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



 
      AHEAD OF POSTAL REFORM: HEARING FROM USPS BUSINESS PARTNERS 

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON FEDERAL WORKFORCE,
                    US POSTAL SERVICE AND THE CENSUS

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 10, 2013

                               __________

                           Serial No. 113-17

                               __________

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

                               ----------

                         U.S. GOVERNMENT PRINTING OFFICE 

80-919 PDF                       WASHINGTON : 2013 


              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland, 
MICHAEL R. TURNER, Ohio                  Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee       CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania         JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee          MATTHEW A. CARTWRIGHT, 
TREY GOWDY, South Carolina               Pennsylvania
BLAKE FARENTHOLD, Texas              MARK POCAN, Wisconsin
DOC HASTINGS, Washington             TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming           DANNY K. DAVIS, Illinois
ROB WOODALL, Georgia                 PETER WELCH, Vermont
THOMAS MASSIE, Kentucky              TONY CARDENAS, California
DOUG COLLINS, Georgia                STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina         MICHELLE LUJAN GRISHAM, New Mexico
KERRY L. BENTIVOLIO, Michigan        VACANCY
RON DeSANTIS, Florida

                   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 the Census

                   BLAKE FARENTHOLD, Texas, Chairman
TIM WALBERG, Michigan                STEPHEN F. LYNCH, Massachusetts, 
TREY GOWDY, South Carolina               Ranking Minority Member
DOUG COLLINS, Georgia                ELEANOR HOLMES NORTON, District of 
RON DeSANTIS, Florida                    Columbia
                                     WM. LACY CLAY, Missouri



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 10, 2013...................................     1

                               WITNESSES

Mr. Steven Brandt, President and Publisher, Greenville News
    Oral Statement...............................................     4
    Written Statement............................................     6
Ms. Joy Franckowiak, Director, Postal Affairs and Distribution, 
  Valpak
    Oral Statement...............................................    13
    Written Statement............................................    15
Ms. Meta Brophy, Director, Procurement Operations, Consumer 
  Reports
    Oral Statement...............................................    27
    Written Statement............................................    29
Mr. Carl Janssens, Vice President, Pharmacy Operations, CVS 
  Caremark
    Oral Statement...............................................    31
    Written Statement............................................    33
Mr. J. Kenneth Garner, President and CEO, Association of 
  Marketing Service Providers
    Oral Statement...............................................    38
    Written Statement............................................    41
Mr. Jerry Cerasale, Senior Vice President of Government Affairs, 
  Direct Marketing Association
    Oral Statement...............................................    44
    Written Statement............................................    46
Mr. Carl Gish, Vice President, Global Shipping for the eBay 
  Marketplace
    Written Statement............................................    54

                                APPENDIX

Letters sent to Mr. Ken Garner, Mr. Steven Brandt, Mr. Jerry 
  Cerasale, Ms. Meta Brophy, Ms. Joy Franckowiak, and Mr. Carl 
  Janssens, asking for a Response to Questions sent from the 
  Honorable Darrell Issa, a Member of Congress from the State of 
  California.....................................................    70


      AHEAD OF POSTAL REFORM: HEARING FROM USPS BUSINESS PARTNERS

                              ----------                              


                       Wednesday, April 10, 2013,

                  House of Representatives,
    Subcommittee on Federal Workforce, U.S. Postal 
                            Service and the Census,
             Committee on Oversight, and Government Reform,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 1:37 p.m., 2154 
Rayburn House Office Building, Hon. Blake Farenthold [chairman 
of the committee] presiding.
    Present: Representatives Farenthold, Walberg, Collins, 
DeSantis, Norton, Clay, Cummings.
    Also Present: Representatives Connolly, Davis.
    Staff Present: Molly Boyl, Majority Parliamentarian; Adam 
P. Fromm, Majority Director of Member Services and Committee 
Operations; Linda Good, Majority Chief Clerk; Shelby Hodgkins, 
Majority Staff Assistant; Michael R. Kiko, Majority Staff 
Assistant; Jeffrey Post, Majority Professional Staff Member; 
Scott Schmidt, Majority Deputy Director of Digital Strategy; 
Peter Warren, Majority Legislative Policy Director; Kevin 
Corbin, Minority Professional Staff Member; Devon Hill, 
Minority Research Assistant.
    Mr. Farenthold. Good afternoon. The Subcommittee on the 
Federal Workforce, U.S. Postal Service and Census will come to 
order.
    I would like to begin this hearing, as is traditional with 
this committee, by reading the mission statement of the 
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 the government accountable to the 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 Government Oversight and Reform Committee.
    At this point, I would like to do my opening statement, 
then we will go to Mr. Clay and his opening statement. And then 
on to the witnesses.
    Again, welcome to our first hearing on Postal Reform. The 
purpose of today's hearing is to give the people that rely on 
the United States Postal Service the opportunity to discuss how 
well the USPS is meeting their needs and to see how we can 
better identify reforms that could make the Postal Service a 
better, more efficient provider.
    When a business is struggling, even the most basic business 
course will teach you that you need to look to your customers 
to see what they want and what they need and how you can serve 
them better. With the Postal Service losing $16 billion a year, 
there is no question that they are struggling. Over the last 
two years, postal reform has become the subject of great 
debate. In fact, in the last Congress, both this subcommittee 
and the full committee focused on issues dealing with postal 
reform.
    While last year s legislation was not ultimately signed 
into law, I believe we made great progress and I look forward 
to working with my colleagues, especially those across the 
rotunda in the Senate, to find a solution that will put the 
USPS on the right track to fiscal solvency.
    The Postal Service's financial condition has only grown 
worse, and more mail has continued to seep from the system. 
While I am a strong proponent of the benefits of the internet, 
the loss of business to business email, with electronic bill 
payment and other first class mail is a real issue. The Postal 
Service must deal with these issues. There is still a need to 
deliver atoms, something tangible, in addition to the bits of 
data that the internet delivers.
    Last year, there were 23 million fewer mail pieces each 
day. How do we get additional revenue and right-size the Postal 
Service for customers current needs? With mail volumes down 
more than 25 percent from its all-time peak, the Postal Service 
has been forced to default on the statutory payments to the 
Treasury and is rapidly facing shrinking liquidity that could 
lead to insolvency in the future.
    While pre-funding requirements are not the scope of this 
hearing, I am certain we will hear a lot about these issues in 
future hearings and as the debate on postal reform continues.
    Given the scope of the reforms we are talking about, 
mailers, a.k.a. customers involvement, is absolutely necessary 
in determining what postal reforms can and cannot be done and 
would be helpful, which brings us to our current hearing. As I 
have already stated, any struggling business must look to their 
customer's need when charting a path to prosperity. If the 
customers are happy, whether they use the Postal Service for 
their business or personally, they will keep coming back.
    Today we will hear from six people who represent broad 
portions of the mailing industry, including newspapers, 
advertisers, periodicals, packages and others. In reading the 
testimony, I am encouraged to see that there appears to be a 
consensus that implementing cost-cutting reforms has gone 
fairly well for many. And many, if not all witnesses today 
broadly support the Postal Service's right-sizing efforts and 
are interested in the long-term best interests of the Postal 
Service and the mailing industry as a whole.
    In addition, recently in the news, as I am sure you heard 
today, the USPS Board of Governors announced their decision to 
reverse modified Saturday delivery, which would have saved $2 
billion annually. Contrary to the Board of Governors decisions 
blaming a Congressional mandate for preventing the 
implementation of modified Saturday delivery, I believe 
modified six-day delivery met any Congressional requirement.
    It still appears there are a number of areas where the 
Postal Service can find further ways to improve its value to 
customers and improve its service and cut costs. I look forward 
to hearing about these areas.
    Finally, I would like to thank the witnesses for taking 
time to come and testify. I will now recognize the ranking 
member, Mr. Clay, for his opening statement.
    Mr. Clay. Thank you, Mr. Chairman, and thank you for 
conducting this hearing. Let me also thank the witnesses for 
appearing before us today.
    Today's testimony will help us understand the important 
relationship between the Postal Service and its business 
partners, mailing industry partners who are heavily dependent 
on a financially healthy postal system.
    Representing over 8 million jobs and accounting for almost 
9 percent of our Nation's gross domestic product, the mailing 
industry is a vast entity dependent not only on a growing 
economy but also on a heathy Postal Service. A recent industry 
study found that a majority of the jobs within the mailing 
industry are dependent on the Postal Service's delivery 
network, whether it is delivering packages, printing 
advertisements or providing supplies for those items. These are 
jobs that are important, not only to the economy, but to our 
constituents.
    For its first quarter, the Postal Service reported a $1.3 
billion loss as a result of declining mail volumes and required 
payments to pre-fund its retiree health benefits fund, a 
mandate that no other company must face. The Postal Service's 
recent announcements to modify its delivery schedule and to 
accelerate its network consolidation program continue to 
reflect the dire financial condition it faces. So clearly, 
postal reform legislation must remain a top priority for this 
Congress.
    At a time where unemployment remains high, we in Congress 
must be mindful that any reform measures must preserve jobs, 
not only within the Postal Service, but also within the 
industry as a whole.
    Finally, as we listen to the testimony of our witnesses, I 
hope that we are reminded that each passing day is a missed 
opportunity to pass postal reform legislation. Each passing day 
is another day that the Postal Service loses millions of 
dollars that it desperately needs and each passing day is 
another day of uncertainty for the Postal Service, the mailing 
industry and its millions of workers across America.
    So thank you, Mr. Chairman, for holding this hearing. I 
look forward to the testimony of our witnesses. I yield back.
    Mr. Farenthold. Thank you, Mr. Clay.
    And without objection, members will have seven days to 
submit opening statements for the record. And we will now 
recognize our distinguished panel.
    Mr. Steven Brandt is President and Publisher of the 
Greenville News in Greenville, South Carolina. Ms. Joy 
Franckowiak is Director of Postal Affairs and Distribution for 
Valpak. Ms. Meta Brophy is the Director of Procurement 
Operations for Consumer Reports. Mr. Carl Janssens is Vice 
President of Pharmacy Operations for CVS Caremark. Mr. Ken 
Garner is President and CEO of the Association of Marketing 
Service Providers. And Mr. Jerry Cerasale is Senior Vice 
President of Government Affairs for the Direct Marketing 
Association.
    Pursuant to the rules of this committee, all witnesses are 
to be sworn in before they testify. So if you will stand with 
me and raise your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth and nothing 
but the truth?
    [Witnesses respond in the affirmative.]
    Mr. Farenthold. Let the record reflect that all witnesses 
have answered in the affirmative. You may all be seated.
    We have a big panel today and a big part of these hearings 
is both hearing your testimony and answering the questions that 
the members of the panel have. As a result of the size of our 
panel, and consistent with our normal operating practices, we 
request that you summarize your testimony and limit it to five 
minutes. You will have a timer in front of you. Green light 
means go, yellow light means speed up and the red light means 
you need to wrap it up.
    Again, you will have five minutes. We have your entire 
written testimony before us. Hopefully the members have already 
read it. But we would appreciate your summary and we will get 
started.
    So first off we will go to Mr. Brandt. Mr. Brandt, you are 
recognized for five minutes.

                       WITNESS STATEMENTS

                   STATEMENT OF STEVEN BRANDT

    Mr. Brandt. Chairman Farenthold, Ranking Member Clay and 
members of the subcommittee, I appreciate this opportunity to 
share my views on how the Postal Service is working with our 
business.
    The Greenville News is a daily newspaper serving the third 
largest metro area in South Carolina. The newspaper has been an 
important source of local news and information since 1874.
    Our newspaper uses all classes of mail, but by far our 
largest postal spend is in standard mail, which we use to 
distribute free weekly newspapers and preprinted advertising to 
homes that do not subscribe to the newspaper. These are ads for 
grocery stores, discount retailers, furniture stores and other 
home service companies. The News also delivers these preprinted 
ads to our subscribers as inserts in the daily newspaper.
    We call this combined distribution to subscribers and non-
subscribers our total market coverage, or TMC program for 
advertisers. We mail 53,000 TMC pieces per week and have an 
annual postage bill of $850,000 for this class. Many other 
newspapers use the Postal Service in a similar manner. Daily 
newspapers collectively spend $500 million on standard mail 
postage for delivery of their non-subscriber TMC products.
    We depend on the reliable and efficient service from the 
Postal Service to keep our advertising customers happy. The 
success of the midweek retail sales promotion depends on the 
timely delivery of the advertising piece. We receive excellent 
service from the hard-working men and women of the U.S. Postal 
Service. They help us serve our advertising clients and are a 
vital part of our local economy.
    Unfortunately, the business relationship with the Postal 
Service has become strained in recent years. Recent pricing 
initiatives are making our newspaper and many others around the 
Country reconsider using the postal system for delivery of TMC 
packages. Let me explain.
    Newspapers compete with direct mailers for the distribution 
of advertising inserts. Over the last decade the Postal Service 
has followed a strategy of giving significantly more favorable 
saturation rates to our direct mail competitors than it has 
offered for our TMC products, which are delivered at high 
density rates. In 2007, the rate difference between what our 
TMC mailings paid and what a saturation mailer paid was 9/10ths 
of a cent. In just six years, this rate difference widened to 
2.6 cents per piece. This is a significant difference in a 
highly competitive market.
    To add insult to injury, the Postal Service last year 
entered into a negotiated services agreement with Valassis, the 
Nation's largest saturation direct mailer, and a direct 
competitor to local newspapers. This special deal provides 
Valassis with deep discounts off its already preferred 
saturation rates for the sole purpose of driving retail 
advertising out of newspaper Sunday editions.
    In response to these pricing decisions, many newspapers 
have moved TMC packages out of the mail. Those packages now go 
to private firms that deliver advertising inserts on the porch 
or in the driveway and provide verified delivery through GPS 
technology. Over the last 10 years, the Greenville News has 
moved approximately 50,000 pieces, or roughly $800,000 in 
annual postage, out of the mail into alternate delivery.
    The Postal Service has driven our business away at 
precisely the time that it had a golden opportunity to increase 
volume and revenues from newspapers. When a newspaper s 
circulation declines, we need to increase the number of TMC 
packages, that we send to non-subscribers. Instead of designing 
rates and services to help us serve those non-subscriber 
customers, and to increase more volume and revenue for the 
Postal Service, the Postal Service put forward pricing 
initiatives designed to divert advertisers from newspapers to 
saturation direct mailers. The unintended consequence of those 
decisions was to drive hundreds of millions of dollars of the 
industry's business out of the Postal Service.
    The Postal Service can get our business back if it stops 
taking sides in the marketplace competition. It should treat 
all mailers as valued and important customers, not some as 
favored and others as targets.
    Thank you for this opportunity to testify. I look forward 
to your questions.
    [Prepared statement of Mr. Brandt follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Farenthold. And Mr. Brandt gives back 20 seconds. He 
set the bar high.
    [Laughter.]
    Mr. Farenthold. We will now go on to Ms. Joy Franckowiak.

                  STATEMENT OF JOY FRANCKOWIAK

    Ms. Franckowiak. Chairman Farenthold, Ranking Member Clay, 
members of the subcommittee, my name is Joy Franckowiak. I am 
the Director of Distribution and Postal Affairs for Valpak 
Direct Marketing, located in Largo, Florida.
    Valpak is a part of Cox Enterprises, a leading 
communications, media and automotive services company. Valpak 
operates through franchises in nearly every State and across 
Canada. Our franchisees are local, independent businesses with 
employees who live and work in towns across America. They sell 
advertising that drives significant economic activity for small 
business, the lifeblood of the American economy.
    Each year, almost half a billion of our familiar blue 
envelopes carry some 20 billion money-saving offers, 
exclusively using the Postal Service. Most mailers choose to 
use the mail as one of several available method of advertising, 
shipping or publishing. But Valpak s actual product is the mail 
that we send. That is why Valpak has been one of the most 
active mailers before the Postal Regulatory Commission, has 
participated in the Mailers Technical Advisory Committee, and 
has partnered with the Postal Service to create efficiencies 
and test new initiatives.
    Valpak also actively supported the Postal Service's move to 
increase efficiency by reducing the number of money-losing post 
offices and supporting the Postal Service's network 
realignment. Valpak was also one of the first large mailers to 
support five-day delivery and, along with the majority of 
Americans, we still support it.
    We, along with our advertisers, rely heavily on timely 
delivery across the Country. The Postal Service rarely gets 
credit for what it is doing right. Currently, the Postal 
Service delivers over 97 percent of our products on time.
    More than 150 postal facilities have been identified for 
closing as an essential cost-cutting strategy. Half of these 
closings affect where Valpak enters its mail. But the Postal 
Service has done an excellent job in working with mailers to 
reduce confusion and delay during this transition.
    To increase communication, last year Postal Service COO 
Megan Brennan reinstated one-day meetings in each postal area 
to ensure mailers are fully advised of upcoming developments. 
Every mailer had to go through painful downsizing a few years 
ago. We believe that Postmaster General Donahoe has done a 
remarkable job of right-sizing his business to adjust to 
plummeting mail volume. We urge Congress to allow him to do 
what he needs to do to cut costs and survive financially.
    Please remember that mailers are footing the bill for every 
dollar of expense that Congress doesn't allow the Postal 
Service to cut. But Congress cannot force mailers to mail.
    I would like to highlight some concerns that we believe 
must be addressed by Congress. First, in fiscal year 2012, the 
Postal Service allowed there to be eight underwater products, 
where the revenues earned do not even cover their attributable 
costs. As an example, a serious problem exists with standard 
flats, which lost an amazing $528 million last year alone. The 
Postal Service could increase these prices significantly, but 
refuses to do so. The Commission repeatedly has found this 
pricing unlawful, but has refused to order meaningful price 
increase.
    It is a mystery to me why the Postal Service believes it 
can lose enormous amounts of money on products, as no business 
could ever operate that way. In fact, during the six years 
since PAEA was enacted, $8.1 billion of the $9 billion in 
operating losses were caused by underwater products.
    A step in the right direction was the Issa-Ross bill in the 
last Congress. It would have done much to remedy underwater 
products, and we urge that these remedial provisions be 
included in the new bill. When some products pay none of the 
overhead, the other products must pay all of it. The product 
that has the highest burden imposed on it is the one most used 
by Valpak, high density and saturation letters. This product 
has a cost coverage of 221 percent and receives significant 
annual price increases, even though it is the only standard 
mail product whose costs have actually decreased. Postage rates 
are extremely important to our franchisees viability and 
postage rates impact the volume in which they mail.
    Lastly, the Postal Service believes that Congress has been 
pressuring it to pursue market-dominant negotiated service 
agreements, or NSAs. Yet its track record with such agreements 
has been terrible. One NSA is now on appeal and another lost 
$4.3 million in its first year. But neither the Postal Service 
nor the Commission has been willing to terminate that 
agreement.
    The Commission has taken a hands-off approach to postal 
pricing on the theory Congress wanted the Commission to use 
only light-handed regulation. We cannot believe this is what 
Congress wanted. Yet the Commission has ignored below-cost 
pricing of many products, abusively high prices for other 
products and losses incurred by NSAs. We suggest Congress use 
this opportunity to remind the Commission that its role is to 
protect against abusive pricing by an agency with statutory 
requirements, rather than giving deference to the agency that 
it has been regulating.
    The Postal Service is the heart of a $1.3 trillion industry 
and needs greater control over its costs, but greater oversight 
over its pricing. Thank you.
    [Prepared Statement of Joy Frankowiak follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Walberg. [Presiding] Thank you, Ms. Franckowiak. I grew 
up in a Polish ghetto on the south side of Chicago, and I was a 
gym leader. Had to pronounce all those names.
    Ms. Franckowiak. So you know it used to have an ski at the 
end of it.
    Mr. Walberg. Right. I married a Polenski.
    [Laughter]
    Mr. Walberg. Thank you.
    Ms. Brophy, we recognize you for five minutes.

                    STATEMENT OF META BROPHY

    Ms. Brophy. Thank you. Good afternoon, Mr. Chairman and 
members of the committee. Thank you for inviting me here today 
to discuss Consumer Reports relationship with the Postal 
Service.
    Consumer Reports serves to educate consumers by helping 
them navigate the countless and confusing options in today's 
marketplace that affect their every purchase decision in their 
everyday lives. Whether big ticket purchases like cars or 
electronics, or everyday purchases like detergents or cereal, 
Consumer Reports provides consumers with everything they need 
to make the best decisions for themselves and their families.
    Consumer Reports has no commercial interests or 
affiliations and operates the largest independent consumer 
testing organization in the world, where hundreds of people 
work every day to test products, inform consumers of the 
results and to protect consumer interests. Consumer Reports 
relies on subscription revenue to fund its product testing 
program, the sole goal of which is to inform and protect the 
U.S. consumer from unsafe products and misleading advertising 
in the marketplace. The marketing goal is to support this 
mission by continuing to grow the subscriber base in the most 
cost-effective manner possible.
    Traditional direct mail marketing is the largest source of 
new subscriber acquisition for both Consumer Reports Magazine, 
published since 1936, its offshoot publication Shop Smart 
Magazine, as well as our Health and Money newsletters. Consumer 
Reports services nearly four and a half million print and more 
than three million online subscribers.
    Our marketing strategy is to continually increase our reach 
to our target market with the most impactful and cost-effective 
stream of communications, offering the right product at the 
right price in the optimal mail slot, using the right promotion 
in the right distribution channel. To that end, our direct 
marketing campaigns are carefully woven, multi-channel programs 
that include direct mail and email messages executed with 
precision to the appropriate prospects.
    The Postal Service is our largest outside vendor. Consumer 
Reports spends more than $32 million on postage in the United 
States each year. We primarily use first class mail, non-profit 
periodicals mail and non-profit standard mail. Consumer Reports 
relies on the Postal Service to deliver its marketing, 
subscriber and transactional mail in a consistently reliable 
and timely way. Our reliance on the Postal Service goes back to 
our beginning. Postal Service delivery is critical to our 
business.
    Like most other content publishers, Consumer Reports is 
moving ahead with the digital first, digital fast 
entrepreneurial approach. To continue in direct mail, still the 
largest source of new subscribers, we pay careful attention to 
containing costs. Whereas CPI increases in postage are more 
predictable to budget, my department annually is charged with 
finding ways to mitigate additional costs. CPI increases are 
not something we can pass along to our customers in the cost of 
a subscription.
    In today's postal announcement, I heard that until 
legislative action takes place the Postal Service has to pursue 
revenue ideas, including perhaps an exigent case. Such a 
scenario, especially in the absence of legislative reform, is 
very disturbing. It will hurt our business and drive our volume 
down. And it is mail volume that is at the heart of this 
situation. The Postal Service has excess capacity now.
    We are more than interested, we are invested in a viable, 
sustainable Postal Service. A significant portion of our 
customers and subscribers rely on mail to receive information 
from us. We support plans that reasonable and effectively 
improve the Postal Service's business and financial footing. So 
far, postal communications have been clear and timely. And we 
have been able to adjust logistics plans and delivery dates 
very well.
    We will adjust to changes as best we can in continued 
partnership with the Postal Service. Thank you for your 
consideration.
    [Prepared statement of Ms. Brophy follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Walberg. Thank you, Ms. Brophy.
    Now, Mr. Janssens, you have five minutes. You are 
recognized.

                   STATEMENT OF CARL JANSSENS

    Mr. Janssens. Thank you.
    Good afternoon, Mr. Chairman and members of the 
subcommittee. Thank you for holding this important hearing 
today and allowing CVS Caremark the opportunity to share our 
views on the United States Postal Service.
    My name is Carl Janssens, I am the Vice President of 
Logistics and Facility Engineering for CVS Caremark, a pharmacy 
innovation company located in Woonsocket, Rhode Island. I have 
the responsibility for the overall strategy in the areas of 
dispensing technology, packaging and transportation services 
for our products.
    Today I would like to provide the committee with an 
overview of CVS Caremark's business, our relationship with the 
United States Postal Service, the benefits and cost savings to 
plan sponsors and beneficiaries of using mail order pharmacy 
and the opportunity for service improvements.
    Most people think of us as the Nation's leading drug store 
chain because we operate more than 7,400 CVS pharmacy stores in 
44 States, the District of Columbia and Puerto Rico. Seventy-
five percent of all Americans live within three miles of one of 
our stores in the markets where we operate.
    We are also a leading pharmacy benefit manager, or PBM, 
which administers prescription benefit plans for our clients, 
which include health plans, unions, and government groups. Our 
goal is to work with our clients to help them design 
prescription drug plans and options that best meet their 
members needs and help plan sponsors drive down costs while 
improving health outcomes.
    Our PBM also provides beneficiaries with access to a 
network of more than 65,000 pharmacies in the U.S. We operate 
19 onsite pharmacies, 43 specialty pharmacies, three mail order 
pharmacies, not to mention CVS.com and Caremark.com websites, 
in addition to our Minute Clinic division, which operates more 
than 640 retail medical clinics.
    Our organization includes more than 75,000 pharmacists, 
pharmacy technicians, physician assistants, and nurse 
practitioners. They are focused on delivering expert pharmacy 
care to our consumers.
    We are a leaders in a variety of areas, including retail 
clinics, specialty pharmacy, technology and Medicare Part D. We 
are the third largest provider of health benefits to eligible 
beneficiaries under the Federal Government's Medicare Part D 
program. Each year, CVS pharmacists serve more than 6 million 
beneficiaries and fill more than 275 million prescriptions 
under the Part D program. We also provides pharmacy benefits to 
the Federal Employees Heath Benefits Plan.
    CVS Caremark's relationship with the United States Postal 
Service is one that dates back to 1985 when Caremark launched 
its first mail order pharmacy offering. CVS Caremark relies on 
USPS for both its inbound and outbound mail services. Our mail 
order pharmacies receive over a million prescriptions each 
week. On Saturdays alone, we receive approximately 100,000 
prescription.
    Once a prescription is received, our pharmacies process, 
fill and deliver the prescription within five business days on 
average, and this would include Saturdays. Our pharmacies are 
currently shipping on a six-day a week schedule, Monday through 
Saturday, and in many situations ships prescriptions seven days 
a week, using USPS services.
    Saturday delivery to our customers is a critical piece of 
our overall service offering to our plan members. Each year, 
over 5 million packages, or 20 percent of all packages shipped, 
are delivered via USPS on Saturday alone. Having a consistent, 
reliable mail six days a week operation is critical for our 
business and for our clients plan members, and we support the 
Postmaster General's proposal to maintain Saturday package 
delivery.
    More than 50 million prescriptions are dispensed through 
mail by Caremark; 100,000 orders are delivered for quality and 
safety and reviewed by a registered pharmacist in mail order 
medications delivered through the USPS. CVS Caremark today 
works closely with our clients to design pharmacy benefit plans 
that ensure convenient, affordable access to medicine through 
mail delivery.
    In addition to cost savings, consumers receiving 
prescription medications for chronic conditions through a mail 
pharmacy are more likely to take them as prescribed by their 
doctors according to a study published in The American Journal 
of Managed Care. Since almost half of all Americans, or 
approximately 133 million, live with at least one chronic 
disease, medication adherence should be a matter of great 
importance to policy makers, insurance plan sponsors, 
physicians and patients.
    USPS plays a vital role in Caremark mail pharmacy offering. 
Caremark has come to rely on the Postal Service's cost 
efficiency, reliability and predictability. We would like to 
see unnecessary regulatory burdens that are currently on USPS 
lifted to allow the Postal Service to better negotiate and 
reduce shipping rates so they can be more competitive with 
other shippers that they currently compete with.
    We appreciate the relationship with the USPS and the 
invitation to talk to you today. Thank you.
    [Prepared statement of Mr. Janssens follows:]

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    Mr. Farenthold. [Presiding] Thank you very much.
    I see that Mr. Connolly from the full committee has joined 
us. Just to make sure we stay appropriate with the rules, I 
would like to request unanimous consent that Mr. Connolly be 
able to participate in this subcommittee hearing. Without 
objection, so ordered.
    Mr. Connolly. I thank the gentleman.
    Mr. Farenthold. We will now hear from Mr. Garner, from the 
Association of Marketing Service Providers.

                 STATEMENT OF J. KENNETH GARNER

    Mr. Garner. Mr. Chairman and members of the subcommittee, I 
want to thank you for the opportunity to testify today on 
behalf of the members of the Association of Marketing Service 
Providers, formerly the Mailing and Fulfillment Service 
Association.
    My name is Ken Garner. I serve as President and CEO of 
AMSP, an organization comprised of 450 member companies that 
provide mailing fulfillment, marketing and consulting services 
for a wide range of clients nationwide. AMSP is a trade 
association that for over 90 years has addressed the needs of 
primarily small businesses serving local customers. Our members 
are typical of those businesses identified as job creators. Our 
members businesses are most sensitive to the economic 
circumstances impacting the hard copy message industry and the 
Postal Service in particular.
    AMSP is more than an association and its members are more 
than just marketing service providers. We are a critically 
important part of an enormous U.S. supply chain that develops, 
markets and sells products and ideas that help drive the 
Nation's economy. This supply chain, which employs roughly 8 
million people and contributes well over $1 trillion to the 
economy, depends on the distribution of our products to the 
ultimate customer. To a significant degree that distribution 
depends on the U.S. Postal Service
    AMSP members also participate in the exchange of 
information technology and ideas in this supply chain. We are 
members of the Coalition for a 21st Century Postal Service that 
includes members from every part of the U.S. print and product 
distribution channel and the Mailers Technical Advisory 
Committee to the Postal Service and many other related 
organizations.
    While there are many postal-related challenges about which 
we feel qualified to speak, we will confine our attention to 
the need for postal system infrastructure and operating cost 
reductions, since this is the most critical part of the 
relationship of our industry to the Postal Service. More 
specifically, I will focus today's comments on downsizing mail 
processing capabilities, mail delivery and retail.
    This need not be a complicated discussion. The fact is that 
the Postal Service's current processing, delivery and retail 
infrastructure was created in a different time with far greater 
volume and different customer expectations. At its peak only a 
few years ago, mail volume topped 212 billion pieces annually. 
The Postal Service's volume projection for its current fiscal 
year is just slightly over 153 billion pieces. Between 2005 and 
2012, mail volume declined by 28.9 percent for a corresponding 
revenue declination of 24.5 percent, even after seven rate 
increases.
    While we believe printed content will remain an important 
part of communication in the future, we know that mail volume 
will never return to anything resembling the peak volume years 
and continuing volume loss is probable. Quite simply, the 
current business model is not sustainable, because the 
underlying financial and operations assumptions no longer 
exist.
    There are no $500 million revenue streams that are readily 
available to tap. Though the Postal Service's approach to 
product innovation, sales and marketing needs dramatic, it is a 
topic for a discussion at another time. While no enterprise can 
assure success through cost reduction strategies alone, and 
while it may be fair criticism that the Postal Service reacted 
too slowly to the crisis facing it, we believe that its current 
focus is well placed. In the past couple of years, it has 
initiated a series of strategies to right-size its processing, 
delivery and retail components. Its network realignment 
strategy is well on the way to accomplishing its goal of 
closing or consolidating over 220 processing facilities. This 
will enable them to better utilize existing equipment 
investment and reduce labor expense. To this point, the Postal 
Service has executed this strategy in an effective and 
efficient manner with minimal negative impact on customers and 
business partners.
    The Postal Service has also worked to rationalize and 
optimize its retail infrastructure. There is a need to close 
post offices that are under-utilized and represent expenses 
that is no longer supported by customer demand. However, in the 
face of Congressional opposition, USPS leadership revised its 
approach and created its POSt initiative that takes a somewhat 
softer but less effective approach. Rather than closing about 
3,700 under-utilized post offices, the POSt plan seeks to align 
operating hours with current customer activity at about 13,000 
post offices nationwide. Even this plan has met community 
resistance, but given the availability of alternative forms of 
access, the perpetuation of traditional brick and mortar USPS-
operated retail outlets is an outdated and inefficient use of 
resources to meet ever-increasing customer demand.
    Operational and logistical management represent a core 
competency of the current Postal Service leadership team. They 
have demonstrated the ability to make tough decisions and, when 
allowed, to execute their strategies with a high degree of 
competency. While some level of oversight is appropriate and 
necessary, an excessive and overbearing approach is not 
productive and only serves to waste precious time in a critical 
turnaround situation.
    Of course, these infrastructure and cost reductions include 
related consequences. All stakeholders must be prepared to 
participate in this process. We all must be prepared to 
recalibrate our expectations.
    The central challenge facing the Postal Service is whether 
the Congress and citizens of the Country will allow the Postal 
Service to make the necessary changes to survive. With 80 
percent of the cost of the Postal Service tied to personnel, 
all cost reductions must include a discussion about the cost 
associated with labor.
    In conclusion, the stakes are high and the consequences are 
significant. Time is not on our side. We need strong, decisive 
leadership that operates with a sense of purpose and urgency. 
This leadership must derive from an unprecedented level of 
collaboration by all stakeholders, including the leaders of the 
Postal Service, the industry supply chain, postal labor and 
legislative oversight bodies and Congress.
    Success will depend on forward thinking, open-mindedness 
and a willingness to set aside dated perspectives. We need a 
commitment to action. At the Association of Marketing and 
Service Providers we are prepared to make this commitment, and 
I call on other leaders to join us in forging an effective 
solution. Thank you.
    [Prepared statement of Mr. Garner follows:]

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    Mr. Farenthold. Thank you very much.
    The staff pointed out that Mr. Davis also needs to be UCd 
in. I have been on this subcommittee so long, we all just 
assumed you were still on it. So at this point,, I would like 
to ask unanimous consent as well for Mr. Davis to participate 
in this hearing. Without objection, so ordered.
    We will now move on to Mr. Jerry Cerasale. He is the Senior 
Vice President of Government Affairs for the Direct Marketing 
Association. You are recognized for five minutes, sir.

                  STATEMENT OF JERRY CERASALE

    Mr. Cerasale. Thank you very much, Mr. Chairman, members of 
the subcommittee and members of the full committee. It is a 
pleasure to be here and speak to you.
    Direct Marketing Association is an association of mailers 
and suppliers. We represent probably 80 to 85 percent of the 
revenue the Postal Service receives.
    As we look at the Postal Service, Americans and American 
business particularly are spending $65 billion a year in 
postage. That is in fact, the Postal Service is providing 
something that is necessary to American business. You have 
heard from some of my colleagues here on how important the 
Postal Service is for their companies. So it is a very 
important entity and this is a very important issue.
    A couple more examples, disabled American veterans, a great 
member of DMA, receives 85 percent of its revenue to help 
disabled American veterans from direct mail campaigns. And they 
are typical for non-profit DMA members, that 80 to 85 percent 
of their revenue comes from direct mail campaigns. So the 
Postal Service is very, very important.
    In essence, as we look at this, the unfortunate of the 
world depend on the U.S. mail to get those revenues to help 
them. But it is not just to non-profits that is important. 
Another example that I will give you are catalogs. People think 
in e-commerce that paper catalogs are no longer important. They 
are important for our members to get new customers, but every 
single catalog, when people order online, over half the people 
ordering online have the catalog sitting in front of them. So 
the mail is important for that segment of our membership.
    Retail sales. There is a sale at the brick and mortar 
store. And the Postal Service delivers that advertisement to 
the home on time, so that customers will go to those brick and 
mortar stores. It is important for them as well to have the 
Postal Service. And the Postal Service does deliver on time 
most of the time. The complaints we receive, the Postal Service 
has been very, very, very responsive to try and look at errors 
and problems in their delivery system. They have been much more 
willing recently to meet with mailers, and we congratulate them 
for that.
    As you look at all those examples, all of the use of the 
mail depends upon the return on investment, how much do I spend 
for postage, what is the response rate that I receive. And all 
of our members look at that return on investment across the 
board for all the communications channels that are open for 
them. And for many of them, the mail is still a very, very 
important communication channel.
    But we all know the Postal Service cannot continue to lose 
$25 million a day. So what can they do? Our hope is that they 
will try and grow volume and try and work with them. But you 
cannot grow volume by raising postage rates. Postage increases 
and increases in mail preparation costs, to put regulations 
down, hurt mail volume in two distinct ways. One, the revenue 
budget, the postal budgets are exhausted with less volume, and 
that volume that is most likely lost is prospective volume, the 
engine to try and grow those businesses. And second, the return 
on investment drops. When that happens, alternatives become 
more and more advantageous.
    So our hope is that the Postal Service can use the sales 
force, Valpak as a sales force, others as sales forces out 
there. And if they get volume for their businesses, it grows 
postal volume. So lets work together and try and have the 
Postal Service leverage those sales forces. We think the Postal 
Service should be more aggressive with negotiated service 
agreements across classes of mail to try and keep volume within 
the Postal Service.
    Finally, cutting expenses. The Postal Service has excess 
capacity. They are working well to reduce that excess capacity. 
They have to work faster. You can't raise rates and ask mailers 
to pay for excess capacity. It is not going to work. It is 
going to hurt mail volume, it is going to hurt the Postal 
Service. And it is going to hurt the mail industry. So they 
have to move more rapidly with that.
    And I appreciate this time, and look forward to your 
questions. Thank you very much.
    [Prepared statement of Mr. Cerasale follows:]

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    Mr. Farenthold. Thank you very much.
    We appreciate everyone's testimony. At this point, we also 
invited testimony from eBay, a Mr. Carl Gish. He was unable to 
attend, and he did submit written testimony. Without objection, 
I would like to include that in the record.
    Without objection, so ordered.
    [Prepared statement of Mr. Carl Gish follows:]

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    Mr. Farenthold. But for eBay, I wouldn't have this lovely 
tie.
    [Laughter.]
    Mr. Farenthold. Actually, but for a lot of people on this 
panel, my life would be very different. I paw through the 
Valpak for the pizza coupons, I paw through my newspaper for 
the CVS coupons. So it is, a very interesting panel that I 
think affects all postal customers lives as well.
    At this point I want to begin my questioning with something 
that is really kind of topical in the news today. We are seeing 
a pullback now from the Postal Service saying they are going to 
stay with full six-day delivery. What I do want to, I know the 
gentleman from CVS pointed out they were happy with just 
packages being delivered, that met their business needs. But I 
would like to go down and ask the panel, is part of their 
business, do they see a huge negative effect with the proposal 
that was before us to just deliver packages and priority mail 
and post office boxes on Saturday? If you could all just answer 
quickly, because I have quite a few questions. We will start 
with Mr. Brandt.
    Mr. Brandt. Mr. Chairman, we in the newspaper industry have 
experienced many of the challenges that the Postal Service is 
facing. We have had multiple responses to that. But one has 
been to reduce our costs significantly. So my view, and the one 
expressed in editorials in my newspaper, is that that was a 
perfectly legitimate option available to the post office for 
reducing its costs.
    Mr. Farenthold. About 71 percent of surveyed folks agreed 
with you on that.
    Ms. Franckowiak?
    Ms. Franckowiak. We actually also mail into Canada. We have 
franchises located up there where they have a five-day delivery 
model currently. So we have been used to that for quite some 
time. We have been very supportive of the Postal Service. At 
this point we kind of look at it as maybe a luxury if they are 
able to continue Saturday. It wouldn't be our preference, if 
they could afford it, to eliminate it. But we have had the 
experience in Canada.
    Mr. Farenthold. Ms. Brophy?
    Ms. Brophy. We understand that the move to eliminate the 
sixth day of home delivery is another initiative to cut costs. 
We have said right along that we will adjust.
    Mr. Farenthold. Okay, great. Mr. Janssens?
    Mr. Janssens. Yes, sir, as I stated, we supported the 
initiative of moving to a five-day for first class and keeping 
the parcel for six days.
    Mr. Farenthold. Great. Mr. Garner?
    Mr. Garner. Our Association was the first to announce its 
support of the PMG s intent to move to five-day, not because we 
were excited about it, but because we believe that everybody 
has to make some concessions in this, everybody has to have 
some skin in the game. That was one of the concessions we were 
prepared to make.
    Mr. Farenthold. And Mr. Cerasale?
    Mr. Cerasale. DMA can't take a position. Our Association is 
split, our membership is split. But we all agree that you 
should cut as much as you can before you cut service, and as a 
last resort there. All my members will have to adjust if 
Saturday delivery goes. For some it would be easier than 
others. But, as a last resort, we support it as a last resort, 
because we need the Postal Service to stay financially viable.
    Mr. Farenthold. Thank you very much.
    I am going to go back to Mr. Brandt, as well. You mentioned 
that the Postal Service is negotiating a sweetheart deal with 
some of your competitors for delivery, a lower rate for 
bringing in new customers. I know my local newspaper, the 
Corpus Christi Times, brought that to my attention. We sent a 
letter to the Postal Service about it.
    Do you feel like some of the customers that are using this 
service are actually new postal customers, or are they 
customers that were using the Postal Service to begin with and 
are just switching providers to get a better deal?
    Mr. Brandt. Mr. Chairman, first of all, I appreciate your 
signing and perhaps even initiating that letter. That was very 
helpful.
    Our industry association tracks activity related to the 
negotiated services agreement with Valassis, which was targeted 
at Sunday inserts in newspapers. There has apparently not been, 
at this point, an actual conversion of a pre-print delivered by 
newspapers to the new program. So at the moment, it has netted 
nothing for the Postal Service.
    However, there is evidence and data that it is being used 
by agencies that place newspaper inserts to flog newspapers in 
rate negotiations to reduce the rates that pre-print 
advertisers are paying for the inserts that they put into 
newspapers.
    Mr. Farenthold. I see my time is expired. So I am going to 
lead by example and move along. If we have time for a second 
round of questioning, I do have a couple more, if they don't 
get asked by other members.
    At this point, I will recognize Mr. Clay for five minutes.
    Mr. Clay. Thank you, Mr. Chairman. I certainly will observe 
the five-minute time limit.
    In the 112th Congress, both Chairman Issa's bill and the 
Senate bill addressed underwater or under-priced postal 
products through a provision that mandated increasing prices of 
market-dominant classes, products or types of mail that did not 
contribute to 100 percent of their indirect or direct costs.
    Joy, let me begin with you, and I will not try to tackle 
your last name. But in your testimony you mentioned that the 
Postal Service allowed eight products to remain underwater, 
costing the Postal Service millions of dollars. Do you think 
that the House and Senate provision on this issue would address 
the problem and do you think that this provision should be 
included in any future reform package?
    Ms. Franckowiak. Thank you. Yes, sir, we believe that the 
Postal Service cannot afford to continue losing, at this point, 
billions of dollars on products that don't cover their costs. 
As a private business, we certainly probably wouldn't be very 
profitable if we had a bunch of products that didn't cover 
their cost, let alone contribute towards overhead. So we don't 
think that it needs to be an immediate jump and get them there 
in one year or even two years. But they should start to move in 
that direction and develop a plan that everybody can move 
toward.
    Mr. Clay. Thank you for your response.
    Mr. Brandt, you mentioned that high density rate prices 
have incrementally increased over time at a higher rate than 
saturation rates. Has this caused you or any of the other 
newspapers in your association to scale back the amount of mail 
you enter into the system at the high density rate?
    Mr. Brandt. Congressman Clay, the expanding differential 
between saturation rates paid by direct mailers and high 
density rates paid by newspapers has resulted in Greenville in 
the transfer of 50,000 pieces per week from the mail to 
alternate delivery. Our industry association estimates that 
$300 million has migrated from the postal system to private 
alternate delivery forces as a result of what we view an ill-
advised pricing action by the Postal Service.
    Mr. Clay. And Mr. Brandt, how do those costs, how do they 
come out? Is it more expensive to use the private company or is 
it less expensive to be with the Postal Service?
    Mr. Brandt. The private or proprietary, in our case, we 
have our own alternate delivery force in Greenville, the 
proprietary or private services are 25 to 50 percent less 
expensive than the Postal Service.
    Mr. Clay. At this time? It could change?
    Mr. Brandt. Yes, sir.
    Mr. Clay. Thank you for that response.
    Do you think that if this issue was addressed in postal 
reform language that it would cause you and other newspapers to 
use the Postal Service more?
    Mr. Brandt. Mr. Congressman, the newspaper industry values 
the Postal Service. Even though it is more expensive, many 
deliveries remain in the Postal Service because our pre-print 
advertising clients value them.
    So, if the differential were scaled back, I think there is 
every reason to believe that postal volume would increase as a 
result.
    Mr. Clay. Thank you for that response.
    Mr. Connolly. Would my colleague yield?
    Mr. Clay. I have one more.
    Mr. Cerasale, one non-profit organization within your 
organization is the Disabled American Veterans. Could you 
discuss how this organization would be affected if non-profit 
mailing rates were increased?
    Mr. Cerasale. Sure. As I said, the return on investment is 
the major driver. But they have a postal, or a mailing budget, 
not just for postage, but to prepare the direct appeals. And if 
postage rates go up, they will send out less pieces of mail. 
They will send it to the lower response rate that they think, 
but they will receive fewer dollars coming in to help disabled 
American veterans.
    So it is just a simple dollar and cents issue, the mailing 
budget is used, and when it is all used up, they stop mailing. 
If they mail less, they get less money back.
    Mr. Clay. Thank you, and I am finished.
    Mr. Farenthold. Thank you very much, Mr. Clay.
    We will now recognize Mr. Walberg for five minutes.
    Mr. Walberg. Thank you, Mr. Chairman. Begin with a father 
that just put my daughter on a plane back to Uganda where she 
has lived and worked for six years and this time, transporting 
with her by air six large containers, because you can't mail to 
Uganda and expect that it gets there, safe, sound, or even gets 
there.
    So to have a panel in front of us that is giving us ideas 
on how to work to make sure that a Postal Service which 
provides us really excellent service that we can trust, when 
you send a check or you send a package it arrives, sometimes a 
little bit beat up, but what do you expect, it is worse on the 
airplanes. It is good that we have this opportunity.
    Ms. Brophy, for your magazines, can you estimate what share 
of the cost is postage?
    Ms. Brophy. There are a number of different ways that you 
could look at that. I couldn't tell you for sure unless I knew 
exactly what we were including. It is a significant portion of 
the direct mail cost.
    Mr. Walberg. So a significant portion.
    Ms. Brophy. It is significant.
    Mr. Walberg. I would assume because of that you have 
probably looked at other possibilities for delivering your 
magazines or mailings. What has kept you with the Postal 
Service?
    Ms. Brophy. Most of our customers, a great number of our 
customers, rely on getting that information. They like getting 
the print information. Direct mail is also the largest 
acquisition source and more than half of our revenue still 
comes from direct mail acquisition. So direct mail campaigns 
are vitally important to the mission and to the budget.
    We have a very strong digital presence. Consumerreports.org 
is one of the largest paid sites on the web. At any given time, 
depending on how much of an expense postal happens to be in 
that equation, we would probably divert much more of our 
resources to figuring out and conquering how to pursue 
acquisitions online.
    Mr. Walberg. Thank you.
    Mr. Garner, in your testimony you highlight the major 
actions that the Postal Service has taken to begin right-sizing 
its infrastructure. Could you expand on why that right-sizing 
is so important to mailers?
    Mr. Garner. I think it is a very basic principle here in 
terms of an infrastructure that exists now that can't support 
itself. It is not sustainable. As we have all been made aware 
here, the financial consequence of having the cost of an 
infrastructure that far exceeds the demand for it is penalizing 
all of us. It puts all of what we do here at serious risk.
    So first and foremost, I think, as a strategy, we need to 
get the Postal Service's infrastructure and costs in line with 
the volume and the revenue it receives.
    Mr. Walberg. In your fully testimony, you touched on the 
larger mailing industry and the effect that the electronic 
diversion and downturn in mail volume has had on the industry 
as a whole. If you could, could you explain for us what have 
been some of the differences between how the United Parcel 
Service has impacted or worked to deal with that, respond to 
that crisis, I think is a better how they have responded in 
some ways in the private sector better than they have done with 
the U.S. Postal Service?
    Mr. Garner. I will take a swing at it. I think one of the 
things about UPS and FedEx is they are not encumbered by some 
of the same requirements that the Postal Service is. They don't 
have a thing called the universal service obligation. They 
don't have to deliver mail every day to every residence. In 
fact, the Postal Service does a lot of that work on behalf of 
FedEx and UPS.
    So as commercial businesses, I think they have more 
latitude, more freedom to execute the kinds of cost reduction 
and infrastructure reduction strategies that are available to 
them. So I think they have a distinct advantage in that area.
    Mr. Walberg. Okay, thank you.
    Mr. Janssens, in your testimony you mentioned the important 
role of cost efficiency in your decision to use the United 
States Postal Service. How has the continual increase in the 
cost of postage affected your business over the past few years?
    Mr. Janssens. From a history perspective, back in the 1980s 
when we first started the program for mail order prescriptions, 
everything went 100 percent UPS. FedEx didn't exist back then. 
The pressure on the industry, like all industries, continued to 
look for cost savings. And we have moved to the postal system. 
And as they upgraded their delivery system for packages, it has 
been very opportunistic for everyone to increase that volume.
    As I said, over 90 percent of the medicine and medication 
that we ship today on the maintenance side for maintenance 
products goes to the postal system. As we continue to have 
these price increases, obviously that affects our business as 
well as our pricing model. We have less ability to pass that 
savings on to our clients and our constituents, or our 
beneficiaries that are using our products. We still have a very 
good differential today between the Postal system and UPS, it 
is getting closer all the time, for example.
    Mr. Walberg. Thank you, Mr. Chairman. I yield back.
    Mr. Farenthold. Thank you very much. We are now up on the 
other side of the aisle to the gentlelady that has the shortest 
commute of anybody in Congress to their home district, the 
gentlelady from the District of Columbia, Ms. Norton.
    Ms. Norton. Thank you very much, Mr. Chairman. Nine blocks.
    [Laughter.]
    Ms. Norton. First, let me ask a threshold question. If we 
do not pass a postal bill, a lot of the testimony we are 
hearing today may be quite moot. We have done nothing on this 
side of the House, of the Congress. But last year I note that 
the Senate actually passed a postal service reform bill. Two-
thirds of the Senate is voting for it, really bipartisan bill.
    Could I ask where each of you stand on the Senate bill? Mr. 
Brandt, why don't you start?
    Mr. Brandt. Congresswoman Norton, I am not familiar with 
the content of the bill. Therefore, I can't comment on it.
    Ms. Franckowiak. Our preference, I think, from an 
operational perspective, we preferred a lot of the language 
that was in the proposed House bill that was passed out of 
subcommittee. Because we didn't feel that the Senate bill 
really went after a lot of the fundamental issues of the Postal 
Service. It relayed a lot about RHBF and some of the other 
things that, while they are things that are impacting the 
Postal Service, they really need to have the ability to right-
size their business model and do some of these changes that we 
feel need to occur.
    Ms. Brophy. We supported the Senate bill. There are very 
many elements in the House bill that we were also in favor of.
    Ms. Norton. Thank you. Mr. Janssens?
    Mr. Janssens. Congresswoman, I am not close enough to 
understand all the details of that bill to comment.
    Ms. Norton. Mr. Garner?
    Mr. Garner. We did support the Senate bill, but similar to 
my colleague, Ms. Franckowiak, we wish it would have been a bit 
more aggressive in its approach to cost reduction.
    Ms. Norton. Mr. Cerasale?
    Mr. Cerasale. We supported the bill. We think the postal 
reform needs to get moving so we supported the Senate bill and 
hope that they pass something similar to get things started 
again.
    Ms. Norton. I appreciate just that understanding of where 
people would have been willing to start. Obviously the House 
and the Senate are not going to agree on everything. That is 
why if somebody doesn't get it started it doesn't happen. So I 
think they did make a start, and I do believe this is the year 
that if we don't do it, the Postal Service, this will be the 
second or third year of defaulting on its health benefits, 
prepayments. It is out of cash. In November it will owe $1.3 
billion just for workmen's compensation. No cash in November. 
It will owe $5.5 billion in prepaid benefits, health benefits, 
at the end of this fiscal year. This is folly. We are sitting 
here talking about an important matter, but I think there are 
worse problems here.
    I was interested in how you viewed the Postal Service, Mr. 
Brandt indicated that something like 25 percent of your 
business had been moved to private deliverers. Mr. Cerasale, 
you indicated that the Postal Service was timely and reliable. 
I am sure if there any Postal Service people here they are glad 
to hear someone say such good things about them.
    By the way, there was a recent survey done of government 
agencies. It found the Postal Service to be the most trusted by 
the American people, and it is not even a government agency.
    Let me ask you, though, this is my pet peeve. In 1971, the 
Congress spun off the Postal Service to be a private business, 
to be like you who are sitting at this table, but it has never 
treated it like a private business. The health benefits are 
only one example that they have to prepay in a way that no 
Federal agency does, for example.
    And the reason for that, very frankly, is only because it 
makes our deficit look better. It doesn't have anything to do 
with them. If they didn't put their trust funds then our 
deficit would look like it really is.
    Let me ask you though about treating the Postal Service as 
a private business. The Postal Service has a unparalleled 
infrastructure in transportation and delivery like nobody else. 
But they cannot at the moment even engage with non-Postal 
Service matters, like products or the internet, other kinds of 
things that its infrastructure, if any private sector had it, 
would be now used in a dozen ways.
    Do you think that today's Postal Service should be allowed 
to use that infrastructure in a, to take full advantage of that 
infrastructure by not being required to stick only to what is a 
very narrow set of products and services related to the Postal 
Service itself? I would like to hear what each of you who are 
in private business have to say about that. Mr. Brandt?
    Mr. Brandt. Congresswoman Norton, I agree with you on the 
scope and magnitude of the challenge that the Postal Service is 
facing. I think that when we talk about spinning it off and 
giving it true independence as a business, an issue that is 
part and parcel of that has to do with the fact that the Postal 
Service is both an umpire and a player in some of the arenas 
where it operates. I think that would have to be taken into 
account if it were spun off as an independent business.
    Ms. Norton. Mr. Franckowiak?
    Ms. Franckowiak. We generally feel that the Postal Service, 
what they are really good at, to your point, is delivering the 
mail and the size of their network and utilizing their 
infrastructure. We would support anything that they could do 
that falls within their specialty. A lot of foreign posts get 
into banking and insurance and different things like that. We 
don't think that that is something the Postal Service should go 
after.
    But anything that can enhance their strengths we would 
support.
    Ms. Norton. Ms. Brophy?
    Ms. Brophy. I would leave it up to other experts to decide 
whether or not the Postal Service should pursue other avenues. 
We are really much more interested in what is in front of us 
immediately and that they continue to work on organizational 
changes that make them financially sound.
    Ms. Norton. I am just trying to allow them to grow like any 
business would like to grow.
    Mr. Janssens?
    Mr. Janssens. I also share your pet peeve, by the way, in 
terms of, either we fund it as an organization as part of the 
government, if we feel that is the right way to go, or we allow 
it to be an independent business from a regulatory perspective. 
So today we are kind of in that middle ground.
    As to your comment or your question, I would support them 
looking for other avenues for revenue generation to fill that 
capacity, as has been discussed by a number of the constituents 
here.
    Ms. Norton. Mr. Garner?
    Mr. Garner. I believe that product innovation and service 
innovation is not a core competency that the Postal Service 
currently has. I think industry could help a great deal in that 
area. But I would also caution against kind of a free rein here 
in a sense that they are in a position to, perhaps in some 
cases inappropriately, leverage their size and their reach. So 
there needs to be a sensitivity to private business and 
competition in those areas. But there is no question about the 
fact that they need to be much better at product and service 
innovation.
    Mr. Cerasale. I agree with Mr. Garner that they need to be 
much better in product service integration. I have testified 
before that the Postal Service should not reinvent the wheel in 
looking at products. They should try and look to partner with 
the private sector, if in fact the private sector is producing 
something they don't have to reinvent and do it, they can work 
with them together. I think that is an area the Postal Service 
should be allowed to more aggressively pursue.
    Ms. Norton. Thank you very much.
    Mr. Farenthold. Thank you, and I would note that they have 
now called votes in the House. This is going to be a rather 
lengthy series of votes. They are saying that we will probably 
not walk off the Floor until 4:15.
    So what we are going to do, so we have time to get to the 
votes by probably taking two more rounds of questions if they 
stick to five minutes. Then we will recess. If any of our 
witnesses have to leave to catch a plane or whatever, we will 
excuse them. But we will reconvene immediately after the votes 
for any other members who have questions of any of our panel 
who can stay.
    So at this point, in order to get a couple more sets of 
questions in, we will recognize the gentleman from Georgia for 
a quick five minutes.
    Mr. Collins. Thank you, Mr. Chairman. This is going to be 
quicker than five minutes.
    I think one of the things that was said here, and we can 
rehash a lot of what has been said, the Postal Service is a 
vital function that is needed, it is something that we need, it 
provides a service that no one else is going to pick up. UPS, 
FedEx, nobody else is going to pick up a lot of what they do. 
And we have to fix that.
    But we also have to acknowledge that there are a lot of 
problems. And this is what we have had in the last two days 
over here. And one of the things, we talk about the pre-funding 
mandate, and that is causing all the problems. There is an 
issue there, but you have $9.9 billion in losses on top of the 
pre-funding. There is just an inherent problematic model here. 
And when I sit here and listen today about the agreements, the 
NSAs agree, you are losing money, you are giving preferential 
treatment, I have a real problem with the Postal Service 
picking winners and losers, I have a problem with any side of 
that.
    But I do have one quick question, and then I am going to 
reserve back. I am just going to say Joy, not even going to 
attempt it. My north Georgia would just mutilate it.
    It is my understanding, though, that products such as 
Valpak pay a higher percentage of basically the cost relative 
to the cost of the Postal Service. Is that true? So basically 
you are a profit, you pay more than what is needed to deliver, 
is that correct?
    Ms. Franckowiak. Yes, sir. We pay approximately 220 percent 
of our costs. So we are paying quite a bit to help offset some 
of the products that aren't paying even 100 percent of their 
costs.
    Mr. Collins. And when I hear that, and seeing how this 
model is not working, it really bothers me. And I am all for 
doing what we can, because it is a vital service. And even the 
others, UPS, FedEx and others I have talked to, want a strong 
relationship with the Postal Service like they already have.
    I think what concerns me though in that question, and with 
other things going on, is that we simply again have just a 
flawed business model here, it is a flawed model that is not 
working to support newspapers, to support others where you have 
this kind of rate structure that basically says, we will make 
here or not make here, when you can actually do something about 
it.
    I look forward to dealing with the chairman and ranking 
member and others on this subcommittee as we move forward, and 
that we do need to address this. This is not something we need 
to duck. It is something we need to move forward on.
    And is it going to be easy? No. But we have to do it, and I 
appreciate all of your attendance today. Mr. Chairman, I yield 
back.
    Mr. Farenthold. And I appreciate your generosity with your 
time.
    We will now recognize Mr. Davis for five minutes.
    Mr. Davis. Thank you, Mr. Chairman. I certainly appreciate 
your giving me the opportunity to participate. I think I have 
been on this committee so long until I forget that I am not 
still a member of it.
    There are many members of Congress, including some people 
on this committee, who are concerned that senior citizens and 
veterans who receive their prescriptions by mail would be 
adversely affected by the Postal Service's decision to reduce 
its delivery schedule. The Postal Service has stated that 
package delivery will occur on Saturdays.
    However, many of the prescriptions that our seniors and 
veterans receive are not classified as packages. Mr. Janssens, 
you mentioned how important Saturdays are to your operation. As 
a provider of mail order prescriptions for Federal employees, 
retirees and their dependents, has the Postal Service reached 
out to your company to explain its plan to implement this 
measure or address the issue of delivery to our seniors and 
veterans?
    Mr. Janssens. Congressman, they have reached out, and we 
have talked to our account representatives. Right now, all of 
our products that we ship today is either a parcel select or a 
parcel select lightweight. It would be included in their 
Saturday delivery schedule.
    Mr. Davis. Do you think that additional costs will be 
incurred by your company that you in turn would pass on to the 
consumer, some of whom are already on fixed incomes or are 
already contending with high prescription costs?
    Mr. Janssens. At this point, are you suggesting if they 
stopped Saturday deliveries?
    Mr. Davis. Yes.
    Mr. Janssens. It would impact our ability to maintain our 
current margins. It has not been decided at this point whether 
that cost would be passed on to our clients, who are the payers 
that tie back into our members from a health plan perspective, 
unions and government organizations.
    Mr. Davis. So you think it would adversely affect your 
operation vis-a-vis your clients?
    Mr. Janssens. Correct. If we had to continue to ship on for 
delivery on Saturday. But there is also the issue, as I touched 
on from an adherence perspective, then we have one less day 
where they would have deliveries if we chose not to ship for 
delivery on Saturday.
    Mr. Davis. Thank you very much. Mr. Chairman, I thank you 
again for the opportunity to participate, and I certainly thank 
all of the witnesses for coming to share with us.
    Mr. Farenthold. Since our two previous questioners were so 
rapid, we probably can still make our votes by letting Mr. 
Connolly go for five minutes. You are recognized.
    Mr. Connolly. I thank the Chair, and I thank you for your 
courtesy in allowing me to participate.
    All of you were asked by the Chairman the question about 
the reasonableness of going from six to five days. But would 
you not, might you have a different answer if the question were 
phrased differently? If for example you knew that the biggest 
cost item that we have not dealt with in the House bill we did 
in the Senate bill that you were not familiar with, Mr. Brandt, 
is the pre-payment requirement, an onus put on no other entity 
on the planet of the United States Congress, except the U.S. 
Postal Service, that costs it between $5 billion and $6 billion 
a year right now? You might have answered differently, might 
you not, if I had said, that is the choice.
    The choice is, cost-cutting from six to five, holding in 
abeyance what revenue loss you might have, and/or dealing with 
the prepayment problem, which is the big elephant in the room, 
except we didn't deal with it here in the House. Might your 
answer have been different, Mr. Brandt, if I had phrased it 
that way?
    Mr. Brandt. Congressman Connolly, my understanding is the 
deficit for the Postal Service last year was $15.9 billion. My 
understanding is that the prepayment on retiree health care 
benefits is $5.5 billion. Clearly that leaves more work to be 
done.
    I understand that the elimination of Saturday delivery 
other than parcels would save an additional $2 billion.
    Mr. Connolly. Can I stop you there, Mr. Brandt?
    Mr. Brandt. Yes, sir.
    Mr. Connolly. So far you are accurate in the retelling. But 
I assume, being a newspaperman, you don't just accept those 
numbers uncritically. For example, let s take this so-called $2 
billion savings from six to five days a week. Are you aware of 
the fact that the Postal Regulatory Commission actually 
examined that number and said it overstates the savings by $1.4 
billion and understates the revenue loss by $.4 billion? Might 
that have changed your editorial opinion about going from six 
to five?
    Mr. Brandt. Congressman Connolly, our editorial was really 
addressing a more general issue, and that is the necessity to 
reduce costs and/or increase revenues in order to sustain the 
viability of the Postal Service into the future. As part of 
that, as a subset of that editorial, we endorsed the idea that 
Saturday delivery be on the table.
    Mr. Connolly. Fair enough.
    Mr. Brandt. And my answer would not have changed.
    Mr. Connolly. I would just say to you, however, especially 
in the newspaper business, it seems to me we can't accept 
things uncritically. It has to be examined. For example, there 
was a study two years ago that the Postmaster General 
commissioned, not an outside study. And they deep-sixed it 
because it found that yes, all these reforms to save money 
actually cost money and lost revenue, over $5.2 billion. And 
they buried the study, rather than have it be available to the 
public. I assume you were aware of that.
    Which calls into question the efficacy of some of the so-
called reforms. And Mr. Garner, you really emphasize cut, cut, 
cut. But don't we need to emphasize new revenue opportunities? 
Let me give you one simple example. In terms of parcel service 
delivery, the Federal business alone, to the Federal customer, 
was $342.6 million in 2011 and $336.9 million a year later. The 
Postal Service share of that was $1.2 million in 2011, and $4.8 
million in 2012. This is Federal business.
    Would you at least agree that in addition to spending cuts, 
there are revenue opportunities that we are not really 
exploring?
    Mr. Garner. I would absolutely agree.
    Mr. Connolly. Okay. Because that is what bothers me. I 
think we need a new business model. And Mr. Cerasale, you 
touched on it. If you look at Europe, they are exploiting that 
business model, and it is a fairly significant chunk of their 
revenue. And it is viable.
    But our 2006 legislation around here actually precludes the 
Postal Service from really examining that. Why, I don't know. 
But it seems to me that we are the ones who put a real onus on 
the ability of the Postal Service to respond by creating a more 
nimble business model, including cuts, including new revenue 
opportunities, including expansion into areas heretofore 
unexplored or limited. And I would hope that as we do that, we 
do it within the law.
    Because one of the others things, I end on this note, that 
didn't get said about the Postal decision to go from six to 
five is, it was frankly an extra-legal decision. The Postmaster 
General clearly, on its face, he did not have that authority. 
That was so opined by the GAO and confirmed today by the Postal 
Board of Governors, even though they disagree with the 
Congressional intent.
    But a statute is a statute, and we all have to operate 
within the law. Thank you.
    Mr. Farenthold. Mr. Connolly and I may disagree with the 
intent of that statute.
    I have been informed by the minority staff that since Mr. 
Connolly has gotten his questions, the remainder of the members 
of the minority, we will not be able to get back after votes. 
We have completed our questioning on our side. I had a couple 
of other questions that I wanted to direct to the panel in 
general. That was just a general comment with respect to the 
customer service you have received from the Postal Service.
    And I have a question for Mr. Brandt as well about the 
different effectiveness of using the Postal Service for 
delivery of your products versus your door hangers. Because I 
need to get over and vote as well, if you guys would just fire 
off a quick letter to the committee with the answers to those 
questions, to supplement your written testimony, we will 
adjourn this and we will all go about our business.
    I would like to thank each member of the panel as well as 
members of the subcommittee for participating in this. I think 
we gained some valuable insight as we move forward with postal 
reform.
    So with that, thank you very much, and the subcommittee 
stands adjourned.
    [Whereupon, at 2:59 p.m., the subcommittee was adjourned.]

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