concerns, and we will be watching the 
usage and the growth in this plan carefully.
    Finally, I want to point out that one of the largest 
factors in FEHBP premium increases has been prescription drug 
costs. The patchwork of prescription drug purchase arrangements 
in the FEHBP contributes to these increases. NTEU believes that 
OPM must negotiate discount prescription drug rates for the 
FEHBP that are similar to those available under the Federal 
supply schedule and that are used by the Veterans 
Administration hospitals.
    As you know, in 1999, one small FEHBP plan attempted to 
purchase its drugs from the Federal supply schedule. 
Unfortunately, the plan which is SAMBA, the Special Agents 
Mutual Benefit Association, was halted when three major 
pharmaceutical companies refused to sell drugs to SAMBA if they 
were permitted to purchase drugs from the FSS. The SAMBA pilot 
had been estimated to save $2.4 million a year, savings that 
would have flowed to Federal employees, to retirees, and to 
taxpayers.
    The idea behind the SAMBA pilot continues to merit 
exploration. At a minimum, NTEU believes that OPM should be 
encouraged to study the merits in negotiating discount 
prescription drug rates for the FEHBP.
    Again, NTEU appreciates this opportunity to appear before 
you, and we look forward to working with you and the 108th 
Congress on this issue.
    Mr. Weldon. Thank you very much.
    [The prepared statement of Ms. Kelley follows:]
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    Mr. Weldon. Mr. Fallis, you are recognized for 5 minutes.
    Mr. Fallis. Chairman Weldon, Ranking Member Davis, I 
appreciate the opportunity to come before you today and speak 
on behalf of the 400,000 members of NARFE.
    We in NARFE were disturbed by the Office of Personnel 
Management's announcement that the FEHBP premiums would 
increase by an average of 11 percent next year. However, we 
understand that costly rate increases are not unique to our 
plan and that other systems are experiencing even greater 
spikes. The reality is that most of the retirees average 
monthly COLA of $26 in 2003 will be consumed by these premium 
increases which will take effect next year, and that will leave 
many of our members and many of our retirees in dire straits.
    To lessen the burden of the premium increases, section 125 
of the Tax Code allows employers to permit their employees to 
pay for health insurance with wages excluded from taxes. This 
premium conversion benefit was granted to executive branch 
employees in October 2000 and was extended also to legislative 
branch employees in January 2001. Unfortunately, Federal 
annuitants were excluded from the program since the Tax Code 
was less clear on making premium conversion benefits available 
to retirees. As a matter of equity, however, Federal annuitants 
must be accorded this same relief.
    NARFE welcomed the premium conversion legislation 
introduced by Representative Tom Davis and Senator John Warner 
in the 107th Congress. This legislation, if passed, would have 
meant about a $405 savings per year for the retiree. We urge 
you, Mr. Chairman, and you, Mr. Davis and the members of this 
subcommittee, to renew your support for premium conversion 
legislation and seek its speedy consideration and approval in 
the 108th Congress.
    NARFE has made premium conversion a top priority. Because 
of the burden borne by the Federal annuitants and employees, 
NARFE supports and will continue to support legislation 
introduced by Congressman Hoyer that would increase the 
government contribution from 72 to 80 percent of the weighted 
average of all planned premiums.
    NARFE is disturbed by the decisions of the American Postal 
Workers Union and the OPM to offer a so-called customer- or a 
consumer-driven option for 2003. Medical savings accounts, 
which NARFE strongly opposes, are plans that combine a high 
deductible catastrophic insurance policy with a tax-exempt 
savings account dedicated for health expenses. Although the 
personal care account component of the APWU plan is not tax 
exempt and provides credits toward health care instead of cash, 
there is little or nothing to distinguish this option from an 
MSA.
    These expensive financing schemes can be attractive to the 
healthier enrollees since the plans reward them with either 
increasing cash balances or extra coverage carried forward in 
subsequent years if they don't go to a doctor or if they don't 
go to a hospital. As a result, healthy individuals are siphoned 
into the new option and premiums, and the comprehensive plans 
they left will inevitably be increased. Consequently, MSAs and 
related plans could circumvent the fundamental principles of 
group health insurance by dividing the healthy and the sick 
into separate coverage options.
    We are hopeful that future announcements do not include 
using new health reimbursement accounts with high deductible 
health insurance as a proxy for offering MSAs. Likewise, while 
we support making flexible savings accounts available to 
Federal annuitants, we are concerned that they could also be 
used as an MSA substitute if legislation is enacted to allow 
FSA balances to be rolled over.
    It is simply a mistake to transform a successful group 
health system where risk-sharing keeps health insurance 
affordable and predictable throughout life to an every-man-for-
himself scheme where premiums and out-of-pocket expenses are 
reasonable only for healthy participants. For 42 years the 
Federal Employees Health Benefits program has minimized costs 
and provided a wide choice of comprehensive health insurance 
plans to nearly 9 million Federal employees, retirees and their 
families.
    NARFE stands ready to work with all parties to find ways 
and means of containing out-of-control health care costs, but 
without sacrificing quality, access and coverage and without 
eliminating risk-sharing in this largest group plan 
environment.
    Thank you, Mr. Chairman.
    Mr. Weldon. Thank you very much, Mr. Fallis for your 
testimony.
    [The prepared statement of Mr. Fallis follows:]
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    Mr. Weldon. We will now hear from Mr. Bobby Harnage. You 
are recognized for 5 minutes, sir.
    Mr. Harnage. Thank you, Mr. Chairman and Congressman Davis. 
On behalf of the more than 600,000 Federal and D.C. government 
employees our union represents, I thank you for the opportunity 
to testify today on the problems plaguing the Federal Employee 
Health Benefit Program.
    Because of the ability of the insurance companies to use 
their financial and political power to influence the decisions 
of the Office of Personnel Management, both taxpayers and 
Federal employees, including retirees, pay far too much for the 
benefits they receive under the program. In addition, the 
formula for determining Federal employees financial burden for 
the program is too low. It undermines the competitiveness of 
the entire Federal compensation package and contributes to the 
government's ongoing problems in recruitment and retaining the 
next generation of Federal employees.
    The program, which covers almost 9 million active and 
retired Federal employees and their dependents, is the Nation's 
largest employer-sponsored health insurance plan. Although 
politicians in recent years have touted FEHBP as a model health 
care plan, its participants consider it anything but a model, 
primarily because of rapidly increasing premium costs.
    In 2003, the average premiums will rise by 11.2 percent. 
This increase follows the pattern of the last 5 years, so that 
over the past 6 years the average premium increased by 61 
percent. These sorts of premiums have far outpaced Federal pay 
increases, the cost of the living measured by the CPI, and 
importantly, the rate of increase in health care spending 
nationally.
    Those who don't participate are also adversely affected by 
these premium hikes. There are 250,000 Federal employees who 
are eligible to participate in the program, but remain 
uninsured; and the reason commonly cited by them is the cost. 
The terms offered to Federal employees under the program are 
substantially worse than those offered to employees of other 
large unionized employers both in the public and private 
sector.
    While the Federal Government pays just 72 percent of the 
weighted average premium, but not more than 75 percent, large 
employers in the private sector and several large States pay at 
least 80 percent and often 100 percent of the premiums 
according to the recent data published by the Bureau of Labor 
Statistics and the Kaiser Family Foundation.
    Employees of the U.S. Postal Service bargain collectively 
over their employer's share of the cost. The Postal Service 
pays 85 percent of the premium, while postal workers pay only 
15 percent. The FDIC, a Federal agency that regulates the 
banking industry, also negotiates with their employees over 
health insurance and pays 85 percent on the premium as well. In 
both cases, the employer does so not because of the 
overwhelming power of the union but because it is a ``best 
practices'' business decision to do so.
    The time has come for the Federal Government to improve its 
funding of the FEHBP and provide all Federal employees with a 
better premium split.
    In the 107th Congress, Representative Steny Hoyer and 
Senator Barbara Mikulski have introduced legislation which 
would have changed the financing formula so that agencies pay 
approximately 80 percent on the premium. This legislation would 
have improved the affordability of the program immensely. 
Moving toward an average of 85 percent would have made the 
program more affordable for Federal workers and their families. 
It also would have been a smart response to the Federal 
Government's much discussed human capital crisis.
    Closing the gap between the Federal Government and other 
employers in both the private-sector and public-sector area of 
insurance would have gone a long way toward improving the 
prospects of recruiting and retaining the next generation of 
Federal employees.
    AFGE strongly opposes OPM's decision in September 2002 to 
grant carriers a permanent waiver from the cost accounting 
standards. We support the position taken by the full House in 
July 2002, when it refused to extend the CAS waivers for the 
carriers. Considering the widespread and serious accounting 
scandals that have emerged in the past year, along with the 
extraordinary premium increases over the past several years, it 
is imperative that standards be placed to make sure that the 
government insurance carriers are prevented from passing on 
illegitimate overhead costs to enrollees and taxpayers, which 
has happened repeatedly in the past. The use of CAS would 
simply ensure uniformity and consistency in the measurement, 
assignment and allocation of the cost of the Federal 
Government's contract with the carriers.
    Indeed, the corporate accounting scandals that have so 
shaken the American peoples' confidence in the Nation's 
financial sector are the direct result of allowing firms to 
make up their accounting rules as they go along. The CAS are 
already used successfully by the agencies responsible for the 
administration of TRICARE and Medicare. In fact, many of the 
same carriers who participate in those programs comply with CAS 
are also FEHBP contractors.
    There is only one particular carrier that is opposing the 
use of CAS, Blue Cross/Blue Shield. Other carriers, Federal 
employee unions and the OMB support using CAS to ensure that 
all carriers submit honest bills. Only Blue Cross stands in the 
way.
    Blue Cross trotted out arguments in defense of its 
position: FEHBP is not a large part of its business, but that 
is precisely why the CAS are so necessary. Carriers bill the 
Federal Government for the costs they incur. However, absent 
the application of CAS, administrations have no idea what 
methods the carriers use to calculate those costs and whether 
the carriers' bills are reliable. The CAS prevents carriers 
from passing on to enrollees and taxpayers costs incurred by 
the carriers from their non-FEHBP contractors.
    Blue Cross/Blue Shield spokesmen also insist that it is too 
expensive for the carrier to use CAS, but the cost of applying 
CAS is an allowable cost that will be charged to the program. 
In other words, ending the sort of accounting chicanery 
practiced so ruinously by Enron and other firms would not cost 
Blue Cross/Blue Shield a dime. And as has been the case with 
defense contracting, university research contracting, Medicare, 
TRICARE, and any cost-based reimbursement contract, the 
application of the CAS standards would be a modest investment 
that would yield significant dividends for taxpayers and 
enrollees.
    Mr. Chairman, I look forward to working with you and this 
committee and other lawmakers within the Congress to help 
reduce the cost to the taxpayers and the participants to this 
program. I am sure it can be done if we make up our minds to do 
so.
    This concludes my statement. I thank you for the 
opportunity to appear before the committee. I will be happy to 
answer any questions the members of the committee may have.
    Mr. Weldon. Thank you very much for your testimony.
    [The prepared statement of Mr. Harnage follows:]
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    Mr. Weldon. We will now conclude with Mr. Scandlen.
    You are recognized for 5 minutes.
    Mr. Scandlen. Thank you, Mr. Chairman. I am fighting a 
cold, so please indulge me.
    I appreciate the opportunity to come here. I am not 
actually an expert in FEHBP. All of my work has been in the 
private sector with business organizations, insurance companies 
and the new innovations that are happening out in the world. I 
know that the private sector certainly learns a lot of lessons 
from FEHBP, and they watch it very closely. And my friends at 
the Heritage Foundation, for instance, are touting FEHBP as a 
model that the private sector should follow.
    At the same time, I think it is worthwhile for the FEHBP to 
be looking at what's happening in the private sector and 
possibly learn from that as well. Education tends to be a two-
way street.
    The most interesting thing that's happening out in the 
world these days is a decisive move my employers toward 
consumer-driven health care. In part this is due to the 
disappointing track record of managed care and the backlash 
that employees have had toward managed care and the 
restrictions that have been placed on that. But it is also 
interesting that it is sparked by the medical savings account 
law that Congress passed in 1996. That law had many, many flaws 
and weaknesses, and the products coming out of that law have 
not been a huge success. However, one of the consequences of it 
is to force people, H.R. executives, insurance companies, 
benefit consultants, all sorts of people, to rethink the way 
consumers relate to health benefits. And for the first time 
ever, I think people are beginning to wonder whether consumers 
are able to control more of their own resources, make more of 
their own decisions.
    Certainly we see that consumers did not care for having 
insurance company executives make major medical decisions for 
them. That is the underlying cause of the managed care 
backlash. If we are not doing that, what are we going to do? 
And, increasingly, I think people are coming to the conclusion 
that many health care decisions could be made by the consumer 
him- or herself if he has control of the resources, which means 
money.
    The IRS issued a decision in June creating what the service 
calls a ``health reimbursement arrangement.'' It's profoundly 
important. I argue it is every bit as important as the 
exclusion that the IRS issued 50 years ago, allowing employer-
sponsored health insurance programs to be free of taxes for the 
employee. The HRA decision is similarly important, only it 
applies to cash accounts and puts cash accounts on an equal 
footing with the insurance products.
    We do not yet know all the consequences of this, and there 
is a whole lot of thinking going on even as we speak on exactly 
what it means and exactly what the optimal product designs are 
going to be. One example is certainly the program that the 
postal workers have offered through FEHBP, and that is very 
interesting and a lot of companies are following that model. 
It's not the be-all and end-all of what could be done with 
this. However, some companies are looking at carving out 
prescription drug benefits for an HRA approach, so you have a 
deductible that applies to prescription drugs and cash accounts 
so people can pay directly up to some level. Others are 
increasing copayments or coinsurance rather than having an 
across the board deductible.
    We are entering an era of just vast innovation and we don't 
yet know what the best balance is going to be between a cash 
account and an insurance product.
    There are a lot of other things that the FEHBP could learn 
from the private sector also; how to preserve an indemnity 
option is certainly one of them. Very few insurance companies 
are actually licensed and active in 50 States. Some are active 
in all but two or three States; others prefer a regional 
approach; others may be a single-State approach. The 
requirement that a private indemnity carrier be available in 
all 50 States simply kills your indemnity option. There are 
very few companies that can comply with that.
    And the same requirement obviously does not apply to HMOs. 
HMOs can be offered only in those areas where they're active. I 
would suggest that if you want to maintain a private indemnity 
option, that the same approach should be applied to HMOs.
    There are a lot of other things. I think medical savings 
accounts are not just for the healthy and wealthy, and all the 
empirical evidence and all the research says just the opposite 
actually, that the wealthiest people prefer HMO coverage and 
the healthiest people prefer no coverage at all. Medical 
savings accounts are good for everybody, and if that is the 
case, I would love to continue meeting with you in the future.
    Thank you.
    Mr. Weldon. Well, thank you, Mr. Scandlen.
    [The prepared statement of Mr. Scandlen follows:]
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    Mr. Weldon. And I thank all of our witnesses. We certainly 
had a fair degree of diverse opinion, and hopefully we can 
explore some of these opinions more in the question-and-answer 
period.
    Let me just recognize myself first for questions. And 
beginning with you, Mr. Francis, understanding that I have some 
experience in the arena that you are talking about where people 
would get a very good Medicare supplemental and then 
essentially throw all cost cautions to the wind--and indeed, I 
saw it on almost a daily basis when I practiced medicine--the 
issue that you brought up I thought was a very good one.
    Understanding that we have always, every Congress, a very 
full plate and it is a very difficult process to get any piece 
of legislation through, which was--if you read the Federalist 
Papers, was the deliberate intent of the Founding Fathers--what 
would you say if we had to reform one thing within the FEHBP, 
or one or two things, what would you say are the highest 
priorities that you would suggest for us?
    Mr. Francis. I think one within your jurisdiction and one 
in the other committee, but I would submit to you, sir, I do 
not think there is any reason to think that the Ways and Means 
Committee believes that some important principle is being 
violated if the penalty on Medicare enrollment were not 
automatic for people in a situation like Federal retirees.
    I also want to be clear, I am not saying people shouldn't 
be entitled to spend that $4,000 for Blue Cross and Medicare 
but let's give them a few other options so they are not forced 
to spend that exorbitant premium amount. I will call that my 
No. 2 priority.
    The No. 1 is in your control. And I want to really just 
emphasize--let me use an analogy: If we had a program called 
car stamps, sort of like food stamps, the way we run the FEHBP, 
basically we say we will pay 75 percent of the cost of the car 
up to some very high number. If we offered a program like that 
for buying cars, maybe people wouldn't be buying Masaratis and 
Ferraris, but they would be buying very expensive SUVs and 
Cadillacs and Mercedes, because, after all, the government is 
paying three-fourths of the cost.
    If, on the other hand, we had a program that said we will 
pay 100 percent of your car purchase up to the cost of a Honda 
Civic, I think we would see a whole lot more Honda Civics and 
nothing thereafter--a whole lot more Honda Civics bought.
    OK, so the issue here is to provide much better first-
dollar premium coverage benefiting low-wage Federal workers and 
retirees on a very strained budget, but at the same time 
employees and retirees have a greater cost exposure for their 
decision, if you will.
    In other words, we can have our cake and eat it too, since 
you do have legislation introduced along the line of premium-
sharing by the Federal Government, which could be very 
expensive.
    I think the OPM estimate of over a billion is right for 
that particular bill. But, you know, you've got a session of 
Congress, you've got Members on both sides who are interested, 
and I think you have people around this table of every 
persuasion interested in seeing some improvements made that 
would both improve cost consciousness while improving the 
program for low-wage and low-earnings employees.
    Mr. Weldon. Does anybody want to respond to what he just 
said, particularly from the unions? If not, then I will--Mrs. 
Kelly.
    Mrs. Kelly. Overall the concept of providing, whether you 
call it a cafeteria plan, as you have, Mr. Chairman, or some 
base plan, anything that's ever been proposed in this arena in 
the past or has been discussed as a proposal talks about a flat 
amount of money, and that any increases in that would come 
through simple inflation. And one of the overriding concerns 
for NTEU is that in any discussions about that which we're 
willing to discuss anything to make the plan better, that our 
concern is that it would need to be tied to medical inflation, 
not to simple inflation, and if Congress were not willing to 
provide the resources to make that happen, then we don't see it 
as a viable plan after anything but a first-year try. So that 
is an overriding issue for us in our discussion about this.
    Mr. Weldon. That's not an unreasonable position at all. One 
of the concerns, and I don't take this as a very serious 
concern, but nonetheless it's one of the things that comes to 
my mind, the issue of a number of Federal employees, it's been 
cited at 5 percent, who elect no insurance because of cost 
reasons I find very troubling, and certainly to go up to 100 
percent of premium for a weighted average of whatever it would 
be, 75 percent, has anybody raised any concerns that if we did 
legislate that as an allowable option, that it would cause a 
stampede of beneficiaries to go to the lower benefit package? 
And maybe Mr. Scandlen, who's familiar with the private sector, 
can comment on this.
    I don't personally think it would. I think consumers are 
much more savvy, and they understand the health benefits, but 
has that complaint been raised at all? Do any of you have that 
type of concern?
    Mr. Scandlen. I think the private sector is going through 
very much a similar process. Many employers have in the past 
done a percentage of premium, and they are beginning to move 
away from that to a fixed contribution, as Walt suggested. We 
don't have empirical evidence yet about what the consequences 
are; however, I think there's also--employers are also 
increasing choices, and employers have been lagging behind the 
Federal--the Federal program in terms of the variety of 
choices. So I think one of the things that happens is increased 
choice at the same time they fix their contribution level, and 
I expect that employees are going to be a lot happier in that 
situation than they have been.
    Mr. Weldon. I see my time has expired. I'm happy to 
recognize the gentleman from Illinois.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    Mr. Francis, I was intrigued with your opening comments. Is 
it your position that copayments or copay might have more 
impact or influence on usage and ultimate costs than premiums?
    Mr. Francis. Yes, sir, I do believe that's the case. 
There's an immense amount of research out there on the 
influence of let's call it cost-sharing--it could be 
coinsurance, it could be deductibles, it could be copayments--
on--on reducing health care costs. In fact, I used in my 
testimony a recent study by the Rand Corp. on prescription drug 
cost-sharing. They studied some methods used in the private 
sector that are very similar to those used in the FEHBP plans. 
That shouldn't be surprising because these plans evolve with 
the private sector, and it turns out that these several tier 
arrangements for prescription drugs have dramatic effects on 
how much people spend on prescription drugs, and they're not 
perverse effects. I mean, the--the issue is you want people to 
think twice whether they buy, for example, that $100-a-month 
Cox inhibitor for their arthritis or that $10-a-month one, and, 
you know, if they have to have the $100 one because of side 
effects, so be it, but--but they will be more frugal somewhere 
else.
    Yeah. One could probably--I won't go through all the 
examples. Yes, huge effect from copayments from coinsurance, 
and that's why I'm so concerned about this 100 percent 
wraparound for people with Medicare because we're--we're not 
only making it more expensive for the program because they'll 
tend to overutilize, but we're also denying those people 
themselves the choice of having a greater mix of plans to let 
them sort of fine-tune their willingness to pay with their 
premium cost.
    Mr. Davis of Illinois. Mr. Fallis, you were here and you've 
heard Mr. Francis' comments. How do you respond to those and 
the initial comments that he made that the FEHBP was in deep 
trouble? How do you respond to that from the vantage point of 
your membership?
    Mr. Fallis. Well, I listened to that, and that could very 
well be true, but my real concern is our members and our 
elderly retirees who have paid into this system since it began, 
and I'm typical of that. I began paying FEHBP premiums in 1960 
when this program was--was instituted, and for 42 years I've 
paid premiums, and when I began, I was 33 years old, and I was 
young and healthy and robust, but I still paid that premium 
because I knew that someday I would be elderly and less 
healthy.
    And I am opposed to any plan that we put into effect with 
FEHBP that will change the rules in the middle of the game 
after 42 years and leave elderly retirees hanging twisting in 
the wind. I know that if--if we use all kinds of changes here 
to siphon off the young and the healthy, and I've heard all the 
comments on this, but when you're left, when they leave one by 
one, we finally are left with a--with a risk pool of elderly, 
ill people, many, many hundreds, if not thousands and tens of 
thousands in my organization, who are going to be harmed by 
this. That's what we're concerned about; the premiums then, and 
what's left of this risk pool that we're in will double, 
triple, quadruple, or services will plummet to the point where 
the insurance policy will be practically worthless or, and I've 
heard nothing about this, the Congress will step up and 
recognize that these people should be held harmless, and they 
will make a decision to help them out with the premiums.
    Mr. Davis of Illinois. So you're concerned that there would 
be enough balance so that there's not an adverse impact on your 
constituents; while overall something might be good for the 
whole system, but is adversely impacting those individuals that 
you have the most responsibility for?
    Mr. Fallis. That's exactly right. And there's something 
else going on here that hasn't been mentioned today. You know, 
we've talked about premium increases over the last 4 or 5 years 
being draconian, and I'm going to tell you those premium 
increases have hurt our people, but that's been the least of 
it. Since 1996, we've continually had the elderly on Medicare 
who year after year have seen--see their drug costs increase, 
the copays. They paid nothing until 1996, and then the system 
was changed.
    You see, this is another foot in the door, getting the foot 
in the door and then--and then make changes. We now pay up to 
$35 for a 90-day supply of drugs, and this can be hundreds and 
thousands of dollars to some of our people and--and it's 
devastating, and so the premium increases are bad. You know, 
they're terrific, terrible, but that's in many cases the least 
of it.
    Mr. Davis of Illinois. Thank you, Mr. Chairman.
    Mrs. Kelly. Mr. Chairman, if I could just add----
    Mr. Weldon. Sure.
    Mrs. Kelly [continuing]. For just a short comment, I would 
echo Mr. Fallis's comments from this respect for NTEU. NTEU 
does not support there being two pools and the separation of 
current young, healthy, however you want to define, with 
retirees. I represent retired Federal workers as a part of 
NTEU, but probably more importantly my constituents today will 
be Mr. Fallis' constituents tomorrow because every Federal 
employee hopes to be a Federal retiree some day.
    So I think--I think there are an awful lot of us that are--
you know, that come at this from the same direction even though 
we might have different ideas or questions about how to get to 
a solution. But NTEU does not support creating separate pools 
in any way, shape, or form, however it's defined.
    Mr. Harnage. If I might add to that, too, I--I support what 
he says 100 percent, but I feel like we're--we're trying to 
look at a defined contribution, whether a defined benefit, and 
we're looking at them especially with retirees as if it's a 
welfare program. Let's keep in mind these are earned benefits. 
This gentleman is talking about 42 years of service with the 
Federal Government and having difficulty in providing him and 
his family with continued health care in those years that he 
most needs it. This is not a welfare program. This is an earned 
program, and it should be a defined benefit, not a defined 
contribution.
    Mr. Weldon. Let me just assure you, Mr. Fallis, at least as 
long as I'm around, I would never allow our retired Federal 
employees to twist in the wind when it comes to their health 
benefits.
    I'm very pleased to recognize we've been joined by the 
gentlelady from the District of Columbia. You're recognized for 
questions.
    Ms. Norton. Thank you very much, Mr. Chairman. I appreciate 
that--that you're holding this hearing. You have even come in 
to have it.
    I do want to say my regrets that I could not hear all the 
testimony. Believe it or not, this is not the only hearing 
being held today. I don't know what you call it, Mr. Chairman, 
a session after the lame duck session, but apparently that's 
what we're having now. But if ever an issue was worth it, 
certainly the FEHBP issue is worth it.
    I won't ask questions relating to the testimony. One reason 
I wanted to come to this hearing is that I wanted to make sure 
that the notion that we tout all over the place, that the FEHBP 
system is a model for the country, continues to be true if it 
ever was true.
    The testimony of Mr. Blair puzzles me somewhat because 
according to his testimony, we should be grateful for small 
favors; that is to say, there is a lower increase this year 
than there was last year. And I'm particularly interested in 
whether the FEHBP can go through another period as it did some 
years ago when it really had a reduction in the cost to 
employees. And I can't understand the difference--I no longer 
understand the difference between FEHBP and everybody else. So 
I no longer say, hey, aren't we lucky.
    I want you to convince me that we are lucky. I know, and 
thanks to Mr. Blair's testimony, he says CALPERS is the second 
largest purchaser in the country. Am I to assume that the 
Federal Government is the first, largest employer purchaser in 
the country? They announced a rate up to 25 percent, up to 25 
percent. See, I don't know what that means. I don't know what 
it means that the average person in that--got the same as 
FEHBP, but it got up to 25 percent. I mean, I don't know what 
that meant. I was beginning to think that the most important 
thing that FEHBP gave us was not economies of scale, which is 
what I always thought, but some convenience. I mean, somebody 
just put a bunch of things before us, and it's more convenient 
than going out into the marketplace.
    I want you to make me understand why FEHBP is still the--
what FEHBP provides that would not be the case if we were a 
part of some other system. Is it convenience? Do the economies 
of scale matter? I mean, if you are really twice--if really the 
second largest purchaser is more than twice as much, then maybe 
there is something to economies of scale.
    How large is the second largest? That also doesn't tell me 
anything. I mean, I don't know whether to credit that or not. 
It's up to 25 percent. It's the second largest. It can be 1/10 
as large as the Federal Government. So I really need some more 
information as I try to evaluate how good or not good FEHBP is. 
So if any of you can help me out, I'd appreciate it.
    Mr. Weldon. Go ahead, Mr. Francis.
    Mr. Francis. I'll be glad to.
    CALPERS is the California State employees system. It's 
pretty big. It's got--I forget--several, 3 million, something 
like that. I mean, we have 9 million. It's--that's not small 
potatoes. I think a large part of their problems unique to 
California, the--the managed care, crashing has been 
particularly severe there, and so some of it is just 
idiosyncratic to their circumstance. Also, they've been very 
successful holding down premiums over a lot of years, and so 
there's some catchup going on.
    Having said that, I'd--I'd take a stand--by the way, the 25 
percent increase is close to the average. They're seeing 
overall some plans much more than 25 percent.
    Ms. Norton. But that's peculiar to California.
    Mr. Francis. Well, it is and it isn't. The Mercer report 
just released, I don't know if OPM is quoting that one or not, 
but in the year 2002 the average employer health insurance--
sponsored health insurance premium went up about 15 percent. So 
this program is outperforming, I think, still the private 
sector.
    Just a partial answer to your other question, what drives 
this program, what makes it work is not per se the scale of it, 
it's the competition among plans to attract consumers. It's 
really a combination of keeping premiums down, keeping 
coinsurance down, and those two contradict, I mean, so there's 
tension there all the time, offering benefits people want and 
offering good service, and each plan and its customers go 
through this dance, if you will, in the open season, and people 
make decisions on the margin. The concern I am--and it's all to 
the good, OK, because you can find the better--if you want 
acupuncture, you can find a plan with acupuncture and so on. 
There's all kinds of good things from this model.
    The problem I testified on is that I think we have so 
attenuated the cost-consciousness parts of it, OK, and you 
can't--you know, the savings to the employee from choosing a 
more frugal plan now are so small that a lot of the incentive 
has gone away, and that's one reason I think we've seen these 
10, 12, 15-percent-a-year premiums in the last 5 years. They 
didn't have to be that high. Even if we were outperforming the 
private sector, we could have more outperformed it. So that's--
that's my thought in answer to your question.
    Ms. Norton. Why are they so close? The competition are 
producing the same price structure?
    Mr. Francis. There's a whole bunch of things going on. For 
example, one thing that people haven't mentioned, the aging of 
the Federal work force and the increase in the number of 
annuitants are huge factors. Older people cost more, a lot 
more, than younger people, but the issue here really is they 
can't over the long haul--the FEHBP is based and uses private-
sector physicians and hospitals. It can't hugely outperform 
what's going on in the market out there, but what it can do is 
be a prudent purchaser, and I think it has been and continues 
to be a prudent purchaser.
    I think Kay James is a great OPM Director, and I think her 
team, the people, are very able. What I think they don't have 
are quite enough tools. They need to get them from the 
Congress, including, for example, the design of the Federal 
contribution, which should be totally budget-neutral. You know, 
it doesn't have to hurt anybody. It certainly doesn't have to 
hurt retirees. You don't want to tie it to overall inflation as 
opposed to medical inflation or the all-plan average. But those 
added with a little better design features than this program, I 
think we could see cost increases reduced significantly, you 
know, back to down to the single-digit levels.
    Mr. Scandlen. If I could add another important point, one 
of the things that FEHBP does better than anything else on this 
is--is transparency and information. Federal workers have a 
source of good information about what their choices are, and no 
one else does that as well. It's partly because of OPM, partly 
because of Walt Francis and a lot of other--I'm sure the labor 
unions have a lot to do with it. So--so not only do you have 
choice, but you have real competition because people can 
compare their choices effectively, and that's a very powerful 
tool.
    Mr. Harnage. I might add, too--how are you doing? You're 
right, we have to look at statistics very carefully. With the 
California plan going up 25 percent, we don't know whether that 
was a change in enrollees, a change in participant status, but 
we do know that over a longer period of time, it outperformed 
FEHBP. So sort of like your TSP, you can look at the C fund now 
and not be encouraged to put any money in it, but if you look 
at it over an 8-year period, it's outperformed all the other 
funds.
    So we have to be very careful when we're looking at 
statistics and look at more than just the dollars. I'm 
convinced that we can do better. I'm convinced that we can 
lower the cost to the taxpayers without taking away benefits 
from--from the Federal employees. We've just got to do a better 
job of administering it.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Weldon. You're welcome.
    I think Mr. Davis had one more question he wanted to ask 
one of the witnesses.
    Mr. Davis of Illinois. Yes. Thank you, Mr. Chairman.
    Mr. Midgett, how do you respond to the less than 
enthusiastic response to the APWU's plan?
    Mr. Midgett. Yes, sir, Mr. Davis. For the record, the 
American Postal Workers Union is opposed to medical savings 
accounts. We do not believe that the consumer-driven option 
that we've proposed for benefit year 2003 is a medical savings 
account. Our option provides 100 percent coverage in network 
for preventative care. You get the personal care account that 
you can use for the health care. You have a member 
responsibility, and you have a traditional PPO product that has 
catastrophic coverage. To compare our product with the medical 
savings account, they just--you can't. They're not like one 
another. I don't know. Mr. Showalter may want to provide 
additional information.
    Mr. Showalter. Thank you.
    I think I hear a lot of concerns, and I certainly would 
never want to leave retirees twisting in the wind also, and I 
think my mom and dad may disown me if I did such a thing. My 
mother recently was in an accident in Texas where she spends 
the winter--I'm from Minneapolis--and under her current medical 
care plan, she couldn't get treated there. She got treated for 
an emergency and now has a scarred face, dental work that she 
cannot get care for in Texas, that she would have to come back 
up to Minneapolis. Unfortunately my dad has MS, so she can't 
really come back to Minneapolis to get the medical care she 
needs because she needs to take care of him. That's the current 
kind of situation we live under.
    So what we really wanted to do was allow people to get in 
charge of their own medical decisions, not have a managed care 
company telling people where to get care, how to get care; so 
we've removed those barriers. In response, there is concerns, 
and I hear your concerns.
    We at Definity Health have been fortunate to have had 
products in the marketplace for 2\1/2\ years that show the 
concerns aren't coming true, and I really would, you know, 
congratulate Representative Hoyer on saying there are concerns, 
but let's take a look at it and see if there can be another 
solution that really puts patients and doctors back in charge 
of health care.
    And the reason I say that is simply this: Of the plans 
we're offering to, the average age of the people enrolled in 
our plans is 41 years old; the average age of the people that 
they were offered to was about 39 years old. So what happened 
is people actually--older people that it was offered to 
actually selected our plan. The average family size in our 
plans is about 2.6, which means more families chose our plans 
than single plans, and you might say, hmm, why is this 
phenomena? And when you think about managed care's value 
proposition, and we all try to think about new options in a 
framework of what we're currently underseeing like managed 
care, in that framework their value proposition was lower cost 
for less choice--we're going to restrict the provider payment 
networks and give you less choice, and we're going to increase 
how much we manage your care. That value proposition is only 
exciting to people who don't need care. If you don't need care, 
you don't care how much oversight you have and that you can 
only go to one hospital.
    Our value proposition is go to the providers you want, get 
the care you need, and be in charge of your own care. The 
people that value proposition resonates with are the people who 
experience care in the health care system. Those people are the 
ones that attenuate to this plan and say, yes, something needs 
to change. Frankly, no one healthy has enrolled in great 
numbers in our plan because they don't care. On average they 
spend less than 7 minutes a year thinking about benefits in 
total, and health care might be 4 minutes of that. So they 
don't care. They have not experienced health care. They don't 
think there's a problem, and if they do, they think it's 
somebody else's problem.
    So I was trying to respond with--I really hear your 
concern, but I'm trying to respond with the facts as we've 
experienced them in the private sector.
    Mr. Davis of Illinois. Mr. Chairman, I certainly want to 
thank you for holding this hearing. I want to thank all of the 
witnesses for coming to testify. The more I hear when we 
discuss the whole range of possibilities and we look at this 
business of trying to provide health care, I'm more convinced 
every time I go through one of these that there's only one way 
to do it, and that's with a national health plan. So I want to 
thank you very much. I certainly want to thank all of the 
witnesses for coming to testify.
    Mr. Weldon. You're welcome. I, too, want to thank all our 
witnesses. I think this has been a most informative hearing. I 
would ask Members who wish to submit written questions for the 
record to give them to the subcommittee staff by Friday.
    I will leave the record open until December 28th for 
witnesses to submit their written responses.
    The hearing is now adjourned. Again, thank you very much.
    [Whereupon, at 2:25 p.m., the subcommittee was adjourned.]

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