[Senate Hearing 110-239]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-239
 
UP, UP, AND AWAY! GROWTH TRENDS IN HEALTH CARE PREMIUMS FOR ACTIVE AND 
                       RETIRED FEDERAL EMPLOYEES 

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

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
                     THE FEDERAL WORKFORCE, AND THE
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 18, 2007

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs

35-536 PDF                 WASHINGTON DC:  2007
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


  OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE, AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                   DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan                 GEORGE V. VOINOVICH, Ohio
THOMAS R. CARPER, Delaware           TED STEVENS, Alaska
MARK L. PRYOR, Arkansas              TOM COBURN, Oklahoma
MARY L. LANDRIEU, Louisiana          JOHN WARNER, Virginia

                   Richard J. Kessler, Staff Director
             Jennifer A. Hemingway, Minority Staff Director
                      Emily Marthaler, Chief Clerk



















                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Akaka................................................     1
    Senator Voinovich............................................     2
    Senator Warner...............................................    20

                               WITNESSES
                          Friday, May 18, 2007

Nancy Kichak, Associate Director, Strategic Human Resources 
  Policy Division, and Chief Actuary, U.S. Office of Personnel 
  Management (OPM)...............................................     4
John E. Dicken, Director, Health Care Team, U.S. Government 
  Accountability Office (GAO)....................................     6
Stephen W. Gammarino, Senior Vice President, National Programs, 
  Blue Cross Blue Shield Association.............................    16
Alan G. Lopatin, Legislative Counsel, National Active and Retired 
  Federal Employees Association..................................    18

                     Alphabetical List of Witnesses

Dicken, John E.:
    Testimony....................................................     6
    Prepared statement...........................................    33
Gammarino, Stephen W.:
    Testimony....................................................    16
    Prepared statement...........................................    46
Kichak, Nancy:
    Testimony....................................................     4
    Prepared statement...........................................    27
Lopatin, Alan G.:
    Testimony....................................................    18
    Prepared statement...........................................    52

                                APPENDIX

Background.......................................................    66


UP, UP, AND AWAY! GROWTH TRENDS IN HEALTH CARE PREMIUMS FOR ACTIVE AND 
                       RETIRED FEDERAL EMPLOYEES

                              ----------                              


                          FRIDAY, MAY 18, 2007

                                 U.S. Senate,      
              Subcommittee on Oversight of Government      
                     Management, the Federal Workforce,    
                            and the District of Columbia,  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:32 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Daniel K. 
Akaka, Chairman of the Subcommittee, presiding.
    Present: Senators Akaka, Voinovich, and Warner.

              OPENING STATEMENT OF CHAIRMAN AKAKA

    Chairman Akaka. Good morning and aloha. The Subcommittee on 
Oversight of Government Management, the Federal Workforce, and 
the District of Columbia will come to order.
    Today, the Subcommittee meets to consider the average 
growth rate of health care premiums for active and retired 
Federal employees and their families. The Federal Employee 
Health Benefits (FEHB) Program is the Nation's largest 
employer-sponsored health care program in the country. Boasting 
a hefty 8 million participants, it is regarded as a model 
program for the public sector and Medicare.
    This is something we can all be very proud of. I believe 
that as we look to the future of the Federal workforce, it is 
critical that the FEHB Program continue to provide quality care 
choices at the lowest possible cost to employees and retirees. 
It is critical to attracting and retaining top-flight talent.
    Without any doubt, the FEHB Program is competitive with the 
private sector and other areas of the public sector. Federal 
employees and retirees have roughly 280 health care plans to 
choose from. Every year OPM uses its leverage as the Nation's 
largest employer-sponsored health benefit plan to keep premiums 
as low as possible for our enrollees and their families, while 
maintaining high-quality care services.
    From 1998 to 2005, premiums rose on average more than 7 
percent a year. From 2001 to 2003, average premiums grew by 
double digits. While this was mostly in line with overall 
premium growth in the marketplace, active and retired employees 
still felt the impact on their wallets.
    After years of growing premiums, OPM used reserve funds to 
reduce the average premium growth rate by 7 percent. Over the 
last 2 years, the premium increases were kept lower. This was 
especially helpful to retirees on fixed incomes who did not get 
to choose what prescription drugs or services they need. 
However, premium growth is still a problem because it 
consistently outpaces the cost-of-living adjustments and 
average annual pay raise.
    What really concerns me is that premiums fell not because 
OPM negotiated better rates or market forces drove down health 
care costs, but because they dipped into reserve funds. 
Premiums would have been lower if OPM had applied the drug 
subsidy. OPM has a good story to tell. They would have had a 
better story and Federal workers and retirees would have paid 
less if OPM had used all of the resources available to them.
    Last year, I requested that GAO conduct a review of the 
trends in FEHB Program premiums. The report, ``Federal Employee 
Health Benefits Program Premium Growth Has Slowed and Varies 
among Participating Plans,'' was released in December 2006. 
Today's testimony will review the results of the GAO report and 
discuss the impact of FEHB Program premiums on administrators, 
providers, and enrollees.
    I disagree with OPM's decision not to apply the Medicare 
subsidy. Also I was disappointed that OPM denied the Postal 
Service, an independent agency which does not receive 
appropriated funds, the subsidy as well. I believe we all have 
a common goal: To offer a range of comprehensive health care 
plans and ensure that the lowest possible premiums are there. 
So, I thank you again for being here today.
    Senator Voinovich, please proceed with your statement.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Good morning, Mr. Chairman, and thank 
you for holding this hearing this morning to examine the 
Federal Employees Health Benefit Program. I share your concerns 
about the rising cost of health care, not just for 
approximately 8 million people in the FEHB Program, but for all 
individuals in my home State of Ohio and across the Nation.
    My remarks this morning, Mr. Chairman, are really more 
geared toward the big picture, and you have done a really good 
job of narrowing it down to the report by the GAO. But I think 
everyone should recognize that spending on health care in the 
United States has reached $1.9 trillion, almost 16.5 percent of 
the GDP, the largest share ever. And despite all that spending, 
47 million Americans, or 15 percent of the population, have no 
health care coverage. For those with access to insurance, the 
costs continue to rise, and that is what we are concerned 
about. Within the FEHB Program, premiums have increased every 
year since 1998. However, the Office of Personnel Management 
has demonstrated its ability to keep premium increases at or 
below the national average.
    In managing the FEHB Program, OPM has a difficult job. The 
FEHB Program is recognized as a model health insurance program. 
Isn't it interesting that it is always referred to as an 
example of quality coverage. We have got to provide all 
citizens with access to the same quality health care that the 
Federal employees have. The expectations of the Executive 
Branch, of Congress, and of the Federal employees are that 
plans will provide comprehensive coverage across the Nation, 
both in rural and in urban environments, at reasonable prices 
for all Federal employees.
    In the private sector employer-sponsored health insurance 
markets, it is even harder to keep the cost of coverage 
affordable. Individuals who receive their insurance from 
private employers were faced with an average premium increase 
of 7.7 percent between the spring of 2005 and the spring of 
2006. Fortunately, that was a lower growth rate than the 9.2-
percent increase in 2005 and the 11.2-percent income in 2004.
    Yet, despite the slowdown, premiums continue to increase 
much faster than overall inflation, 3.5 percent, and wage 
increases, 3.8 percent. Premiums for family coverage have 
increased by 87 percent since 2000. These statistics are 
startling, and it is beyond time that we do something about 
them.
    Now, for too many years, I have listened to my colleagues 
on both sides of the aisle talk about the rising cost of health 
care and the growing number of uninsured Americans without much 
progress at the Federal level to come up with an inovative 
solution to the Nation's problems regarding access to quality, 
affordable health care. That is why, Mr. Chairman, Senator 
Bingaman and I have introduced a bipartisan bill that presents 
inovative solutions called the Health Partnership Act. It was 
introduced in the House by Tammy Baldwin, Democrat from 
Wisconsin, and Dr. Tom Price, Republican from Georgia. The 
House version has more than 65 cosponsors. The bill would 
support State-based efforts to reduce the uninsured, reduce 
costs, improve quality, improve access to care, and expand 
information technology.
    Over a 5-year period, Congress would then evaluate whether 
the States are meeting the goals of the Act and evaluate 
whether various State's approah's do not work in order to make 
recommendations for Federal health care reform. I know that 
Secretary Leavitt, the National Governors Association, the 
Heritage Foundation, and The Brookings Institution, are all 
supportive of this legislation.
    While I continue to work to advance the Health Partnership 
Act, I also plan to introduce legislation next week with 
Senator Carper to establish and maintain an electronic personal 
health records system for individuals and family members 
enrolled in the FEHB Program. Our legislation was the result of 
a Subcommittee hearing earlier this year, which examined the 
use of health information technologies. Experts agree that a 
widespread adoption of health information technologies, such as 
electronic health care records will revolutionize the health 
care profession. In fact, the Institute of Medicine, the 
National Committee on Vital and Health Statistics, and other 
expert panels have identified information technology as one of 
the most powerful tools in reducing medical errors and 
improving the quality of care. Not only can EHRs save lives and 
improve the quality of health care, they also have the 
potential to reduce the cost of delivering of health care.
    According to the Rand Corporation, the health care delivery 
system in the United States could save approximately $160 
billion annually with the widespread use of electronic medical 
records, and that is why, Mr. Chairman, I would like to see us 
get legislation that would require our health system to do 
this. We would set the example for the rest of the country.
    So I look forward to hearing what the witnesses have to say 
today and, again, thank you for holding this hearing.
    Chairman Akaka. Thank you very much, Senator Voinovich.
    Senator Voinovich and I have worked closely together. He 
has been a leader in these areas, and I would tell you that he 
has set the pace for this Subcommittee as we continue to work 
on issues that we need to, to try to flesh out problems and to 
try to improve those conditions as well.
    We are so happy that we have been able to have you as 
witnesses, and as you know, our Subcommittee has rules that 
require that all witnesses testify under oath, and, therefore, 
I ask our witnesses to please rise and raise your right hand. 
Do you solemnly swear that the testimony you are about to give 
this Subcommittee is the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Ms. Kichak. I do.
    Mr. Dicken. I do.
    Chairman Akaka. Thank you very much. Let the record note 
that the witnesses responded in the affirmative.
    We have two witnesses before us today. First is Nancy 
Kichak, Associate Director and Chief Actuary, Strategic Human 
Resources Policy Division, U.S. Office of Personnel Management; 
and John Dicken, Director of the Health Care Team, U.S. 
Government Accountability Office. Good to have you, and may I 
ask you, Ms. Kichak, to begin with your statement.

  TESTIMONY OF NANCY KICHAK,\1\ ASSOCIATE DIRECTOR, STRATEGIC 
HUMAN RESOURCES POLICY DIVISION, AND CHIEF ACTUARY, U.S. OFFICE 
                 OF PERSONNEL MANAGEMENT (OPM)

    Ms. Kichak. Thank you, and thank you for inviting me here 
today to represent the Office of Personnel Management and to 
discuss the recent premium trends within the Federal Employees 
Health Benefits Program (FEFB), as well as the initiatives OPM 
and the health insurers who participate in the program use to 
provide top-quality health care at a reasonable cost to 
approximately 8 million Federal employees, retirees, and their 
families.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Kichak appears in the Appendix on 
page 27.
---------------------------------------------------------------------------
    The FEHB Program offers competitive health benefits 
products to Federal workers, like other large employer 
purchasers, by contracting with private sector health plans. 
For 5 consecutive years, rate increases in the FEHB Program 
have declined. In fact, for 2007, the rates increased only 1.8 
percent. The result: Approximately 63 percent of FEHB Program 
enrollees incurred no premium increase, while another 15 
percent saw increases of less than 5 percent. For the past 5 
years, the rate increases were lower than industry averages.
    We believe these low increases are the result of the 
continued efforts by OPM and the Administration and our 
carriers to provide FEHB Program enrollees with health care 
choices that meet their respective individual and family health 
care needs at affordable prices. Among those efforts, OPM has 
taken steps to further promote market-based competition by 
providing a range of quality health care options that include 
high-deductible health plans and consumer-driven plans. We have 
also introduced flexible spending accounts and new dental and 
vision programs.
    Under authority provided by law, OPM has provided guidance 
to agencies to allow them to pay the full cost of premiums for 
Federal employee reservists for up to 24 months, while they are 
deployed in harm's way. Agencies have shown their support for 
our reservists by accepting this responsibility.
    Over the past several years, OPM's annual guidance for 
benefit proposals in the FEHB Program has encouraged carriers 
to add benefits to their respective coverage options. Those 
benefits have included coverage for a variety of preventive 
services such as screenings for osteoporosis, colorectal 
cancer, abdominal aortic aneurysm, and cholesterol, as well as 
a variety of immunizations. In addition, we have consistently 
encouraged carriers to place emphasis on care management 
programs and practices to address the complex health care needs 
of enrollees with chronic conditions.
    As part of the annual rate negotiation process, OPM makes 
use of its authority to use excess reserves to mitigate premium 
increases. As OPM stated during the past year's Open Season 
rollout period, we negotiate with FEHB Program plans to 
exercise this option. The recent Government Accountability 
Office (GAO) report on premiums confirms OPM's ability to use 
reserves in this manner and to generally mitigate fluctuations 
in premiums from year to year. This is the third time in the 
last 5 years our bilateral negotiations with insurance carriers 
have resulted in some planned reduction in reserves.
    Regarding the use of the Medicare Part D employer subsidy 
to assist with offsetting premiums in the program, the intent 
of the subsidy is to encourage employers to continue providing 
prescription drug coverage to their Medicare-eligible retirees. 
As part of the fiscal year 2006 budget process, the potential 
use of the subsidy was evaluated by the Federal Government. 
This review found no good rationale for the Federal Government 
to pay itself to continue providing prescription drug coverage 
to Federal retirees, especially since OPM has no plans to 
eliminate this coverage. As OPM moves forward, we will continue 
to seek innovative benefit proposals from FEHB Program carriers 
that provide quality, value, and affordable health care 
options.
    We are proud of our record in administering the program and 
believe it offers Federal employees and retirees a wide variety 
of options from which to select the health benefits and 
premiums that best meet their needs.
    I appreciate the opportunity to testify and will be glad to 
answer any questions. Thank you.
    Chairman Akaka. Thank you very much, Ms. Kichak. Mr. 
Dicken.

  TESTIMONY OF JOHN E. DICKEN,\1\ DIRECTOR, HEALTH CARE TEAM, 
          U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO)

    Mr. Dicken. Mr. Chairman and Senator Voinovich, I am 
pleased to be here today to discuss the findings from our 
December 2006 report entitled ``Federal Employees Health 
Benefits Program: Premium Growth Has Recently Slowed and Varies 
among Participating Plans.'' About 8 million Federal employees, 
retirees, and their dependents receive health coverage through 
more than 280 plans participating in the FEHB Program. As you 
noted, Mr. Chairman, this makes the FEHB Program the largest 
employer-sponsored health insurance program in the country. 
Federal employees' health insurance premiums have increased on 
average each year since 1997. These increases posed higher 
costs for the Federal Government and for enrollees who combined 
will pay about $35 billion in premiums in 2007.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Dicken appears in the Appendix on 
page 33.
---------------------------------------------------------------------------
    My remarks today, based on our December report, will focus 
on three areas: One, recent FEHB Program premium growth trends 
compared to those of plans offered by other purchasers; two, 
the factors that contributed to average premium growth trends 
across all FEHB Program plans; and, three, the factors that 
contributed to differing premium growth among selected FEHB 
Program plans.
    In summary, the average annual growth in FEHB Program 
premiums has slowed each year since 2002. From 2003 through 
2007, the FEHB Program premium growth was generally lower than 
the growth for other purchasers. The key factors driving most 
of the growth in premiums were increases in the cost and 
utilization of health care services and prescription drugs. 
However, the premium growth for 2006 and 2007 was moderated by 
projected withdrawals from reserve funds.
    To elaborate, growth in average FEHB Program premiums 
peaked at 12.9 percent for 2002 and has slowed to 1.8 percent 
for 2007. This represents the lowest average growth in FEHB 
Program premiums since 1997. The average annual growth rate in 
FEHB Program premiums from 2003 through 2007, 7.3 percent, has 
been slower than that of other purchasers. For example, 
premiums for the Nation's second largest public employee health 
benefits program, the California Public Employees' Retirement 
System, grew at 14.2 percent on average during this period. 
Similarly, premiums for employers surveyed annually by the 
Kaiser Family Foundation grew at 10.5 percent on average during 
this period.
    Projected increases in the cost and utilization of health 
care services and prescription drugs accounted for most of the 
average annual premium growth across all FEHB Program plans for 
2000 through 2007. Absent projected decreases in the costs of 
other factors, these increases will have raised 2007 average 
premiums by about 9 percent--6 percent due to higher cost and 
utilization of services and 3 percent due to higher 
prescription drug costs. Enrollee demographics, particularly 
the aging of the enrollee population, were projected to have 
less of an effect on premium growth.
    At the same time, projected withdrawals from reserves 
offset average premium growth in the past 2 years, particularly 
for 2007. Officials from several plans stated that OPM 
monitored their plans' reserve levels and worked closely with 
them to build up or draw down reserve levels gradually to avoid 
wide fluctuations in premiums from year to year. Projected 
additions to reserves nominally contributed to average premium 
growth by less than 1 percentage point for 2000 through 2005. 
However, projected withdrawals from reserves offset average 
premium growth by about 2 percentage points for 2006 and 5 
percentage points for 2007. Other factors, including benefit 
changes that resulted in less generous coverage and enrollees 
choosing lower-cost plans, slightly offset average premium 
growth for 2000 through 2007.
    Premium growth varied among plans. Premium growth rates for 
the 10 largest plans by enrollment, accounting for about three-
quarters of total enrollment, ranged from 0 to 15.5 percent for 
2007. The variation was even wider across the smaller plans. 
Officials from several plans cited two key drivers of this 
higher than average premium growth: Higher than average 
increases in the actual costs and utilization of services and 
increasing shares of elderly enrollees.
    In closing, FEHB Program premiums are driven in large part 
by plans' actual costs and utilization of health care services 
in prior years, projecting for future changes in benefits, 
enrollment, and health care expenditures. While for the last 2 
years anticipated withdrawals from reserves have moderated FEHB 
Program premium growth, this strategy cannot be sustained 
indefinitely. As costs and utilization of prescription drugs 
and other health care services continue to increase, the FEHB 
Program, like other employer plans, will continue to face 
premium pressures in the future.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer questions that you or Members of the Subcommittee may 
have.
    Chairman Akaka. Thank you very much, Mr. Dicken. I want 
both of you to know that your full statements will be placed in 
the record.
    To both of our witnesses, according to GAO, one of the 
reasons the premium rate slowed over the past 4 years was due 
to ``less generous coverage.'' OPM disagreed with GAO's 
characterization. While we all want lower premium increases, we 
do not want to see a loss of service.
    What services do you each consider to be generous types of 
services? Let me ask first Ms. Kichak and then Mr. Dicken. Ms. 
Kichak.
    Ms. Kichak. We believe that in recent years we have done a 
very good job in improving coverage for preventive services. We 
are covering more screenings than ever before. We are covering 
more immunizations. Although there have been some changes in 
our prescription drug programs in recent years, we feel we have 
been able to maintain the value of the drug programs by good 
management of pharmacy benefit programs and substitutions of 
generics which are the same quality drug at a lesser price.
    We have increased our preventative services and maintained 
some of our most costly services by good management of the 
benefits.
    Chairman Akaka. Thank you. Mr. Dicken.
    Mr. Dicken. Certainly the plans offered by the FEHB Program 
offer comprehensive benefits and, like other large employers, 
OPM has been looking at those benefits. The plans have made 
some changes which in some recent years have had a modest 
effect on reducing the premiums. As Ms. Kichak noted, a number 
of those changes are in the area of prescription drugs where a 
number of plans have made changes in their cost sharing to 
enrollees, in some cases increasing that cost sharing or else 
restructuring the cost sharing to try to encourage the use of 
generic drugs or other cost-effective drugs.
    Chairman Akaka. Ms. Kichak, after Congress authorized 
employees to apply for a Medicare Part D drug subsidy, the 
Postal Service took advantage of the program and spent hundreds 
of thousands of dollars to apply for the employer supplement. 
OPM denied the application as the administrator of the FEHB 
Program. However, GAO found that had the Postal Service's 
application been approved, retirees would have saved money on 
their premiums.
    Doesn't OPM look at whether or not retirees would reduce 
their premium costs in deciding on a course of action? And if 
not, why don't they?
    Ms. Kichak. I think OPM is extremely concerned with the 
cost of health care, which is why we work so hard to have a 
competitive program open to all different kinds of coverages so 
that folks have a choice and can find what they want.
    As far as the Medicare subsidy is concerned, the Federal 
Government pays a significant portion of the premium, in the 
same way that the government subsidizes a part of Medicare Part 
D. The government was paying for this coverage anyway for the 
Part D drug. The particular legislation that authorized the 
application only said that employers, including the FEHB 
Program, could apply. But it did not specify that went to 
reduced premiums. Other employers have used that money to 
offset their total costs, which enables them to continue to 
provide the coverage. Likewise, the FEHB Program, had they 
applied, could have used that money to offset the cost of their 
contribution for annuitants.
    So, really, when we looked at it, it was a question of was 
the government going to spend the money through the Medicare 
program or through the FEHB Program. We felt that it made no 
sense to go through the complex application process for the 
subsidy to move money from the Medicare program to the FEHB 
Program or vice versa.
    Chairman Akaka. Ms. Kichak, one of the stated reasons OPM 
said it did not apply for the subsidy was that it would be 
``the government paying itself.'' However, the Postal Service 
does not receive appropriated funds from Congress. Did OPM 
expect the Postal Service to receive other Federal funds to 
supplement premium coverage and is that the reason they chose 
to deny the Postal Service the subsidy?
    Ms. Kichak. The Postal Service is part of the FEHB Program, 
and their annuitants, when they retire, are paid out of the 
Civil Service Retirement and Disability Fund, and they are part 
of the same group. When their claims are filed, they are 
identified as civil service annuitants, not postal annuitants, 
and they are treated like everyone else. In fact, this is an 
instance where, when they are an employee, they get a different 
subsidy from the Postal Service than other Federal employees, 
but when they retire, they become paid the same as anyone else.
    So, first of all, in our data pool that we would need to 
refer to to apply for the subsidy, it would be hard for our 
carriers to distinguish the costs of postal annuitants as 
opposed to non-postal annuitants. So they are part of our 
system. We are not going to reduce the drug benefits, so we do 
not need the subsidy to protect the drug program in the FEHB 
Program. And so it was just difficult to treat them differently 
than the rest of the Federal Government.
    Chairman Akaka. You said in your testimony the Federal 
Government evaluated participation in the Medicare subsidy. Who 
specifically reviewed this?
    Ms. Kichak. OPM looked very carefully at all of the options 
under the Medicare program. We consulted with CMS to make sure 
we understood the options. Remember, this was a new program. It 
had a lot of options. It was not quite clear. Everything was 
not known on day one when the legislation passed it. They 
provided us some assistance in evaluating our level of drugs 
versus their level of drugs. And then we consulted throughout 
the Administration.
    Chairman Akaka. Thank you for your responses. Senator 
Voinovich.
    Senator Voinovich. Thank you. I was one that was very 
supportive of the Medicare retirees subsidy to other retirement 
systems in the country, both public and private, to encourage 
them to stay in the program. Many of us were concerned that if 
we did not provide the subsidy, some employers like General 
Motors and others would just drop their prescription drug 
coverage and tell their retirees to enroll in Medicare. I have 
been pleased with the way it has worked out because most 
retiree and retirement systems have stuck with the program, and 
it has made a difference.
    In the case of the Federal Government, your calculation 
was--and correct me if I am wrong--that if you applied for that 
subsidy, the money would have come in and it would have been 
coming from the Federal Government. It would have increased the 
cost of Medicare, the Part D program, because you would have 
got the money.
    Ms. Kichak. Right.
    Senator Voinovich. Now, one would argue that if you had 
done that, that would have given you more money so that you 
could have reduced your overall costs to the program and 
perhaps passed that on to your participants who pay a 
percentage of the cost. What is it, about 28 percent average?
    Ms. Kichak. About 28 percent.
    Senator Voinovich. So I would like you to respond to that 
issue. That is my first question.
    Second is, from what I understand some of the folks from 
the Postal Service claim that they fund their retirement system 
or benefit programs similar to a State program, like California 
or Ohio, where you have retirees in it, and that because of the 
fact that you did not apply for that, you put them at a 
disadvantage so they were not able to get the benefit of this 
additional money.
    Could you just clarify that for me on that rationale again?
    Ms. Kichak. First of all, you are absolutely right. Had we 
applied for the subsidy, it would have cost the Medicare 
program more. And the FEHB Program also relies on general 
revenues from the Federal Government to pay the government's 
share of the health insurance for the non-postal retirees.
    Senator Voinovich. OK. So your logic is that the general 
fund comes up with the money for Medicare. It also provides 
money to you, for you to do the job, but it would just be 
taking money out of one pot and putting it into another.
    Ms. Kichak. Yes.
    Senator Voinovich. OK.
    Ms. Kichak. If you look at how the private sector uses the 
subsidy--and we do not have good statistics--but they were 
getting the subsidy to help defray their costs so they would 
continue to provide the coverage. So the money goes back to the 
employer, and it is not specified how the employer uses it 
other than the employer cannot cancel the coverage. That is the 
point of the subsidy.
    So, yes, applying it to premiums would have been one 
option, but it was not a requirement. The money could have all 
come directly back into the general fund and then used to 
defray rate increases.
    Now, the Postal Service is a separate issue because they do 
fund differently. But it is very hard in the FEHB Program with 
8 million enrollees and 4 million enrollments and 285 plans to 
identify those drug costs for postal versus non-postal. One of 
the reasons the FEHB Program is cost efficient is we have 
extremely low administrative expenses, and it would have been a 
very difficult process to try to identify the drug costs.
    The application process with CMS is not simple. It would 
have placed a great burden on our enrollees to try to identify 
that money for a relatively small group of folks, not the 
entire program.
    Senator Voinovich. Are you saying the Postal Service, in 
terms of their retirement system, is separate and is funded by 
premiums that the folks in the Postal Service pay for their 
health care benefits?
    Ms. Kichak. For their retirees, they pay----
    Senator Voinovich. No. For their active employees. Is the 
premium about the same as retiree's pay for their health care.
    Ms. Kichak. Well, the postal employees are in the same risk 
pool, so the total premium is the same. One of the hallmarks of 
the FEHB Program is the premium is the same whether you are a 
postal employee, a non-postal employee, or a retiree. Everybody 
is in the same risk pool.
    Senator Voinovich. So the Postal Service is in the FEHB 
Program?
    Ms. Kichak. They are in the FEHB Program. The Postal 
Service has historically paid a higher portion of the total 
premium for employees, higher than the 72 percent. That ceases 
when the person retirees, and then when they become a postal 
retiree in our civil service system, then the contribution of 
their health insurance is based on the 72 percent formula.
    Senator Voinovich. All right. So if the Postal Service 
would have applied for the 28 percent subsidy, both retired and 
active workers premiums would have been reduced.
    Ms. Kichak. It could have helped them reduce their costs, 
yes.
    Senator Voinovich. And you distinguish that, or do not 
distinguish that from--you are not going after it?
    Ms. Kichak. For one segment of the population, yes.
    Senator Voinovich. Well, for a lot of them, it is fairly 
confusing. The other problem that we have heard about is the 
problem of providing health care in rural areas of our State. 
It is becoming more difficult, and I understand it is not just 
Ohio but a national problem. What are you doing about that in 
terms of people who live in rural areas that are Federal 
employees to make sure that they have got access to health 
care?
    Ms. Kichak. There are a couple things. First of all, we 
have national plans. Blue Cross, who is going to be on the next 
panel, serves the Nation governmentwide, and we look to make 
sure that their preferred provider networks are comprehensive, 
as there are other plans in the program that are nationwide--
GEHA, Mail Handlers, NALC, APWU--and, I am sure I am forgetting 
someone.
    In addition, this year, for 2008 in our Call Letter we are 
trying to do some things to encourage more HMOs to participate. 
We have many. It has been said before that we have 285 plans. 
We have had some problems with pricing of HMOs because we have 
not previously allowed them to offer benefit packages unless 
they were already in place, which meant if an HMO wanted to do 
something different, we would not accept it until it had a 
proven track record. Now we are going to be looking at some 
different packages in HMOs. Maybe this will be a way to get 
more HMOs to come in and expand that provision of care also.
    Senator Voinovich. On another subject, have you seen more 
of your retirees go into Medicare Advantage as a result of the 
4D program?
    Ms. Kichak. Yes, we have.
    Senator Voinovich. Do you know what percentage it is?
    Ms. Kichak. No. We do not have the data on that, but it is 
a program that they are starting to move into.
    Senator Voinovich. I would like to find out the percent, if 
you could.
    Ms. Kichak. Well, we will get you----
    Senator Voinovich. I would also be interested to know why 
they are moving to the Medicare Advantage program. There is a 
budget controversy about that right now. There are some that 
say that the costs are too high and more than what they would 
be if they were not in Medicare Advantage. But from my 
perspective, as I have traveled around Ohio and talked to many 
people--people like it because they get a little better deal. 
Also they feel more comfortable because they have been able to 
establish a relationship with a health care provider on a 
regular basis, rather than the fee-for-service that you get 
under the other program.
    Ms. Kichak. One of the things that we see even in the FEHB 
Program, in our HMOs, is if folks have been with them as 
employees, they like to stay with them when they retire because 
of that doctor-patient relationship. So, I will find out 
anything I can about our participation and get that for the 
record.

                  INFORMATION SUBMITTED FOR THE RECORD
    About 2.5 percent of retirees (49,200) are in Medicare Advantage.

    Senator Voinovich. Yes, because that is going to be from 
your perspective. I would like to see it because we are going 
to have some debate about this issue. Could you try to look at 
our mandated costs for the Federal Government, particularly in 
the Medicare area?
    Ms. Kichak. Yes. Thank you.
    Senator Voinovich. Thank you.
    Chairman Akaka. Thank you very much. I will start a second 
round of questions here.
    To both of you, as you know, the Office of Personnel 
Management is responsible for negotiating the terms of service, 
such as what the premium rates will be and the services 
provided for those premiums. I am concerned OPM lacks 
sufficient negotiating authority to address specific problems 
such as prescription drug costs.
    Do you believe that OPM has enough negotiating authority, 
or are there areas that OPM could do a better job of 
negotiating for lower premiums if they had that authority? Ms. 
Kichak.
    Ms. Kichak. First of all, I would like to point out that we 
negotiate with our carriers, but it is our carriers who 
negotiate with the doctors, the providers, the drug companies, 
etc. Having said that, it appears to me that we have sufficient 
authority. What we seem to be getting are very good prices for 
the drugs we have. I understand that drugs are expensive, but 
when we introduced the PBMs in the program, we were able to 
increase benefits for people who used those pharmacies through 
the savings we and our carriers achieved on our behalf from 
those drug companies. So, in my mind, it seems to be working.
    Also, OPM has the authority to negotiate a level of 
benefits to ask the carriers to go out and agree with the 
providers at a certain level of benefits, and we exercise it. I 
think we deliver a good product. So, I am not looking for any 
more authority. Thank you.
    Chairman Akaka. Mr. Dicken.
    Mr. Dicken. As Ms. Kichak indicated, as OPM is negotiating 
with about 200 different plan options, they will be looking at 
the differences among those plans and they are keeping all the 
plans that meet minimum standards. FEHB Program, as contrasted 
to some other large employers, will be negotiating with a large 
group of plans that meet their minimum standards. Other 
employers may negotiate with one or fewer plans and be able to 
select only those that have the best value for their options.
    Certainly OPM has indicated that in the past they have been 
able to negotiate down from the initial bids that come in 
during the Call Letter process. And also as Ms. Kichak noted, a 
key part of this is the plans themselves, often working with 
pharmacy benefit managers, negotiating the most effective 
prescription drug costs and ensuring that some of those savings 
are passed on to FEHB Program and its enrollees.
    Chairman Akaka. As we all know, there are many plans, 
approximately 280. And so, OPM negotiates with the large, 
medium, and small health care providers to offer a significant 
range of options for employees. Hopefully this competition 
helps keep the costs down.
    To both of you, do you think the fact that OPM negotiates 
with so many plans impedes OPM's ability to negotiate each 
plan's premium rates?
    Ms. Kichak. Well, it is a lot of plans, but we have been 
able to manage it, I think very well. We put our most 
experienced folks on the plans that cover the most enrollees. 
Therefore, we are able to focus our efforts where it is most 
important that we do.
    But we look at every plan in the program, and innovation 
can come from any corner. We work very hard with each and every 
carrier to get their best ideas, and then I know in a 
competitive model like we have, the other carriers are looking 
to see what their competition is doing. And this is how we get 
new ideas into the program. But we are definitely able to 
negotiate with every plan.
    Chairman Akaka. Mr. Dicken.
    Mr. Dicken. Here is where FEHB Program is unique in having 
8 million enrollees in all parts of the country, they require a 
large number of plans so that there can be both the national 
options as well as regional options that are available locally. 
OPM is relying on its competitive model to have a number of 
plans that will allow enrollees to choose the benefits that are 
available in their area and at their cost. Other employers may 
choose other ways, employers like GM and CalPERS that may 
instead select a small number of plans. It is just two 
different approaches for how to negotiate.
    Chairman Akaka. Ms. Kichak, wellness and preventive care 
can do a lot to keep people healthy and reduce the costs of 
more serious illnesses, like heart disease. In the 2008 Call 
Letter, you asked carriers to address preventive care in their 
proposals. How do you make wellness and preventive care a 
priority in FEHB Program plans?
    Ms. Kichak. We ask for it every year. I think if you look 
at our history of Call Letters, you will see something almost 
every year in the preventive area. I do not know exactly when 
cholesterol screening was added, but it was very recent.
    We rely on the accrediting bodies that determine when the 
best time is for mammograms, immunizations, and things like 
that. We make sure that our carriers are aware of what those 
schedules of preventive services are and that they comply with 
them so that we are in step with what the medical community and 
the providers are telling the Nation is the best kind of 
preventive care to offer.
    Chairman Akaka. My last question before I call on Senator 
Voinovich is to Ms. Kichak. According to OPM's 2007 numbers, 
the President's HealthierFeds Initiative has almost 39,000 
employees and retirees enrolled, but only 20 percent have 
completed the challenge. What else is OPM really doing to 
encourage participation in the HealthierFeds program beyond 
advertising it on the website?
    Ms. Kichak. We have a very active network, e-mail network, 
of HealthierFeds coordinators in the agency. So, the website 
itself was not the major part of that campaign. We had a 
webcast from the Department of Health and Human Services when 
we kicked it off. We have worked with the President's Council 
on Physical Fitness and have had leaders from that area work 
with us. But there is somebody in virtually every agency trying 
to get that agency to get healthier.
    Even though our HealthierFeds challenge has ended, during 
Public Service Recognition Week we had HealthierFeds walks at 
lunchtime throughout the entire week. So, we are keeping that 
campaign going even though those numbers were very 
discouraging.
    Chairman Akaka. Thank you very much. Senator Voinovich.
    Senator Voinovich. On the same thing, I would suspect that 
all of the companies that cover folks are also encouraging them 
to be as fit as possible and setting up programs to try and 
deal with the whole issue of wellness.
    Ms. Kichak. Very definitely.
    Senator Voinovich. In other words, you are doing it as a 
system? The companies within the system, I am sure, are doing 
everything they can, I have met with some of the major 
insurance companies. They say, ``We are really trying to get 
the people we cover to do some things differently to keep the 
costs down.''
    Ms. Kichak. HealthierFeds is a workplace initiative. Yes, 
the carriers are doing a lot and they have a very good story to 
tell. They are identifying chronic diseases and working with 
individuals to manage those chronic diseases, so that if there 
is an individual who has something like diabetes and is not 
keeping up with their medication program, they are in contact 
with them.
    We are always working with new programs in that area. In my 
house, we get lots of mail from the health plan that my husband 
has selected telling him what he needs to do. I am glad I do 
not have to make those directives to him. And it is very 
encouraging to see the health plans reach out to the enrollees 
and try to encourage good health.
    Senator Voinovich. Are you familiar with the legislation 
that Senator Carper and I have introduced in terms of health 
information technology, specifically the personal health care 
records, in the FEHB Program?
    Ms. Kichak. No, I am not familiar with your specific piece 
of legislation.
    Senator Voinovich. Have you ever looked at the issue of the 
Federal Government negotiating directly with the pharmaceutical 
companies? Under the current Medicare FEHB Program structure, 
that compete for business, they compete against each other to 
try and deal with as large a formulary as possible and also as 
reasonable a cost as possible. Have you ever looked at the 
option of eliminating the PBM's role and requiring the 
government to regotiate directly with any companies.
    Ms. Kichak. We have definitely looked at that option. I 
believe there was a legislative proposal along those lines. I 
have been with OPM a long time. Probably that legislative 
proposal could have been as long ago as 10 years ago. It did 
not receive very strong support.
    We also have conducted a couple of studies about how our 
carriers are doing in negotiating with PBMs, and one of the 
studies showed that they were doing very well. So we have not 
continued to push that option because of our consideration of 
how we think our carriers are doing.
    Senator Voinovich. OK. So it is the carriers that negotiate 
with the PBMs.
    Ms. Kichak. The PBMs, yes.
    Senator Voinovich. At this stage of the game, no one is 
looking to do it differently because you feel that the 
smorgasbord of options in terms of the formulary and the costs 
seem to be OK because of the fact you have got competition 
among the plans.
    Ms. Kichak. They seem to be working, and our Inspector 
General is providing increased oversight of the carriers' 
agreements with the PBMs. And that is providing us some 
assurance that we are getting money back through those 
arrangements.
    Senator Voinovich. Mr. Chairman, I have no other questions.
    Chairman Akaka. Thank you very much, Senator Voinovich.
    I want to thank both of you for your testimony and your 
responses to our questions. I want you to know that we may have 
other questions for you to respond to, and we will keep the 
record open for one week for other Members to do that.
    Again, thank you so much. You have been helpful, and we 
look forward to seeing you again at another hearing. Thank you.
    Chairman Akaka. I would like to call forward our second 
panel: Stephen Gammarino, Senior Vice President, National 
Programs, Blue Cross Blue Shield Association; and Alan Lopatin, 
Legislative Counsel, National Active and Retired Federal 
Employees Association.
    I want to welcome both of you and to tell you that we have 
a requirement that we swear in witnesses before this 
Subcommittee. Would you please rise? Do you solemnly swear that 
the testimony you are about to give this Subcommittee is the 
truth, the whole truth, and nothing but the truth, so help you, 
God?
    Mr. Gammarino. I do.
    Mr. Lopatin. I do.
    Chairman Akaka. Thank you very much. Let the record note 
that the witnesses responded in the affirmative.
    I want to thank you again for coming and before I call on 
Mr. Gammarino, I just noticed that our good friend and 
colleague, Senator Warner, has arrived, and I want to ask him 
for any statement or comment he has before your testimony.
    Senator Warner. Thank you, Mr. Chairman. I would just 
simply ask that my prepared opening statement appear following 
the Chairman's and the Ranking Member's opening statements in 
the record. I thank you.
    Chairman Akaka. Thank you very much, Senator Warner. It 
will be included in the record.
    [The prepared opening statement of Senator Warner follows:]
              PREPARED OPENING STATEMENT OF SENATOR WARNER
    Chairman Akaka and Senator Voinovich, I thank you for holding this 
important hearing today to examine the growth trends in health care 
insurance premiums for active and retired Federal employees, an issue 
that impacts a number of my constituents in the Commonwealth of 
Virginia.
    Access to affordable health care is a critical issue for everyone. 
While Federal employees enjoy the ability to choose among a wide 
variety of health plans to best suit their needs, substantial increases 
in Federal Employee Health Benefits Program (FEHBP) premiums could 
unfortunately threaten to make health insurance coverage cost 
prohibitive for many Federal employees, their dependents, and Federal 
retirees.
    To address the escalating cost of health insurance, a Presidential 
directive issued in 2000 extended the concept of premium conversion, 
the ability to pay health insurance premiums with pre-tax dollars, to 
active Federal employees who participate in FEHBP. This benefit is 
already available to many private sector employees and State and local 
government employees. While premium conversion does not directly affect 
the amount of the FEHBP premium, it helps to offset some of the cost by 
reducing an individual's Federal tax liability.
    Regrettably, our retired civil servants, who pay the same premiums 
as Federal employees, do not have this same opportunity. In the Senate, 
for the last several Congresses, I have introduced legislation to 
extend premium conversion to our retired Federal employees, many of who 
are fixed incomes. This benefit is estimated to result in average 
savings of $820 per year for annuitants.
    I look forward to hearing from the distinguished witnesses, and 
their examination of the issue and suggestions on ways to ensure that 
FEHBP continues to be one of the leading health insurance plans in 
terms of its coverage and cost effectiveness. Thank you.

    Chairman Akaka. Mr. Gammarino, would you please proceed 
with your statement?

 TESTIMONY OF STEPHEN W. GAMMARINO,\1\ SENIOR VICE PRESIDENT, 
     NATIONAL PROGRAMS, BLUE CROSS BLUE SHIELD ASSOCIATION

    Mr. Gammarino. Good morning. Thank you for this opportunity 
to discuss premiums in the Federal Employees Health Benefits 
Program. We appreciate your interest in this program and look 
forward to working with you and the Subcommittee to address 
this and other issues that are so important to Federal 
employees and retirees.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gammarino appears in the Appendix 
on page 46.
---------------------------------------------------------------------------
    The Blue Cross and Blue Shield system is proud to have 
offered the Service Benefit Plan from the beginning of the 
program in 1960. Today, we provide health insurance to more 
than 4.7 million active and retired Federal employees and 
dependents. We believe we have been successful because, in 
large part, Federal employees and retirees recognize our 
commitment to offer high-quality, affordable health care 
coverage. Our goal is to ensure that the right person gets the 
right treatment at the right time, and we work hard to do that 
while maintaining competitive rates.
    One factor benefiting Federal employees and retirees is the 
very structure of this market-oriented, employer-sponsored 
program in which risk-bearing carriers compete with one another 
for an individual's business. This retail competition and the 
fact that all the competitors are at risk compel carriers to 
develop actuarially sound products that offer attractive 
benefits at competitive prices. Through their choices, 
enrollees help to keep premiums in check.
    Federal employees and retirees have also benefited from the 
OPM's sound stewardship and its focus as the employer on 
maintaining this as an attractive employment benefit to assist 
in recruitment and retention of a well-qualified workforce. 
This has contributed significantly to this program's reputation 
as a model employer-sponsored health benefits program. Congress 
has also played an important role in the success of the program 
through its diligent oversight.
    The FEHB Program is, of course, integrally tied to the 
private health care industry. Federal employees and retirees 
see the same doctors and hospitals as their neighbors who work 
for private employers. Accordingly, the program is also 
affected by the same forces at work in health care in general. 
These forces include increased usage of prescription drugs and 
provider services, advances in medical technology and drug 
therapies, national demographic trends, and, of course, 
customer expectations.
    This program is also affected by the demographics of the 
Federal population. Retirees make up over 46.1 percent of the 
FEHB Program and 47 percent of our program. In 2006, the 
average age of contract holders in the Service Benefit Plan's 
Standard Option--that is our largest program--was almost 61 
percent and Basic Option was over 45 percent. I am, however, 
very pleased that this year, for the third consecutive year, 
there was no change in premiums for our Basic Option. 
Additionally, the individual's share of the premiums for our 
Standard Option, which covers almost 4 million people, actually 
declined slightly, while the premium increased by only 1 
percent.
    I am even more pleased that we accomplished this while 
making enhancements to our benefits. As the Members of this 
Subcommittee know, the act expressly provides that funds in a 
carrier's contingency reserve may be used to stabilize 
premiums. We were able to use our reserves to that effect in 
2007.
    I would also like to review for the Subcommittee three 
relatively new initiatives designed to improve the quality of 
health care that our enrollees receive.
    Working closely with OPM, we are developing a member-
centric program called Care Coordination. Care Coordination 
applies health information technology to an integrated database 
in order to improve our members' ability to receive higher 
quality of care. It specifically focuses on members with 
chronic conditions, such as diabetes, who would benefit from 
our disease or case management initiatives.
    The second initiative is called Blue Distinction. This is a 
nationwide program of Blue Cross Blue Shield that helps foster 
the development of a more consumer-centered, knowledge-driven 
health care system. Blue Distinction is an important step 
toward providing health care consumers with cost and quality 
information similar to what they expect when they buy other 
types of goods and services. Consumers will have access to the 
information necessary for sound decisionmaking through Blue 
Distinction's:
    Special care centers for bariatric surgery, cardiac care, 
and transplant services. These centers must meet clinically 
valid standards and deliver better outcomes;
    Nationwide hospital measurement program and improvement 
program;
    And, last through demonstration of various transparency 
projects. We believe Blue Distinction will lead to healthier 
lives and, over time, lower health care costs as doctors and 
patients improve their interaction.
    Third, the Blue Cross Blue Shield Association has recently 
proposed a legislative initiative to create a new independent 
institute to support clinical research comparing the 
effectiveness of medical procedures, drugs, devices, and 
biologics. The institute would disseminate its findings to 
providers and in reader-friendly form to consumers. We believe 
this approach would ultimately be the best path to assuring 
affordability by reducing ineffective, inappropriate, or 
redundant care while maximizing the quality of care.
    In conclusion, let me assure the Subcommittee that we are 
committed to providing Federal employees, retirees, and their 
families affordable coverage so they may obtain high-quality 
health care. We look forward to working with OPM and Congress 
in order to achieve that objective.
    This concludes my prepared remarks, and I would be very 
pleased to answer any questions you may have.
    Chairman Akaka. Thank you very much. Mr. Lopatin.

TESTIMONY OF ALAN G. LOPATIN,\1\ LEGISLATIVE COUNSEL, NATIONAL 
        ACTIVE AND RETIRED FEDERAL EMPLOYEES ASSOCIATION

    Mr. Lopatin. Thank you, Mr. Chairman and Senator Warner. On 
behalf of our Nation's 4.6 million Federal employees, retirees, 
and survivors, I appreciate the opportunity to express the 
views of the National Active and Retired Federal Employees 
Association on FEHB Program premiums.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Lopatin appears in the Appendix 
on page 52.
---------------------------------------------------------------------------
    Chairman Akaka, NARFE commends you for requesting the GAO 
report we are considering today and for your leadership on 
trying to help Federal employees and annuitants shoulder higher 
health care costs. We were pleased that you specifically asked 
the nonpartisan GAO to determine how FEHB Program premiums 
would have been affected had OPM applied for a payment provided 
under the Medicare Modernization Act of 2003.
    The MMA provides that all employers who furnish drug 
coverage to their retirees age 65 and older, at least as 
generous as the new Medicare Part D, are eligible to receive a 
subsidy of 28 percent of the per enrollee cost for drug 
coverage--an average of $670 per Medicare beneficiary, 
according to CMS. GAO found that premium growth in one of the 
largest FEHB Program plans with a high share of older enrollees 
could have been 3.5 to 4 percent lower in 2006 and 2 percent 
lower across all the FEHB Program plans had the payment been 
accessed.
    NARFE has long held that the FEHB Program is the best group 
health insurance plan in America today and should serve, as we 
have all said, as a model for others. Even in years of double-
digit rate hikes, we have said that OPM does a better job 
negotiating premium increases than any other employer. But we 
are bewildered by the action--or, more appropriately, 
inaction--of the Federal Government in not taking advantage of 
a $1 billion subsidy to which its health plan is entitled. It 
just does not make street sense.
    The goals of the Federal Government as an employer should 
be to attract and retain the best and the brightest to serve 
this country. OPM, as the chief steward of the civil service, 
must keep its focus on that goal in decisions affecting our 
competitive edge.
    This decision also denied the U.S. Postal Service access to 
a payment that would benefit its competitive status and its 
ratepayers, including you and me. OPM has cited two reasons for 
the Administration's decision to forego the payment. First, 
they said they did not need to take advantage of the payment 
since they had no plans to change the drug coverage of Federal 
annuitants age 65 and older. Yet other public and private 
employers with no intention of reducing their retiree drug 
benefits decided to apply for the payment anyway.
    Second, OPM claims that they do not believe it is 
appropriate for the Federal Government to be paying itself for 
this purpose. Such intragovernmental transfers are not unusual. 
In fact, the Federal Government pays itself for future 
retirement obligations when Federal agencies make contributions 
from annual appropriations to the retirement trust on behalf of 
their employees.
    In response to several years of quickly rising premiums, 
the demand for lower-cost FEHB Program plans has increased. 
This has been helpful to some enrollees who want to cut costs. 
Lower-wage and younger workers naturally gravitate to lower-
cost plans. In many instances, the higher-cost plans have more 
comprehensive coverage and better provider access than lower-
cost options. As a result, individuals with greater health care 
needs tend to remain in higher-cost plans, and the opposite is 
true for healthier persons. With fewer healthier enrollees, 
greater claim experience with the higher-cost plans contributes 
to even higher premiums.
    The GAO report confirms NARFE's fear that this migration 
could mean a race to the bottom where workers and annuitants 
are limited to plans with less coverage, smaller provider 
networks, and greater out-of-pocket costs. As it is, the shift 
of enrollees combined with the weighted average formula for 
government fair share contributions result in 
disproportionately higher enrollee premiums in the most popular 
plans for retirees.
    No option has more potential for separating the risk pool 
than the combination of a health savings account and a high-
deductible health plan. Healthier enrollees tend to be 
attracted to HSAs because, as low health care utilizers, they 
can be rewarded with unspent balances or credits at the end of 
each year. Less healthy enrollees avoid HSAs because they could 
end up paying thousands of dollars in out-of-pocket costs. 
Without precautions against HSA-inspired risk selection, the 
introduction of these new plans could ultimately be the death 
knell for fee-for-service and many traditional HMO options.
    The Administration's fiscal year 2008 budget would give 
lackluster enrollment in HSAs a jump start by allowing Blue 
Cross to offer the controversial option. Blue Cross plans are 
the largest and most popular in the FEHB Program, and as a 
result, the insurance carrier's brand loyalty and considerable 
marketing resources could significantly increase HSA enrollment 
if Blue Cross was allowed and decided to offer such an option. 
NARFE opposes further expansion of HSAs because of their 
potential adverse effect on comprehensive plans.
    The higher utilization of health care by older enrollees is 
a well-documented reality of what happens to us as we age. Most 
annuitants started their careers in Federal service when they 
were younger and healthier and paid more into health insurance 
than they got out of it. Now that they have retired, some of 
them get more out of health insurance than they pay into it. 
This contract between generations has been a fundamental 
principle of group health insurance for decades. NARFE strongly 
believes that the cost of providing health care to older 
enrollees could be mitigated if: First, the Administration 
agreed to apply for and accept the Medicare employer payment; 
and, second, if FEHB Program plans were allowed to buy 
prescription drugs for their enrollees at the discount mandated 
by the Federal supply schedule. Given substantial congressional 
support for allowing Medicare to directly negotiate drug 
prices, it is time for this Subcommittee to revisit using the 
same leverage to make prescription drugs less expensive in FEHB 
Program.
    Finally, Mr. Chairman, I would be remiss were I not to put 
in a plug for NARFE's top legislative agenda in this arena, 
especially at this moment--namely, the enactment of premium 
conversion legislation introduced by Senator Warner as S. 773, 
a matter referred to the Senate Finance Committee. The measure 
would allow Federal annuitants and military personnel to pay 
for their health insurance premium with pre-tax dollars in the 
same manner as current employees are allowed. This modest step 
would make health insurance premiums more affordable.
    For 47 years, the FEHB Program has minimized costs and 
provided a wide choice of comprehensive health insurance plans 
to nearly 9 million Federal employees, retirees, and their 
families. NARFE stands ready to work with this panel, with 
others in Congress, OPM, and insurance carriers to find the 
ways and means to contain out-of-control health care costs 
without sacrificing quality, and to ensure that the Federal 
family has access and coverage, without resorting to proposals 
that only shift costs to enrollees, or circumvent risk sharing 
in our group health plan.
    Thank you so much.
    Chairman Akaka. Thank you very much.
    It is always a pleasure to have Senator Warner here. I am 
going to ask Senator Warner to proceed with his comments or 
questions. Senator Warner.

              OPENING STATEMENT OF SENATOR WARNER

    Senator Warner. Thank you, Mr. Chairman. I have to leave to 
go to Arlington for a soldier from Virginia who was lost in 
Iraq.
    I would like to go back to S. 773 that you referred to, Mr. 
Lopatin. Do you feel that as it is drawn up, it largely 
addresses a considerable segment of this problem?
    Mr. Lopatin. It would certainly help to alleviate the 
increase in premiums if Federal retirees could use pre-tax 
dollars much as employees do right now. They find sticker shock 
when they go from employment to retirement and notice that they 
are not getting that same subsidy, if you will, or at least tax 
advantage. And I think it would help greatly.
    Senator Warner. Within your organization, is it well 
received?
    Mr. Lopatin. NARFE is a thousand percent supportive, and 
every one of our members is pushing----
    Senator Warner. Given that you are working on this 24 hours 
a day, 7 days a week----
    Mr. Lopatin. Twenty-five hours on some days.
    Senator Warner. How do you feel this legislation is being 
received by other Members of Congress?
    Mr. Lopatin. I only wish it were before this Subcommittee 
instead of the Senate Finance Committee, just because we have 
so many friends here. But it is being well received. We have 
got a good number of cosponsors working with your office on 
both sides of the Hill, and Congressman Davis' bill in the 
House. We are hopeful, but we are trying to do whatever we can 
to also help mitigate the cost so that we can move the 
legislation forward.
    Senator Warner. Well, you have got a marvelous 
organization, and I am delighted to be associated and to work 
with it, and I thank you very much.
    Mr. Lopatin. We appreciate your leadership.
    Senator Warner. I thank the Chairman and Ranking Member.
    Chairman Akaka. Thank you very much, Senator Warner.
    I want to pursue questions about wellness and preventive 
care, as I did with the first panel. Mr. Gammarino, as a 
provider, what is your policy on covering wellness services 
like gym memberships and preventive care?
    Mr. Gammarino. First of all, we have very comprehensive 
benefits with what I call our core health insurance program 
relative to preventive services. The types of services that you 
just mentioned--gym memberships, other types of what we call 
``affinity programs''--are not in our core product, not 
associated with the actual cost as it relates to the premium. 
We do actively have these affinity programs, and we offer what 
we call discounted nationwide programs that allow our members, 
if they sign up through our affinity programs, various 
discounts for joining those types of entities.
    Chairman Akaka. Mr. Lopatin, as an association representing 
the interests of active and retired employees, how are you 
promoting those issues in your membership?
    Mr. Lopatin. Well, NARFE is 100 percent behind active 
retirees, not just in the legislative arena but to get out, get 
exercise, get help behind them and in front of them. We have 
encouraged it through our federation conventions. Our 
President, Margaret Baptiste, is on the road right now or would 
otherwise be here. Our members come out to these meetings, and 
the type of social networking that they are able to do helps to 
keep them healthy by exchanging information about what is 
available out there, especially for seniors. We are foursquare 
behind civic engagement. NARFE members, as you can imagine, are 
dedicated civil servants with a lifetime of experience and are 
trying to contribute that experience back to their communities 
by staying active and keeping healthy that way.
    Chairman Akaka. Because of the size of your organization 
and the active participation, the retirees feel the burden of 
health care costs more than most as a result of being on fixed 
incomes. What do you see retirees doing to deal with the 
growing premium rates?
    Mr. Lopatin. Unfortunately, retirees every day, and not 
just Federal retirees, are faced with making tough decisions 
between affording prescription drugs, putting food on the 
table, and the other everyday costs of living. Often, Federal 
retirees have seen their premiums outpace their cost-of-living 
adjustments, and they are lucky to have those cost-of-living 
adjustments which we hope to retain and that we do not expect 
to expand. But it still is hard to make ends meet.
    We find that Federal retirees in a very generous or at 
least a reasonably generous and competitive retirement program 
keep Federal retirees in a place where they are in a bit of a 
better place than some other retirees. But it is a tough time, 
especially with spiraling health care costs, especially for 
prescription drugs, notwithstanding Medicare.
    Chairman Akaka. I would like to ask both of you about the 
impact of health savings accounts. OPM continues to promote the 
use of health savings accounts as an alternative to traditional 
health care options. Some feared that HSAs would increase the 
premiums for traditional coverage.
    What do you believe the impact of health savings accounts 
has been on active and retired employees' health care premiums? 
Mr. Gammarino.
    Mr. Gammarino. When this particular plan was first 
introduced, there was a lot of concern among a number of 
different groups that somehow these new products would take the 
better risk from the older, well-established insurance 
programs, like Blue Cross Blue Shield. I know at the time the 
agency was very focused on ensuring when they did introduce it, 
they introduced it in a way that it would reduce that type of 
impact. And I think they succeeded. I think today you would say 
those products are in the market. Blue Cross Blue Shield very 
much encourages choice and availability of different choices 
within the market. We think that is a good thing. We think the 
way they were introduced was appropriate, and materially, they 
have not affected the program as a whole, and they have not 
specifically affected Blue Cross Blue Shield in their ability 
to ensure affordable health care products.
    Mr. Lopatin. Mr. Chairman, if I could also add to that, 
luckily the small uptake in the HSAs available in the current 
FEHB Program have had a negligible effect. But time and again 
we are seeing, as lower-income employees, as younger and 
healthier employees migrate to more attractive plans and the 
incentives behind HSAs of having balances available to you at 
the end of the year can only have a deleterious effect on the 
premiums for the plans where retirees want to have the 
continued relationship with their doctor, want to get that 
preventive care, have the right incentives. We are concerned 
that if HSAs were to blossom, we would see more risk selection 
going on as a consequence, potentially see the undermining of 
all other FEHB Program plans.
    Chairman Akaka. Let me ask each of you, how have HSAs 
affected the overall premium market? Mr. Lopatin.
    Mr. Lopatin. I believe in FEHB Program, again, the effect 
has been negligible, only because of the small enrollment 
numbers in HSAs. We are just concerned that would not last.
    Chairman Akaka. Mr. Gammarino.
    Mr. Gammarino. In terms of Blue Cross Blue Shield, we serve 
98 million people nationwide. It is a growing segment of our 
market, particularly as it relates to what I would call small 
groups and individual markets. We do see that it provides an 
opportunity in some cases for affordable health care products 
where one did not exist. So we do see some small groups that 
are enrolling that were not enrolling before because of the 
cost of health care.
    So we think it is a good option to have out there, and it 
is a growing option relative to the private market.
    Chairman Akaka. We will have a second round. Now, Senator 
Voinovich.
    Senator Voinovich. Ninety-eight million people?
    Mr. Gammarino. Yes, sir.
    Senator Voinovich. That is a lot of people.
    Mr. Gammarino. We are very proud of that. Almost 100 
million. We are looking forward to that day, too.
    Senator Voinovich. We just talked about HSAs. Do you see 
any marked movement from people that are in regular plans to 
HSAs? Or as you just said, is it mostly in areas where they do 
not have access to that, that HSAs have become an option for 
folks that heretofore might not have insurance coverage?
    Mr. Gammarino. Yes, it is basically what I referred to 
before and what I would call the small and individual group 
market.
    Senator Voinovich. And Mr. Lopatin basically said he is 
worried about some of the people moving off from more 
comprehensive coverage to HSA plans.
    Mr. Lopatin. From the large group health environment.
    Senator Voinovich. They are already covered and saying they 
are in good health and so they choose lower cost HSAs. And then 
you pull them out of the larger risk pool, and then what is 
left are the people that are more sick, and as a result of 
that, premiums rise for every one else. Is that what you are 
saying?
    Mr. Lopatin. We have already seen it in the risk 
segmentation that has gone on because of new moves to consumer-
driven plans.
    Mr. Gammarino. On the private sector, there are other large 
employers that are pretty much doing the same thing that OPM 
is, meaning they have a cafeteria of products. They are 
introducing this newer product as one of many choices, and the 
uptake is--it can vary depending upon how the employer decides 
to incent this. But, bottom line there is always that issue of 
new product introductions and cascading of poorer risk relative 
to better risk. It is something that we, the Blues, have seen 
over our 40 years. It is not necessarily only focused on this 
particular product. You can have this evidence in other 
products as well.
    Senator Voinovich. To what do you attribute the lower rate 
of increase in premiums? Well, let's put it this way: Taking 
our Federal program and comparing it with lots of other 
programs in the country, why is it that our premiums have 
stayed pretty competitive compared to, say, some of the other 
places?
    Mr. Gammarino. That is a great question, because it is 
something that we are very sensitive to, and I think we are 
very proud to be part of what I would call a great competitive 
choice model that is probably the most effective that is out 
there in terms of allowing a competitive environment to drive 
the best value for the members. And it is not just price. It is 
also what we provide that makes, what we think, this program 
very valuable to Federal employees and retirees.
    Senator Voinovich. Is the coverage available under this 
program pretty much the same as what it is around the country?
    Mr. Gammarino. Relatively to large employers, yes. It is a 
very comprehensive program, but it is similar to any of what I 
would call the Fortune 500 relative to the comprehensive set of 
benefits.
    Senator Voinovich. So the thing is you cover 8 million 
people and have various providers competing for their business. 
And as a result of that, competition providers are required to 
offer good coverage and lower costs to keep the folks that you 
have.
    Mr. Gammarino. Right. What does distinguish the FEHB 
Program is--there was some concern on the other panel that 
there was a large number of health plans and does that hurt. We 
think it helps. We actually think the large choice and then the 
only way you can succeed long term in this program is to be 
very focused on this population, be very sensitive to the 
needs, and provide a price point that is reasonable with a set 
of benefits. And if you cannot do that, you will not last long 
in this program.
    It is something unique, something that I think other people 
should certainly try to emulate. It works.
    Senator Voinovich. Of the people in the program, how many 
of them are retirees?
    Mr. Gammarino. In our program, 47 percent are retirees. In 
the entirety of the FEHB Program, I believe it is 46.1 percent 
are retirees, so that is a very large percentage.
    Senator Voinovich. I asked the question of the Advantage 
program. Do you see people moving more toward Advantage or are 
they pretty well staying with what they have?
    Mr. Gammarino. I have not seen any significant movement. 
Most of our members are long-term members. They are going to 
need a significant reason to leave our program, and given our 
value proposition, that does not occur very frequently.
    Senator Voinovich. Mr. Lopatin, in terms of retirees, if 
you compare the cost of health care by retirees with, say, a 
large system like California, what is the participation and the 
percentage that the retiree contributes to the plan?
    Mr. Lopatin. In CalPERS?
    Senator Voinovich. Yes.
    Mr. Lopatin. I do not know offhand.
    Senator Voinovich. In other words, the percentage that our 
retirees contribute is about 28 percent. Is that basically----
    Mr. Lopatin. On average, yes, under the fair share formula. 
But we find that retirees and enrollees are having a larger 
premium increase because of the weighted average as more folk 
move to lower-cost plans. This is true because of the way the 
Federal Government contributes--putting in 72 percent of the 
cost of health insurance in the aggregate. As you move to 
lower-cost plans, that aggregate number becomes lower and 
shifts those costs especially to retirees who do not move from 
the plan.
    Senator Voinovich. But nationally that is what is 
happening?
    Mr. Lopatin. Correct.
    Senator Voinovich. I am familiar with some of the public 
retirement systems, and they are all feeling the pinch of it 
and they are raising the costs to their retirees because that 
is what they have to do.
    Mr. Lopatin. We are more concerned with keeping the FEHB 
Program healthy because it has been successful for almost five 
decades.
    Senator Voinovich. And the people in the program, one of 
the things that I think that is an attractive aspect of the 
Federal program is the fact that if you are in it, once you 
retire you can continue to remain in the program; whereas, some 
other retirement systems, particularly now we are seeing in the 
private sector, they are whacking them out, and they are 
without----
    Mr. Lopatin. And I myself personally am a deferred 
annuitant and do not have access to the FEHB Program. I will 
talk to your staff about how we might be able to remedy that in 
time. [Laughter.]
    But, when the day comes, I hope to come back and work for 
the Federal Government and finish out my retirement and go out 
as an immediate annuitant, a benefit that I sorely miss.
    Senator Voinovich. That is a big deal, isn't it?
    Mr. Lopatin. Huge.
    Senator Voinovich. Yes.
    Mr. Lopatin. Because what I buy in a Blue Cross plan on the 
private market is not nearly as generous as what you get 
through the Federal Government plan.
    Senator Voinovich. Yes. Well, I know that you are promoting 
the concept that they should be able to pay for it with pre-tax 
dollars. But I have to say to you that if we did that for 
Federal retirees, you know very well that everybody else would 
be then asking for----
    Mr. Lopatin. We are happy to endorse your legislation 
opening it to everybody else. [Laughter.]
    Senator Voinovich. Well, to be candid with you, it butts up 
against this whole issue of entitlements and where we are going 
as a country in terms of dealing with it, though I understand 
that you have a reason to be promoting it.
    But I would say, Mr. Chairman, that overall, God bless the 
FEHB Program. It is one of the great benefits of people who 
work for the Federal Government. Thank you.
    Chairman Akaka. Well, thank you very much, Senator 
Voinovich. Let me conclude before we adjourn. As a provider, 
Mr. Gammarino, you are the gatekeeper for employees, retirees, 
and their families' access to health care. This care is 
important for all enrollees, but, in particular, to families 
with children and also the retired.
    How can you improve the customer service for those in your 
plan?
    Mr. Gammarino. Well, we are working at it every day, 
Senator. I would like to talk a little bit about what we are 
doing to try to work with employees to provide even greater 
value, which I know you strongly support. With an aging 
population, one of the things that we are focused on is 
providing services to enrollees. We have various patient 
advocate programs today that actually reach out to members. We 
have a very rich database. We can pinpoint people that may need 
some help navigating the health care system, and we focus on 
that today to try to reach out and, through a voluntary 
approach, allow people to help provide that gatekeeper approach 
for members as they navigate this system and get the care they 
need and make sure that we maintain an affordable product.
    So we are working at that day in and day out, from just 
general customer service, now we are entering a new phase of 
what I would call this patient advocate, where we are reaching 
out to members, providing the service they need to get better 
health care.
    Chairman Akaka. Mr. Lopatin, from your perspective, what do 
you think carriers can do to be more customer friendly to the 
participants and their programs?
    Mr. Lopatin. To the extent they can have efficient customer 
service phones that get answered, reasonableness in reviewing 
accounts and claims, and a consumer-friendly and a health-
friendly workplace so that we can maintain not only the 
relationship that we have with doctors but with our health 
plans. NARFE members are very satisfied with the plans that 
they have. We would hope that the best thing that most of these 
plans could do is keep up the good work. Certainly the lion's 
share of our members are Blue Cross members as well, and we 
continue to hope and pray that we will have that service there 
year in, year out.
    Chairman Akaka. Well, thank you very much, both of you, for 
your testimony and your responses.
    The hearing record will remain open for 1 week from today 
for Members of this Subcommittee to submit additional 
statements or questions.
    You have been very helpful to this Subcommittee, and I just 
want you to know that we are doing this to try to find better 
ways of providing the best service to our people.
    So, with that, I want to thank you very much. The hearing 
is adjourned.
    [Whereupon, at 12:02 p.m., the Subcommittee was adjourned.]




















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