[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
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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
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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
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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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