[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





  OVERSIGHT OF THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM AND THE 
                FEDERAL LONG-TERM CARE INSURANCE PROGRAM

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

                                HEARING

                               before the

                     SUBCOMMITTEE ON CIVIL SERVICE
                        AND AGENCY ORGANIZATION

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 24, 2004

                               __________

                           Serial No. 108-170

                               __________

       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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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia                 C.A. ``DUTCH'' RUPPERSBERGER, 
CANDICE S. MILLER, Michigan              Maryland
TIM MURPHY, Pennsylvania             ELEANOR HOLMES NORTON, District of 
MICHAEL R. TURNER, Ohio                  Columbia
JOHN R. CARTER, Texas                JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee          ------ ------
PATRICK J. TIBERI, Ohio                          ------
KATHERINE HARRIS, Florida            BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

         Subcommittee on Civil Service and Agency Organization

                   JO ANN DAVIS, Virginia, Chairwoman
TIM MURPHY, Pennsylvania             DANNY K. DAVIS, Illinois
JOHN L. MICA, Florida                MAJOR R. OWENS, New York
MARK E. SOUDER, Indiana              CHRIS VAN HOLLEN, Maryland
ADAH H. PUTNAM, Florida              ELEANOR HOLMES NORTON, District of 
NATHAN DEAL, Georgia                     Columbia
MARSHA BLACKBURN, Tennessee          JIM COOPER, Tennessee

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     Ron Martinson, Staff Director
                Chris Barkley, Professional Staff Member
                            Reid Voss, Clerk
          Mark Stephenson, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 24, 2004...................................     1
Statement of:
    Blair, Dan, Deputy Director, U.S. Office of Personnel 
      Management.................................................     6
    Fineberg, Dr. Harvey, president, Institute of Medicine; 
      Charles L. Fallis, president, National Association of 
      Retired Federal Employees; Stephen W. Gammarino, senior 
      vice president, national programs, Blue Cross/Blue Shield; 
      Dr. Scott P. Smith, vice president and chief medical 
      officer, First Health; and Paul E. Forte, chief executive 
      officer, Long Term Care Partners, LLC......................    28
Letters, statements, etc., submitted for the record by:
    Blair, Dan, Deputy Director, U.S. Office of Personnel 
      Management, prepared statement of..........................     9
    Davis, Hon. Danny K., a Representative in Congress from the 
      State of Illinois, prepared statement of...................     4
    Fallis, Charles L., president, National Association of 
      Retired Federal Employees, prepared statement of...........    41
    Fineberg, Dr. Harvey, president, Institute of Medicine, 
      prepared statement of......................................    31
    Forte, Paul E., chief executive officer, Long Term Care 
      Partners, LLC, prepared statement of.......................    91
    Gammarino, Stephen W., senior vice president, national 
      programs, Blue Cross/Blue Shield, prepared statement of....    60
    Smith, Dr. Scott P., vice president and chief medical 
      officer, First Health, prepared statement of...............    83

 
  OVERSIGHT OF THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM AND THE 
                FEDERAL LONG-TERM CARE INSURANCE PROGRAM

                              ----------                              


                       WEDNESDAY, MARCH 24, 2004

                  House of Representatives,
          Subcommittee on Civil Service and Agency 
                                      Organization,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., room 
2203 Rayburn House Office Building, Hon. Jo Ann Davis 
(chairwoman of the subcommittee) presiding.
    Present: Representatives Jo Ann Davis of Virginia, Danny K. 
Davis of Illinois, and Van Hollen.
    Also present: Representative Norton.
    Staff present: Ron Martinson, staff director; Chad Bungard, 
deputy staff director and chief counsel; Chris Barkley and 
Shannon Meade, professional staff members; Reid Voss, clerk; 
John Landers, detailee; Mark Stephenson and Tania Shand, 
minority professional staff members; and Teresa Coufal, 
minority assistant clerk.
    Mrs. Jo Ann Davis of Virginia. A quorum being present, the 
Subcommittee on Civil Service and Agency Organization will come 
to order.
    Thank you all for joining us today as we examine the 
Federal Employees Health Benefits Program and the very new 
Federal Long-term Care Insurance Program.
    More than 8 million Federal workers, retirees, and their 
families are covered by the FEHBP, and more than 20 million 
people are eligible for long-term care insurance. And we want 
to look at several issues facing both programs.
    The FEHBP is widely considered to be a model employer 
provided health insurance program. Yet there are pressing 
issues facing the program.
    For one, there is the question of whether the cost 
accounting standards should be applied to the program and what 
effect that might have on Blue Cross/Blue Shield, its largest 
carrier.
    There is also the possible addition to the program of 
health savings accounts which would allow individuals to use 
tax-free money to pay for qualified medical expenses. And I am 
interested to hear from our witnesses how they view the impact 
of HSAs on the Federal health program.
    We will also discuss the Office of Personnel Management's 
long-term vision for the FEHBP, including the number and types 
of coverages offered, the level of government contributions, 
and how the addition of flexible spending accounts is working.
    Our other subject is the Federal Long-term Care Insurance 
Program. Established by legislation in 2000, the Federal long-
term care program is designed to cover injuries or conditions 
that prevent people from performing the task of everyday life.
    While more than 20 million people are eligible for the 
insurance, I would like to know how many actually signed up. As 
of last year, the number was slightly over 200,000. So I wonder 
if that indicates any problem with the Federal coverage offered 
or whether people just do not know about the insurance.
    There is also the question of whether the long-term care 
program should be opened up to more than one carrier. I look 
forward to our discussion, and now I will turn to our ranking 
member, Danny Davis for an opening statement.
    Mr. Davis of Illinois. Thank you very much, Madam 
Chairwoman.
    And I could not think of anything that is more important 
than health care benefits, and especially long-term care as 
people like myself begin to get older and look forward to the 
possibility of having that need.
    So I want to thank you for holding this hearing because it 
focuses our attention on two issues that greatly impact the 
lives of Federal employees, the Federal Employees Health 
Benefits Program and the Federal Long-term Care Insurance 
Program.
    A major problem facing Federal employees and retirees is 
rising FEHBP premiums. This year, the FEHBP premiums will climb 
an average 10.6 percent for the 8 million Federal employees, 
retirees, and family members who receive their health insurance 
through this system.
    Representative Hoyer has introduced H.R. 577 which would 
help keep Federal employees' health care costs affordable by 
increasing the government's contribution to premiums. Currently 
the Federal Government pays 72 percent of the total cost of 
health insurance for Federal employees and retirees. H.R. 577 
would raise this contribution to 80 percent.
    Representative Hoyer's bill has been referred to this 
subcommittee, but unfortunately no action has of yet been 
taken.
    In December 2003, the Office of Personnel Management 
Director, Kay Cole James, announced that OPM had begun to 
explore health savings accounts [HSAs], for Federal employees 
and retirees. HSAs, also known as medical savings accounts, are 
tax advantaged personal savings accounts for unreimbursed 
medical expenses.
    Today I hope to hear what impact implementing HSAs will 
have on the FEHBP.
    This is the first hearing the subcommittee has held on 
OPM's implementation of the Long-term Care Security Act, which 
was signed into law in September 2000. This subcommittee spent 
2 years debating how best to fashion a Long-term Care Insurance 
Program for Federal employees. The debate centered around 
whether or not a single long-term care insurance carrier should 
be chosen to negotiate premiums and benefits on behalf of 
Federal employees, an employer based group model, all where the 
multiple carriers would be able to sell individual long-term 
care insurance to employees.
    That debate has been settled, and I look forward to hearing 
how Long-term Care Partners, LLC, which was awarded the long-
term care contract by OPM in December 2001, is implementing the 
program.
    And finally, Mr. Gammarino with Blue Cross/Blue Shield will 
testify extensively to why cost accounting standards should not 
apply to Blue Cross/Blue Shield. However, I would like to note 
for the record that there are many who are not represented here 
today that feel that it is financially prudent that cost 
accounting standards apply to all FEHBP carriers.
    I look forward to hearing the testimony of the witnesses, 
and again, I thank you, Madam Chairwoman, for calling this 
hearing.
    [The prepared statement of Hon. Danny K. Davis follows:]

    [GRAPHIC] [TIFF OMITTED] T4904.001
    
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Davis.
    Ms. Norton, do you have an opening statement?
    Ms. Norton. Thank you very much, Madam Chairwoman.
    Let me thank you for this particular hearing coming at this 
time, early enough so that there is some contribution we can 
make to the increasing troubles I see with the FEHBP model.
    I also appreciate the opportunity to hear about experience 
thus far with long-term care insurance.
    Madam Chairwoman, it is hard for me with a straight face to 
simply come here and criticize the increase in FEHBP premiums, 
you know, as we do each year. I know full well that what is 
happening to FEHBP is part and parcel of the never ending 
spiral, the virtual explosion of health care costs above and 
beyond any other item in our country.
    I do regret that Congress is letting it happen. If we are 
letting it happen to virtually everyone, including people in 
Medicare, I do not know why I would expect that FEHBP would be 
any different.
    If you look at Federal employees and what we could most do 
for them, the single most important thing we could do for them, 
of course, would be to increase the Federal contribution to 
FEHBP, and that is the single least likely thing to happen.
    In fact, employers are doing just the opposite elsewhere. 
They are offloading part of the premium or entirely eliminating 
health care to their employees, and that will not happen, I am 
certain, in the Federal Government, and I am grateful that the 
Federal Government certainly would not set that example.
    But I have to say that the much touted FEHBP model I no 
longer tout, and I am not sure exactly what Members have in 
mind when they say the way we could cure the health care 
increased problems of the country would be to have some giant 
FEHBP.
    It is true that FEHBP gives choice, but I am not clear on 
what this model with its 8 million employees does for us on 
price, and the only way I think we could ever find that out is 
to compare our choice model with other choice models.
    I mean, when we are the largest employer in the country and 
you still have premiums going up at a rate above 11 percent per 
year, that is nothing to write home about. That is something to 
complain about, and if that is what we do with a million in our 
risk pool, heaven help small employers, even Fortune 500 
employers.
    So I do not know what the largest pool in the country has 
brought to pricing or why it has seemed to invite so little to 
premium costs.
    In that regard, Madam Chairwoman, I will be very 
interested. The burden is surely on those who want to add 
health service accounts to show that somehow such accounts 
would dare I say strengthen or even leave in place the FEHBP 
price structure we have now. If so, that is counterintuitive to 
me.
    It seems to me that health service accounts may well be the 
one way to increase premiums at an even faster rate than they 
are going now. If you want to leave the least healthy retirees 
and workers in the FEHBP and tell everybody else they can get 
out and get the tax advantage, I invite them to get the tax 
advantage that is already available to them in the Federal 
flexible benefits plan, but don't where you are likely now to 
leave Medicare.
    Look, we already have seniors in a number of districts as 
the guinea pigs for health service accounts in the country. 
That is enough guinea pigs for one time. I do not see why we 
should add Federal workers to that select group of Americans to 
try out this plan that would seem to work in exactly the 
opposite way we would want to work for the great majority.
    I do not know whatever happened to the idea that we are all 
one community. The notion of community economically starts with 
insurance, and we put everybody in there. We put the healthy 
ones that will never use it, and we put the unhealthy ones that 
will never use it, and together we are a community. We are all 
helping one another, and, by the way, it makes economic sense.
    You break up that idea. You break up the very bottom line 
notion of health insurance as an economic concept. FEHBP is 
already far from living up to its reputation as this grand 
model. I hope we do not make it even less of a model by 
marching forward with something that will fix it by hurting it.
    Thank you.
    Mrs. Jo Ann Davis of Virginia. Thank you, Ms. Norton.
    I ask unanimous consent that all Members have 5 legislative 
days to submit written statements and questions for the hearing 
record and that any answers to written questions provided by 
the witnesses also be included in the record.
    Without objection, it is so ordered.
    I ask unanimous consent that all exhibits, documents and 
other materials referred to by Members and the witnesses may be 
included in the hearing record, and that all Members be 
permitted to revise and extend their remarks.
    Without objection, it is so ordered.
    On the first panel we are going to hear from Mr. Dan Blair, 
Deputy Director at the U.S. Office of Personnel Management.
    It is a standard practice for this committee to administer 
the oath to all witnesses, and if all of the witnesses, both 
the first panel and the second panel, could please stand, I 
will administer the oath to all of you at one time.
    If you will please raise your right hands.
    [Witnesses sworn.]
    Mrs. Jo Ann Davis of Virginia. Let the record reflect that 
the witnesses have answered in the affirmative, and you may be 
seated.
    Mr. Blair, thank you for being with us today. We appreciate 
you coming back to the committee for testimony, and we look 
forward to hearing your comments. We will recognize you now for 
5 minutes.

    STATEMENT OF DAN BLAIR, DEPUTY DIRECTOR, U.S. OFFICE OF 
                      PERSONNEL MANAGEMENT

    Mr. Blair. Thank you, Madam Chairwoman. It is good to 
appear before the subcommittee. Ranking Member Davis, Ms. 
Norton, it is good to see you all this afternoon.
    I am Dan Blair, the Deputy Director, and I am pleased to be 
here on behalf of the Office of Personnel Management and its 
Director, Kay James, to talk about the Federal Employees Health 
Benefits Program, as well as the new long-term care program.
    I am assisted here today by Abby Block, who is OPM's Deputy 
Associate Director for Employee and Family Support Policy, and 
with your permission, I may ask Ms. Block to help me with more 
technical questions that the subcommittee may pose to me.
    Mrs. Jo Ann Davis of Virginia. Let the record reflect that 
Ms. Block also was administered the oath at the same time.
    Mr. Blair. Thank you.
    First, I would request that my full statement be included 
in he written record.
    Mrs. Jo Ann Davis of Virginia. So ordered.
    Mr. Blair. I will be happy to summarize.
    First, let me talk about the Federal Employees Health 
Benefits Program [FEHBP]. You talked about our vision. Our 
vision for the program is clear. We intend to keep FEHBP as a 
model for group health insurance purchasing in the private 
sector.
    In order to do that, we must maintain or enhance 
competition, while at the same time effectively utilizing the 
purchasing power of the risk pool that is over 8 million people 
strong.
    Further, to borrow from an ad line, an educated consumer is 
our best customer, and we intend to provide access to the best 
possible education in order to educate our enrollees.
    We recognize the program is frequently cited as a model for 
the employer sponsored health insurance program. The program 
operates under a statutory framework enacted in 1959, which has 
permitted OPM to contract with multiple health plans to provide 
coverage for about 8\1/2\ million employees and retirees and 
independents.
    The statute specifically defines the categories of plan 
sponsors that may offer plans in the program. HMOs may apply 
from year to year. New fee-for-service and preferred provider 
type plans may not.
    Each spring we send our carriers our annual call letter 
which highlights particular areas of interest and provides 
broad guidelines for the upcoming negotiations. We have 
repeatedly expressed opposition to benefit mandates by opposing 
mandates in the call letters.
    Rather, we encourage plans to be creative and responsive to 
consumer interests, especially in the areas of preventive 
services.
    While enrollment in the program is generally relatively 
stable, with no more than a 5 percent fluctuation of enrollees, 
several plans have increased their enrollment of late, 
including Blue Cross/Blue Shield's Basic Option, and the 
National Association of Letter Carriers MD/IPA Plan, and the 
Foreign Service Benefit Plan.
    Committee members recently spoke to flexible spending 
accounts, and in order to increase the value of the employees' 
hard earned dollars and give them greater control over their 
health care spending, we worked closely with the National 
Treasury Employees Union last year to make flexible spending 
accounts available to employees beginning last July.
    We had our first full open season last November, and we are 
pleased to report that 123,187 employees are participating in 
the program. We have 117,950 accounts for health care, and a 
little over 18,000 for dependent care. So the total health care 
allotments add up to a little over $193 million.
    Let me talk for a moment about health savings accounts 
which were referenced earlier. HSA's were made available by the 
Medicare Modernization Act, which was enacted last year. We 
estimate that there are 3.1 million individuals covered under 
FEHBP who would be eligible to have an HSA if they are enrolled 
in a high deductible health care plan.
    The principle underlying HSA is to give consumers greater 
access to more of their pre-tax dollars for health care. In 
analyzing how best to approach the introduction of this new 
product, we must carefully consider the advantages of expanding 
the options available to Federal enrollees, along with the 
potential impact on the program overall and on specific groups 
of enrollees, like Federal annuitants.
    While we believe there is a place for products like HSAs in 
FEHBP, our experience leads us to believe that the movement by 
large enough numbers of enrollees to raise a concern about the 
adverse selection is not likely. Rather, we will be providing 
guidance on HSAs to the FEHBP plans along with our general 
negotiating guidance through our annual call letter.
    You also mentioned the cost accounting standards. Let me 
talk about that for a moment. The Congress, as you know, has 
waived the caps for FEHBP contracts in appropriation acts for 
fiscal years 2000, 2001, 2002, 2003, and 2004.
    Further, Director James exercised her statutory authority 
to waive them as well, and we are proposing regulations to 
waive their applicability to experience rated contracts. We 
take these actions with the intent to do everything necessary 
to preserve the physical integrity of the program without 
placing an unnecessary and very costly burden on the plans that 
would ultimately be reflected in higher premium costs.
    And on a final note, I would like to talk a little bit 
about the Long-term Care Insurance Program. We are pleased with 
the success thus far of the program. More than 200,000 
individuals have enrolled, making it the largest employer 
sponsored long-term care insurance program in the country.
    We are going to continue to work the Long-Term Care 
Partners to inform and educate employees and annuitants about 
the importance of this insurance for their own security and the 
future financial security of their families. Choice of plan 
design and options is a hallmark of the program. We offer 528 
plan designs when combining the various components of the 
benefits package.
    Further, the program is designed to meet long-term demands 
with an eye to keeping rates stable over the long haul.
    That is my summary of my testimony. I am happy to answer 
any of your questions.
    Thank you.
    [The prepared statement of Mr. Blair follows:]

    [GRAPHIC] [TIFF OMITTED] T4904.002
    
    [GRAPHIC] [TIFF OMITTED] T4904.003
    
    [GRAPHIC] [TIFF OMITTED] T4904.004
    
    [GRAPHIC] [TIFF OMITTED] T4904.005
    
    [GRAPHIC] [TIFF OMITTED] T4904.006
    
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Blair.
    I am going to turn first to our ranking member, Mr. Davis, 
for questions.
    Mr. Davis of Illinois. Well, thank you very much.
    Thank you, Mr. Blair.
    In addition to providing long-term care insurance for 
Federal employees, the Long-term Care Security Act also 
includes provisions to help employees who had been placed in 
the wrong retirement system.
    My question is: what is the status of the retirement error 
corrections provisions of the Long-term Care Security Act?
    Mr. Blair. As you remember, that was a provision that was 
added during negotiations on the program, and that was an issue 
that both the House and the Senate took quite seriously.
    I will be happy to provide you with an update for the 
record. I would have to go back and look, but I know we have 
been involved in making sure that those retirement corrections 
are, indeed, taking place.
    I am reluctant to talk off the top of my head on this, but 
as I remember, we did not find many employees who were wrongly 
enrolled in the retirement system. However, any employee that 
is inaccurately enrolled does, indeed, face financial 
uncertainties when they reach retirement, and so we want to 
make sure that we get them in the right system.
    Mr. Davis of Illinois. Then I would appreciate it if I 
could get that information, the number of people who have been 
placed in the wrong systems.
    Mr. Blair. Certainly.
    Mr. Davis of Illinois. And the number of corrections that 
have been made, as well.
    Mr. Blair. Certainly.
    Mr. Davis of Illinois. Also, let me ask you. I mean, we 
continuously talk about the increasing cost of health care. We 
continue to see premiums escalating, and this has been the 
order of the day now for many, many years. As a matter of fact, 
we have been talking cost containment in health care, to my 
knowledge, at least 30, 40 years, or at least as long as I have 
been involved in it.
    Does OPM see any possible daylight or areas that can be 
pursued that would continue to provide the kind of coverage 
that our employees need, but at the same time be able to 
maintain or to handle cost as effectively as it can be handled?
    Mr. Blair. Well, let's look first at what the cost drivers 
are. They are utilization, an aging population, increased 
pharmacy costs, and that is due to having a burgeoning number 
of new pharmaceuticals on the market. That is a good thing.
    We have our population which is seeing its average life 
expectancy increase. That should be a good thing.
    But all of those are going to be cost driving factors, and 
I think what we need to do with our program is find out what 
works best in the program. And what works best in our program 
is the competition among plans.
    I wish that we had a silver bullet to say that, yes, we 
would reduce premiums next year by 5 percent, but we do not 
have that, and as Ms. Norton noted, we reflect the economy at 
large in facing increasing health care costs.
    We are going to continue to hone our competitiveness in 
this to make sure that what cost increases do take place should 
be the lowest possible for the enrollees.
    Mr. Davis of Illinois. Is there anything that perhaps we 
could do in addition to the business model?
    I am saying we are obviously interested in the business 
model, but are there any things that maybe we could suggest or 
do with our employees that might then translate into premium 
differentials or reductions on the part of those who provide--
--
    Mr. Blair. We do have an emphasis on preventive medicine, 
and we do have am emphasis on wellness, and I think that those 
are two things that will become more and more essential as time 
goes on because we have seen that the benefits of a healthy 
work force translate into less cost in terms of the health care 
plan.
    And so if there is anything that we can do with our 
employees, it is to promote activities and promote a work force 
that makes healthy life style choices.
    Mr. Davis of Illinois. And so then as utilization changes, 
then that gets factored into negotiations?
    Mr. Blair. It may be a little bit more complicated than 
that, but ideally if you have a healthy work force, you will 
not have as many claims, and then less claims would help 
restrain increasing costs.
    Mr. Davis of Illinois. Thank you very much.
    Mr. Blair. Thank you.
    Mr. Davis of Illinois. Thank you, Madam Chairwoman.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Davis.
    Mr. Blair, when you were just responding to Mr. Davis, you 
made a comment, and I think I heard you right, that you rely on 
the competition to keep the premiums down rather than, I guess, 
anything else.
    I guess my concern is when I look at the charts, I think 
since the early 1990's, or the last 13 years, Blue Cross/Blue 
Shield has increased steadily, and the HMOs and the other plans 
have gone down. Is there any point you see where this may be a 
danger?
    I mean, is the Director looking for competition? I mean, 
are we looking to go to a one source? You know, what is the 
direction that OPM is going on this, and does that concern you 
that it has gone up so much?
    Mr. Blair. We want to strike a balance, and I think the 
balance that we want to strike is we recognize that Blue Cross/
Blue Shield offers a very competitive product, and we see that 
because it has a large number of enrollees, but we also have 
other competitive plans as well.
    We want to keep those plans in the FEHBP. We want to make 
sure the competition is strengthened. We want to keep the HMOs. 
I remember a point, 10, 12 years ago, maybe longer than that, 
when there was a perception there were too many plans in FEHBP, 
and that there possibly could be too much competition.
    I think the question is how to reach the right balance. 
Remember that by Blue Cross/Blue Shield being so large, they 
reach economies of scale, and they can offer their competitive 
product that way. We do not want to favor one plan over the 
other, however, and we want to encourage the other plans to be 
just as competitive.
    And so if we are constantly pumping up one side, you have 
to keep the other side up, and it is a balancing act, and I 
think that is what we are going to have to maintain. One of the 
hallmarks of the program has been choice, and we want to keep 
that choice, and we have a commitment to that choice.
    And so it is going to be an effort over the long haul to 
make sure that we keep competition and choice in plans intact.
    Mrs. Jo Ann Davis of Virginia. Does it concern you? When I 
look at the chart in 1990, Blue Cross/Blue Shield was 39 
percent. Other fee-for-service plans was 35 percent. Today Blue 
Cross/Blue Shield is 53 and other service plans are 22.
    Does that direction concern you at all?
    Mr. Blair. I would not say it concerns me. Maybe, on one 
hand, you could argue that size can pose a problem. On the 
other hand, is that showing that they are offering a very good 
benefit, and Federal employees and annuitants and enrollees are 
recognizing that?
    I just want to make sure that we are offering the best 
product, and so I would say it does not concern me, but it is 
an important trend to watch.
    Mrs. Jo Ann Davis of Virginia. Do you think the fact that 
people have heard of Blue Cross/Blue Shield as opposed to maybe 
some of these other plans makes a difference?
    Mr. Blair. It could make a difference.
    Mrs. Jo Ann Davis of Virginia. When I sold real estate name 
made the difference.
    Mr. Blair. Pardon?
    Mrs. Jo Ann Davis of Virginia. When I sold real estate name 
made the difference. Does Blue Cross/Blue Shield make the 
difference?
    Mr. Blair. Well, I think it could make a difference, but at 
the same time, if you are a member of the National Association 
of Letter Carriers, you may come into the Postal Service and 
decide I want to go with my union plan, or if you are a member 
of the American Postal Workers Union, I may want to go with my 
union plan. So that can be influencing, too.
    What I said earlier though is we will make sure that our 
consumers are educated and that name recognition is important, 
but you need to go beyond the name recognition. And an educated 
consumer does make the best choices. That has been one of the 
initiations that we want to see that we educate our enrollees 
to make the best choices for themselves.
    Mrs. Jo Ann Davis of Virginia. I agree with that. Choice 
should hopefully keep the competition going and keep the cost 
down.
    On the HSAs, a lot of people when I talk to them, they say 
that the HSAs are much more attractive to the younger employees 
who view themselves as healthy, and that the fee-for-service 
plans and the HMOs will be more attractive to your older 
employees and annuitants who consider themselves more at risk.
    Assuming that is so, how can the detrimental effects of 
adverse selection in the FEHBP program be avoided if the HSAs 
are readily available to the healthy or less at risk?
    Mr. Blair. I am not so sure I agree with the assumption, 
but even if it does occur, I think we need to look at the 
experience we have in what we call our consumer driven plans 
now. Some have voiced concerns that these so-called consumer 
driven plans will exacerbate adverse selection.
    We have seen those consumer driven plans. It's the ATWU 
plan. Abbie, if you could.
    Ms. Block. AETNA and ANGINANA.
    Mr. Blair. Yes, there were three plans. We have not seen a 
mass migration to those three plans. We have 13,000 enrollees 
in those plans out of 4 million. Overall, Federal employees, I 
think, are not a group that goes for uncertainty; that's the 
case with HSAs being a new product on the market, and I think 
that should it ever be offered, it will certainly fill a market 
niche.
    However, I think I do not share the view with those that 
say that this will lead to great adverse risk, the adverse 
selection. Rather, I see it as filling a market niche should it 
ever be offered.
    Mrs. Jo Ann Davis of Virginia. Should the assumption be a 
true assumption, does OPM have safeguards in place to modify 
the program?
    Mr. Blair. We would be very concerned over any adverse 
selection taking place. We do not want to see that happen 
either, and so I think we all start from a common premise that, 
should it ever be offered, that it be offered within the 
context of making sure that we minimize any kind of adverse 
selection.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Blair.
    Ms. Norton.
    Ms. Norton. Thank you very much, Madam Chairwoman.
    That was an amazing response, Mr. Blair, that you just gave 
to the Chair. I take it that you who have nothing to do with 
the control of market mechanisms, you who have nothing to do 
with the choices that employees make would somehow make every 
effort to make sure adverse selection does not occur as a 
result of the availability of health service accounts.
    Let me be specific. You are right that we ought to look at 
the evidence, and, sir, I submit to you that the Medicare bill 
is now in the process of providing us some evidence that ought 
to be instructive to us.
    You, of course, recognize that it is counterintuitive, 
maybe even counteranalytical, to say that if you offer a more 
attractive package for younger people with a tax advantage to 
it that you almost seem to be saying you hope they do not take 
it because you are saying thus far, of course not with health 
service accounts, but what we have for the tax savings accounts 
we do have, there have not been a lot of people who have taken 
it.
    So you are asking us to believe that if you split up, if 
you take away the one advantage that FEHBP has, I mean, because 
I have been unable to find what these other ones are, but there 
is this very large risk pool. Everybody fits. If you take that 
away, split it up, my question to you is: are you willing to 
say that on the basis of whatever evidence you are wiling to 
offer that you do not believe that splitting the risk pool up 
into various sections, particularly health service accounts, 
HRAs, and everybody else who cannot possibly eliminate the risk 
of going in, that would not have an effect upon those left in 
FEHBP?
    Are you willing to say that there would be no effect in a 
greater or higher or more rapid increase in premiums if we 
opened the doors and said, ``OK. Everybody wants an HSA. Just 
come on in?''
    Mr. Blair. I am not saying that we are splitting up the 
risk pool, that HSAs would be part of that whole risk pool that 
enrollees will be able to access. I think it will fill an 
important niche, and what you are saying is that you are going 
to see a mass migration to HSAs.
    Ms. Norton. I am not saying that. I am saying how can you 
say anything about the migration. Are there not incentives, as 
the Chair said, for younger people----
    Mr. Blair. Well, you are presuming that they will take 
those incentives.
    Ms. Norton. Yes, and you are assuming they are not.
    Mr. Blair. I do not----
    Ms. Norton. And you are assuming they are not, and based on 
the way in which people respond to tax incentives, I do not 
know why your assumption is better than mine.
    Mr. Blair. Well, I do not want to get into that, but I will 
say----
    Ms. Norton. Well, the burden is on you to justify the 
notion.
    Mr. Blair. I will say----
    Ms. Norton. That it will have no effect and we ought to 
just be quiet.
    Mr. Blair [continuing]. It is a new product, and as a new 
product, it does not have a track record yet, and without that 
track record----
    Ms. Norton. So what are you willing to do to safeguard?
    In case premiums go up and you have already offered this 
new product, what are you going to do to safeguard FEHBP as we 
now know it?
    Mr. Blair. I think that we will do everything that we can 
to ensure that adverse selection does not take place.
    Ms. Norton. Yes, and you have to be more specific than 
that. What is everything that you can?
    Don't you think if you are going to do something as radical 
as introduce a product that could lure people away from what 
has given FEHBP what it has now to keep price down; don't you 
think you have a burden to say what everything you do, in fact, 
amounts to?
    I am asking for specifics, Mr. Blair.
    Mr. Blair. What I am saying is I do not see----
    Mrs. Jo Ann Davis of Virginia. Well, Ms. Norton, let him 
answer the question and maybe we can get somewhere.
    Ms. Norton. Well, he keeps saying everything--you know 
what? I am trying to make myself perfectly clear, Madam 
Chairwoman. I want to know specifically what he means by 
everything we can do. That is just an insult to keep coming 
back with same thing. That is why I keep interrupting him.
    Mrs. Jo Ann Davis of Virginia. Do you have safeguards in 
place?
    Ms. Norton. Give me some any things you could do. List them 
for me.
    Mr. Blair. Well, let me just say this. I do not see the 
Federal populations as following the pied piper.
    Ms. Norton. So you are not listing them. You are saying 
they are not going to do it. I said list them for me, Mr. 
Blair. You said, ``We are going to do everything we can do.'' 
Give me one.
    Mr. Blair. One thing would be to review benefit designs in 
all the plans to make sure that adverse selection is not taking 
place.
    Ms. Norton. So after you review them, what do you do if 
adverse selection is taking place and you have already offered 
health service accounts out there?
    Mr. Blair. Then we will start looking at how to redesign 
those benefits out there.
    Ms. Norton. Oh, my God. But it is already out there.
    Mr. Blair. Remember we re-enroll every year.
    Ms. Norton. The toothpaste is out of the tube then, Mr. 
Blair. It is out of the tube. Are you going to put it back in 
the tube and say to all of those young people who are trying to 
save money that I am sorry we are not going to do this any 
more? We are going to cut it off?
    Mr. Blair. I think that you are talking about a premise 
that there is going to be a mass migration out there, and what 
I am saying is I think that it will fill an important market 
niche if offered.
    Ms. Norton. No. 1, Mr. Blair----
    Mr. Blair. And you are presuming that they are going to be 
offered. The Director has not made a decision on this issue.
    Ms. Norton. No. 1, Mr. Blair, and this will be the last 
thing I have to say, Madam Chairwoman; No. 1, Mr. Blair, you 
have not come forward with anything resembling a basis for 
saying that there will not be adverse selection, No. 1.
    And, No. 2, I assume----
    Mr. Blair. I said based on our experience with the consumer 
driven plans, we have seen 13,000 enrollees go to that, and 
what we are saying there is that if you look at that as a test 
for HSAs, we have not seen mass migration to those.
    They definitely fill a market niche. That is what the FEHBP 
is about, being market driven, and I don't know why we would 
want to deny a very popular product out there. You are posing 
it as an either/or question. It is either in this basket or 
this basket.
    I am saying it is a balancing act, and it is a balancing 
act every year that our folks go through.
    Ms. Norton. What do we get by the balance? What do we get 
by the balance?
    Mr. Blair. You need to strike a proper balance between 
offering attractive market rates, attractive benefit designs, 
while keeping a broad risk pool. That is a balance.
    Ms. Norton. And if, in fact, these assumptions do not work 
out, you will do all you can for all of the rest of the 
employees who are left in that pool, and whatever that is, you 
cannot quite tell us at this time.
    Mr. Blair. We have a pretty good track record of 
maintaining that balance thus far.
    Ms. Norton. You do not have a pretty good track record of 
keeping premiums down.
    Mr. Blair. Better than the private sector.
    Ms. Norton. Is that your standard?
    Mr. Blair. Better than any other governmental----
    Ms. Norton. You ask Federal employees what they think of 
that standard. What is the increase in the private sector, on 
average?
    Mr. Blair. The average increase----
    Ms. Norton. For large employers.
    Ms. Block. The average increase last year was considerably 
higher than ours, and I do not want to give you an incorrect 
number.
    Ms. Norton. Yes, well, you give me some numbers and then--
do not make general statements here that you are not prepared 
to back up.
    Thank you, Madam Chairwoman.
    Mrs. Jo Ann Davis of Virginia. Thank you, Ms. Norton.
    And just for the record, I think there are assumptions 
being made on both parts, on our part, as well as the 
witnesses, but I am wondering, Ms. Block, since we swore you 
in, do you have any examples of maybe some things that you have 
done in the past when there have been new programs and you were 
concerned about what was going on? Do you have any specific 
examples?
    I think what Ms. Norton was trying to get to: do you have 
any specific examples of what you have done to try and head off 
the problem?
    Ms. Block. Yes, and I think if I may just say something 
preliminary to that, we do not have a single risk pool in the 
FEHBP program now. We have various types of plans with various 
delivery systems. And some of the concerns being expressed now 
about HSAs were expressed in the 1970's about HMOs when they 
first became an important new product in the market.
    And there was great concern that younger employees were 
going to enroll in that type of plan, and the premiums tended 
to be lower than in the fee-for-service plans. And that has 
over time certainly leveled out and has not posed a major 
problem in the program.
    But as Mr. Blair mentioned, one of the things that we 
always do in the negotiation process is look at overall benefit 
design and balancing benefit design so that there is not one 
type of plan that is unusually more attractive to one group of 
employees than another type of plan. And it is an ongoing 
process that is in place all the time of trying to strike that 
balance, as Mr. Blair suggested.
    Mrs. Jo Ann Davis of Virginia. Thank you, Ms. Block.
    Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Madam Chairwoman.
    I think we have covered the health savings accounts issue 
pretty well. I just do want to add my voice to the concerns 
that have been expressed.
    And I want to note that when CBO looked at Senate bill 
2230, the Patient's Bill of Rights legislation in the 105th 
Congress they concluded that, ``offering high deductible health 
insurance with MSAs to Federal workers and annuitants would 
increase FEHBP premiums for comprehensive plans by siphoning 
off relatively healthy enrollees into MSAs. Higher premiums for 
comprehensive plans, in turn, would increase government 
contributions for all enrollees.'' That was CBO, which as we 
all know is a nonpartisan agency.
    So I do think it is critical that we monitor this issue. I 
share the concerns that have been expressed, and I do think 
that before you really open it up, you should put in place some 
specific criteria. Whatever red flag it is going to be we know 
in advance, you know, what steps are going to be taken so that 
we don't have a problem on our hands and then later figure out 
that we are in the middle of a problem.
    Mr. Blair. I did not want to leave everyone with the 
impression that this is a foregone conclusion because it 
certainly is not. In the spirit of discussion that we just had, 
I would like to just say that the Director understands the 
concerns expressed about adverse selection. No one wants that 
to take place.
    Keeping that in mind, we will move forward. We will be 
keeping stakeholders, this committee, and others informed.
    Mr. Van Hollen. No, I understand you do not want it, and I 
am not an expert in this area. So all of us have to rely on 
people who are expert, and the CBO experts who looked at this 
very same issue just a number of years ago concluded that you 
would very likely have adverse selection, and that would have 
an impact on the premiums of other people.
    So I just think that we have to understand clearly what we 
are getting into, and if you do proceed down that road, have in 
place in advance some kind of system that you can detect a 
problem early on and take action.
    During the consideration of the prescription drug Medicare 
bill that was passed last year, you may recall Congressman Tom 
Davis from Virginia offered a piece of legislation on the 
floor. It was actually right after the House had passed its 
version, making clear that there should be no adverse impact on 
prescription drug benefits provided to Federal employees under 
FEHBP going forward.
    That provision was never included in the final package. My 
question to you is: what impact, if any, do you foresee the 
prescription drug Medicare plan having on prescription drug 
benefits under FEHBP now or in the future?
    Mr. Blair. At this point I do not think we see any impact, 
especially for this upcoming year, but it is still too early to 
tell. Remember we issue our spring call letter advising the 
carriers what the plans may look like, but I do not anticipate 
any impact from that legislation this year.
    Mr. Van Hollen. I mean, the purpose of that piece of 
legislation by Tom Davis of Virginia was not just for this 
year, but it was to ensure protection going forward, that this 
wouldn't have any impact on the package of prescription drug 
benefits.
    Can you say categorically that it will not impact the 
benefits going forward?
    Mr. Blair. I do not want to fall into that trap, but I 
would say that we are going to do everything we can to continue 
to offer a very competitive package to both current employees 
and annuitants, and we will do everything that we can to make 
sure that the program continues as a model.
    As bumps come down the road, as Congress makes changes in 
laws, we are going to have to deal with that, and we understand 
that and we know that is our job. The bottom line is that we 
want to offer the best product we can to our enrollees and the 
annuitants, and we intend to maintain that course.
    Mr. Van Hollen. All right. Well, I know the chairman of the 
full committee and maybe the chairman of the subcommittee 
agrees that the best protection of course, would have been the 
actual inclusion of that piece of legislation that was 
supported by, I believe, everybody here on this panel, and so I 
hope we will continue to pursue and I intend to work with 
others to pursue that, to insure that protection is there going 
forward.
    Let me just close with a question regarding the Long-term 
Care Insurance Program because in your testimony, you noted 
that while the enrollment of over 200,000 members is 
significant, we believe the program has even greater potential 
for increased participation. What do you intend to do; what are 
your current plans for trying to better educate the people who 
are eligible to participate in the program about the benefits?
    Mr. Blair. Congress recently broadened the eligibility to 
include deferred annuitants, Grey Reservists, some D.C. 
government employees, and we also have new hirees coming into 
the government. Our efforts are going to be focused on those 
new folks to make sure that they understand what the product is 
that we're offering, what the benefits of that product are and 
why it is important to them.
    Two hundred thousand may seem low to some people, but 
actually that is something of which we are quite proud. With 
that, we are now the largest long-term care insurance offeror 
in the country, and we should be. With a relatively new product 
we had some startup difficulties. We could not get individual 
home addresses or things like that because of privacy concerns. 
We had to focus our education efforts in the work place, but we 
were proud that we were able to get that to the 200,000 folks.
    And we are going to continue. We see the retirements in the 
Federal Government, new people coming in. There is a new pool 
of potential applicants, and we are going to go for them as 
well.
    Mr. Van Hollen. If I might, Madam Chairwoman, specifically, 
I mean, do you mail out to the new potential enrollees? What 
specific steps are you taking?
    Mr. Blair. If they would request a package, I think that we 
would. What we do is we make sure that their H.R. offices in 
the various agencies make this kind of information available. 
We will make sure that it is available to them in the community 
role.
    When you become a new Federal employee, you have the 
ability to enroll in the Federal Employees Group Life Insurance 
Program, the health benefits program. We make sure that the 
long-term care program is offered to them as well.
    Mr. Van Hollen. Thank you.
    Mr. Blair. The Long-Term Care Program is part of our 
standard package of benefits.
    Mrs. Jo Ann Davis of Virginia. Are you satisfied with the 
200,000?
    Mr. Blair. We would have liked to have seen more, but I am 
told that this exceeded the normal participation rate when 
offered in the private sector, and if you look at it, you have 
to understand that not a lot of people understood the product 
and maybe that was an education issue. If you read Consumer 
Reports, if you read the other consumer articles, they are 
saying most people should not look at it until their 40's or 
50's, and so we do have a good population to draw from within 
the Federal Government. But remember we also offer into the 
Uniformed Services. They tend to be much younger than that.
    In the Postal Service we did not see the participation 
rates within it that we would have liked to have seen. It is a 
new product, and most people do not even think they are going 
to need to use it. You do not see it widely enrolled in out in 
the private sector either, and so I think it is going to be an 
effort on the part of baby boomers and beyond to make sure that 
we are well protected when we confront what can happen to us as 
we grow older and have health care challenges.
    And again, I think in 15, 20 years, you are going to see it 
much more standard than you do now. It is interesting. They 
call it a new product, but it has been offered since the 
1970's, but you just have not seen it widely offered throughout 
the country.
    We offered our product with an eye toward keeping rates 
stable for the long term. Some folks thought that our rates 
were a little bit too high. I would have liked to have seen 
them lower as well, but when we set our rates, we did so 
according to the National Association of Insurance 
Commissioners' rate setting policies, and now we are seeing 
other competitors out there having to do the same thing.
    Our rates are looking much more competitive than they were, 
and they were still about 10 to 15 percent lower than what you 
could find in the private sector.
    I think the most important piece of this is that our rates 
are going to stay stable. As I enrolled as a 44 year old, I can 
be certain that my rate was designed to be the same as when I 
am 60 or 70 or hopefully 80 years old, as I bought inflation 
protection, and I am very pleased with the product. I think I 
certainly did the right thing.
    Mrs. Jo Ann Davis of Virginia. What about the 60 and 70 
year olds, our retired folks? What are you seeing in their 
enrollment?
    Mr. Blair. You know, for some I think that it is a very 
individual choice. You have to look at a whole host of factors 
to see if this is something that you really need or not. If you 
have the money to cover these long-term care costs, you may not 
need the insurance.
    On the other hand, if you want to leave a legacy to your 
survivors, you may, again, decide I really do need this. So it 
is a very individual call.
    Mrs. Jo Ann Davis of Virginia. Do you know the breakdown, 
Mr. Blair, on the retirees, how many of those have taken the 
long-term?
    Mr. Blair. Could I provide that for you for the record 
because I don't think I have that information on the tip of my 
tongue?
    Mrs. Jo Ann Davis of Virginia. Because that is where I have 
heard the most complaints, is our retirees.
    Mr. Blair. Our rates are age based, and so the retirees 
were going to pay more, and it was not like health insurance. 
They were going to pay more because they were older--because 
they were the people who are most likely going to have to 
utilize the product much more quickly than someone who is 45 or 
50.
    Mrs. Jo Ann Davis of Virginia. I look forward to hearing 
from our panelists on the next panel, but what I am hearing 
from the retirees is that they are not accepted, and I am not 
so sure that they are not accepted so much as they are not 
accepted because the rate would be sky high. You know, if they 
have diabetes or things like that, then they are not accepted 
or the rate is so high that they cannot get in.
    Let me just echo what Mr. Van Hollen was saying about the 
legislation. I know that Tom Davis, and I think this is what 
Mr. Van Hollen was referring to, has the legislation that 
protected our Federal retirees, that they would not be treated 
any differently with the prescription drug plan than our active 
force.
    And if I can send a message at all today, that is one I 
would really like to send back to Director James. I would 
certainly hope that even though it did not get into the 
legislation, that our retirees are not treated any differently 
than our active.
    Mr. Blair. She has been a real protector of retirees and 
retiree benefits, and so I think that message will certainly be 
welcomed and was already there.
    Mr. Davis, Ms. Norton, do you have any further questions? 
Mr. Davis.
    Mr. Davis of Illinois. I think probably just one.
    We know that choice costs. When individuals are part of a 
plan where they have more flexibility, there is more cost than 
in a straight-laced HMO or a straight-laced program. Is there 
anything that we could expect in terms of cost differential or 
that you would expect to pay for choice?
    I am saying how much more should choice cost.
    Mr. Blair. I am not sure. Abby, correct me if I am wrong 
here, but I do not think choice costs more. Actually it may 
provide the kind of competition you are looking for that can 
keep costs down.
    Ms. Block. I think what we are talking about here is choice 
of providers within a health plan rather than choice of health 
plans, and the whole trend, as I know you know, has been away 
from the very restrictive model of the very closed HMOs, and 
that has been nationwide.
    Even the HMO industry has moved more toward choice. Many of 
the HMOs have eliminated the requirement for a referral, for 
example, to see a specialist. So the consumers have really 
expressed a very strong interest in having that kind of 
flexibility in terms of how they get their health services, and 
it costs more because you cannot really control as much as you 
might in a more closed system inappropriate utilization or 
overutilization. That is one of the issues and one of the 
factors that goes into choice costing more.
    There are some other issues in terms of provider 
reimbursements and so on. So it has typically been the 
experience that choice costs more, but more and more we are 
seeing plans now being offered where the premium really is 
close to or in some cases even less than the premiums of more 
restrictive systems.
    Mr. Davis of Illinois. And the consumers, as I indicated, 
they are prepared to pay. I mean, if the cost is there, people 
are willing to pay for the flexibility.
    Ms. Block. People feel very strongly about having that 
flexibility.
    Mr. Davis of Illinois. No further questions.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Davis.
    Ms. Norton.
    Ms. Norton. Yes. Mr. Blair, I am looking at your testimony 
because you referred in answer to my question about HRAs to 
work you had already done, and you refer to 2004 where the 
total enrollment in these consumer driven plans was and the 
figure in your testimony is 13,151.
    Now, how old are these plans that you are referring to, and 
when did they go into effect?
    Mr. Blair. The APW plan went into effect in 2003, and the 
other two plans went in in 2004.
    Ms. Norton. Mr. Blair, that is very important information. 
We are talking about brand new plans, and you had testified 
here that one of the most important things FEHBP can do is to, 
``educate people about all of the choices that are available to 
them.''
    Again, looking at that figure with education just 
beginning, you're talking about one plan this year, one plan 
last year. I am not sure how you could then say on the basis of 
evidence of less than a year apparently this experience leads 
to believe that the movement of large numbers of employees to 
raise a concern about adverse selection is not likely. I 
thought that most of the time when people try to make 
statements like that they have a body of experience that they 
can rely upon, whereas you are talking about experience that 
has only just begun.
    Mr. Blair. That is right, and the HSAs would be a new 
product as well. What we are saying is that, should they be 
offered, we do not anticipate a large migration to HSAs, 
especially in the first years.
    Ms. Norton. Well, I can understand in the first years when 
people barely know about the plans, and I think the burden on 
OPM, of course, is to indicate what the risk is to the pool 
over time. If the risk to the pool after 5 years or 10 years is 
great, the notion that it was not so great after a year would 
not be very impressive.
    And, therefore, I think that at the very least, Mr. Blair, 
I would like to see you extrapolate this year or so experience 
so that we would have some sense of where this might lead in 5 
years, in 10 years, at some point where we could say reliably, 
``Look, this is not going to mean a thing. People look like 
they are going to stay where they are despite what is a rather 
attractive economic incentive depending on your age and state 
of health to do just the opposite.''
    And of course, as an economic matter, we are taught to 
regard human beings as rational economic beings, and one 
wonders why a rational economic being, unless they thought 
ahead, way ahead, as you say that people do not do, for 
example, on long-term health insurance, why they would not 
respond to the immediate economic incentive that is planted 
right there precisely because you want them to respond.
    Mr. Blair. I am not sure how I can say this again, but the 
way that we are viewing this, and I think that we do have the 
evidence to show that we have not seen great trends of 
migration from one plan to another over a period of a year or 
even 2 years.
    Ms. Norton. I understand you, Mr. Blair.
    Mr. Blair. Right.
    Ms. Norton. But you understand me, that I think 1 year or 
less, and certain we are now in 2004; this is, sir, not even 
April, and so all I am saying to you is I do not think the body 
of experience from which you are working is very impressive, 
and I am asking you to do something that is typically done in 
situations like that, and that is to try to figure out what it 
would be over a longer period of time based on what it is 
today.
    Would you be willing to do that?
    Mr. Blair. I think we are going to carefully look at these 
trends as they evolve over a period of time because we are all 
on the same page here. We do not want to see the program spiral 
into adverse selection. We do not want to take actions that are 
going to do that, and we want to make sure that we do 
everything we can, such as looking at benefit design over the 
long term. And so----
    Ms. Norton. I am asking you to do more than look at the 
benefit design. You know, again, I am trying to be specific, 
and that is why you see me being impatient with you. I am not 
asking you to look at the benefit design. I am asking you to 
extrapolate the figures, sir.
    That is to say look at the figures you have now. Economists 
do this all the time. Assume that there would be greater 
knowledge and information and extrapolate out to what you think 
over 5 years or over 10 years, for example, would be the up 
tick in these plans. That is all I am asking.
    Mr. Blair. We certainly can do that.
    Ms. Norton. Thank you. That is really all I am asking.
    Finally, I asked because you heard my concern because we 
have 8 million employees and still the stuff goes up and 
Federal employees pay 11 percent a year, my heavens, and you 
say or at least your partner said, well, it is better than what 
it is in the private sector.
    I would ask you to both look at, because I am sure these 
figures are readily available, at the let me say Fortune 1,000 
companies, and would you give to the chairman and to me 
personally what the increase in health care has been? I am not 
even saying Fortune 500, but Fortune 1,000 companies so that we 
can get some sense of comparison.
    I think we would more appreciate FEHBP if we could see 
those comparisons.
    Mr. Blair. Oh, certainly.
    Ms. Norton. I am sure there must be something.
    Ms. Block. Over how many years would you want that?
    Ms. Norton. These 3 years that are in your testimony. You 
show the increases in the last 3 or 4 years, and so I think----
    Mr. Blair. Since 2000?
    Ms. Norton. 2000.
    Mr. Blair. Give a fuller figure and fuller flavor of what 
is out there.
    Ms. Norton. I would appreciate it. I am sure there is some 
difference, but it would be helpful to know what that 
difference is, and of course, they would say that is no fair 
comparison because we are talking about 8 million.
    Mr. Blair. Well, you have to remember when we are comparing 
what are we comparing. In FEHBP we have single and family 
coverage, and that is what we offer. Many private sector 
employers will cover a higher percent of an employee's premium, 
but not necessarily the family, or they may, but they may not 
carry people into retirement either.
    So I am always cautioned that when looking at these kinds 
of figures that you keep in mind what we are actually 
comparing.
    Ms. Norton. That is a very good point, Mr. Blair. To the 
extent that you can, I am not asking for a whole lot of work 
here. Could you look at Fortune 1,000 companies that are most 
like us that kind of cover families the way the FEHBP does.
    Mr. Blair. Certainly.
    Ms. Norton. And I recognize that many of them cover a 
greater percentage. So that would make that cost even more.
    Ms. Block. I think one of the other things though----
    Ms. Norton. A greater percentage of the cost for employees.
    Ms. Block. One of the other things that feeds into that 
comparison is whether there were or were not significant 
benefit reductions because we have looked at this very 
carefully, and very often the difference in the rate increase 
may be relatively small, but we got our rate increase with very 
minimal, if any, benefit reductions and the private purchaser 
got theirs with much more significant benefit reductions.
    Ms. Norton. With all due respect, when I asked the question 
before, what were we getting for the large risk pool we had, 
your answer, madam, was it is better than in the private 
sector. All I want to know, all I want to have is some 
comparisons so that I can better understand that, and you all 
can give me whatever figures are most convenient for you.
    Thank you very much.
    Mrs. Jo Ann Davis of Virginia. Thank you, Ms. Norton.
    And thank you, Mr. Blair and Ms. Block, and I think Ms. 
Norton shares the same concern that many of us have, and that 
is just to make sure that the HSA is a good concept, but we do 
want to make sure that there is no adverse effect on our 
Federal employees.
    Mr. Blair. I think we all share that.
    Mrs. Jo Ann Davis of Virginia. But thank you so much.
    Mr. Blair. Thank you. I appreciate it.
    Mrs. Jo Ann Davis of Virginia. We appreciate your being 
here, Mr. Blair and Ms. Block.
    I would now like to invite our second panel of witnesses to 
please come forward to the witness table. First, we will open 
with a statement from Dr. Harvey Fineberg, president of the 
Institute of Medicine.
    Next we will hear from Mr. Charles Fallis, president of the 
National Association of Retired Federal Employees.
    Then we will hear from Mr. Stephen Gammarino, senior vice 
president of national programs at Blue Cross/Blue Shield.
    After Mr. Gammarino, we will be hearing from Dr. Scott 
Smith, vice president and chief medical officer at First Health 
Group.
    And finally, we will have the pleasure to hear from Mr. 
Paul Forte, chief executive officer at Long Term Care Partners.
    Mr. Forte, did I pronounce your name correctly, or is it 
Forte?
    Mr. Forte. No, it is Forte.
    Mrs. Jo Ann Davis of Virginia. It is Forte. OK.
    It is going to be tight. I do apologize. Can you all fit?
    Mr. Forte, I was going to say you may be more comfortable 
at the end of the table if you would like. We can pull the 
microphone over there when it is time for you.
    I want to thank you all for joining us here today, and the 
panel will now be recognized for an opening statement. We will 
ask you because there are so many of you to summarize your 
testimony in 5 minutes and your more complete statement will be 
included in the record.
    And we will start first with Dr. Fineberg. You are 
recognized for 5 minutes.

  STATEMENTS OF DR. HARVEY FINEBERG, PRESIDENT, INSTITUTE OF 
MEDICINE; CHARLES L. FALLIS, PRESIDENT, NATIONAL ASSOCIATION OF 
 RETIRED FEDERAL EMPLOYEES; STEPHEN W. GAMMARINO, SENIOR VICE 
PRESIDENT, NATIONAL PROGRAMS, BLUE CROSS/BLUE SHIELD; DR. SCOTT 
   P. SMITH, VICE PRESIDENT AND CHIEF MEDICAL OFFICER, FIRST 
 HEALTH; AND PAUL E. FORTE, CHIEF EXECUTIVE OFFICER, LONG TERM 
                       CARE PARTNERS, LLC

    Dr. Fineberg. Thank you very much, Madam Chairwoman, 
members of the subcommittee. It is a pleasure for me to have 
this opportunity to testify before you today.
    As president of the Institute of Medicine, I represent an 
organization that is an advisor to the Nation, to the agencies 
of government, and to the public about matters of health. The 
kinds of work that the Institute of Medicine undertakes ranges 
as widely as the health agenda of the Nation. We have worked on 
problems of the public health infrastructure. We have worked on 
problems of prevention of disease. We have worked on the 
science research needs of our Nation and problems of insurance.
    Today I am going to refer specifically to some of our work 
that I think may be especially pertinent to your considerations 
of the Federal Employees Health Benefits Program, and that has 
to do especially with matters of quality and safety in our 
health care system. And I want to stress those in part because 
I believe they are not only very important in their own right, 
but I think they bear very directly on the concerns of cost 
that have occupied so much of the questioning and discussion in 
the early part of your deliberation today.
    Before I get to that, it is worth, I think, reflecting for 
a moment on the extraordinary progress that we in our country 
have enjoyed in health over a long period of time. It is 
startling to imagine that in the time of our grandparents at 
the turn of the century when they were having children of which 
more than 100 per 1,000 newborns in the United States died 
before the first year of life was reached.
    In the last century, life expectancy in our country 
increased from under 50 years to more than 75 years, and 
particularly in recent decades we have seen dramatic deceases 
in major diseases that threaten the health of our citizens, and 
particularly older citizens, heart disease especially, but also 
stroke.
    Now, with all of this success, we nevertheless have some 
serious problems. You've already been talking about the rise in 
cost which has become especially acute again in the last few 
years.
    Incidentally, according to the figures that I have seen, in 
the year between 2002 to 2004, the increase in cost of the 
average employer based health plan in the United States was 
13.9 percent, and that was a very significant blow, and led 
many, as has been alluded to earlier, to change the nature of 
the benefits that were offered.
    But the problem with our system that I want to stress today 
is more around the problems of safety and the quality of care 
that our citizens and beneficiaries of the Federal employees 
plan and others receive in the care that they seek.
    When the Institute of Medicine looked at the problem of 
errors in health care a few years ago, we found that every year 
tens of thousands of hospitalized patients were dying as a 
result of errors in medicine. In fact, if errors counted as a 
cause of death, it would rank in the top 10 causes of mortality 
in the United States.
    Other studies that have looked at the quality of care 
received on average by our citizens--yes, I know, Madam 
Chairwoman, it is not a safe place to go, those hospitals--if 
other studies that have looked specifically at the quality of 
care find that on average only about half of the care 
requirements of those in care with chronic diseases are 
actually met.
    So we have problems of misuse of care. We have problems of 
under use of needed care, and we have problems of overuse, of 
care that is not really beneficial to the individual 
recipients.
    Now, with respect to the Federal Employees Health Benefits 
Program, I would like to make a few suggestions that are 
elaborated a bit more in my testimony that may be relevant to 
your considerations over time, and I would like to just briefly 
mention a few.
    First, it would be, I think, very advantageous to do 
everything possible to ensure that high value services are, in 
fact, covered in the plans. Now, these types of services are 
those that return very high benefit for relatively low cost or 
can be done much more efficiently than typically is done, and 
they include preventive services, comprehensive care for common 
chronic conditions, which is a part of many of the programs 
today, coordination of care, especially for beneficiaries who 
have multiple chronic conditions, and very importantly an often 
neglected end of life care, alternatives for those at the end 
stage of life.
    Second, it is worth considering what the FEHB program could 
do in what is sometimes called pay for performance. This is a 
reimbursement strategy, a kind of approach that says to the 
providers of care if you meet certain standards of quality, we 
will pay a premium for that benefit of service.
    The advantage of reducing errors and actually insisting on 
and rewarding quality is that over time costs go down, while 
quality goes up for patients, but not because of, for example, 
medication errors and other ways that quality improves 
performance and can keep costs down.
    Third, information technology, while it does have an 
expense at the outset, is an area that if made available can 
reduce errors on physician orders, particularly on medication 
and in the long term also save money.
    I see that my time is exhausted. I would only like to add 
one final thought and that is around the area of what is 
sometimes called health literacy. It is shocking to realize how 
even educated people under times of stress and in their medical 
care are unable to understand and to follow effectively the 
instructions and advice that their physicians and other 
caregivers provide, much less to be able to find information 
they need to take care of themselves.
    I believe that efforts to better educate and inform and 
empower the beneficiaries of the insurance program to make them 
more informed consumers for their own health would repay 
benefits for themselves and for the program in the long term.
    Thank you very much.
    [The prepared statement of Dr. Fineberg follows:]

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    Mrs. Jo Ann Davis of Virginia. Thank you, Dr. Fineberg.
    Charlie Fallis, it is good to have you here with us today, 
and I look forward to hearing your testimony. You are 
recognized for 5 minutes.
    Mr. Fallis. Thank you, Madam Chairwoman.
    Madam Chairwoman and honorable members of the committee, I 
appreciate the opportunity to express NARFE's views on FEHBP 
today and our concerns that HSAs might be introduced into the 
program perhaps as early as this year. NARFE historically has 
opposed adding MSAs and now HSAs. HSAs are likely to attract 
healthier enrollees since the plans reward them with tax free 
balances if they do not go to a doctor or to a hospital.
    However, less healthy enrollees would, in our opinion, 
remain in comprehensive plans with significantly lower out-of-
pocket costs, but with increasing premiums, costs of premiums 
that I believe and we believe would result from the addition of 
HSAs.
    CBO, the Congressional Budget Office, has estimated that it 
would cost taxpayers an additional $1 billion over 5 years with 
the addition of HSAs and FEHBP. Although there are some 
differences between the old MSAs and the new HSAs, their 
variation does not appear to significantly alter the outcomes 
estimated by CBO and others.
    For example, HSA enrollees will be allowed to contribute 
larger amounts to their savings accounts, but this change does 
not help those who cannot afford to deposit more money. 
Although some may be willing to initiate an HSA experiment in 
FEHBP, we believe it is premature and risky to impose that 
option.
    Paul Ginsburg, president of Health Systems Changes, states, 
``There is little question that HSAs will transfer resources 
from the sick to the healthy. Higher income people will benefit 
more from these accounts because they are more likely to have 
insurance and because of their higher marginal tax rates.''
    HSA supporters claim that enrollees in comprehensive plans 
are not sensitive to health care costs, and that HSAs will 
encourage them to spend their health care dollars more wisely.
    Well, a study in the June 26, 2003 New England Journal of 
Medicine found that only 55 percent of Americans get sindicated 
health care. Massachusetts General hospital took these figures 
and extrapolated that about 100 million Americans under-used 
their health care, where only about 30 million over used health 
care.
    So we do not believe the claim that increased cost sharing 
required by HSAs will tackle the difference between under use 
and over use. HSAs savings might be illusory since HSA 
consumers acting on their own, as they would be required to do, 
will have less leverage than insurance carriers in negotiating 
provider discounts.
    NARFE is also concerned about how OPM intends to pay for 
HSAs. For instance, how would enrollees pay for health care 
costs early in the year if the account held no more than a 
prorated share of the anticipated annual government and 
enrollee contribution.
    And, on the other hand, if the full amount is advanced to 
enrollees at the beginning of the year and it is their account, 
they could walk away from that account, walk away from Federal 
service with a windfall.
    NARFE recognizes OPM's interest in providing more health 
care choices. This makes sense when the only choice is a 
managed care plan, but that is not the case with FEHBP. We are 
confident that what Federal workers really want is to choose 
their own health care provider, something they can do very well 
without an HSA, and HSA catastrophic plans are not a choice for 
enrollees over 65 years of age, which of course excludes most 
of our members.
    As a matter of fact, therefore, we question whether this 
age barrier conflicts with the Federal law that prohibits OPM 
from implementing contracts with plans that exclude enrollees 
based on age.
    Given the risks and concerns that I have described, we are 
concerned that HSAs will be offered without any safeguards 
against adverse selection. For example, tax free savings 
accounts could encourage FEHBP enrollees to game the system by 
switching to a comprehensive plan during the annual open season 
for any year that they know their health care expenses will 
multiply.
    We believe this problem could be mitigated if enrollees 
were forced to remain in an HSA for a period of, say, 5 years 
after making that selection. And since the FEHB fair share 
government contribution formula is weighted to the number of 
enrollees, catastrophic plans with lower premiums coupled with 
HSAs that attract larger shares of enrollees would reduce the 
overall dollar amount of the government contribution and we are 
very concerned about that.
    To protect against this, OPM must disregard high deductible 
health plans in determining the government contribution. 
Otherwise it is a disaster. Most of my fellow annuitants and I 
started our careers in government when we were younger, when we 
were healthier, with a health care system whose premiums were 
never driven by age or condition.
    And what gets NARFE members rankled today now that we are 
older is that HSAs could sabotage this contract between 
generations by introducing adverse selection based on health, 
wealth, age, and condition just at a time when those factors 
are most important to us.
    For that and other reasons, Madam Chairwoman, NARFE members 
implore this subcommittee to insure that OPM's plan to impose 
HSAs into FEHBP be put aside.
    Thank you very much.
    [The prepared statement of Mr. Fallis follows:]

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    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Fallis. You 
brought up some good points there. We are going to look into 
that one on the 65, whether it violates the Federal law there.
    Mr. Fallis. Title V.
    Mrs. Jo Ann Davis of Virginia. Got your point on that one.
    Mr. Gammarino, you are recognized for 5 minutes, and thanks 
for being with us today.
    Mr. Gammarino. It is nice to be here. Good afternoon. I 
want to thank the subcommittee for the invitation. I am please 
to testify at Chairwoman Davis' first FEHBP oversight hearing.
    I ask that my written testimony be made part of the record, 
please.
    Mrs. Jo Ann Davis of Virginia. So ordered.
    Mr. Gammarino. Blue Cross/Blue Shield, as you know, 
administers a governmentwide service benefit plan today. We are 
proud to be involved in the inception of the FEHBP since 1960. 
Today we are proud to serve over 4 million Federal enrollees 
and their families.
    You asked us to address two questions: the cost accounting 
standards and cost containment. First, let me address the cost 
accounting standards.
    For reasons given in much more detail in my written 
testimony, we believe first that the cost accounting standards 
referred to as CAS adds no value to the program. We do, 
however, believe that it will add unnecessary cost to the 
program, and therefore, we think the burden should be on CAS 
advocates to show concrete benefits to taxpayers and enrollees.
    Second, CAS is not required to protect program integrity. 
The carriers today are subject to a broad array of cost 
accounting requirements, including compatible CAS standards 
that are in various Federal regulations, and as I am sure you 
are aware, the health plans are subject to regular and vigorous 
OPM Inspector General audits.
    Third, CAS is a particular project to Blue Cross/Blue 
Shield. For reasons detailed in our written statement, CAS 
which was designed for the defense industry is incompatible 
with insurance accounting practices. Simply it is like fitting 
a round peg in a square hole.
    More specifically, the Blue Cross/Blue Shield service 
benefit plan for Federal enrollees is tightly integrated into 
our commercial business. Let me explain.
    Blue Cross/Blue Shield benefit plan serving over 3 million 
members represents about 5 percent of our overall business. 
Collectively, today Blue Cross/Blue Shield insures over 88 
million people. Consequently Blue Cross/Blue Shield plans would 
have to either revamp our systems in ways that we feel are both 
detrimental and costly to our far larger commercial customers 
to be CAS compliant or leave this program.
    We feel either choice makes sense. Therefore, we think CAS 
is a permanent problem that requires a permanent solution. We 
ask your support of a statutory exemption for all carriers just 
as Congress did for the Long-term Care Insurance Program.
    The second topic you asked us to discuss is cost 
containment. Under that heading we are talking about insuring 
quality health care at affordable prices. As many people have 
already addressed, we live in a challenging environment, and 
the FEHBP is subject to the same cost pressures as other health 
plans in the country.
    Additionally, the FEHBP has a significant aging population. 
Blue Cross/Blue Shield's focus is to keep quality high while 
restraining cost.
    First, we do think that the FEHBP, which is individual 
choice and promotes vigorous competition, promotes continual 
cost containment.
    Second, in the plan itself, we have aggressive initiatives 
on two fronts. First, on economic cost controls, Blue Cross/
Blue Shield negotiates significant provider discounts on the 
basis of our commercial business that save billions of dollars 
annually for the program. We also partner with at least two 
PBMs to provide significant savings on the prescription drug 
side as well.
    The second area we focus on is what we call member centered 
programs. They are designed to help members make what we call 
cost effective use of benefits and/or adopt healthier 
lifestyles. Included in these programs are areas such as case 
management, disease management and health and wellness 
programs.
    I cannot say that all of these member center programs lead 
to low cost in the short run. We do believe they are helpful in 
the long run. We are certain that members receive better care 
because of these programs.
    This concludes my prepared remarks, and I would be happy to 
answer any questions.
    [The prepared statement of Mr. Gammarino follows:]

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    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Gammarino.
    Dr. Smith, thank you for being with us today. You are 
recognized for 5 minutes.
    Dr. Smith. Thank you very much, Madam Chairwoman and 
members of the committee. I apologize for my cold.
    I am Dr. Scott Smith. I am the vice president and chief 
medical officer at First Health, and in the interest of full 
disclosure, a constituent of Mr. Davis' from Oak Park, IL.
    First Health is a premier health benefit services company 
and provides integrated managed care solutions serving the 
group health, worker's compensation, State agency and Federal 
Government markets, a provider of managed care services in the 
FEHBP since 1985, and my remarks will focus on care management.
    Since 2002, First Health has offered comprehensive care 
management services for Federal employees, including Medicare 
eligibles, in the Mail Handlers Benefit Plan, which is the 
second largest plan in the program. Care management services 
encompass an array of patient centered initiatives, including 
identification of patients with chronic conditions, patient 
self-management, education, and collaboration with attending 
practitioners.
    Fewer people now account for the majority of health care 
costs than in the past. As an internal medicine physician and 
medical officer of the health benefits company, I am concerned 
about the prevalence of chronic disease and conditions in our 
country and the rising costs associated with these conditions 
due to uncoordinated care, as was previously referenced.
    The Centers for Disease Control and Prevention estimate 
that 75 percent of the $1.4 trillion in annual health care 
costs in the United States is attributable to providing 
services for chronic illnesses. What used to be the 80-20 rule, 
in other words, 80 percent of the cost generated by 20 percent 
of the population, is now the 80-11 rule. Eleven percent of the 
population now accounts for 80 percent of health care costs. 
Included in this 11 percent are chronically ill patients, and 
these figures are illustrated in my written testimony, 
attachment 1.
    For these chronically ill patients, our experience proves 
that care management can have a significant impact on cost, 
productivity, quality of life, and objective disease related 
outcomes. Effective care management requires early 
identification, the ability to identify at risk members at the 
earliest possible time so that we may work with the patient and 
the physician to achieve the best possible outcomes.
    By the time a patient with a chronic condition is 
hospitalized, the condition is intensified and incurs the 
increased costs and complications of an unstable situation. 
First Health uses a predictive model, including medical and 
pharmacy claims to proactively identify patients in need of 
care management before their conditions deteriorate.
    I want to share with you the story of Ethel. Ethel was one 
of our Mail Handlers Benefit Plan members, and her experience 
demonstrates the value of integrated care management services, 
particularly those that include pharmacy. Ethel was an elderly 
patient who was identified through a pharmacy system trigger, 
indicating she had congestive heart failure. When a First 
Health nurse case manager contacted Ethel, she also learned 
that Ethel was diabetic. This real time pharmacy trigger led to 
our being able to support her in following her doctor's 
treatment plan. It allowed us to have an impact on both cost 
and clinical outcomes.
    Ethel was not stable at this time. Trying to manage her 
condition on her own resulted in Ethel incurring medical costs 
that could have been avoided due to ER and hospitalizations. 
Our case manager sent Ethel a glucometer so she could monitor 
her blood sugar twice a day, and this same case manager was 
involved with the other co-morbid conditions referenced.
    Care management intervention avoided further instability 
and costs, and Ethel is now able to manage her own condition in 
conjunction with her doctor, and improve her quality of life.
    Financial results indicate decreased annual claim costs for 
patients enrolled in care management. In attachment 2 in the 
written testimony comparing patient costs before and after 
program participation, decreases are shown in each year. While 
pharmacy costs rose for the first 2 years due to increased 
patient compliance, total cost decreased.
    In the third year pharmacy costs leveled off as well. This 
cost decrease is in the face of an industry trend that as has 
been noted, has risen dramatically each year.
    One additional example in which care management resulted in 
significant savings for the plan is a recent situation of an 
elderly patient admitted to the hospital with pneumonia and 
complications. At the end of her in-patient stay, she was frail 
and weak, and the attending physician did not believe it would 
be safe for the patient to return home alone.
    Rather than keep the patient in the acute care hospital, 
which we just discussed in terms of danger, at a cost of $1,800 
per day, First Health obtained a daily rate of $450 for a 
skilled nursing facility which provided a safer environment for 
the patient's recovery.
    The patient was in the facility 28 days to complete 
rehabilitation and fully recover. The plan cost was $11,000. 
The member cost was $1,200. At the acute care hospital the cost 
would have been more than $50,000 for the plan. First Health's 
involvement saved more than $39,000, and the patient received 
safer and better care.
    This is a case where our clinical involvement had 
significant impact on cost and quality results.
    In conclusion, First Health believes that the FEHBP can 
serve as an example to the private sector by adopting 
innovative care management programs for its participants. These 
care management programs are essential to achieving optimal 
cost in clinical outcomes for Federal employees and retirees.
    Chairwoman Davis and members of the committee, I thank you 
again for the opportunity to share our views, work further with 
your committee, and would be happy to share with you video 
testimonials we have of Ethel herself and other members 
involved in our care management programs.
    Thank you.
    [The prepared statement of Dr. Smith follows:]

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    Mrs. Jo Ann Davis of Virginia. Thank you, Dr. Smith.
    And finally, welcome, Mr. Forte. We are pleased to have you 
with us today, and you are recognized for 5 minutes.
    Mr. Forte. Good afternoon, Madam Chairwoman and members of 
the committee. I am Paul Forte, chief executive officer of Long 
Term Care Partners, the exclusive administrator of the Federal 
Long-term Care Insurance Program.
    Long Term Care Partners is headquartered in Portsmouth, NH 
and employs 93 people. On behalf of Long Term Care Partners and 
of our parent companies, John Hancock and MetLife, I would like 
to thank you for this opportunity to participate in today's 
hearing.
    We are mindful of the privilege of having been awarded the 
first contract to administer the Federal program which we 
believe is destined to become a critical development in the 
history of financial planning and an important resource to 
Federal employees, annuitants, and family members.
    I am happy to report that the Federal program is off to a 
strong start. We have conducted a successful open season in 
2002, developed policies and procedures for key functions, and 
begun paying long-term care insurance claims. The 2002 Federal 
open season featured a multi-phase, multi-media campaign, one 
of the most comprehensive education and marketing campaigns 
ever conducted for this product. This campaign reached more 
than 4 million Federal and U.S. Postal Service employees and 
members of the Uniformed Services and an additional 4 million 
annuitants, including retired members of the uniformed 
services.
    The campaign was designed to help individuals access 
information, understand the risk of needing long-term care, and 
consider their options for financing such care. Less than 2 
years after open season, the Federal program has over 200,000 
enrollees. I am happy to note some 66,000 retirees.
    This makes the Federal program the largest Long-term Care 
Insurance Program in the country, larger than the program 
sponsored by CalPERS, now in its 8th year and constituting 
roughly 15 percent of the total employer group, LTC Market, in 
the United States. Thanks to the passage of legislation last 
year, several newly eligible groups have been added, including 
Grey Reservists, D.C. government employees with Federal 
benefits, separated employees with title to a deferred annuity, 
Navy personal command, nonappropriated funds personnel.
    These groups will be contacted in the coming weeks and are 
eligible to apply for coverage now.
    The Federal program requires that certain underwriting 
conditions be met by prospective applicants. There are several 
levels of underwriting depending on the status of the 
individual, actively at work, say, or retired, and the window 
of opportunity in which the individual is applying, open 
season, say, versus post open season.
    The aim of the Federal program underwriting is not to 
insist on perfect health--many people with a medical condition 
requiring treatment are approved for coverage--but rather to 
accept people who have average health for their age group.
    Now, the overall approval rate for underwritten 
applications is 85 percent, which is in line with the industry. 
The Federal program has already assisted people with serious 
life threatening illnesses that may be terminal in nature, as 
well as those for whom the program is principally designed, 
people with chronic and debilitating conditions requiring 
custodial help with the activities of daily living.
    In addition, we are providing care coordination services to 
the qualified relatives of those who enroll. As of the end of 
February, our care coordinators had handled almost 6,000 calls 
for services.
    These calls consist of evaluating service needs, assisting 
in the set-up of a plan of care to answer those needs, 
identifying and making referrals to appropriate local services 
and informal care providers, and answering questions about 
coverage under the program.
    As Federal family members look forward, they can take 
comfort in the assurance that the Federal program is well 
poised for stability and growth. Those of us who have been 
involved in the industry for a long time believe that the full 
potential of the Federal program has not been capped; that 
there are tens of thousands, perhaps hundreds of thousands who 
may 1 day enroll.
    We plan to take our message first to the many baby boomers 
who are beginning to plan their retirement. We are 
participating in about 50 retirement seminars per week with 
various agencies coast to coast, and we are continuing to 
contact annuitants who are now shopping for long-term care 
insurance, but have not yet made a decision.
    We plan to continue working with NARFE and to extend our 
promotion efforts with large national associations with both 
active and annuitant members.
    As we do, we will be sure to emphasize the Federal 
program's general and flexible informal care benefit, care 
coordination and information counseling services, third party 
claim appeal process, international benefits and other features 
which we strongly believe make the Federal program the best 
value in long-term care insurance today.
    Thank you for your invitation to participate in this 
hearing. I would be happy to answer any questions.
    [The prepared statement of Mr. Forte follows:]

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    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Forte.
    And thank you, all of our witnesses, for being patient in 
being here with us today.
    I am going to turn to my ranking member, Mr. Davis, for 
questions.
    Mr. Davis of Illinois. Thank you very much, Madam 
Chairwoman.
    I too want to thank all of the witnesses for their 
testimony.
    Mr. Gammarino, you note in your written statement that the 
Federal cost accounting standards, even if they were applied to 
the FEHBP carriers would only apply to administrative costs and 
not to the payment of medical providers. For the record, could 
you tell us what your annual administrative costs are?
    Mr. Gammarino. Our administrative costs are about $700 
million a year.
    Mrs. Jo Ann Davis of Virginia. You need to use the 
microphone, Mr. Gammarino, for the reporter.
    Mr. Gammarino. OK. I have got everything covered now.
    They are approximately $700 million a year.
    Mr. Davis of Illinois. And you also maintain that applying 
cost accounting standards would be prohibitively expensive, 
forcing Blue Cross/Blue Shield perhaps to withdraw from the 
FEHBP program. Could you elaborate on that?
    Mr. Gammarino. Yes. Let me start with the value 
proposition. You mention that the costs only relate to 
administrative costs, which from a program point of view are 
well under 10 percent.
    Additionally, what I want to make sure the committee 
understands is the way it was designed, it does not even apply 
to most of the carriers, and that is one reason why you 
probably just see somebody like myself sitting here today. 
Eighty percent of the carriers in the FEHBP are carved out of 
the requirement to be CAS compliant.
    So specifically, again, about Blue Cross/Blue Shield, we 
are the only carrier left when you carve out the community 
rated HMOs, which are 80 percent of the health plans that have 
a product that we provide the program, the Federal enrollees, 
that is imbedded in our private business, and therefore, the 
existing accounting systems, which are designed for the 
insurance business rather than CAS, which is primarily designed 
around the defense industry. As I said before, is not 
comparable and would cause us to have to not only reengineer 
our existing systems, and not only affect this program, but 
every customer we have, all 88 million of them.
    And the added cost and burden to those customers, as well 
as the Federal employees members, we just do not think is cost 
justified.
    Mr. Davis of Illinois. I think all of us would probably 
agree that education, as we try to get to this whole business 
of cost and how everybody fits into the picture, that education 
becomes an essential party.
    Could each one of you just briefly comment on what you 
think perhaps could be done to actually make that happen?
    I mean, I hear us talk about lifestyle changes. I hear us 
talk about appropriate utilization. I hear us talk about missed 
opportunities, missed appointments. I mean, everything that we 
talk about that somehow contributes to the overall cost. What 
can we do?
    Mr. Forte, perhaps we will start with you.
    Mr. Forte. Well, Congressman, I think for the long-term 
care program, education is primarily important because we need 
to educate people about the risk that long-term care poses to 
them. Many people are still in denial about it being something 
that could happen to them. It is a risk that all of us face 
because you can suffer from an accident, a tragic accident, as 
well as an illness in old age.
    I think we have to do more to the problem of retirement 
security and make sure people understand that this is their 
problem, that at least it is something they need to give some 
thought to.
    Now, whether they choose to buy private long-term care 
insurance under the Federal program or some other sources or 
not to buy it at all, they must look at the fact that this is a 
problem for them. People turning age 65 have a three in five 
chance of needing long-term care at some point, and right now 
we do not have any way of paying for it. You can try to save 
for long-term care, but it is very, very expensive.
    Medicaid programs all over the country are suffering from 
the burden of people not having their own form of protection. 
People have had to turn to Medicaid for relief, and that is a 
huge problem for taxpayers.
    That leaves private insurance, and I think what we need to 
do is more in the way of helping people understand how it can 
affect their retirement and to get them to plan for it, and 
that is exactly what we are doing for thousands of Federal 
employees now. We are going around the country participating in 
retirement seminars and trying to carry this message, trying to 
get them to understand so that they can take some steps to 
prepare for their future.
    Mr. Davis of Illinois. Dr. Smith, if I had known, I cannot 
say I would have baked a cake, but I would have been pleased to 
introduce you. We are actually neighbors. I live right on the 
border of the city.
    Dr. Smith. Right on the border. Well, as it relates to 
chronic care, I think that the brief answer is that education 
is something that sounds easy and runs hard, and in discussions 
with the doctors in our network, they often say, ``Well, you 
have all of the information. You have all of the data, the 
claims, the pharmacy. Why don't you use it more effectively?''
    And so the system I described briefly is really designed to 
do that, to try to identify those patients, high risk patients, 
and reach out to them. Nobody calls us and asks us for chronic 
care management. They call us with problems. They call us with 
questions. They call us with issues.
    And so fundamentally we want to make ourselves available to 
them 24 hours a day, 7 days a week with real people. We want to 
provide them with responsive information that is meaningful to 
them personally, not just general education, and target it at 
those people that need to make changes, and that is really what 
chronic care management is about.
    As it relates to general lifestyle issues, that is another 
topic for another day. How do you teach people to do what is 
right and good for them? I wish I had the answer to that 
question.
    Mr. Gammarino. At Blue Cross/Blue Shield, we have some of 
the very same programs, and one thing we have to deal with 
today is that most of our programs are voluntary. So we do have 
so-called intervention programs for the provider or the member, 
but it is the member's choice.
    Second, what I think we have to focus on with this 
particular population is that it is a significantly aging 
population, and they do require medical care. In our standard 
option program for Blue Cross/Blue Shield, which is our largest 
program, the average age is 60. They need medical care, and so 
I think when you deal with the cost issues that are formidable 
with this program, one thing I think you have to take your hats 
off to the agency and to the competitive nature of this program 
over is that it has held the premiums relative to what is 
happening elsewhere, relatively in check even with a population 
that requires in many cases significant medical care.
    Mr. Fallis. I think our 400,000 members are fairly well 
educated on health care, and quite frankly, everything we have 
in terms of retirement and health benefits come from the 
Congress. I think you probably will agree that we do a pretty 
good job at letting you know what we want. I guess our problem 
is in trying to get from you what we need. [Laughter.]
    Mrs. Jo Ann Davis of Virginia. We know what you want.
    Mr. Fallis. So I think our people are pretty well educated. 
It is a work in progress. We have new members coming in every 
year and so forth.
    On Federal long-term care, NARFE took a very active role. 
As a matter of fact, we were leaders in getting the enactment 
of that legislation, and my sense is that our members who have 
an average age of about 74 saw sticker shock when this came 
out. They had a heightened expectation because the government 
was involved, albeit administratively, that this was going to 
be a great bargain for them, and they were disappointed when 
they finally realized that, you know, they are going to have to 
pay for all of this.
    And so that has been a problem and a disappointment. I 
think probably most of the members are employees, but I do not 
know. I cannot tell you what percentage of our members of that 
200,000 signed on, but our people understand quite well some of 
the things that are at risk here and are at stake. We really 
are very concerned about HSAs.
    What it simply comes down to is after 44 years we are 
talking about changing the rules, and we do have one risk pool. 
Let anybody tell you differently. It is one risk pool. 
Universal employee and retiree premiums throughout the history 
of this program until now, a foot was put in the door a year 
ago with APWU, and consumer driven plans, and all of these 
things are nothing more than MSAs which we fought all the way 
down the line, and we know that once the healthy, the young are 
siphoned from the program, that one risk pool, what is left in 
it in those comprehensive plans is going to be driven by the 
free enterprise system which says the higher the risk, and it 
will be higher, the higher the premium.
    Our people understand this very well. We need Congress to 
understand.
    Dr. Fineberg. In response to your question, Mr. Davis, I 
would add the idea of looking to priority conditions that have 
special promise for closing a gap between where care 
potentially could make a difference and where we are delivering 
and failing to deliver on that potential.
    Just a little over a year and a half ago, the Institute of 
Medicine released a report at the request of the Agency for 
Health Care Research and Quality identifying 20 conditions 
which it deemed to be especially promising as areas of 
attention for closing the quality gap and improving on the 
performance of the system, and I think it would be a good place 
to start for our educational objectives.
    Mr. Davis of Illinois. Thank you very much.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Davis.
    Mr. Fallis, let's go back to you on the HSAs. I think at 
least these members sitting up here on this side understand 
your concerns on the HSAs, and I guess my question to you is, 
and I think I probably already know the answer, do you believe 
that OPM has enough safeguards in place if there is any, you 
know, adverse selection to modify at the FEHBP.
    Mr. Fallis. If they have, I have not heard them. All I have 
heard, and I have talked to the Director of OPM directly, face 
to face, and she has said, and I do not like to violate 
confidences, but this was not given in confidence. She simply 
said that, you know, she would really fight for Federal 
retirees, those that are Medicare eligible retirees. That is 
what we are talking about here.
    Our concern is for the long haul though. Who knows who will 
be Director of OPM 2 years, 3 years, 4 years from now? I do not 
know.
    Mrs. Jo Ann Davis of Virginia. I understand.
    Mr. Fallis. We need safeguards. We need statutorial. We 
need something in the law that covers the situation.
    Mrs. Jo Ann Davis of Virginia. To make sure the annuitants 
are not treated any differently than the active; is that what 
you are saying?
    Mr. Fallis. Pardon?
    Mrs. Jo Ann Davis of Virginia. You need safeguards to make 
sure HSAs never enter into the FEHBP or you want safeguards to 
make sure annuitants are treated the same as active?
    Mr. Fallis. Well, I just would want safeguards that would 
alleviate this problem that I just spoke of where our fears 
that the premiums for comprehensive plans would go through the 
ceiling once we have only left in the comprehensive plans those 
safe enough to take HSAs.
    These are going to be the elderly, the sickly, the 
unhealthy.
    Mrs. Jo Ann Davis of Virginia. You know that in the Federal 
Government we have had hearings on recruiting and retention and 
so forth, of being able to bring in the best and the brightest 
into the Federal Government, and I think in our country today 
that a lot of the private sectors are offering similar things 
like the HSAs to their employees.
    Do you not think that the Federal Government should offer 
the same thing as the private sector?
    Mr. Fallis. I am not saying they should not offer them, but 
they should have safeguards for those of us who have paid into 
the system for 44 years under rules that have existed for 44 
years into one risk pool with universal employee/retiree 
premiums undriven by age and condition. We do not want to see 
the system changed here at the 11th hour of our lives and 
suddenly be faced with insurmountable premium costs. That is 
our concern.
    Mrs. Jo Ann Davis of Virginia. I understand. I wanted to 
make sure I had you clear on the record there.
    Dr. Fineberg, let me ask you. Do you believe that the 
widespread availability of the HSAs will over time endanger the 
health care system as we know it?
    Dr. Fineberg. Let me respond personally because this is not 
a subject that we have particularly studied at the Institute of 
Medicine.
    My own belief is that HSAs introduce two types of 
incentives. As a matter of out-of-pocket expense, they exert a 
discipline on seeking medical care which is sometimes good, if 
it prevents over use, and sometimes bad if it prevents 
appropriate use. So there is a built in disincentive to use 
care which can have both good and bad effects. How much of each 
is the uncertainty.
    And, second, by virtue of providing an alternative that is 
more attractive to healthier people or those who believe they 
are likely to be more healthy, it does provide a kind of 
adverse selection for the remaining pool who are not part of 
the HSA.
    So from the point of view of effect on a health system, a 
challenge for a designer is how can you introduce into a system 
a kind of discipline for the individual in seeking care so as 
not to pursue frivolous care, keeping the barriers sufficiently 
low through education and access so that appropriate care can 
be accessed, and protect the overall affordability for those 
whose care needs are higher.
    That is the trick and that is the challenge that is going 
to be faced by the FEHBP and every insurance plan that is 
trying to wend its way through these competing kind of 
incentives that an alternative like HSA provides.
    Mrs. Jo Ann Davis of Virginia. I think that has been the 
$64,000 question today, and everyone is making assumptions 
because we just do not know.
    Let me go very quickly to the long-term care because that 
is an issue that I hear about. I have 36,000 Federal employees, 
about half retired and half active in my district, and I will 
tell you that when I am at NARFE luncheons and speaking to the 
retired folks there, Mr. Forte, they tell me that the plan is a 
failure; that they are not accepted, and I think out of--I am 
just going to throw the numbers out, but it was about this 
percentage--out of 10 that had applied, 1 was accepted.
    Are you concerned? You said you presented the plan to 4 
million retirees, 4 million annuitants, and 4 million active, 
and you said you had 200,000 that were in the plan, and 85 
percent were accepted.
    Well, if you take the number, and maybe I just have a 
district of people who are sick because if you take the number 
in the different luncheons that I have been to, there certainly 
have not been in those luncheons 85 percent of the people who 
applied accepted.
    Mr. Forte. It is a difficult subject. Let me see if I can 
shed some light on it. First of all, I would like to remind the 
committee that the statute section, 9002, expressly allows for 
and says that, in fact, no issue will be guaranteed. No 
coverage will be guaranteed so as to avoid the occurrence of 
immediate claims, and furthermore, that higher standards may be 
applied down the road if it is deemed necessary.
    Medical evidence underwriting is a standard feature of 
Long-term Care Insurance Programs, particularly for retirees. 
There are probably some 5,000 group plans in place across the 
United States, from very small ones to large ones. They are all 
medically underwritten, and if you start a program like this 
without having some underwriting standards, you will probably 
find that your experience will be poor. Word that that 
experience is poor will begin to travel, and you will lose the 
opportunity to capture larger amounts of people who have an 
average health profile as opposed to a poorer health profile.
    I can tell you that the reasons for declinations stem from 
people who had serious conditions that would have predisposed 
them very much to the risk of stroke. Many had serious 
cardiovascular conditions, 19 percent. Some 27 percent of 
declinations had severe conditions that were likely to result 
in an immediate claim. Some people actually were in need of 
long-term care services at the time that they filled out their 
application, and there were some questions at the beginning of 
the application to try to get at that. Ten percent had 
neurological or several vascular or cognitive impairments.
    So what we are seeing is, you know, tremendous pent up 
demand for the product. People want this product. They have 
followed the progress of the Federal program in some instances 
for several years, and I think the fact that it was sponsored 
by the Federal Government led to expectations that perhaps the 
underwriting qualifications would be waived or modified.
    But if we had done that, we would not have had the 
opportunity to attract a lot of healthy people from the start 
source to establish a good, solid risk pool. We want to make 
sure that we can offer--this is the kind of thing you buy in. 
You might possibly not use the program for 20 or 25 years. You 
want to be assured of rating stability.
    And so we wanted to make sure that we could get off to a 
good, strong start. I can tell you that in instances where 
people are declined, they will come back to us. There are 
reconsiderations, and a fair number are actually accepted upon 
reconsideration because a certain amount of time has gone by, 
and the underwriter feels more comfortable that perhaps he or 
she has made progress in recovering from some illness.
    And there is even an appeal process, and there are numbers 
of people who actually are able to be accepted in the program 
after they go through that appeal process. Often it is because 
we get a vital piece of information that they did not make 
available to us in the original application process.
    Mrs. Jo Ann Davis of Virginia. Let me give you an example, 
one couple, and they looked as healthy as you and I. They were 
probably in their early 70's. Both had diabetes, but I mean, my 
sister-in-law has diabetes, and she is falling apart. These two 
folks looked perfectly healthy, but they were both declined.
    Mr. Forte. Yes. Well, diabetes is a tricky, tricky thing to 
talk about. You know, if it is insulin dependent diabetic from 
childhood, you know, that would be grounds for declination. If 
it is adult onset and it is controlled by medication and there 
are not other complications such as heart disease, very high 
blood pressure, weight problems and so forth, that condition 
may be accepted.
    And in fact, we do accept people who have diabetes, but you 
know, you have to look at all of the facts, and often when you 
read the reports that we read from attending physicians, a 
picture emerges that is different than the one that, you know, 
may have been described to you over the telephone or in passing 
and in the hallway.
    And you know, we employ experienced nurses who have 
clinical experience, are soundly trained in underwriting. They 
understand these conditions. We have physician examiners who 
are consultants and are specialists in various families of 
conditions, and they review the applications. We have 
underwriters from both John Hancock and MetLife who have 
reviewed some of the tougher applications, and you know, if it 
is an appeal, our Director, who is very, very knowledgeable, is 
involved in every single one of those.
    But I would just say in conclusion that, you k now, it is a 
shame that we cannot accept more, but there is a tradeoff 
between getting a brand new program like this off to a strong 
start and accepting so many people that you would put the 
program at risk, destabilize it early on, and then you would 
have to do something with the rates, and that is something that 
we all agreed from the start we wanted to avoid.
    Mrs. Jo Ann Davis of Virginia. One more question, and then 
Mr. Van Hollen, I was going to go to you. Do you need to go?
    Mr. Van Hollen. No, that is OK.
    Mrs. Jo Ann Davis of Virginia. OK.
    Mr. Van Hollen. Thank you very much.
    Mrs. Jo Ann Davis of Virginia. My ranking member alluded to 
the fact that at the beginning it was apparently all hashed out 
a great deal as to the fact you would go with one carrier. That 
was before my time, obviously.
    Do you think that having more than one carrier would make a 
difference? You know, we heard earlier talking with OPM that, 
you know, you have all of these choices which keeps the 
competition and, you know, keeps the rates down, and it is 
probably not a fair question to ask you.
    But if there were more carriers other than you, would it 
bring the price down? Would there be competition? Would it give 
choice to the folks and would it be a better program?
    Mr. Forte. At the risk of this statement appearing 
counterintuitive, I would say no. I do not see how----
    Mrs. Jo Ann Davis of Virginia. That is what I expected you 
to answer, but OK.
    Mr. Forte. The making available of another officially 
sponsored Long-term Care Insurance Program would strengthen 
what we are doing right now, and the reason is that you want to 
build a large risk pool coming right out of the gate. You do 
not want to have separate smaller sort of pods of risk pools 
that are being independently managed by various consortia. If 
you do that, then everybody who is doing that will have--there 
will be more volatility, and I do not think that you would get 
the same very robust program that is being offered in the 
Federal Long-term Care Insurance Program today.
    We have one of the most generous informal care benefits on 
the market, whereby you can have friends and neighbors and 
family members take care of you, and we will reimburse them.
    We have a third party claim appeal process where if you do 
not like our decision on a claim, you have the right to go to 
an expert who is an independent reviewer, and that decision, if 
it goes against us, is ultimately binding on us.
    You can get coverage anywhere in the world. There is no war 
exclusion. There are features. This is the engineering that is 
beneath the hood that people do not always see on this program. 
And what I would submit to you, Madam Chairwoman, is that if 
there were to be a number of smaller risk pools, HMO type 
arrangements, no one would be able to match the terms that are 
currently being offered here.
    Now, let me just say----
    Mrs. Jo Ann Davis of Virginia. Because you are new and 
there is a smaller pool. But down the road if there were 8 
million people in it, it would be a different story.
    Mr. Forte. That is right. That is a different story. You 
know, altogether there probably are not more than about 7 
million people who have private long-term care insurance across 
this vast country, even though products have been available, as 
representatives from OPM noted earlier, for some 15, 20 years. 
So you know, there are relatively small numbers of people who 
have this, and there is no Federal subsidy of any kind.
    So people must pay 100 percent of the cost of this, and the 
challenge is to educate them about the importance of long-term 
care, the risks that they are under, the difficulty of trying 
to save on your own, and how much value you can actually get, 
how this would really be the difference between your being able 
to maintain your financial security or not at some later point 
in your life.
    Now, if there were to be millions of people who were 
enrolled in the program, that would be a different thing, and 
the only other thing I will just close with and say is that we 
have a lot of competition. There are dozens and dozens of top 
quality insurers competing for people in your district and all 
over the country. In fact, many of those agents have reported 
some good results because we are generating a lot of discussion 
and a lot of awareness.
    I would say that people do have options, but to get the 
program that they have today would not be possible if you were 
to break it up and have a dozen separate sponsored plans.
    Mrs. Jo Ann Davis of Virginia. Mr. Davis, do you have a 
question?
    Mr. Davis of Illinois. Well, just one. Let me make sure 
that I understood Mr. Gammarino.
    Did you actually say that most of the FEHBP carriers are 
carved out from the cost accounting standards?
    Mr. Gammarino. Right now we are all carved out, but prior 
to the administrative waiver by Director James, the intent was 
that it would only apply to a small minority of carriers which 
are called the experience rated carriers. That is not the 
majority of carriers.
    The majority are what we call community rated HMOs, which 
were about 80 percent of the carriers, and they were excluded 
from the cost accounting standards, and they, like Blue Cross/
Blue Shield, have their systems for the FEP program imbedded in 
their private insurance products as well.
    Mr. Davis of Illinois. Thank you.
    Thank you, Madam Chairwoman. That is all.
    Mrs. Jo Ann Davis of Virginia. I just have a couple more 
questions, and we may have some questions for the record that 
we may want to submit to you all to get you to answer.
    Dr. Fineberg, I am not sure. You have to leave in 5 
minutes. So let me ask you real quickly, and you may not know 
the answer to this. But how do you think the life expectancy--
you know, we are living so much longer--how do you think that 
will affect the Long-term Care Insurance Program? Is that 
something you could answer?
    Dr. Fineberg. Well, I think actuarially what is interesting 
about the length in survival, contrary to some earlier 
expectations is people are also living healthier longer so that 
actuarial projections about the burden of long-term care and 
when it occurs, on average, have been improving over time.
    Mrs. Jo Ann Davis of Virginia. You mean later on in life?
    Dr. Fineberg. Later in life and on average, and, therefore, 
that is all to the good for the idea of a pooled insurance 
scheme, but the premise that ultimately a substantial fraction 
of us will require some form of long term care remains valid, 
and the only real challenge in this is putting together the 
kind of attractive package that people in their own interests 
can find it within their means and sensible for them early on 
to make that investment. That is the trick.
    Mrs. Jo Ann Davis of Virginia. I am going to try to get you 
out of here by 4:15.
    Dr. Fineberg. Thank you. I will try to be brief, too.
    Mrs. Jo Ann Davis of Virginia. One quick question. Doctors 
now are practicing defensive medicine, if you will, ordering 
more tests and things that are really not necessary just to try 
to avoid potential lawsuits. What do you think that is doing to 
the cost of our health care system?
    Dr. Fineberg. It is driving costs up, and I believe that 
our current system of malpractice serves neither the interest 
of the patients who may be injured nor the interests of medical 
care very well. This is a separate area obviously, but it is 
another huge potential area of improvement.
    Mrs. Jo Ann Davis of Virginia. Well, I am very concerned 
about our health care system and the cost, and I am going to 
let you go because I know you have to go, and I am going to 
see.
    Mr. Gammarino, I do not want to do anything to make those 
other, I forget how many million you said, 88 million folks 
that are with Blue Cross/Blue Shield, because I am one of 
those. I am not under FEHBP. We are under a separate one. So I 
do not want your costs to go up to those folks either.
    Mr. Gammarino. Thank you.
    Mrs. Jo Ann Davis of Virginia. That does not mean that I 
agree with you but--no, just kidding.
    I am going to give any of you a chance to say anything else 
you want to say before we close out.
    Dr. Fineberg. Thank you, Madam Chairwoman.
    Mrs. Jo Ann Davis of Virginia. Anyone else? Mr. Forte.
    Mr. Forte. I would just like to make one more comment. It 
is important to note we have established an experienced fund 
for this program, and if it turns out down the road that, you 
know, there is, you know, excess premium because of ratings; we 
have been conservative, it will be possible to enhance benefits 
or make modifications of one kind or another.
    The same thing goes for claims. The carriers cannot benefit 
because there were fewer than anticipated claims. We are 
strictly reimbursed according to certain measures for our 
expenses and for our profit and other elements of experience 
stay in the fund and ultimately belong to the fund and belong 
to all of the participants.
    Mrs. Jo Ann Davis of Virginia. I want to thank you, Mr. 
Forte. You have given me a lot of answers to questions that I 
had today that I will be able to carry back to my constituents 
and be able to explain the situation.
    And, Dr. Smith, I thank you for being here today and Mr. 
Gammarino and, Charlie, it is always good to see you, and with 
that the hearing is adjourned.
    [Whereupon, at 4:14 p.m., the subcommittee meeting was 
adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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