[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





      CAN A USPS-RUN HEALTH PLAN HELP SOLVE ITS FINANCIAL CRISIS?

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

                                HEARING

                               before the

 SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL SEVICE AND LABOR POLICY



                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                        TUESDAY, MARCH 27, 2012

                               __________

                           Serial No. 112-147

                               __________

Printed for the use of the Committee on Oversight and Government Reform










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

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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy

                   DENNIS A. ROSS, Florida, Chairman
JUSTIN AMASH, Michigan, Vice         STEPHEN F. LYNCH, Massachusetts, 
    Chairman                             Ranking Minority Member
JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of 
JASON CHAFFETZ, Utah                     Columbia
CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
TIM WALBERG, Michigan                DANNY K. DAVIS, Illinois
TREY GOWDY, South Carolina


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 27, 2012...................................     1

                               WITNESSES

Patrick R. Donahoe, Postmaster General/CEO
        Oral Statement...........................................     4
        Written Statement........................................     6
Walton Francis, Author and Federal Health Care Expert
        Oral Statement...........................................    45
        Written Statement........................................    49

                                APPENDIX

The Honorable Elijah E. Cummings, A Member of Congress from the 
  State of Maryland: Written Statement...........................    70
United States Postal Service Retiree Health Benefits.............    71

 
      CAN A USPS-RUN HEALTH PLAN HELP SOLVE ITS FINANCIAL CRISIS?

                              ----------                              


                        TUESDAY, MARCH 27, 2012

                   House of Representatives
    Subcommittee on Federal Workforce, U.S. Postal 
                          Service and Labor Policy,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 9:35 a.m., in 
Room 2154, Rayburn House Office Building, Hon. Dennis Ross 
[chairman of the subcommittee] presiding.
    Present: Representatives Ross, Amash, Issa (ex officio) 
Jordan, Gowdy, Lynch, Norton, Connolly, Davis and Cummings (ex 
officio).
    Staff Present: Ali Ahmad, Majority Deputy Press Secretary; 
Michael R. Bebeau, Majority Assistant Clerk; Robert Borden, 
Majority General Counsel; John Cuaderes, Majority Deputy Staff 
Director; Adam P. Fromm, Majority Director of Member Liaison 
and Floor Operations; Linda Good, Majority Chief Clerk; Seamus 
Kraft, Majority Director of Digital Strategy and Press 
Secretary; Justin LoFranco, Majority Press Assistant; Jeffrey 
Post, Majority Professional Staff Member; Peter Warren, 
Majority Policy Director; Kenneth John, Majority Detailee; 
Jaron Bourke, Minority Director of Administration; Kevin 
Corbin, Minority Staff Assistant; Ashley Etienne, Minority 
Director of Communications; Angela Hanks, Minority Counsel; 
Jennifer Hoffman, Minority Press Secretary; Adam Koshkin, 
Minority Staff Assistant; and Adam Miles, Minority Professional 
Staff Member.
    Mr. Ross. Good morning. I would like to welcome everyone to 
the Subcommittee on Federal Workforce, U.S. Postal Service and 
Labor Policy. Our hearing today is, Can a USPS-Run Health Care 
Plan Survive its Financial Crisis?
    I will call the Committee to order and begin with the 
tradition of Oversight Committee and its subcommittees with the 
mission statement of the Oversight Committee.
    We exist to secure two fundamental principles: first, 
Americans have a right to know that the money Washington takes 
from them is well spent and, second, Americans deserve an 
efficient, effective government that works for them. Our duty 
on the Oversight and Government Reform Committee is to protect 
these rights.
    Our solemn responsibility is to hold government accountable 
to taxpayers, because taxpayers have a right to know what they 
get from their government. We will work tirelessly in 
partnership with citizen watchdogs to deliver the facts to the 
American people and bring genuine reform to the Federal 
bureaucracy.
    This is the mission of the Oversight and Government Reform 
Committee.
    I will begin with my opening statement. After we do some 
opening statements, I may have to either suspend or turn the 
gavel over to run and do a vote over in Judiciary, but it would 
just be three to five minutes. I respect everybody's time and I 
am grateful that you are here.
    I will now recognize myself for an opening statement.
    A vibrant, healthy Postal Service is critical to our 
economy. Virtually everyone in the mailing industry, paper 
manufacturers, printers, catalog companies, and advertisers, 
rely on the Postal Service. These jobs, and many others, are 
directly tied to a healthy Postal Service. The mailing industry 
as a whole accounts for nearly 8.7 million employees and 
generates $1 trillion in economic activity each year.
    Unfortunately, the United States Postal Service continues 
to inadequately respond to Americans' transition to digital 
communication and the related decline in first class mail 
volume, in large part due to an oversized workforce whose labor 
costs account for approximately 80 percent of the Postal 
Service's operating expenses.
    As a result, today the Postal Service is facing the most 
significant financial challenge in its history and is on the 
brink of default, threatening the existence of hundreds of 
thousands of jobs all across America. Under the leadership of 
Postmaster General Donahoe, the Postal Service has made recent 
strides in improving the fiscal standing of the USPS. While I 
commend Mr. Donahoe for his commitment to implementing cost-
cutting measures, the financial situation of the Postal Service 
remains untenable.
    In response to this fiscal crisis, the Postal Service 
recently presented its five-year business plan to 
profitability. The USPS plan details a need to cut $22.5 
billion in annual expenses by 2016 in order to keep pace with 
diminishing consumer demand for mail. The plan contains 
elements USPS can implement on its own and those that would 
require congressional approval.
    The centerpiece of this plan involves shifting USPS 
employees and their retirees from the Federal Employee Health 
Benefits Plan, FEHBP, to a new USPS-run health plan. Today's 
hearing will examine many of the aspects of the Postal 
Service's business plan, and I thank the witnesses here today 
for testifying.
    On a personal note, I do want to thank Mr. Donahoe, who I 
have come to deal with over the last 18 months and appreciate 
your efforts in trying to do all that you can to save the Post 
Office. When we met a couple of weeks ago, you indicated that 
you came from Pennsylvania and saw the occurrence of the rust 
belt, and that action there was not taken quick enough to save 
an industry. You are committed to saving this industry and I, 
along with you, am committed to saving this industry and making 
sure that the Post Office is around for well over another 200 
years, that it is running efficiently, effectively at the 
service level the American public deserve and expect. So I 
thank you for being here.
    With that, I will now recognize the Ranking Member of the 
full Committee, Mr. Cummings, for an opening statement.
    Mr. Cummings. Thank you very much, Mr. Chairman. I want to 
thank you for calling this hearing.
    The Postal Service recently issued its five-year plan of 
profitability in which it proposes achieving $20 billion in 
savings by 2015. The Postal Service estimates that it can 
achieve $10 billion in cost savings without legislation, but it 
will require congressional action to realize the remaining $10 
billion in savings.
    According to the Postal Service's plan, the bulk of those 
savings, $7 billion, would be realized if Congress authorized 
the Postal Service to take its employees and retirees out of 
the Federal Employees Health Benefit Plan and put them into its 
own health care plan.
    Currently, the FEHBP covers more than 9 million Federal 
employees and their families nationwide. Employees enrolled in 
FEHBP can choose from among 200 different health care plans. 
The Postal Service contends that it could manage employee 
health insurance better than the Federal Government as a whole.
    I want the Postal Service to succeed in the long run. I 
believe the Postal Service serves a unique and irreplaceable 
function in our society; that it is a necessary part of our 
Nation's economic and social future. But I am quite skeptical 
that the Postal Service can or should manage its own health 
insurance system. I suspect that the achievable cost savings 
will come not from shrinking health care costs, but from 
shifting them onto employees. Postal employees would likely 
receive less coverage under the Postal Service plan and they 
would pay a greater share of their health bills. Postal 
annuitants would also pay more, as they would be faced with 
paying an increasing share of their health care from their 
fixed retirement incomes.
    I look forward to hearing from the Postmaster today about 
his proposal and about these concerns.
    I am also concerned with regard to the issue of possibly 
raising rates. One of the things that we have seen is a 
decrease in first class usage of the Postal Service. When we 
raise rates, which we may very well have to do, the question 
becomes will we continue to lose business. I think that is a 
very important thing that I know Mr. Donahoe will address.
    I also want to hear from him as to how he is going to grow 
the Postal Service business and what new authority he needs 
from Congress in order to make the Postal Service as relevant 
to America's future as it was to our past.
    So, Mr. Chairman, I want to thank you for your courtesy, 
and I yield back.
    Mr. Ross. Thank you, Mr. Cummings.
    When Mr. Lynch, the Ranking Member of the Subcommittee, 
arrives, I will also allow him an opportunity to have an 
opening statement.
    With that, members may have seven days to submit opening 
statements and extraneous material for the record.
    We will now welcome our first panel. Mr. Patrick Donahoe is 
Postmaster General and CEO of the United States Postal Service.
    Mr. Donahoe, as you are aware, pursuant to Committee rules, 
all witnesses will be sworn in before they testify. If you 
don't mind, please stand and raise your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give this Committee will be the truth, the whole 
truth, and nothing but the truth?
    [Witness responds in the affirmative.]
    Mr. Ross. Let the record reflect the witness answered in 
the affirmative.
    Thank you. As you know, your written testimony is before 
the Committee. We like to limit it to five minutes. This is a 
crucial issue. I am grateful for you being here. With that, Mr. 
Donahoe, you are recognized for an opening statement.

   STATEMENT OF PATRICK DONAHOE, POSTMASTER GENERAL AND CEO, 
                  UNITED STATES POSTAL SERVICE

    Mr. Donahoe. Thank you, Mr. Chairman. Mr. Chairman and 
members of the Subcommittee, good morning. Thank you for 
scheduling this important hearing. I appreciate the opportunity 
to testify about the financial state of the Postal Service, 
about our five year plan to restore the Postal Service to 
profitability and long-term financial stability, and about our 
proposal to manage health care insurance for Postal employees 
and retirees.
    America depends on a financially strong Postal Service. The 
Postal Service provides a vital national delivery platform that 
is part of the bedrock infrastructure of the American economy. 
It supports a $900 billion mailing industry that employs 7.5 
million people. Every American residence and business depends 
on a regular, secure, and affordable delivery of mail and 
packages.
    Nevertheless, due to a rise in electronic bill payment and 
the economic recession that began in 2008, the Postal Service 
has been in a financial crisis. In response to a 25 percent 
decline in the use of first class mail, the largest and most 
profitable part of our business, the Postal Service has 
aggressively cut costs and taken the responsible steps to 
return to profitability.
    We have generated cost savings of $10.5 billion since 2008 
and have reduced the size of the workforce by 106,000 
employees, and done so without layoffs or disruption in 
service. Indeed, our service levels have never been higher.
    Unfortunately, we cannot emerge from our financial crisis 
within the current legal framework. Absent a legislative 
remedy, the Postal Service will default this fiscal year on 
mandated prepayments to the Postal Service Retiree Health 
Benefit Fund. And as troubling as our current cash crisis is, 
these near-term shortfalls pale in comparison to our long-term 
financial challenges.
    Mr. Chairman, the Postal Service has put forth a 
comprehensive five-year plan that provides a clear path towards 
financial stability. Our plan would enable the repayment of all 
existing debt and fully fund future health care obligations. 
Our plan will also position the Postal Service to better meet 
the changing mailing and shipping needs of the American public.
    The plan we have developed is the result of an exhaustive 
process of evaluating every appropriate option to reduce costs 
and retain or grow revenue. We have worked with Evercore 
Partners, one of the Nation's leading restructuring firms, to 
validate our approach. At the core of the plan is a reduction 
in annual costs of $22.5 billion by the year 2016. Our plan 
calls for, and we are aggressively pursuing, the realignment of 
our mail processing, retail, and delivery operations. This 
realignment of the operational network is expected to yield 
more than $9 billion in annual cost reductions.
    Among the major legislative reforms we are recommending, 
the most significant includes enabling the Postal Service to 
provide employee and retiree health benefits independent of the 
Federal programs. This has the potential to produce 
approximately $7 billion in annual cost reductions and 
eliminate the need for any further scheduled prefunding of 
retiree health benefits. If provided the authority to do so, we 
believe that we can provide our employees and retirees with the 
same or better health cover for significantly less cost. Both 
our employees and retirees and the Postal Service would end up 
paying lower premiums.
    Mr. Chairman, without legislative reform that quickly 
enables meaningful operational changes in cost reductions, the 
Postal Service could incur annual losses as great as $21 
billion by the year 2016. As a result, it is not inconceivable 
that the Postal Service may soon require appropriations greater 
than $20 billion a year. Fortunately, such an outcome is 
entirely avoidable. The Postal Service does not want to become 
a burden to the American taxpayer.
    The Postal Service is currently recording a loss of $25 
million a day. If our plan is fully implemented, we could 
record a profit of $6 million per day by 2016 and be debt free. 
We believe the plan we have proposed for the consideration of 
Congress is a strong one. Our plan would restore the Postal 
Service to profitability and financial stability; it would 
enable the Postal Service to meet its universal service 
obligations and continue to provide secure, reliable, and 
affordable service to the American public.
    We believe it is a responsible approach that is fair to our 
customers and fair to our employees, as well as fair to the 
American public to which we serve.
    I look forward to discussing this with you today and would 
be more than pleased to take any of your questions. Thank you 
very much.
    [Prepared statement of Mr. Donahoe follows:]





    
    Mr. Ross. Thank you, Mr. Postmaster.
    With that, I will recognize myself for five minutes for 
questioning.
    Mr. Donahoe, 150 million homes and businesses each day rely 
on the effectiveness and efficiency of the Postal Service to 
deliver their mail; 8.7 million employees are somehow or 
another, indirectly or directly, dependent upon the Postal 
Service for success. So today I think there are many that are 
hanging on your words as you give your testimony and answer the 
questions today.
    To go straight to one of the points that I think is most 
glaring at us is the cost of doing business for the Postal 
Service, and we know that over 80 percent of that cost is 
labor. With your plan for profitability that includes 
sustaining your own health care benefits, what have been your 
efforts and your results in dealing with the APWU, the Letter 
Carriers, and others in trying to sell this particular package?
    Mr. Donahoe. Thank you, Mr. Chairman. First of all, let me 
just say that I agree wholeheartedly with your concerns about 
the entire postal industry. This is a major issue for us. 
Sending the right message to this industry in terms of people 
who use us to present bills and manage their cash flow, as well 
as advertising and shipping their packages, is extremely 
important, so the quicker we act and get ourselves back on firm 
financial footing, the better for the entire industry.
    In regard to the unions, we have had a lot of, I think, 
very productive discussions, and we are still in the discussion 
phase with these proposals. The goal in the short-term has been 
to get to the point where everybody understands what the 
proposals are, to listen and make sure that, going forward, 
everybody is on the same page. We are not at the point where we 
are in agreement yet, but we are at the point where we are 
discussing and getting a good knowledge base on these issues.
    Mr. Ross. Let me ask you this. In getting to that point, is 
it a catalyst that your financial situation is such that you 
may run out of money soon?
    Mr. Donahoe. I think that the unions realize the financial 
situation that we are in.
    Mr. Ross. And when do you think is there a risk of the 
Postal Service running out of money this year?
    Mr. Donahoe. Here is where we are from a cash perspective. 
Our finances this year have been a little bit better than 
projected; we are about $600 million ahead of our finance plan 
right now. In October of this year we will be required to make 
a payment of $1.3 billion to the Department of Labor. At that 
point we will be at about $100 million in cash on hand. That is 
razor thin. Our operating cash for a day is $200 million a day. 
We will be able to go as long as the finances hold up this 
year, but in October 2013 we would be in a cash crisis.
    Now, that also precludes us not making the prefunding 
payments this year.
    Mr. Ross. Okay, so right now it doesn't look likely that 
you are going to be able to make the prefunding payments for 
2012.
    Mr. Donahoe. No. No, we are not.
    Mr. Ross. Which come due in November.
    Mr. Donahoe. Yes.
    Mr. Ross. And you are thinking, then, that if we stay on 
this course with inactivity of this Congress, then you are 
going to be out of cash to operate the United States Postal 
Service by October of 2013?
    Mr. Donahoe. We would be out of cash as it stands now. 
There are some options that we could take, that we have taken 
before, to conserve cash, like suspension of payment into the 
FERS fund that we are overfunded by $11 billion, but I would 
strongly encourage Congress to move now. This is much more of 
an issue of a crisis of confidence about the postal industry 
than it is just our cash flow. The faster we can resolve this 
and get focused moving forward on growing this industry----
    Mr. Ross. Quick question about the reduction in workforce. 
I laud you and the Postal Service over the last few years in 
trying to respond to the decline in revenues because of first 
class mail not being utilized as much. There has been a 
decrease in the number of employees in the United States Postal 
Service. I recognize that; I think that is tremendous. I also 
understand that we have probably close to 150,000 employees 
that, by way of attrition, will be necessary in order to right-
size the expenditure side of the Postal Service.
    Do you have any plans or suggestions for those that are 
currently eligible for retirement to incentivize retirement?
    Mr. Donahoe. We think that by the year 2015 we need to be 
at about 400,000 current employees. Presently there are about 
155,000 people that can retire, with another 100,000 eligible 
over the course of the next five years. We do plan on issuing 
some incentives based on the fact that we make some changes in 
our operations. As we shrink the network, as we move to six to 
five day delivery, we would put some incentive money to move 
people along.
    It is critical for us to move the headcount down, but at 
the same time we have a lot of non-career people on the rolls 
that are less expensive to work with, but they are also younger 
people, and if we had to take them off the workforce, they 
would end up unemployed, and I don't want to do that.
    Mr. Ross. One real quick question; I am running out of 
time. The impact on Medicare under your health care plan, could 
you expound on that?
    Mr. Donahoe. The way that we are looking at the entire 
plan, what we would like to be able to do is take full 
advantage of Medicare, just like any other organization. Right 
now the Postal Service is the second largest contributor into 
the Medicare system. We think it is only fair that our 
employees and our retirees get to take advantage of Medicare 
and enjoy the savings of a wraparound plan that is more 
affordable for them, just like any other private corporation.
    Mr. Ross. I appreciate that. My time is up.
    I now recognize the Ranking Member from Massachusetts, Mr. 
Lynch, for an opening statement and then we will move right 
into questions for you.
    Mr. Lynch. Why don't we go right into the questions?
    Thank you, Postmaster General. Good morning.
    Mr. Donahoe. Morning.
    Mr. Lynch. You are making me nervous. I am just trying to 
figure out and we have been dealing with FEHBP for a while now. 
There are some colossal inefficiencies in that whole system.
    So I can see where the opportunities for savings within 
that plan exists, and I have fought for some of those plans, 
especially with the pharmaceutical side. I think we are losing 
about $1 billion a year, honestly, on the drug plans offered by 
the pharmacy benefit managers. We are not getting the value 
that we should be getting for the taxpayer or for the employee. 
We are being ripped off, I think. So I am pretty frustrated 
because we haven't been able to move. I have legislation to try 
to save that.
    So, on one hand I do see some opportunities for savings, 
but how many members, we have 8 million in the wider system for 
Federal employees?
    Mr. Donahoe. I think it is around 9 million total.
    Mr. Lynch. Okay.
    Mr. Donahoe. Total employees, retirees, and their families.
    Mr. Lynch. Okay. So you have, admittedly, or at least in 
theory there is a certain amount of leverage that we have 
having 9 million participants in the Federal Employee Health 
Benefit Plan. Now you are suggesting we are going to extract 
about 600,000, if you add survivors and what-not, by extracting 
the Postal employees from that wider plan, and I am just 
concerned about the lack of leverage, the lack of our ability 
to capitalize on savings opportunities as a separate group.
    I also know that the mail handlers' plan, which is very 
popular among Postal employees, I think my mom and dad are in 
that, two of my sisters, all 55 of my cousins. I am kidding. I 
am kidding. I am kidding. There are only about 17 of them.
    [Laughter.]
    Mr. Lynch. But there is a lot of popularity in that plan 
and I am just nervous that you are going to make it 
unaffordable. People hate change.
    Mr. Donahoe. Sure.
    Mr. Lynch. Especially when they have something that works 
for them; it is stable, it is reliable, it is fairly efficient. 
So what happens to my folks that are in the mail handlers' 
plan? Now, if you were suggesting that we are going to give 
people another opportunity here and we are going to give them 
another plan, and there was an opt-in opportunity where, if you 
ran a good plan, you ran a low-cost plan, you ran an effective 
plan, people would opt into that by their own volition, because 
I think there are a lot of people that you could convince that 
you could do a better job. I think there are some people that 
are unhappy out there.
    If that were the case, I would have less problem with it. 
However, what you are suggesting here, I think, is we are going 
to pull our people out and that there is not a whole lot of 
choice there for the employees who would like to stay with the 
plan they have now. Could you address some of that?
    Mr. Donahoe. Absolutely. I would be more than happy to.
    The key thing from our perspective is to find the best plan 
for all of our employees and retirees, and what we have been 
doing over the course of the last year is working on that with 
consultant Ayon Corporation and Hay Corporation to put together 
an excellent plan. So the first thing I would assure you is 
whatever we would present to employees and retirees would be 
something they would be interested in.
    The idea is not to run it ourselves, per se. What we would 
do is go out on the market and actually bid competitively for 
one of the large health providers like a Blue Cross or United 
Healthcare, one of those companies out there, to run the plan. 
What we would offer in the plan would be a number of different 
options.
    Number one, you would have a couple of different tiers, a 
high value, a medium value, and a low value plan A young 
person, 25 years old, they may pick the low value. We would 
also give people options: single, single plus one, plus family, 
family. So that gives people some options there too.
    What has happened with your mom and dad, if they are 
Medicare age, and I don't know if they are, they have actually 
already done what we are proposing to do. They have measured 
the value of the mail handler plan and said I will sign up for 
Medicare A and B, and I can save money taking this mail handler 
plan.
    That is exactly what we propose. We would like to have a 
plan for the current employees and then a wraparound plan for 
the Medicare-eligible employees that gives them excellent value 
at a low cost, so they would use Medicare as their primary 
provider and have this backup plan from a wraparound. That 
saves a lot of money, because today what happens is a person 
like me or other people who would be retiring may never change 
their health care, and the Postal Service and the retirees end 
up paying full health care plan for the rest of their lives, 
when in fact they could get much better value at that lower 
cost.
    So we have looked at this from a total top to bottom 
perspective and making sure that the good value is there for 
the employees and the retirees.
    Mr. Lynch. Well, I have enormous respect for you and I also 
understand how difficult the environment is right now. But as a 
lawmaker we need to drill down. I need to know every last 
detail about this if this is something that you are serious 
about, and I think you are. And we need to talk to the 
employees and let them know that this is what is being 
suggested, and we need to be poking at this thing and testing 
it, and whether or not this is really going to help the 
taxpayer and is going to help the Postal customer. Obviously 
this is really primarily going to impact Postal employees and 
their families. So we will keep talking.
    Mr. Donahoe. Thank you.
    Mr. Lynch. I am not convinced. I am not convinced.
    Mr. Donahoe. That is fine.
    Mr. Lynch. But we will keep talking. Part of it is I need 
to know more. But thank you, I appreciate your testimony today.
    Mr. Donahoe. Thank you.
    Mr. Ross. Thank you, Mr. Lynch.
    I now recognize the Chairman of the full Committee, the 
gentleman from California, Mr. Issa, for a round of 
questioning.
    Mr. Issa. Thank you.
    I want to thank you, Mr. Postmaster. The work you do I 
won't say it is thankless, but it is pretty close. And I know 
that your program is not being well received in some quarters, 
particularly, well, the real austerity is not being well 
received, but even the shift to using Medicare in a primary 
position is not being well received, and one of the not well 
received people could perhaps be me.
    I am probably going to support your doing this, but let's 
have no illusions: you are just cost-shifting. There is no real 
cost savings to the American people. The money in fact will be 
paid out of one hand in order to save out of another hand. Now, 
if you didn't have a projected $22.5 billion loss in just three 
years from now if no change is made, we probably would say no 
thank you, but suck it up and keep it in the rate base.
    I think the questions today that I have is even if we do 
this, where with inaction is the rest of the savings going to 
come from? If we do this, how much more do we have to do? You 
have given us a program that makes an assumption that you will 
be $60 billion in revenue in 2015, is that correct?
    Mr. Donahoe. That is correct.
    Mr. Issa. Do you really believe you will be at $60 billion 
without some change in the trajectory in 2015?
    Mr. Donahoe. And I think the exact number is about 61 and 
change by 2016. I think that based on the fact that a lot of 
our research has shown that is the direction that mail is 
going, predominantly driven by first class, as well as a CPI-
based rate change, we think that we will be right in that 
vicinity. We have been talking to customers, as I had mentioned 
here before.
    My biggest fear is not so much diversion, electronic 
diversion that is happening with bill payment; my biggest fear 
is the electronic diversion of bill presentment if we don't 
stabilize the finance of the Postal Service. We have to get our 
finances stabilized. I think then that will keep bill 
presenters, first class mail in the mail. That is the best way 
for them to still communicate with their customers.
    Mr. Issa. Well, because I am a member of Congress and have 
extensive reporting, I want you to know that I am doing my 
share. I do get electronic presention, is that the word.
    Mr. Donahoe. Presentation.
    Mr. Issa. Presentation. But I also get the paper copy so 
that I can absolutely be sure that I can do my reports 
properly. So I am doing my share to make sure that is 
happening.
    Mr. Donahoe. Thank you.
    Mr. Issa. But let's be honest, it will be a cold day in 
hell before I would voluntarily write a check and put it in the 
envelope again. My regular bills are all paid electronically, 
as probably, if not everyone on the dais now, in the near 
future will be. So again, it is a rosy scenario to be at $61 
billion in revenue. If the continued decline in other forms, 
magazines and the like, if they continue to have more robust 
online services and less current, you are going to have 
challenges, aren't you?
    Mr. Donahoe. Well, here is what we are looking at towards 
the future. We think that the Postal Service has three major 
products that will grow, either stay steady or grow going into 
the future: first class commercial mail bill presentment; 
advertising we know can grow. Advertising through the mail is 
the most effective way you can do it. And the package business. 
We are growing package business right now at a very brisk rate. 
Our final model delivery is running 15 percent over last year, 
and that is over the year before.
    Mr. Issa. Let me follow up on that, because it is true that 
that is one of the areas, and when I speak to many of your 
partners, most notably FedEx and UPS, you are critical to them, 
you are teamed. You are teamed on the back end, you are teamed 
on the final mile.
    Isn't the future of the Post Office an efficient, effective 
delivery system that often carries, in greater amounts, all of 
the above, meaning that you are the last mile in many, many, 
many cases, and that allows you to continue to be more 
efficient while it allows them to save money? Isn't that, to a 
great extent, where you are going to be?
    Mr. Donahoe. That is where we are going to be and that is 
where the Country is going with the growth in e-commerce.
    Mr. Issa. Now, today, in rural areas, you are the last mile 
for newspapers in many cases, aren't you?
    Mr. Donahoe. Yes. Yes.
    Mr. Issa. And those newspapers choose to deliver on 
Saturdays, and you are planning, for major cost savings, to no 
longer deliver on Saturdays, is that correct?
    Mr. Donahoe. That is correct.
    Mr. Issa. Do you find it odd that the vast majority of 
these newspapers do not want a rate increase, say they cannot 
tolerate a rate increase, but they want you to continue 
delivering on Saturday?
    Mr. Donahoe. Well, right now we are still working through 
trying to get all stakeholders on the same page, but I think we 
can work with the newspaper industry too, if they are 
interested on Saturday delivery. But to your point, we feel we 
have to reduce it at this point.
    Mr. Issa. You have a very bold proposal that you offer 
Saturday delivery, but that it be self-paying, in other words, 
to the extent that people still want a Saturday delivery, for 
example, pharmaceuticals, where, for a smaller premium than 
FedEx or UPS, you can in fact still roll out that delivery.
    Does that system in some way translate to other areas? For 
example, is it possible to maintain, if you are given the 
flexibility to make it pay its own way, maintain, for example, 
those newspapers on Saturday in rural areas? You have rural 
letter carriers. Is there any way that is going to pencil out 
if you are given complete flexibility, as long as it pays for 
itself?
    Mr. Donahoe. What our proposal is for Saturday is to keep 
post offices open, post office boxes, run the network, and 
deliver packages with an extra fee. To your point, with the 
technology today, with intelligent mail bar codes, we could 
actually deliver mail if a customer asks, again, making sure 
that we would charge the amount that would cover. So if a 
person absolutely needed delivery on Saturday of their letter 
mail and newspapers, I am sure the flexibility is there for us 
to work that out.
    Mr. Issa. So as Senator Lieberman and others in the Senate 
are reaching cloture on their bill and we are preparing for a 
date on the floor, should we have a sensible manager's 
amendment that would include greater flexibility, or does the 
current bill give you the flexibility you need for a modernized 
Saturday delivery, in addition to what we all understand to be 
historic Saturday delivery ceasing?
    Mr. Donahoe. I think any language that gives the Postal 
Service more flexibility is good, because with all the 
financial issues that we are facing, we could certainly use 
that flexibility for the customers, and I think working with 
our unions we can get more flexibility in the workforce to make 
sure that we can deliver that mail.
    Mr. Issa. Well, thank you. I note an esteemed former chief 
staff member here behind you. He knows how that should be 
written. I also see Mr. Clay, Sr. He certainly knows how the 
Committee works. I won't name everybody, but we would look 
forward to that. Obviously, it is probably on our side of the 
Capitol that we are going to have to put additional language 
in. We would like to work on making sure that language is 
flexible enough for your proactive proposals, which I think are 
every bit as important as the cost-cutting.
    Mr. Donahoe. Yes.
    Mr. Issa. I thank the Chairman and yield back.
    Mr. Ross. Thank you.
    I now recognize the Ranking Member of the full Committee, 
the gentleman from Maryland, Mr. Cummings, for five minutes.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    I want to go back a moment to some things Mr. Lynch was 
saying. When you are talking about, and I agree with everything 
he said and I agree with his skeptical comments, about this 
health care plan, when you think about something like health 
care, it is so very, very important and vital to people, 
particularly in today's world. Have you had a discussion with 
the unions about the proposed health care plan?
    Mr. Donahoe. Yes. We have been talking with the unions and 
the management associations for the better part of about three 
or four months. What we have been trying to do is go through a 
process so everyone understands what is being proposed. So we 
talked about the original how we would set it up, the Medicare 
requirements. We have actually mocked up some proposals based 
on taking a set of private industry plans, averaging them 
together and comparing some costs with what we have today, and 
we have discussed those.
    Mr. Cummings. So you are saying that they have had some 
input into your thinking and your planning there with regard to 
the program?
    Mr. Donahoe. We have had discussions, but we have not come 
to an agreement. To your point, this is probably the most 
critical issue that people worry about, their health care, so 
we don't want to push them. We want to try to work through so 
that we understand. We listen at the same time.
    Mr. Lynch mentioned the question about the mail handlers. 
One of the things that we have said to the unions is if you 
want to still maintain your plan, because some of them have a 
number of people and the rest of the Federal Government, we are 
fine with that.
    Mr. Cummings. One of the reasons why I mentioned unions is 
because they have, in my estimation, bent over backwards and 
have been very understanding, trying to work things out. It is 
just incredible the lengths that they have gone to try to work 
things through and understanding that sacrifices have to be 
made, and I would hate to see you coming up with these kinds of 
plans without having some type of input, because you are going 
to have to come back to them at some point anyway, and I think 
it is better to have people onboard as you go along and they 
feel as if they have been a part of the process, as opposed to 
going and trying to shove something down their throats.
    Mr. Donahoe. I agree 100 percent. We want to make sure we 
work with the unions on this and also the communication of the 
employees, and just as much so the communication with retirees, 
because there is a lot of concern, there is a lot of fear of 
the unknown out there, and it is just as important for us to 
listen to what the recommendations are and build that into the 
plan.
    Mr. Cummings. Now, let me go back to revenue. Packages rose 
some 8 percent?
    Mr. Donahoe. Priority mail, yes.
    Mr. Cummings. Priority mail. And why is that? Why do you 
think that is? Because I think whenever we find a sweet spot we 
need to kind of zero in on that to try to figure out how we 
increase it. Go ahead.
    Mr. Donahoe. I agree 100 percent. Couple things on priority 
mail. Number one, priority mail is an excellent value. That is 
the flat rate box, if it fits, it ships.
    Mr. Cummings. Oh, yes, that commercial. I like that 
commercial.
    Mr. Donahoe. There you go. And returns the same thing. We 
have really priced these well so that you have small users, 
small business, home business, it is very easy for them and 
large businesses to use priority mail.
    The other thing we have concentrated on this year is 
visibility, so good scanning the whole way through. Our people 
have done a tremendous job improving that, so I think that is 
where you are seeing a lot of value and that is where you are 
seeing growth.
    The other area that we have seen tremendous growth is that 
last mile, parcel select, that our letter carriers and rural 
carriers deliver. That is growing at almost 15 percent a year. 
So we are very excited about packages and that is why we would 
like to get a resolution around some of these issues, so we can 
get back and focus on growing advertising and marketing mail, 
packages, stabilizing first class mail.
    Mr. Cummings. Now, you are familiar with the Senate bill, 
are you not?
    Mr. Donahoe. Yes.
    Mr. Cummings. And what are your feelings about it? Any 
concerns that you have? Because I think it is quite possible 
that may very well be the vehicle that we may end up sort of 
using to try to figure this out. That is my opinion, though.
    Mr. Donahoe. Sure.
    Mr. Cummings. Mine only.
    Mr. Donahoe. We think there are some very good points in 
the Senate bill. We have had a number of discussions with 
Senators Lieberman, Carper, Brown, and Collins. We think there 
are some very good points in there. There are some suggestions 
we have made. We have said to them the biggest concern is the 
length of time. If we can move up some of the proposals to 
match up more with our plan, we will get back to a profitable 
nature quickly and then be able to focus on growth.
    Mr. Cummings. One last question. There have been 
discussions and you have said that maybe you would not have to 
close as many as 250, 200 and some processing centers. Can you 
talk about that for a moment, please?
    Mr. Donahoe. Sure. One of the questions that has come back 
from the Senate has been, rather than moving to the full phase 
of the network consolidation, is there a halfway point to keep 
more overnight service for local businesses and customers, and 
we think that there is an opportunity. We have done some 
studies around there, and it would require us closing about 
half as many facilities as we propose.
    In order to stay true to the finances, we have pitched the 
idea that we would like to raise the price of single piece 
first class eventually up to 50 cents. That is about a billion 
dollar tradeoff each way; provide service, keep more of the 
network up, but we would need the finances on the revenue side 
of the house to stay true to the numbers.
    Mr. Cummings. Thank you, Mr. Chairman.
    Mr. Ross. Thank you, Mr. Cummings.
    I now recognize the Vice Chairman of the Subcommittee, the 
gentleman from Michigan, Mr. Amash, for five minutes.
    Mr. Amash. Thank you, Mr. Chairman, and thank you, Mr. 
Donahoe. It is good to see you again.
    Mr. Donahoe. Good to see you.
    Mr. Amash. I have a few questions. When was the last year 
the Postal Service had a profit?
    Mr. Donahoe. I think we had a profit in 2006, maybe 2007. I 
can't be 100 percent sure, one of those two years.
    Mr. Amash. How much money did the Postal Service lose in 
the first quarter of 2012?
    Mr. Donahoe. With our requirement to prefund, about $3.3 
billion.
    Mr. Amash. And how much do you expect to lose for the 
entire fiscal year?
    Mr. Donahoe. Depending on how we finish the year, probably 
in the vicinity of about $14 billion. We are a little ahead of 
our revenues right now and people have done a great job holding 
costs. The prefunding for this year accounts for both this year 
and last, so that is 11 billion of those dollars.
    Mr. Amash. Now, last year Congress acted at the last second 
to give you some temporary relief from the prefunding. What 
does the lack of certainty of whether or not you will have to 
make your payment each year do for your plan for profitability 
in your overall business model?
    Mr. Donahoe. We have to get that resolved. That is what we 
are proposing right now in terms of the health care proposals 
in the overall plan. But I will tell you it is much larger than 
us. This is an industry issue. To give you an example, if you 
are worried about the Postal Service being able to deliver your 
bills and statements, and you are worried about your cash flow 
as a large company, you are going to start thinking about 
alternatives. The faster we get this resolved, the faster 
people don't have to worry about alternatives to the mail.
    Mr. Amash. That goes nicely with my next question. In 
November 2011, you addressed the National Press Club and, 
according to the transcript, you said, ``You know that phrase 
speed kills? Well, the lack of speed will kill the Postal 
Service. There is a stark choice: a more flexible business 
model that allows us to control costs quickly or very large 
losses that will ultimately burden the taxpayer.''
    If immediate action is needed to return the Postal Service 
to solvency, why did it decide to self-impose a five-month 
moratorium on closures and consolidations of its facilities?
    Mr. Donahoe. We were approached by members of the Senate 
and they asked us, in order to keep some stability with the 
employees and the customers, if we would agree to wait to give 
them an opportunity to get legislation out and over to the 
House, and get the legislation through the House and up to the 
President for signature. I didn't think that was an 
unreasonable ask.
    As we work through these processes to consolidate 
facilities, it is not going to happen all at once. The way we 
consolidate will be done in a very thoughtful and careful 
method so we don't disrupt service. We are looking for the 
bottom line cost reductions, and we will get those, but these 
consolidations will happen over the course of the next year.
    Mr. Amash. So you were supportive of the Senate's request, 
then?
    Mr. Donahoe. They asked me for that consolidation; I had no 
issue with that.
    Mr. Amash. Chairman Ross and Chairman Issa wrote a 
comprehensive Postal reform bill last year that was passed by 
this Subcommittee and the full Oversight Committee. It is full 
of cost-saving measures that will revitalize the Postal 
Service. What parts of H.R. 2309 does the Postal Service 
support?
    Mr. Donahoe. We support the FERS refund; we support the 
ability to move and consolidate the network; we support the 
ability to move to consolidate from six day to five day 
delivery. Practically everything in the bill we are in support.
    Mr. Amash. In your written testimony you mentioned 
establishing a Postal Service-sponsored health care program 
represents the largest part of the plan for profitability 
savings, accounting for over $7 billion of annual savings. Does 
the Postal Service have the resources to maintain its own 
health care plan?
    Mr. Donahoe. What we would do for a health care plan is 
what any other company does; you go out into the free market, 
you bid that, you find the best health care provider to act as 
pretty much an overall health administration firm, say a Blue 
Cross or United Healthcare.
    We would also expect to use HMOs or other health care to 
fill the gaps, because there are gaps out there, and that is 
the way that we would manage it. We would go out through a 
regular competitive request for proposal, and once we are able 
to secure the health care, the provider would manage the plan 
for us.
    Mr. Amash. And how long do you think it would take to 
implement such a plan?
    Mr. Donahoe. We have had some discussions with health care 
companies to understand that, to actually test out our ideas 
and see if they are sound. We would have to go through a 
request for information, an RFI, to get more and then go out 
with an actual bid. We think that we would be able to have a 
health care plan ready by 2014.
    Mr. Amash. All right. Thank you, Mr. Donahoe.
    Mr. Donahoe. Thank you.
    Mr. Ross. Thank you, Mr. Amash.
    I now recognize the gentlelady from the District of 
Columbia, Ms. Norton, for five minutes. Good morning.
    Ms. Norton. Good morning, and thank you very much, Mr. 
Chairman. This is an important hearing we are having.
    First, Mr. Donahoe, I just want to congratulate you and 
your union for what you have done so far. Never in the history 
of the Federal Government has a Federal agency downsized, saved 
billions of dollars without a single layoff.
    And I must say that that could never have been done if 
there were not a union at a table. All hell would have broken 
loose if any private corporation or if the Federal Government 
had tried to make these billions of dollars in savings 
singlehandedly as a management matter. I also note that the 
fact that the Postal Service is doing better seems to me to be 
a sign of recovery. You are a virtual barometer about the 
economy itself.
    Now, if you look at the top line of what you are proposing, 
there is a part of it that is counterintuitive because of the 
notion adopted by every country in the world, that the larger 
the pool, the less the cost of health care. That is what is 
before the Supreme Court now. That is what every country in the 
world does, it creates the largest pool it can. Every country 
in the world creates a pool of the nation itself. That is what 
we are trying to do with the Affordable Health Care Act.
    Moreover, I am sympathetic to the Postal Service in this 
respect: we ask you to do what we ask no Federal agency to do. 
It is mind-boggling that what we do, including providing 
services, and yet we want to treat you as a private 
corporation. We haven't made up our minds how to treat you.
    So I look at what might motivate this new idea of yours and 
I want to ask you, candidly, if you would have felt compelled 
to put forward this proposal if the post retiree fund 
contribution the Postal Service must make today was eliminated 
or substantially reduced. If that were not the case, would you 
feel compelled to come forward here today?
    Mr. Donahoe. One of the things, to your point, that we have 
looked at over a number of years is to actually own our own 
insurance plan, and your point of the size of the pool is 
critical. The size of the pool for the Postal Service would be 
about one million participants, retirees plus the----
    Ms. Norton. Compared with how many in the FEHBP?
    Mr. Donahoe. Well, compared within the FEHBP it is a 
smaller pool, but if you took that and you went out into the 
private market and bid that, that would be the largest single 
health care group or pool out there. And that is the exact 
thought behind what we have been looking at.
    My feeling is that, not that we have any arguments with the 
FEHBP, I am sure that everybody tries to do their best there, 
they run a pool of 200-plus different plans, and there is no 
real way to get out and compete to get the best price. And we 
have had companies come in to talk to us about how they are 
saving in health care costs and providing better benefits 
through making the health care companies go out and compete and 
provide better pharmaceutical plans, et cetera, and we look at 
that and say, jeez, with a million people we should be able to 
get some of those same benefits.
    Ms. Norton. So the post retiree contribution issue is not 
what motivates the proposal?
    Mr. Donahoe. That is one of them. We have looked at this 
beforehand. However, with the retiree health benefit 
requirement, having our own health insurance does give us the 
opportunity to reduce those costs and manage Medicare at the 
same time. So what we are doing is looking at a number of 
things.
    There is a potential that, as we work through these 
changes, we won't be at the point where we are fully resolved 
with the health care, and we will have to continue to work with 
the unionson that which will be__
    Ms. Norton. Mr. Donahoe, the first thing that any member of 
Congress will think about when a new proposal of this kind 
comes forward, and you have mentioned stakeholders, is what the 
OMB, and you say this plan has been vetted, what the OMB, what 
the OPM, what your own inspector general have said precisely 
about this plan.
    Mr. Donahoe. Yes. We have asked them, to your point, please 
look at that, shoot holes. Are we missing anything? So we have 
asked the IG to audit it and they have, and they have told us 
it looks good. We have been to the OPM; I have been there with 
Mr. Barry on a couple of occasions and actually have sent a 
number of our people back to look at it to make sure that any 
issues that were not covered we thoroughly vetted.
    I think to Mr. Lynch's point and Mr. Cummings' point, we 
need to continue with that. We need to continue to examine----
    Ms. Norton. And what about the OMB?
    Mr. Donahoe. We have talked to the OMB, but in terms of 
really digging in, probably not to the same level. We have had 
discussions----
    Ms. Norton. Do you have anything in writing from those 
three----
    Mr. Donahoe. I have from my IG, and I have asked Mr. Barry 
at the OPM to please provide back in writing what his thoughts 
are.
    Ms. Norton. Mr. Chairman, could I ask that what Mr. Donahoe 
has in writing from the OMB, the inspector general, and who 
else did you say?
    Mr. Donahoe. We have to get something back from the OMB. We 
have asked----
    Ms. Norton. The other two you have something in writing? 
Could you submit that to the Chairman so it can be----
    Mr. Ross. Without objection.
    Mr. Donahoe. Absolutely.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Ross. Thank you.
    We now recognize the gentleman from Illinois, Mr. Davis, 
for five minutes.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Thank you, Mr. Donahoe. I want to go back a little bit to 
the number of mail processing plants that we might be arriving 
at in terms of closure. I think some rethinking has been done 
from what was initially indicated.
    Mr. Donahoe. Yes.
    Mr. Davis. Where are we now in terms of that?
    Mr. Donahoe. The original proposal was to move from 
approximately 487 down to around 200. We came back after we did 
our studies and proposed that we would go from 487 down to 
about 232.
    Mr. Davis. Could I ask that, in light of the potential job 
impact and the uncertainties in the minds of individuals who 
would be affected greatly in terms of where they might end up 
working or having the opportunity to work, do we expect to have 
that maybe close to finalization by the 15th of May? That is a 
date that we have been talking about some things happening.
    Mr. Donahoe. We have been working through that with our 
employees. One of the things that we have continued to do, even 
though we have held the date for closings until after May 15th, 
was to continue to work with customers and employees. So we 
would know by then which employees would be affected.
    What we are trying to do is go person by person, that is 
how important this is, so we can sit down with an employee and 
have a discussion if they want to retire, if they want to take 
a different job, if they want to do something different in 
their career, because as we have reduced headcount in the 
organization, we have always been very conscious to try to do 
the right thing as a responsible employer.
    Mr. Davis. Do we have any round numbers in terms of how 
much we are likely or would like to be able to save as a result 
of this process?
    Mr. Donahoe. We think that the network reductions as 
proposed right now would save us about $2.5 billion. We also 
have actually taken about $400 million in revenue off of there 
based on feedback we have gotten from our customers. So the net 
would be about $2.1 billion.
    Mr. Davis. Then let me shift over a little bit back to the 
line of questioning from Representative Norton. Did I glean 
that we are very comfortable from the responses that we have 
gotten from the stakeholders who vetted the proposed system 
that the Postal Service would run itself, in terms of health 
benefits and----
    Mr. Donahoe. I think comfort would probably not be the 
right word. I think that our feeling is, with our work with our 
IG, we have asked them, as we have gone along, make sure we are 
doing this the right way. We don't want to put something out 
that is incorrect. So we have kept them abreast.
    The OPM, we are waiting back for answers in writing from 
them. We have been working with them and asking them again, as 
we make these proposals, does it make sense? What we are 
saying, is this legal? Does this make sense from a health care 
perspective.
    I think any time you get into a big change like this, there 
is no real comfort level, it is just trying to reassure and ask 
the questions to make sure we are doing this the right way.
    Mr. Davis. Let me ask what are we getting back from the 
unions as we interact with them around this proposed change?
    Mr. Donahoe. I think that the unions, as we have worked to 
communicate and explain what we are thinking, there have been a 
number of questions come back. From some of the unions they 
have said, jeez, you know, we have our own health care plan; 
what would happen with that? And that is something that has to 
be resolved. Of course, some of the other concerns have been 
what happens in the long-run if there is any problem with the 
Postal Service from a financial perspective.
    Our proposal also includes putting together a trustee group 
like representatives of the unions, as well as management, and 
a third party like the Treasury or the OPM, somebody else in 
there that could oversee and make sure that all decisions were 
proper decisions going forward. And this has come about through 
all the discussions and looking at how other people have gone 
through those processes. But to your point, we have to be very 
careful and make sure everybody knows exactly what is on the 
table and what is being proposed.
    Mr. Davis. Have you looked at or explored or thought about 
a Postal only plan within the Federal Employees Health Benefits 
Program?
    Mr. Donahoe. We have talked to the OPM about that and that 
is something we have said to them if you could come back to us 
and say how, managed within there, we could get the same 
benefits, the same savings and flexibility, we would certainly 
be open to something like that.
    Mr. Davis. So we still have a number of options open 
relative to how we close the loop on providing these benefits.
    Mr. Donahoe. Yes.
    Mr. Davis. Thank you very much.
    And thank you, Mr. Chairman.
    Mr. Ross. Thank you, Mr. Davis.
    For those who want to hang around, I would like to do 
another round with you.
    Specifically, I want to recognize myself for five minutes, 
but also ask you about rates. You have talked about increasing 
postal rates from 44 cents to 50 cents. My concern is even 
though I was a lawyer by trade, I had an undergraduate degree 
in business, and some of the business models we would deal with 
when I was in school would be that if nobody is buying your 
product, one of the last things you do is raise your rates. And 
my concern here is that the assumptions upon which you are 
basing your increase in revenues with an increase in rates, 
does that take into the cause and effect a declining user base 
of first class postage?
    Mr. Donahoe. This would be the way we would approach this: 
our prices are broken out right now competitive and market 
dominant.
    Mr. Ross. Right.
    Mr. Donahoe. For the most part, we would follow the pricing 
scheme that we have now with the CPI cap on all of our market-
dominant products. The only portion of mail that we would look 
at to increase the price would be specifically the single 
piece, the blue mailbox mail that you or I might use to send a 
card or mail a bill in. That is a volume that has continued to 
shrink.
    Mr. Ross. Right.
    Mr. Donahoe. And as that has shrunk, that has generated the 
recommendations of shrinking our network down. Now, there have 
been some suggestions that have been made to slow the shrinking 
down to some extent over the course of the next couple years, 
not be as drastic, and our approach to that has been if that is 
an option, if that is the will of the Congress, if that is 
where people want to go, that we would propose to increase just 
that single piece stamp rate to make up the difference of the 
savings that we would lose.
    Mr. Ross. But wouldn't logic and reason and, quite frankly, 
laws of economics dictate, then, that you might actually have 
an even further decline in revenues because of a lack of 
buyers, if you will?
    Mr. Donahoe. That revenue is going, whether we like it or 
not, because of electronic diversion. It is kind of an 
interesting situation because the revenue of single piece is 
going away and we project it to continue to drop based on bill 
payment online and electronic diversion. But there are other 
portions of that mail that are very inelastic. So we have 
looked at----
    Mr. Ross. Inelastic. Even if you went from six to five days 
it would still be inelastic?
    Mr. Donahoe. Yes, because it is convenient. Even today with 
Forever stamps, you can buy a book of Forever stamps and pay 45 
cents apiece and use those five years from now when the postage 
rate might be 50 cents. So it is a good deal for people.
    Mr. Ross. Real quickly on your charts there, because I want 
to go to the second part there, operational initiatives. It 
looks as though you have formulated a $9 billion savings with 
those three particular areas. Could you identify those? You are 
talking about the reduction there, I guess, in the network and 
sortation and transportation?
    Mr. Donahoe. Right.
    Mr. Ross. If you could go over each one of those three in 
the middle part there.
    Mr. Donahoe. Sure. Here?
    Mr. Ross. Right there, yes, sir.
    Mr. Donahoe. Okay. What we have laid out here are three 
basic approaches. We have legislative initiatives, that is the 
prefunding result in five day. That is worth about $8.5 
billion. The network itself, that is the facilities, retail, 
post offices, and then our delivery routes. We think there is 
about $9 billion worth of savings there. And then the final is 
compensation and benefits. That is health care savings plus 
more flexibility with the union contracts.
    Mr. Ross. And specifically on the middle part there, when 
you say the savings in network, that is through consolidation, 
correct?
    Mr. Donahoe. That is consolidation of----
    Mr. Ross. How would that affect the geographic delivery of 
mail, if any, when those changes are made?
    Mr. Donahoe. What we are proposing is changing service 
standards today from one, two, and three days, to two and three 
days. What that would allow us to do is to consolidate 
substantially into the smaller number of plants, going from 487 
down to the 232 we proposed. What that allows you to do is to 
use those buildings for 20 hours a day, versus the 8 to 9 hours 
a day that we use now and save substantial amount of money; a 
lot of overhead, a lot of maintenance costs. That is the area 
that we would be able to get this----
    Mr. Ross. And the retail would be the consolidation or 
closure?
    Mr. Donahoe. The retail would be the consolidation and/or 
change in the cost of post offices.
    Mr. Ross. So you are talking about village post offices, 
that concept?
    Mr. Donahoe. We have four proposals right now that we think 
are very viable for post offices. One is to consolidate small 
ones into larger ones. And, again, we want to be very careful 
with the customers. That is only a mile or two. We are not 
proposing for people to have to drive 25 miles. Second is some 
type of a contract unit available at a local store that is open 
7 days a week.
    Another is to serve people off of the rural routes, and we 
have had people actually ask us, as we have had these 3700 
community meetings, to move to rural delivery. But another 
solution is to match up the cost of the office with the revenue 
we bring in.
    Mr. Ross. Right.
    Mr. Donahoe. What we face right now is we have thousands of 
offices that cost us, on average, $70,000 to operate and bring 
in somewhere between $15,000 and $20,000. We think that there 
is a happy medium there. We are working with our postmaster 
associations. We will also go back to the community to work on 
this, too. Keep the flag flying, but we will be able to do it--
--
    Mr. Ross. And one last one--I am out of time--on the 
delivery. Are you going, then, from door to curb, is that----
    Mr. Donahoe. No, that does not include door to curb, that 
is improvements in what we call flat sequencing and also in the 
way that we have the route structured. That is something that 
we are working with the----
    Mr. Ross. So this doesn't include door to curb.
    Mr. Donahoe. No.
    Mr. Ross. And what is that estimated as annual savings?
    Mr. Donahoe. Door to curb varies. There are savings and 
there is also investment, and I would be more than happy to 
give you a paper on that. We have done a lot of research on 
that. That is also something, I will tell you, of all the 
research that we have done from a customer satisfaction 
standpoint, that is the one thing that customers don't want 
changed; they don't want their mailbox changed. So we did not 
include that in there.
    Mr. Ross. But isn't it true that only about 25 percent of 
Postal customers really get door-to-door anymore?
    Mr. Donahoe. It is about 30 million people.
    Mr. Ross. Okay.
    Mr. Donahoe. So we want to be sure we don't have 30 million 
people really mad at us.
    Mr. Ross. And I will follow up with you on that. Thank you 
very much. My time has expired.
    Mr. Donahoe. All right.
    Mr. Ross. I now recognize the Ranking Member, Mr. Lynch 
from Massachusetts, for five minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Postmaster General, in your proposal here, as Chairman Issa 
identified, there is a cost shift over to Medicare. How do you 
propose to do that in terms of just mechanically? Are you going 
to tell your Postal employees, okay, now it is mandatory? Are 
you going to ask Congress for the power to say to you that you 
can tell your Postal employees the first dollar has got to be 
from Medicare, you have to go to that first? Or are you going 
to have some type of option to have people go, or how is that 
going to work?
    Mr. Donahoe. We would prefer the mandatory requirement for 
Medicare. We are the second largest payer into Medicare, the 
Postal Service is, and we feel it balances the playing field 
with everybody else that uses Medicare. So we would ask to 
require Medicare A, B, and D, and that we would provide, as 
part of the health care proposal, a very good value, low-cost 
option to provide Medicare wraparound for B when our retirees 
sign up for that.
    Mr. Lynch. Okay, here is my problem. Right now on the 
Medicare side I am seeing a lot of docs refusing Medicare. So 
let's just say I have a Postal employee wants to go to that 
doc, now you it is mandatory that they go Medicare.
    Mr. Donahoe. Yes.
    Mr. Lynch. Their doc doesn't accept Medicare because 
reimbursement rates are pathetically low. So under your plan my 
person couldn't go to their doctor, right, they would have to 
go to some other doctor that accepts Medicare?
    Mr. Donahoe. I don't know the answer. That is something I 
would have to get back to you on. I am not sure how that works. 
With the wraparound, I don't know the answer to that on 
Medicare A and B, that if a person could actually choose to use 
that wraparound to cover some of that. I will have to get back 
to you on that.
    Mr. Lynch. Okay. Well, that is an important question 
because, ideally, I would like the opportunity, if you are 
going to require a person, in the first instance, to go 
Medicare, if their doctor, their existing doctor, current 
doctor does not accept Medicare, I would like there to be some 
other option. They have gone first, if it is rejected, then 
they can still go to the same doctor. There is this promise out 
there with the Affordable Care Act that everyone would still be 
able to go to their own doctor.
    Mr. Donahoe. Right.
    Mr. Lynch. That is not necessarily what is going on right 
now. And as this folds out over the coming years, I am 
concerned about even people being able to go to their own 
hospital.
    Mr. Donahoe. Yes.
    Mr. Lynch. Because I am seeing some hospitals are getting 
very shaky, so they may not be in existence. So I am concerned 
about that.
    The number you have up there for five day delivery shows a 
savings of $2.7 billion.
    Mr. Donahoe. Yes.
    Mr. Lynch. We have had some analysis on this that shows it 
to be half of that.
    Mr. Donahoe. Yes.
    Mr. Lynch. Does this properly account for the fact, if you 
are not delivering on Saturday, and most people talk about the 
five day, eliminating Saturday, do you factor in the drop-off 
in volume? Because if I am mailing an important package on 
Thursday and I know it is not going to get there Friday because 
we have lower delivery standards, and it is not going to get 
there Saturday because the post office is closed, and it is not 
going to get there on Sunday because the post office is closed, 
and God forbid Monday is a holiday, there is going to be a 
drop-off in volume there. Have you factored that in fully 
because of the fact that you are not working Saturday?
    Mr. Donahoe. We did market research on that and I will tell 
you, off the top of my head, I can't remember the exact number, 
but I can give you that number. We have done some market 
research and that is why we picked Saturday, because it was by 
far the lowest volume day.
    One of the proposals that we also have working through the 
Saturday delivery, to your point, is on non-widely observed 
holidays that fall now on Monday, we would deliver on Saturday. 
That is part of our proposal. So that closes that loop.
    Mr. Lynch. Okay, I only have about 30 seconds here, so let 
me just squeeze in this last one. I had an opportunity to meet 
with the folks from Pitney Bowes, and they are running a 
program in Denmark where they have a virtual mailbox now. So on 
your iPad or on your computer at home or on your laptop you can 
pull up a virtual mailbox, and what they do there is, as the 
mail comes into the processing center, it takes a picture of 
your mail. What you can do is you can click on the mail you 
want delivered and you can click off on the mail you don't want 
delivered. So it eliminates what some people call junk mail. We 
call it direct mail. I understand it. We call it jobs, right.
    Now, that technology, are you looking at anything like 
that, where folks could use this virtual mailbox to click off 
on mail? Look, I have two girls at home; I get a ton of this 
stuff. They probably like to get it, but I sure don't. I am 
just thinking about looking down the road. Have we factored 
that in here? If they are doing it in Denmark now, number one, 
are we looking at that and have we factored that in? What is 
our plan?
    Mr. Donahoe. Well, I want to make sure your daughters get 
their mail, because then they will buy something and we will 
deliver it.
    [Laughter.]
    Mr. Lynch. I bet you do. You are saving me money.
    Mr. Donahoe. We are. Right now we are looking at digital. 
In fact, we are in the process of establishing a group to take 
the lead on that, and we think there are big opportunities in 
the digital world from a digital transmission because we 
provide the safety and security of first class mail. We think 
that there are some opportunities to transition that into the 
digital world. But we also think that there are plenty of 
opportunities to grow revenue within the current products that 
we have now, employing some of those same technologies. So 
plenty to report out on that and we would like the opportunity 
to cover more of these digital areas.
    The one thing that we will need from a legislative 
standpoint is just some clarity around the fact that we can get 
into those areas. That is part of the non-Postal we are looking 
for.
    Mr. Lynch. Okay. Just one yes or no question. I am abusing 
my time, I understand that, and I appreciate your patience with 
me. Have you been talking with Kevin Tally from the Rural 
Carriers and Jennifer Walburton from the National Association 
of Letter Carriers on this five day thing and where the numbers 
might be on this?
    Mr. Donahoe. I talked to Fred Rolando and to Jeanette. I 
don't know the other people.
    Mr. Lynch. Okay. All right, thank you.
    Mr. Donahoe. Thank you.
    Mr. Ross. Thank you, Mr. Lynch.
    We now recognize the Ranking Member from the full 
Committee, Mr. Cummings from Maryland, for five minutes.
    Mr. Cummings. Mr. Donahoe, what went into the development 
of this plan? How did you come about it? You are dealing with 
some pretty exact numbers and projections, and I am just 
wondering, trying to get to the integrity of the plan.
    Mr. Donahoe. Sure. Here is how we approached this. To Mr. 
Darton's point earlier, facing the problems that we face with 
the retiree health benefit payment, rather than throwing our 
hands up and saying we can't do anything about it, we started 
to look at what actually made up the requirements of that 
retiree health benefit, and there were a number of things that 
came up. Number one was the requirements for health care for 
employees who weren't in the Medicare plan. There were some 
accounting issues and, of course, the cost of FEHBP plans that 
don't give you the value of the wraparound. So we have 
historically looked at having our own health care plan.
    This goes back, I think we made some original studies right 
after the 2000-2001 time frame. So we went back and sat down 
with a couple of groups, Ayon Corporation and the Hay Group, 
two outside firms who are expert in this area, and we actually 
assembled a health care plan based on what we thought one would 
look like in the size and scope of an organization the size of 
the Postal Service. We designed it based on what other 
companies are doing today, looking for a number of value levels 
plus a number of different groups, the single payer, single 
plus one, family. The other thing we did was made sure that we 
had pharmaceutical coverage in that too.
    So we sat down and pretty much built a health care proposal 
based off of all this information, and that is where we are 
right now. Taking that, then, and then comparing that to what 
we spend currently in FEHBP and the same way what we are doing 
in terms of Medicare today, and that is where we have arrived 
at the point where we are today. So we have done a lot of 
studies on this.
    To the point we made before, we have talked to the OPM, the 
OMB, we have had our IG, we have had people come in from the 
outside, all the big health care providers, not on RFIs, but 
for discussion to understand how we can manage health care, how 
you can manage pharmaceuticals. A lot of work has been done.
    Mr. Cummings. And would the employee have to give up 
anything if going into your program?
    Mr. Donahoe. I can provide you all the detail. We have gone 
through and stratified every plan that every employee is in. I 
would say, for the most part, probably 95 percent of our 
employees would benefit from a better plan at a better cost. 
There are people who choose some very, very low value plans. 
They would probably have to pay a little bit more. But I can 
provide you all that data.
    Mr. Cummings. And I take it that when you have a plan where 
you have the four categories, I think it is four?
    Mr. Donahoe. Yes.
    Mr. Cummings. As opposed to two?
    Mr. Donahoe. Yes.
    Mr. Cummings. That allows for more precise measurement as 
to what it would cost the insurance company, is that right?
    Mr. Donahoe. Yes.
    Mr. Cummings. And therefore, hopefully, tailoring of the 
premium too.
    Mr. Donahoe. It gives you a better choice in terms of what 
you actually offer, and I will get you this information too, 
but I think that it actually ends up costing us a little bit 
more to give that actual flexibility. But I can provide you 
with that information. We think it is fair that a person 
shouldn't have to buy family if there is only two of them.
    Mr. Cummings. Sure.
    Mr. Donahoe. But I think that, as you shake all the numbers 
out, that is something that would fall back as more expensive 
for the Postal Service, but it is fair for the employees.
    Mr. Cummings. Now, someone asked you, I think it may have 
been the Chairman of the Subcommittee, asked you whether you 
were comfortable with the House bill, the one that we have 
developed so far, and you said just about everything.
    Mr. Donahoe. Yes.
    Mr. Cummings. Are you comfortable with the control board 
type system that is in there?
    Mr. Donahoe. That is the one area that I will tell you that 
I am not very comfortable with, and it is kind of a 
philosophical thing. I felt very strongly about the fact that, 
as a group of stakeholders, being the unions and the mailers, 
we should be able to figure out how to get these issues 
resolved working with Congress, working with the 
Administration, getting the right laws passed so that we don't 
have to go to a control board type of environment. What we have 
proposed in this plan, if we can get that through and everybody 
have a little bit of skin in the game, we can get the Postal 
Service back on good firm financial footing, clear that issue 
up with the mailers that were ``going out of business,'' and 
really be strong for the next decades to come.
    Mr. Cummings. Thank you, Mr. Chairman.
    Mr. Ross. Thank you, Mr. Cummings.
    We now recognize the Vice Chairman of the Subcommittee, the 
gentleman from Michigan, Mr. Amash, for five minutes.
    Mr. Amash. Thank you, Mr. Chairman, and thanks again, Mr. 
Donahoe.
    In a March 2010 USPS action plan, USPS stated 
diversification to non-Postal activities, such as logistics, 
banking, and consumer goods, would not be viable due to high 
operating costs and relatively light customer traffic in post 
offices. Is this still your opinion?
    Mr. Donahoe. Yes.
    Mr. Amash. And could you elaborate on that?
    Mr. Donahoe. Here is the thing. The way we look at it is 
this. The Postal Service has a tremendously strong core 
business and we think that, looking out to the future, 
commercial first class mail, advertising mail, and packages 
provides us big opportunities to grow the business itself, as 
well make some additional money on new services. So our focus 
should be on being the best at what we do the best right now.
    When you look at things like banking, there are banks on 
every corner. When you look at cell phones, AT&T is trying to 
merge with T Mobile because they can't make any money 
independently. Even if you study what the foreign posts do, if 
you look at what Germany does today, Germany makes their 
profits off of the mail. Of course, they charge 85 cents for a 
stamp to deliver the size of a territory like Ohio and 
Pennsylvania, but they don't make money on logistics. And it 
would be foolish for us, especially in a situation we are, to 
take our eye off the ball and get into something we are not 
good at.
    Mr. Amash. I have a slide up here which I think really 
emphasizes this point. This is from 2009. It shows a $7.8 
billion shortfall. In order to make up that sort of shortfall, 
you need to run revenues of almost $150 billion. And to show 
you how big a deal that is, that would equate to creating 13 
Fortune 500 companies, it would be more than twice the combined 
revenue of FedEx and UPS, it would be equal to capturing 5 
percent market share of the total U.S. savings market, and it 
would be equivalent to building an e-commerce business eight 
times the size of Amazon.com. Do you have any comments on this?
    Mr. Donahoe. Well, I agree with that. It is better for the 
Postal Service to focus on the core mission. We have people 
that do an excellent job every day out there. We have the best 
network in the world, the house-to-house, business-to-business 
network. And with the growth in e-commerce that we can see 
coming up, we think there are definitely opportunities for us 
to grow that business.
    Mr. Amash. Thank you. I have a few questions about the 
health care plan.
    Mr. Donahoe. Sure.
    Mr. Amash. Currently, the taxpayer provides a backstop for 
Postal employees retiree health care benefits. Would you expect 
the backstop to continue if USPS leaves FEHBP?
    Mr. Donahoe. Backstop meaning that if we left FEHBP and the 
Postal Service was out of business, that there would be no----
    Mr. Amash. If you were running the plan yourself.
    Mr. Donahoe. Right. Here is the way we look at it. First of 
all, by implementing a plan like we are projecting now, we do 
not plan on going out of business. We plan on getting stronger 
and being strong out into the future. That is the goal right 
there.
    Secondly, by working through how we actually set up the 
health care plan and how we manage the retirees and how we 
manage the prefunding money that is already in there, $45 
billion, we think that will be enough to cover retiree health 
care benefits going out to the future. The key critical thing 
for us, though, is, again, a good, viable, financially strong 
Postal Service going out into the future.
    Mr. Amash. And would the premiums and benefits of a USPS-
run health care plan be subject to collective bargaining?
    Mr. Donahoe. They could be. We have not really spent a lot 
of time on that, but it would be an area that would be open for 
collective bargaining. That is pretty much the way that the 
rest of American business does it today. Currently, the 
legislative issues cover retiree benefits and the retirement 
portion of the FEHBP. I think many years ago there was actually 
some collective bargaining done around benefits and, of course, 
we consider that going out to the future.
    Mr. Amash. And how would USPS prefer to have its separate 
health plan funded?
    Mr. Donahoe. We would fund it just like we do now. It is 
part of the business of running the organization. There is no 
government money coming our way. We want to be self-sufficient, 
like I said in my opening statement, and that is exactly how we 
would fund this.
    Mr. Amash. And would you immediately want to draw on the 
current Retiree Health Benefits Fund managed by OPM?
    Mr. Donahoe. There are a couple different options on that. 
We would have to sit down and walk through those with you. I 
think that as you go out there will be a need to start to use 
those funds, probably three or four years from now, but I don't 
know that we would be doing anything in the next couple years. 
But I would like to sit down with you. We have some people that 
know that stuff a lot better than me. I would be more than 
happy to cover that.
    Mr. Amash. Thanks for your time. I yield back.
    Mr. Donahoe. Thank you.
    Mr. Ross. Thank you, Mr. Amash.
    We now recognize the gentlelady from the District of 
Columbia, Ms. Norton, for five minutes.
    Ms. Norton. Thank you, Mr. Chairman.
    I have two questions I want to get in in my five minutes.
    Mr. Donahoe, are you aware of the experience of agencies 
that have done exactly what you propose to do, like the FDIC 
have tried to do their own health care plan, only to come right 
back a couple years later?
    Mr. Donahoe. I am familiar with it. I understand that some 
of those changes were due to accounting changes the FDIC 
decided they----
    Ms. Norton. What do you mean by that?
    Mr. Donahoe. The prefunding requirements. From what I 
understand, when the FDIC moved off to have their own health 
care plan, once they were faced with law changes that required 
prefunding, they chose to move back with the FEHBP.
    Ms. Norton. Because the Federal Government required 
prefunding in their plan.
    Mr. Donahoe. Yes. And it was smarter for them to move back 
in.
    Ms. Norton. They didn't have prefunding before.
    Mr. Donahoe. I know.
    Ms. Norton. Because they were a Federal agency and these 
Federal agencies don't have to prefund, which, of course, goes 
back to my original question to you, would you be here if you 
did not have that requirement. And, Mr. Donahoe, I am not quite 
sure you would. There is every private employer who moves first 
to insurance because we are the only country where employers 
pay for insurance and that, of course, is the biggest part of 
what they have to take care of, even with the tax issue for 
them, which you don't even have.
    Mr. Donahoe. Yes.
    Ms. Norton. Let me ask you a question. I think the record 
would benefit from knowing how you are proceeding on the 
closings. We had a number of closings here, then some of them 
were taken off apparently by the Postal Service. How do you 
decide what post offices will be closed? I recognize they have 
been suspended after the Senate intervened, but I assume they 
are going to resume.
    Mr. Donahoe. Here is the way we would approach that. Post 
offices and stations and branches in, say, a city like 
Washington, we think there are a number of options. Number one, 
consolidation, which we are doing in some cases. Where we just 
don't have the foot traffic in a place, we would consolidate 
one into the other, maintain the zip code so customers would 
have no ill effects of changing an address.
    In the rural areas we are looking to do some contracting 
with local stores that are open 24/7. In many cases our 
contract with them keeps the lights on in a place like that, 
and it is also convenient for customers. One of the other 
considerations in rural areas is what is called extension of 
rural delivery so that we deliver to a person's house, rather 
than having them to come to the post office.
    But I think the key thing going forward, and this is 
something we have been working with our Postmaster Associations 
on, and that is being able to provide a better match up of 
costs and revenues for small post offices going forward. Maybe 
instead of opening for eight hours a day, we would be open for 
six hours a day. That matches the revenues up with the costs 
and it allows us to keep the lights on, the flag up there for 
customers to have access to the Postal Service.
    Ms. Norton. Shorter hours?
    Mr. Donahoe. In some cases, yes.
    Ms. Norton. Well, actually, your notion of partnering with 
a commercial establishment was part of an amendment I 
introduced. I couldn't imagine why this wouldn't have passed; 
it would help the private sector, it would help the Postal 
Service. But, believe it or not, that amendment did not pass, 
and it shows we are not looking always for win-wins.
    But I have to tell you, in my own district, I got some 
information back that intrigued me that said that at a post 
office that was due to be shut, perhaps because of your other 
troubles, there was only one Postal clerk there. This was a 
neighborhood which people regard as very busy, very much in 
need of postal service. People would walk in and they would see 
these humongous lines with only one little person there, and 
they would just walk out again. So that is why I need to know 
what are your criteria when your own downsizing may have been 
inadvertently chasing people away from the Postal Service.
    Mr. Donahoe. That is a concern. One of the things that we 
pride ourselves on is customer service, and long lines is 
something we want to avoid. Years ago, when I worked in 
Washington, D.C., that was one of my major impetus, was to work 
better with customers, make sure that we provide a great 
service. Offline you can tell me what office that was, and I 
will make sure that we take care of that. But one of the things 
we are looking at is making sure that not only we have access 
to post offices, we are looking at putting more self-service in 
so the people have the opportunity to either go to the line 
or----
    Ms. Norton. How much are you going to save if you were to 
close every post office that is on your list? And I recognize 
that there is an appeal process. So if you are going to have 
savings, that appeal process is going to continue operative, 
isn't it? And if so, what would be the savings in the end, 
assuming that you prevailed in every appeal?
    Mr. Donahoe. We think that as we balance up the hours and 
the revenues, we will probably save about half a billion 
dollars, and that is keeping the majority of places open, it is 
just trying to make sure that we have the right number of 
resources there with the revenue that comes in the door.
    Ms. Norton. Thank you, Mr. Chairman.
    Mr. Ross. Thank you.
    We now recognize the gentleman from Illinois, Mr. Davis, 
for five minutes.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Mr. Donahoe, as we experience this era of declining mail 
volume, do you think that the current cap is reflective of your 
actual cost, or should maybe the PRC look at possibly 
reconfiguring the cap?
    Mr. Donahoe. Well, the cap, there is a good side and a bad 
side for the cap. The cap, from a Postal Service perspective, 
puts some discipline into the costs of the system and makes us 
work hard to stay efficient, which is a good thing. From a 
customer perspective, it provides a lot of predictability, 
which is a very good thing and helps us keep people in the 
mail.
    To the discussion that we had earlier, we think that there 
is some ability for the Postal Service to raise single piece 
mail prices over the course of the next couple of years. Right 
now, by law, single piece and commercial mail is linked. We 
would like, by law, that to be changed and have some 
flexibility. The fact that we have Forever stamps out there, 
customers can buy them and use them forever, that gives them a 
little bit of a discount that way. But it would certainly help 
us generate a little bit of money with what we think even 45 
cents is a pretty good bargain.
    Mr. Davis. In his last round of questioning, Chairman Ross 
raised the issue of rates. Let me ask what do you see or what 
do you think might be in store for nonprofit or not-for-profit 
mailers under the proposals that we are looking at?
    Mr. Donahoe. The nonprofit revenues continue, from a 
standpoint of volume, continue to be strong in the 
organization. We have not come out, from a Postal Service 
perspective, and asked to change that. I know there has been 
some discussion about increasing the not-for-profit rates. 
Those people depend on the mail. They will tell you that even 
though they advertise a lot online, I don't think they get many 
donations online. The majority of the donations that come in to 
the not-for-profit come through the mail, and the good thing 
about those, a lot of those donations are mailed back with a 45 
cent stamp, which is good for us.
    Mr. Davis. I have no further questions. Thank you very 
much, Mr. Chairman.
    Mr. Ross. Thank you, Mr. Davis.
    Mr. Donahoe, I appreciate your being here today. I am 
looking forward to continuing to work with my colleagues on 
both sides of the aisle and with you in making sure we do what 
is necessary to preserve this age-old institution, and make 
sure it is run efficiently and effectively. Thank you for time. 
That will conclude this first panel.
    Mr. Donahoe. Thank you.
    Mr. Ross. We will now take a few minutes and get ready for 
our second panel, Mr. Francis.
    [Pause.]
    Mr. Ross. I will now reconvene the Subcommittee on Federal 
Workforce, U.S. Postal Service and Labor Policy, and welcome 
our next panel, our witness, Mr. Walton Francis, who is an 
author and a health care expert.
    Mr. Francis, it is customary for those who testify before 
the Oversight Committee and its subcommittees that they be 
sworn in under oath, so if you wouldn't mind stand and raise 
your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give this Committee will be the truth, the whole 
truth, and nothing but the truth?
    [Witness responds in the affirmative.]
    Mr. Ross. Thank you.
    Let the record reflect that the witness answered in the 
affirmative.
    Please be seated. We do have your opening statement by way 
of a written testimony before us, but please, I would like now 
to recognize you for five minutes for an opening statement.

  STATEMENT OF WALTON FRANCIS, AUTHOR AND FEDERAL HEALTH CARE 
                             EXPERT

    Mr. Francis. Thank you, Mr. Chairman, members of the 
Committee. I am going to just try to summarize very briefly.
    First, the proposal before you is essentially a proposal to 
dismantle the Federal Employees Health Benefits Program. That 
program covers 8 million people. Probably half the plans in 
that program will be forced out effectively. All the people in 
all those plans will be forced to move to new plans. A lot of 
these people are elderly, don't want any change. They are going 
to be faced with massive change. And all that proposal is 
unnecessary, which I will explain in a second. So that is the 
issue before you.
    Let me just say, first, I happen to agree strongly with 
virtually the entire Postal plan that I heard described by the 
Postmaster General, and I cannot urge on you too strongly that 
it is incumbent on the Congress to fix the flawed legislation 
which the Postal Service now works and give it a chance to 
solve its problems. This part of it, however, isn't part of the 
solution, it is part of the problem.
    Second general point, the FEHBP model, multiple plans 
competing for consumer business, is a widely adopted and copied 
model, and has been the winning model in the Congress of the 
United States and with the last two or three administrations 
for very good reasons, and I won't go through the whole list. 
The Breaux-Thomas proposal was to copy the FEHBP for Medicare. 
The Medicare Advantage program and the Part D programs, when 
enacted, were explicitly modeled after the FEHBP, with 
improvements, Okay? But that was the model. And both have been 
hugely successful.
    The original Paul Ryan proposal, Ryan-Rivlin, Rivlin-
Domeneci, Ryan-Wyden, which I think is maybe the best of that 
group. Just the budget resolution that the House passed a few 
days ago, the Medicare part of that is modeled on the FEHBP.
    The Obama Administration's health reform, whichever side of 
that issue you are on, the State exchanges where multiple plans 
compete for people is modeled on the FEHBP.
    Now let's talk about the prefunding issue. There is a 
reality here. The prefunding is not going to be paid, ever. The 
$5.4 billion is toast. It may be carried on the books as a debt 
owed the U.S. Government; it may be written away by legislation 
you pass. I don't know how it is going to be solved. The only 
thing I am sure of is it is not going to be paid.
    So now the question is why are we going to destroy the 
FEHBP to create what amounts to a fig leaf for not paying the 
$5.4 billion? I just find that Kafkaesque. It is driven in part 
by the budget rules that control you to some degree in how you 
account for things, but that is the reality. And a part of that 
reality is the money in the trust fund, okay, actually, every 
trust fund, Social Security trust fund, but the prefunding 
retirement thing, that trust fund is a paper fiction, it is an 
accounting exercise. Any money spent out of that fund will 
actually be spent by taxing the American public or borrowing 
money to be paid by our children some years hence through 
taxes. The money is taxed, it is not there. Remember the 
Clinton Administration, all the lockbox talk about Social 
Security? That was essentially a debate over this same issue.
    I will stop there, but merits of the proposal. I have to 
tell you I have read one of the consultant reports that the 
Postal Service got and I have read several of their own 
reports. They are full of errors, false assumptions, 
misstatements, and so on. I won't go through all the examples, 
but I have one simple one. They are talking about saving money 
on prescription drugs because they are going to operate a 
single plan that is going to enroll 2 million people. Well, the 
FEHBP has a single plan that enrolls 5 million people, it is 
called Blue Cross. Funny thing. How are they going to save more 
money covering 2 million people than we can save covering 5 
million people? It is unreal, okay? It is made up.
    They have never recognized, but I have given you in my 
testimony details, on it is going to cost at least half a 
billion dollars because the Postal employees are subsidized by 
the GS and other non-Postal employees who are much younger, on 
average, and healthier, and it is all one pool. So there is a 
half billion dollar-plus subsidy every year going into the 
Postal Service. Okay, they pull out, they are going to have to 
spend an extra half billion just to maintain existing benefits 
and premiums. They start a half billion a year behind.
    The other point I want to emphasize is a lot of what is 
going on here is shifting costs from FEHBP to Medicare. That is 
not real savings, that is moving it from one pot to another. 
And when you get some real analysis from CBO or others, and I 
don't count the Postal Service Inspector General in this group, 
you are going to hear what I am telling you.
    The Postal Service, unlike most Federal agencies, has a lot 
of flexibility right now under current law. One of the 
suggestions I made in my testimony, kind of buried near the 
end, is they could offer to pay its employees a bonus for 
signing up for Part B. Just say we will pay you $100 if you 
sign up. Or they could say we will pay you $100 if you switch 
from higher cost plans to lower cost plans. They have the 
ability to create employee incentives right now. They are not 
bound by the general pay schedule and all the rest.
    Their record, I won't go through their record in the past. 
They have bargained with the unions quite improperly. The 
unions have sought the best possible benefits for their 
members. That is their job. But one of the prices paid by that 
has been overpaying premiums relative to the non-Postal side 
and relative to the private sector.
    The good news in all this is they are focused like a laser 
on the biggest single defect in the FEHBP, the interface with 
Medicare. And I cannot commend to you too much how important it 
is to address that issue, but not for the Postal Service alone, 
for the entire program. It is crazy the way it is done now. And 
it is going to get worse. People are going to bail out more and 
more from Medicare.
    I might add, this Committee, I don't think, has the 
jurisdiction to solve this problem alone. For one reason, they 
are proposing mandatory enrollment in Medicare Parts A and B. 
Well, I am going to tell you something. There are tens of 
thousands of 80-year-old widows, Postal Service widows who do 
not have coverage for Medicare Part A due to their work or 
their husband's work, and who opted out of Part B. The premium 
cost for one of those widows to join Parts A and B, right now 
under current law in the Social Security Act, is over $8,000 a 
year. That is what it would cause to mandate that that widow 
leave the Postal plan she is now in and sign up for A and B.
    There are several ways to reform this. Part of the question 
will be who is how the saving is going to be shared between the 
Medicare program, the employing agencies, and the FEHBP system, 
and the retirees themselves. A lot of options here, but the 
basic idea, I think, is to provide positive incentives to 
retirees to join, first place, Medicare Part A is automatic. It 
is illegal to collect Social Security in this Country if you 
are not in Medicare Part A at age 65.
    So this stuff about people aren't signing up for Part A or 
all these taxes that have been paid, all the taxes paid are 
Part A taxes. Anyone who is not in the 80s or 90s of Postal 
Service retirees already is in Part A once they hit 65. So that 
is a false issue and it has been misdescribed. Again, I am sure 
it not the Postmaster General's fault, but the people who write 
his speeches, the people who prepare these consulting documents 
aren't getting it right.
    Part B, where the premium for most is $1200 a year, the 
right model is the employer or the plan, directly or through 
the employer, subsidize people, incentivize them to join Part 
B, and you don't have to give them 100 percent, complete 
wraparound benefits, which is what they now get if they have 
Part B, because that induces massive waste. And there are real 
savings to be made by reducing overutilization of medical care.
    Thank you very much.
    [Prepared statement of Mr. Francis follows:]





    
    Mr. Ross. Thank you, Mr. Francis. I appreciate your energy, 
especially your expertise in this area, and I will now 
recognize myself for five minutes.
    I want to talk about prefunding for a quick second because 
you touched on that. Are you suggesting then because it is 
simply not true that everything is being set aside that it is 
really an obligation to pay an IOU, if you will, in a trust 
fund, that we all just call it what it is and eliminate it 
entirely and tell the American taxpayers that they are going to 
be on the hook for the unfunded liabilities of health care and 
retirement benefits?
    Mr. Francis. I don't know the best answer to that, Mr. 
Chairman. A couple of points. First, if we reform the Medicare 
interface, that alone will substantially reduce. The part of 
what you heard from the Postmaster General is correct. So the 
unfunded liability can be greatly reduced if you can get more 
Federal retirees to enroll in Medicare Part B. That is sort of 
Point A.
    Point B, a lot of this may hinge on scoring rules and so 
on. I think the Congress enacted this prefunding requirement 
about four or five years ago, as I understand it, in the 
expectation that the Postal Service might go insolvent, so we 
better get these funds before it is too late. And then it has 
turned out that the prefunding itself has been the single 
biggest cause of the Postal Service's budget hemorrhaging----
    Mr. Ross. Which, of course, it isn't. There are systemic--
--
    Mr. Francis. Well, you are right.
    Mr. Ross. Given the $5 billion or the $5.8 billion, they 
are still showing over a $5 billion annual loss. It has nothing 
to do with prefunding.
    Mr. Francis. Right.
    Mr. Ross. But be that as it may, also on the Medicare 
issue, Mr. Donahoe mentioned that he is the second largest 
employer that contributes to Medicare and, therefore, there 
should be some benefit for that contribution. How do you 
reconcile that?
    Mr. Francis. Well, it just sounds like strange writers to 
me. First, he is not the second largest. How about the civilian 
side of the Federal Government? I mean, don't they count for 
something. View from a business perspective I am not going to 
argue with his point, but what he is doing and the employees 
are doing--and, by the way, economists all believe that the 
entire burden of the Medicare Part A tax is paid by employees. 
It effectively comes out of wages, okay?
    The Postal employees are paying into a Medicare Part A 
trust fund and they are going to get free Medicare Part A when 
they retire. That is the deal. There are problems with that 
deal, but they are not Postal Service problems. There is 
nothing special about what the Postal Service is doing; that is 
the system for every employer in America.
    Mr. Ross. Obviously, we are here because we want to talk 
about the proposal on the health care benefits, but that is 
more of a symptom of the major problem. The major problem is 
that there is a problem within the Postal Service that requires 
reorganization and reformation. One of the issues that we have 
to address, of course, is their labor costs. Over 80 percent of 
their cost is labor. How do you recommend that we handle that?
    Mr. Francis. This is a similar problem, no, actually, it is 
a common problem.
    Mr. Ross. It is the $60 million question.
    Mr. Francis. This is what Rhode Island faced and had to 
take really drastic action to reduce public employee pensions 
and health benefits. I don't know the right answer. Is the 
Postal Service----
    Mr. Ross. But you would agree we have to address the labor 
cost, right?
    Mr. Francis. Oh, absolutely. No question about it.
    Mr. Ross. Because if the revenue side of the equation 
continues to decline, even if it stays static on the expense 
side, we are going to have further and further shortfalls.
    Mr. Francis. Yes. And I have no sense of whether Postal 
employees are overpaid or underpaid by any metric, but clearly 
reducing labor costs is a vital thing for them to do. But I 
want to be clear. For employees they are going to increase 
labor costs. Their proposal is not going to save money, it is 
going to cost money.
    Mr. Ross. Let me throw out something. In your written 
testimony you talk about a health savings account and a 
contribution. So you believe that maybe there is even a more 
innovative way to stay within FEHBP and just change the way we 
do it, and have the Postal Service contribute less but more by 
ways of an HSA?
    Mr. Francis. Absolutely. They could go ahead and give 
health savings accounts to employees who sign up for Part B. 
That is another area we might have to change the law----
    Mr. Ross. So, in other words, we could reduce the cost 
because the premium would be reduced, and yet increase the 
amount we put into an HSA and have a net decrease of what we 
are investing in health care?
    Mr. Francis. Yes. That could be done tomorrow, assuming 
there is no legal impediment on the Ways and Means side. I 
don't know of any other legal impediment.
    Mr. Ross. One last thing. You indicate that the USPS finds 
itself in a predicament that is primarily the result of one 
flawed statute that enables the Congress of the United States 
to micromanage what should be a business decision. Any 
suggestions in the next 30 seconds that you would offer how we 
make that a more flexible statute so that there would be more 
flexibility to the Postal Service?
    Mr. Francis. I think the proposals that were discussed, 
that are in the bill that you discussed with the Postmaster 
General, all sound to me perfectly reasonable. I think the 
flexibility to close processing centers and post offices is 
very important, but it is not probably as important as some of 
the other things discussed. I think he has a great plan, and I 
hope the Congress enacts all of it but this piece.
    Mr. Ross. One last quick question. Have you had a chance to 
consult with the Postmaster General on any of his proposals?
    Mr. Francis. Only a few seconds before and after his 
testimony, sir.
    Mr. Ross. Thank you, Mr. Francis.
    Mr. Connolly. There are a lot of us in Congress in the same 
position.
    Mr. Ross. Okay, I recognize the gentleman from Virginia, 
Mr. Connolly.
    Mr. Connolly. Thank you, Mr. Chairman, and thank you, Mr. 
Lynch, for your courtesy. I have to run to the steps of the 
Capitol, so I really appreciate it. I have a middle school 
group of 200 kids.
    I want to welcome Mr. Francis, who deservedly has the 
reputation for being the walking expert on these matters, and I 
thank you, Walt, so much for being here today. If I understood 
your testimony, let me get this straight, now. If we were to 
adopt, whole and entire, the Postmaster General's proposal with 
respect to health care here, it would actually cost the Postal 
Service a half a billion dollars, that transition, because they 
are now beneficiaries of being in a larger pool and, therefore, 
they are subsidized?
    Mr. Francis. Correct.
    Mr. Connolly. Would it be a half a billion every year or 
just a one-time hit?
    Mr. Francis. It would grow over time, because----
    Mr. Connolly. Grow over time?
    Mr. Francis. Yes, sir. Because they already have an aging 
workforce that is much more aged. The crucial point is a 50-
year-old, on average, in this Country costs something like 
$8,000 a year in health care, and a 20-year-old costs something 
like $2,000 a year in health care. They aren't going to be 
hiring any more 20-year-olds for at least a decade to come. 
Leave aside those retiring. The existing workforce will keep 
aging, will be more expensive every year. The best thing they 
could do is stay in that FEHBP pool. It affects the cross-
subsidy from the younger and healthier ones being hired.
    Mr. Connolly. So, golly, gosh darn, a proposal allegedly 
designed to save money will cost money. And, by the way, as we 
discovered in the study the Postmaster General and his senior 
management team commissioned and then deep-sixed because they 
didn't like the results, it is a similar situation where some 
of the other so-called reforms that apparently would cost $5 
billion in lost revenue, more than offsetting the savings. So 
here we have another example.
    Let's assume, let's stipulate good intention, but the 
analysis does not hold up. We are going to lose money, and I am 
shocked. That loss of a half a billion grows over time because 
of the aging workforce and the fact that newer, younger folks 
aren't come in because of the shrinking of that workforce.
    Mr. Francis. That is the case.
    Mr. Connolly. Now, you also said a second problem with 
this, I am sure also unintended, is that we are going to have 
one heck of a penalty on widows and other survivors who 
currently aren't signed up for Medicare A and B. And the reason 
there is an $8,000 per person penalty or cost is because they 
actually have to pay a certain penalty, don't they, under 
Social Security?
    Mr. Francis. Yes, sir. Let me just be clear. Under current 
law, if you do not have Part A through the normal post-
employment way that you get it, and there is a large number of 
people in this Country, several hundred thousand, who don't 
have it you get to pay the princely premium for signing up for 
Part A of around $5,000 a year. Now, I have never heard of 
anyone paying that, actually, I have, but there aren't many who 
would pay that. But the proposal, as written, says they are 
going to force, now, actually hidden in----
    Mr. Connolly. So it will be an individual mandate.
    Mr. Francis. Oh----
    Mr. Connolly. My goodness, Mr. Chairman. I can't imagine 
the Subcommittee----
    [Laughter.]
    Mr. Francis. Part B has a penalty of 10 percent a year for 
every year you could have signed up after age 65. So say you 
are an 80-year-old widow. You have 15 years of 10 percent a 
year penalty if you sign up for Part B. And, again, you could 
change the Social Security Act to get rid of those penalties--
--
    Mr. Connolly. So, given my brief time, Walt, it is going to 
cost a half a billion dollars a year to the Postal Service, 
hardly saving money, and that grows over time. We are going to 
penalize widow ladies to the tune of about $8,000 per widow, 
and there are tens of thousands of them because, again, of the 
nature of the workforce and the retiree demographics.
    Now, a third consequence from this proposal, of course, is 
an FEHBP itself, is it not? It reduces the risk poll rather 
considerably, given the size of the Postal Service.
    Mr. Francis. It will be a cosmic change.
    Mr. Connolly. Cosmic?
    Mr. Francis. Well, to give you a simple example, two 
examples. A lot of the HMOs that participate in the FEHBP are 
in cities where the main part of the Federal workforce is 
Postal, okay? Guess what happens in those cities? Insurance is 
going to say it is not worth doing business. We used to have 
1,000 enrollees, now we are going to have maybe zero or maybe a 
few hundred. So they are going to pull out.
    So a lot of people who are not Postal employees are going 
to lose that access. I think it is unlikely that any of the 
Postal plans would survive this. It is possible, but almost all 
the Postal plans predominantly enroll either current Postal 
employees or retired Postal employees, and they are not going 
to be allowed to enroll either group.
    Mr. Connolly. So other than that it is a great idea.
    My time is up, Mr. Chairman, but I just want to cite H.L. 
Mencken, who once said that for every human problem there is a 
solution that is simple, neat and wrong. The Postmaster 
General's proposal on health care fits that description.
    Mr. Ross. Thank you.
    I now recognize the Ranking Member of the Subcommittee, the 
gentleman from Massachusetts, Mr. Lynch, for five minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Thank you, Mr. Francis, for your willingness to come and 
help this Committee with its work. The idea of insurance 
usually or generally is that you spread the risk of harm or 
illness over a wide population so that what happens is the 
healthy folks, which is the majority of people, subsidize the 
cost to those of us who get sick. That is how insurance 
generally works.
    The way the Postmaster General was describing it today was 
that we were going to concentrate the risk. In other words, if 
an individual participant was just by themself, they would pay 
less. They would pay less. A husband and wife would not have to 
pay a family plan, they would pay less. And it would, by its 
nature, concentrate more of the risk on the very individuals 
who might be the sickest.
    Have you looked at that aspect of the proposal?
    Mr. Francis. Yes, I have, sir. The key factor here is that 
people pose very different risks at different ages. By the way, 
the OPM actuaries have actually looked at this question because 
it has many times been proposed that, for example, there be a 
rate for couples. I counsel thousands of people very year and 
they will raise their hand and say we are a married couple, we 
are 50 years old, we don't have all those kids; why can't we 
get a rate just for us? And the answer is because that young 
couple with kids is cheaper than you, and if you were in a 
separate pool you would pay more, a lot more. And I give an 
example in my testimony of how it could be double.
    The FEHBP pool of 8 million people, the 20-year-olds are 
paying a lot more than they would if they were in a separate 
category, okay, to be sure. And it is very interesting how this 
all plays out. And, by the way, back to the Medicare point, 65-
year-olds with Medicare Parts A and B, they often complain why 
can't we get a lower rate because we are cheaper? And they are 
right, because Medicare is primary and they cost less than 
those 64-year-olds.
    So the FEHBP says we are going to spread it across 
everybody and we are not going to try to chop it up in pieces, 
and the Postal proposal would not only reduce the pool from 8 
million to 2 million people, it would, by creating four premium 
paying categories, may make a lot of people pay more than they 
pay today; others would pay less.
    Mr. Lynch. Okay. Thank you. Thank you for that. The other 
question I had is regarding the Affordable Care Act. Under the 
Affordable Care Act, one of the key funding provisions for the 
Affordable Care Act is that in 2018, if you have an expensive 
health care plan, then in 2018 you are going to be hit with a 
20 percent tax on the value of your health care plan. Not how 
much you use, but the value of your health care plan. Now, just 
for the record, I voted against the Affordable Care Act, and 
that was one of the key reasons why, because we never used to 
tax health care because we wanted people to have it. It is kind 
of like taxing food. We would never taxed food in this Country 
because you would starve without it.
    Well, the way it looks right now, what the framework of 
FEHBP and, most likely, this Postal plan that the Postmaster 
General has suggested, it would a Cadillac plan based on the 
costs now and the estimated increases until we reach 2018. And 
there is a reason it comes into effect in 2018, because the 
folks that pushed it will all be gone and they won't have to 
answer for this. So have you thought at all about this 20 
percent tax on expensive high-end health care plans and what it 
might mean for this Postal plan if it is separated from FEHBP?
    Mr. Francis. I hadn't, Congressman, but you are absolutely 
right, it is a potential problem of significant proportions. 
That provision of the law, by the way, in the Affordable Care 
Act ties that number to the cost of the Blue Cross plan in the 
FEHBP. What will happen, I think, and I am just thinking on my 
feet on this, actually, the high value Postal plan, the one 
they say is equal to, it isn't, it is actually inferior. For 
example, it has lower benefits than Blue Cross standard option.
    Nonetheless it is pretty close in benefits to that. It is 
going to disproportionately attract the older and sicker Postal 
employees. They are all going to be in that group by then, 
pretty much, and, yes, that plan will cost more than Blue Cross 
standard option in that year, I think, that would be a 
reasonable projection, and that tax will hit Postal employees.
    Mr. Lynch. Okay.
    Mr. Francis. Or the Postal Service.
    Mr. Lynch. All right. I see I have exceeded my time. I 
appreciate you coming before the Committee and helping us with 
our work. Thank you, Mr. Francis.
    I yield back.
    Mr. Ross. Thank you.
    I now recognize the gentleman from Illinois, Mr. Davis, for 
five minutes.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Mr. Francis, do you see any redeeming value in the 
Postmaster General's self-run plan or do you see anything about 
it that you like?
    Mr. Francis. Well, I hope I am clear. There is one huge 
redeeming value, sir, and that is the focus on the need to 
reform the interface between Medicare and the FEHBP. And while 
he wants to make it compulsory and I would quibble with some 
other details of it, he innovatively includes Part D in that 
calculus. I was pleased to see that. I hadn't, even myself, 
focused on the Part D side. But the thinking there is good, it 
is a basis for thinking about the entire FEHBP, and that is the 
part that is most important to the Postal Service.
    I find it hard to believe that they really think running 
their own plan is going to save any money, but, regardless, it 
won't. But fixing the interface between these two programs, 
they have been going along side-by-side for 50 years and no one 
has ever adjusted either program, Medicare or the FEHBP, to 
take account of the other. It is almost bizarre. No 
administration, no OPM director. I am not criticizing Mr. Barry 
in particular, this Administration in particular. It is time 
for the Congress to take a hard look at reform angles. So that 
is where I see the positive in this.
    Mr. Davis. But you answered the other question that I had 
relative to cost savings, and it is your position that it would 
not save any money.
    Mr. Francis. It is my position that it not only would not 
save money; it would cost more. Quite apart from the extra cost 
of the older and sicker enrollees, Mr. Lynch had stepped out 
and didn't hear my point about the premium thing for 
prescription drug point, which I know is of particular interest 
to you, sir. They are saying, and if you look at this Hay 
report, they will say, I forget the number, the bulk of their 
projected savings come from they are going to bargain better 
for prescription drugs in their 2 million enrollee plan.
    Well, the Blue Cross carrier with two plans today enrolls 5 
million people. So the notion that mere size, that is illusory. 
It is preposterous to say that just because they have a plan 
with 2 million people they are going to save money. In fact, I 
am, frankly, skeptical. I think OPM does a superb job in 
managing the FEHBP in terms of keeping the plans honest and 
frugal, and I have no reason to think the Postal Service has 
that competence.
    Mr. Davis. I must admit that with a limited pool and with 
not as many subscribers or beneficiaries or individuals in the 
pool, it is difficult for me to see how, unless you had a pool 
that you could select out or cherry pick, I just couldn't see 
the money saving. So let me just thank you for coming to share 
your views with us. I appreciate it.
    I have no further questions, Mr. Chairman, and I yield back 
the balance of my time.
    Mr. Ross. Thank you, Mr. Davis.
    Just real quickly. I will go briefly and then I think Mr. 
Lynch wants to go also.
    As I understand it, if the employees of the United States 
Postal Service had paid for their health care at the same 
amount that the other Federal employees had, then the Postal 
Service would be showing a half a billion profit?
    Mr. Francis. Yes. But let me restate it, sir, if I may. 
Yes, they have been, if you will, I hate to say overpaying 
because these were union negotiated rates.
    Mr. Ross. Right.
    Mr. Francis. But they have been paying about 10 percent a 
year more than the rest of the Federal Government every year 
for the last 20 years or so.
    Mr. Ross. The Postal Service has been paying that.
    Mr. Francis. The Postal Service has. They could have saved 
multiple hundreds of millions of dollars every year.
    Mr. Ross. If we had just let them pay--if we let the 
employees of the Postal Service pay what the Federal employees 
were paying.
    Mr. Francis. Exactly.
    Mr. Ross. Which begs the question that it is such a 
sweetheart deal that it is almost killing the goose that is 
laying the golden egg.
    Mr. Francis. Yes. And it doesn't give one confidence that 
they know what they are doing, though I must say this 
Postmaster General is a bright light compared to----
    Mr. Ross. I agree with you. I agree with you. I think he 
has done an outstanding job in recognizing the problems and 
realizing that something has to be done. He is very innovative.
    Mr. Francis, I am grateful to you for your testimony today. 
I hope that you do get a chance to work with Mr. Donahoe on 
this because I think you bring a lot of things to the table.
    With that, I will recognize Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    Recently, Mr. Barry, the Director of OPM, has suggested 
that the 9 million people, Federal employees, who are right now 
in the FEHBP, the Federal Employee Health Benefit Plan, 
prescription drug program, he has suggested that that 9 million 
be taken out of that program so that they be allowed to use a 
competitive process to pick a plan, pick their own drug benefit 
plan and could probably get a better deal, because they are 
being overcharged right now in the FEHBP, but they are a 
captive group. What do you think about that proposal?
    Mr. Francis. Congressman, I know it is probably near and 
dear to your heart, but I am against it, and let me tell you 
two reasons. One, let's assume it is correct that there somehow 
OPM could bargain better than Blue Cross. I am not at all 
convinced with----
    Mr. Lynch. Well, no. They are suggesting that individuals 
be given the power.
    Mr. Francis. Oh, I thought they were talking about a single 
drug contract. But let me just say, assume some money could be 
saved. The problem is this: you want to have a drug benefit 
integrated with the hospital and doctor benefit. It is less 
important that you may be paying $21 for a certain pill instead 
of $20, or vice versa. That is a lot of money for a lot of 
people, but compared to, hey, if this plan is able to make sure 
you take that pill and stay out of the hospital, that is where 
the big savings are.
    So you really want the health plan to be managing all the 
pieces at once. That is disease management; it is done quite 
well, I think, by many health plans, but not by all, and that 
is the wave of the future. All the Medicare reforms that this 
Administration is making, accountable care organizations and so 
on are all aimed at that same idea. We want people to look at 
the totality of costs and services that a person gets and 
minimize cost and maximize their health.
    Mr. Lynch. Well, thank you, Mr. Francis. Not the answer I 
was looking for, but I certainly give you credit for that. 
Thank you.
    Mr. Ross. Thank you, Mr. Francis, for being here.
    That concludes our witnesses' testimony today. I appreciate 
your taking the time from your busy schedule. Thank you for 
your input and the Committee now stands adjourned.
    [Whereupon, at 12:15 p.m., the subcommittee was adjourned.]






                                 
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