Federal Employees' Health Plans: Premium Growth and OPM's Role in
Negotiating Benefits (31-DEC-02, GAO-03-236).			 
                                                                 
Federal employees' health insurance premiums have increased at	 
double-digit rates for 3 consecutive years. GAO was asked to	 
examine how the Federal Employees Health Benefits Program's	 
(FEHBP) premium trends compared to those of other large 	 
purchasers of employer-sponsored health insurance, factors	 
contributing to FEHBP's premium growth, and steps the Office of  
Personnel Management (OPM) takes to help contain premium	 
increases compared to those of other large purchasers. GAO	 
compared FEHBP to the California Public Employees' Retirement	 
System (CalPERS), General Motors, and a large private-employer	 
purchasing coalition in California as well as data from employee 
benefit surveys.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-236 					        
    ACCNO:   A05781						        
  TITLE:     Federal Employees' Health Plans: Premium Growth and OPM's
Role in Negotiating Benefits					 
     DATE:   12/31/2002 
  SUBJECT:   Comparative analysis				 
	     Employee benefit plans				 
	     Employee medical benefits				 
	     Health care costs					 
	     Health insurance					 
	     Insurance premiums 				 
	     California Public Employees Retirement		 
	     System						 
                                                                 
	     Federal Employees Health Benefits			 
	     Program						 
                                                                 

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GAO-03-236

Report to the Subcommittee on International Security, Proliferation, and
Federal Services, Committee on Governmental Affairs, U. S. Senate

United States General Accounting Office

GAO

December 2002 FEDERAL EMPLOYEES* HEALTH PLANS

Premium Growth and OPM*s Role in Negotiating Benefits

GAO- 03- 236

FEHBP*s premium trends from 1991 to 2002 were generally in line with other
large purchasers* increasing on average about 6 percent annually. OPM
announced that average FEHBP premiums would increase about 11 percent in
2003, 2 percentage points less than in 2002 and less than some other large
purchasers are expecting. FEHBP enrollees would likely have paid even
higher premiums in recent years if not for modest benefit reductions and
enrollees who shifted to less expensive plans.

Increasing premiums are related to the plans* higher claims expenditures.
For FEHBP*s three largest plans, about 70 percent of increased claims
expenditures from 1998 to 2000 was due to prescription drugs and

hospital outpatient care. Most of the increase in drug expenditures was
due to higher plan payments per drug, while the increase in hospital
outpatient care expenditures was due to higher utilization.

OPM relies on enrollee choice, competition among plans, and annual
negotiations with participating plans to moderate premium increases.
Whereas some large purchasers require plans to offer standardized benefit
packages and reject bids from plans not offering satisfactory premiums,
OPM contracts with all plans willing to meet minimum standards and allows
plans to vary benefits, maximizing enrollees* choices. Each year, OPM
suggests cost containment strategies for plans to consider and relies on
participating plans to propose benefits and premiums that will be
competitive with other participating plans.

OPM generally concurred with our findings.

Average Annual Change in Premiums for FEHBP and Other Large Purchasers,
1991 through 2003

Note: FEHBP and large employers* premium increases in 2001 and 2002 were
within 0.3 percentage points of each other. The data from the Kaiser
Family Foundation/ Health Research and Educational Trust for large
employers for 2003 were not available at the time of our work. FEDERAL
EMPLOYEES' HEALTH PLANS

Premium Growth and OPM's Role in Negotiating Benefits

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 236. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Kathryn G. Allen on (202) 512- 7118. Highlights of
GAO- 03- 236, a report to the

Subcommittee on International Security, Proliferation, and Federal
Services, Committee on Governmental Affairs, U. S. Senate

December 2002

Federal employees* health insurance premiums have increased at double-
digit rates for 3 consecutive years. GAO was asked to examine how the
Federal Employees Health Benefits Program*s (FEHBP) premium

trends compared to those of other large purchasers of employersponsored
health insurance, factors contributing to FEHBP*s premium

growth, and steps the Office of Personnel Management (OPM) takes to help
contain premium increases compared to those of other large purchasers. GAO

compared FEHBP to the California Public Employees* Retirement System
(CalPERS), General Motors, and a large privateemployer

purchasing coalition in California as well as data from employee benefit
surveys.

Page i GAO- 03- 236 Federal Employees' Health Premium Growth Letter 1
Results in Brief 2 Background 4 Rise in FEHBP Premiums Has Been Similar to
Increases for Other

Large Purchasers 9 Increases in Expenditures for Prescription Drugs and
Hospital Outpatient Care Drove Most of Recent Rise in Premiums for FEHBP*s
Largest Plans 13 OPM*s Reliance on Competition among Plans and Annual

Negotiations to Contain Premium Increases Differs in Some Ways from Other
Large Purchasers 17 Comments from OPM and Other Reviewers 24 Appendix I
Methodology 26

Appendix II Comments from the Office of Personnel Management 30

Tables

Table 1: FFS Plans Participating in FEHBP, 2002 7 Table 2: Cost Drivers
for the Three Largest FEHBP Plans, 1998 to 2000 14 Table 3: Selected
Characteristics of FEHBP Compared to Health Benefit Programs Offered
through CalPERS, PBGH, and GM 29 Figures

Figure 1: Average Annual Change in Premiums, 1991 through 2003 10 Figure
2: Change in Per- Enrollee Claims Expenditures due to Plan Payments and
Utilization for Major Categories of Health Care Services for the Three
Largest FEHBP Plans, 1998 to 2000 16 Contents

Page ii GAO- 03- 236 Federal Employees' Health Premium Growth
Abbreviations

BCBS Blue Cross and Blue Shield CalPERS California Public Employees*
Retirement System FEHBP Federal Employees Health Benefits Program FFS fee-
for- service

GEHA Government Employees Hospital Association, Inc. GM General Motors HMO
health maintenance organization HRET Health Research and Educational Trust
OPM Office of Personnel Management PBGH Pacific Business Group on Health
POS point of service PPO preferred provider organization

Page 1 GAO- 03- 236 Federal Employees' Health Premium Growth

December 31, 2002 The Honorable Daniel K. Akaka Chairman The Honorable
Thad Cochran Ranking Minority Member Subcommittee on International
Security,

Proliferation, and Federal Services Committee on Governmental Affairs
United States Senate

After a period of decline in the mid- 1990s, federal employees* health
insurance premiums have increased at double- digit rates in recent years.
During the past 5 years, premiums for the Federal Employees Health
Benefits Program (FEHBP)* which is the nation*s largest purchaser of
employer- sponsored health benefits with about 8.3 million covered lives*
have increased cumulatively by about 50 percent. For 2003, premiums are
expected to increase on average about 11 percent following an average
increase of about 13 percent in 2002.

Concerned about the continuing increases in FEHBP premiums, you asked that
we analyze these premium increases and the Office of Personnel
Management*s (OPM) approaches to containing cost growth and compare these
increases and approaches to other large public- and private- sector
purchasers of employer- sponsored health benefits. To do this, we examined

 trends for FEHBP*s premiums compared to premiums for other large
purchasers over the last decade,  factors that contributed most to
FEHBP*s recent premium growth, and  steps that OPM takes to help contain
premium increases compared to

those of other large purchasers. To identify trends in the federal
government*s and other large purchasers* health insurance premiums over
the last decade, we obtained premium data from OPM, from the California
Public Employees* Retirement System (CalPERS)* the second largest public
purchaser of employee health

benefits* and, for other large purchasers, from the Kaiser Family
Foundation/ Health Research and Educational Trust (Kaiser/ HRET) surveys
of private employer- sponsored health benefits. To identify factors
contributing to FEHBP premium trends, we analyzed available OPM data,

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 236 Federal Employees' Health Premium Growth

including summary reports it received on enrollees* health care
utilization and related claim expenditures for 1998 through 2000 from the
three largest nationwide plans participating in FEHBP. These three plans
are all fee- for- service (FFS) plans and represented 90 percent of FEHBP
enrollment in FFS plans and almost two- thirds of FEHBP enrollment in all
plans. We also interviewed OPM officials. To ascertain how OPM and
selected large purchasers attempt to control costs, we interviewed
actuaries and other officials at OPM, CalPERS, General Motors (GM)* the
largest private purchaser of employee health benefits in the United

States* and the Pacific Business Group on Health (PBGH), a Californiabased
purchaser representing 19 large employers. To obtain information on large
purchasers* cost containment strategies in general, we reviewed the
literature and interviewed employee health benefit consultants. In
addition, we reviewed the applicable statute and regulations and
interviewed representatives of major plans participating in FEHBP and
federal employee unions.

Appendix I provides more detailed information on our methodology. We
performed our work from December 2001 through December 2002 in accordance
with generally accepted government auditing standards.

Since 1991, the average increase in premiums for FEHBP has been similar to
those of other major purchasers. Premiums for FEHBP, CalPERS, and other
large employers increased, on average, about 6 percent per year from 1991
through 2002. FEHBP premium increases were lower than other large
purchasers* average from 1991 to 1996, while from 1997 to 2002 FEHBP*s
premium increases were higher than other large purchasers. The 11 percent
average premium increase in 2003 for all FEHBP plans that OPM announced in
September 2002 represents a lower rate of increase than FEHBP*s 13.3
percent average increase in 2002 and is less than some employee- benefit
experts expect for many other purchasers. For example, CalPERS health
maintenance organizations* (HMO) premiums were expected to increase by an
average of 26 percent in 2003. FEHBP enrollees would likely have faced
higher premium increases in recent years but for some modest reductions in
benefits* mostly increased enrollee cost sharing* and their shifts in
enrollment to plans with lower premiums.

FEHBP premium trends are influenced by plans* claims expenditures.
Increasing expenditures for prescription drugs and hospital outpatient
care accounted for the largest share of increased claims expenditures in
recent years for the three largest FEHBP plans covering most FEHBP
enrollees. The increases in claims expenditures represented changes in
Results in Brief

Page 3 GAO- 03- 236 Federal Employees' Health Premium Growth

plan payments and utilization for these categories; for drugs, most of the
increase was due to higher plan payments per drug dispensed, while for
hospital outpatient care the increase was due to higher utilization.

OPM relies on enrollee choice among competing plans and its negotiations
with plans to help contain FEHBP premium growth, while other large
purchasers adopt some different approaches. To maximize enrollee choice,
OPM allows plans that meet minimum standards to participate in FEHBP. OPM
does not require a standardized benefit package, resulting in plans
competing for enrollment based on varying benefits. Plans also

compete for enrollees based on the premiums they offer. Further, the
statutorily defined method for determining the government*s and enrollees*
shares of premiums results in enrollees having an incentive to select
lower cost plans because they would pay more for plans with higher
premiums. Each year OPM negotiates with plans to encourage benefit
adjustments and other steps to control premiums. For example, it typically
will not allow plans to add new benefits without a corresponding

adjustment to other benefits to offset the additional costs. In several
respects, other major purchasers follow a different purchasing approach.
For example, CalPERS, GM, and PBGH negotiate with plans based on
standardized benefit packages, which facilitate purchaser and enrollee
comparison of costs across plans. These purchasers then select only some
plans and may reject others in order to offer those they believe offer the

best value in terms of quality and cost. Many large purchasers, facing
projections of double- digit premium increases in the next few years, are
shifting more health care costs to enrollees in an effort to control
premium increases. In addition, some of these purchasers are beginning to
explore

new strategies to reduce overall health care costs, such as giving people
more responsibility for their health care spending through innovative
benefit designs that provide enrollees with a set amount of money to pay
health care expenses along with a high- deductible insurance plan.

OPM generally concurred with our findings.

Page 4 GAO- 03- 236 Federal Employees' Health Premium Growth

The federal government has provided health insurance benefits to its
employees through FEHBP since 1960. 1 The Congress established FEHBP
primarily to help the government compete with private- sector employers in
attracting and retaining talented and qualified workers. All active and
retired federal workers and their dependents are eligible to enroll in
FEHBP plans, and about 86 percent of eligible workers and retirees
participate in the program. As of July 2002, FEHBP provided health
insurance coverage to about 8.3 million individuals, including 2.2 million
active workers, 1.9 million retirees, and an estimated 4.2 million of
their dependents. The government pays a portion of each enrollee*s health
insurance benefit premium cost. Currently, as set by statute, the
government pays 72 percent of the weighted average premium of all health
benefit plans participating in FEHBP, but no more than 75 percent of any
plan*s premium. 2 The premiums are intended to cover enrollees* health
care costs, plans* expenses, reserves, and OPM*s administrative costs. 3
Total FEHBP health insurance premiums paid by the government and

enrollees were about $22 billion in 2001. The legislative history of the
FEHBP statute indicates that the Congress wanted enrollees to exercise
choice among various plan types and, by using their own judgment, select
health plans that best meet their specific needs. 4 The FEHBP statute
authorizes OPM to contract with FFS plans

1 FEHBP was established by the Federal Employees Health Benefits Act of
1959, Pub. L. No. 86- 382, 73 Stat. 708. The act, as amended, is codified
at 5 U. S. C. S:S: 8901 et seq.

Unless otherwise noted, our reference to the statute throughout this
report refers to these sections of the U. S. Code. The law became
effective on July 1, 1960. Before FEHBP was established, federal employee
unions and organizations had established their own health plans to provide
group coverage to their members. When the Congress established FEHBP, it
allowed these plans to be included in the program and to compete for
enrollees.

2 The Balanced Budget Act of 1997 established the government*s current
share of the premiums effective in 1999. Pub. L. No. 105- 33, S: 7002, 111
Stat. 251, 662 (amending 5 U. S. C. S: 8906). OPM determines separate
averages for self- only and for self and family enrollments.

3 The premiums paid by employees, retirees, and the government are held in
the Employees Health Benefits Fund. The FEHBP statute requires that an
amount not to exceed 3 percent of the contributions made to this fund for
each health benefit plan participating in FEHBP must be set aside in
contingency reserves. Contingency reserve funds are placed in special
reserve accounts for each plan. The contingency reserve for FFS plans is
set to cover about 2 months of claims and these plans can use the money to
fund claim expenses that were larger than expected or offset future
premium increases. OPM uses the HMOs* reserves to adjust payments to them.
An additional amount, not to exceed 1 percent of premiums, is set aside to
cover OPM*s administrative costs.

4 See House Committee on Post Office and Civil Service, H. R. Rep. No. 86-
957, at 3- 4 (1959). Background

Page 5 GAO- 03- 236 Federal Employees' Health Premium Growth

which include the Blue Cross and Blue Shield (BCBS) service benefit plan
and plans sponsored by federal employee and postal organizations, such as
those for the Foreign Service and rural letter carriers and comprehensive
medical plans (commonly known as HMOs), thereby providing choice to
enrollees. 5 Some plans offer two levels of benefits, which provide
enrollees with more options, and some plans also offer a point- of-
service (POS) option that provides an enrollee a choice of using the
plan*s health care providers or, by paying a higher fee, selecting
providers outside of the plan*s provider network.

By statute, OPM is responsible for negotiating contracts with the FFS
plans and HMOs each year. 6 Under this authority, OPM can negotiate these
contracts without regard to competitive bidding requirements. 7 Those

plans meeting the minimum requirements specified in the statute and
regulations may participate in the program and their contracts may be
automatically renewed each year. However, plans can choose to terminate
their contracts with OPM at the end of the contract period, and under
certain circumstances OPM has the authority to terminate contracts. 8 As
part of its contracting responsibility, OPM negotiates benefits and

premiums with each plan. In April of each year, OPM sends a letter to all
approved and participating FFS plans and HMOs* its annual *call letter**
to solicit proposed benefit and premium changes for the next year, which
are due by the end of May. The statute does not define a specific benefit
package that must be offered but indicates the core health care services

5 The statute also provided for one indemnity benefit plan. The only such
plan withdrew from FEHBP in 1990 and has not been replaced. The House
Committee report accompanying this provision indicated that the indemnity
plan was to make payments for medical services to either the service
provider or directly to the enrollee, whereas the service benefit plan,
where possible, was to make payments to the provider.

6 5 U. S. C. S: 8902. 7 Each year, HMOs can submit applications to
participate in FEHBP without having to respond to a specific request for
proposals. The statute limits the participation of FFS plans in FEHBP to
one service benefit plan, one indemnity plan, and certain employee

organization plans and thereby limits entry of new FFS plans. 8 OPM can
terminate a plan*s contract at the end of its term if fewer than 300
federal employees and retirees were enrolled during the two preceding
contract terms. In addition, if a plan fails to meet program requirements,
OPM can withdraw its approval after giving the plan notice and providing
an opportunity to have a hearing.

Page 6 GAO- 03- 236 Federal Employees' Health Premium Growth

that plans must cover. 9 Each plan therefore proposes its own benefit
package in response to the call letter. In addition, the plans propose the
premiums for these benefits, which must be provided for two levels of
coverage* self- only and self and family. As a result, each plan*s benefit
package and premiums can differ.

OPM attempts to complete its negotiations by August so that brochures
describing the plans* benefits and premiums can be ready for the FEHBP
open season that begins in November and lasts about a month. FEHBP*s
brochures, which OPM approves each year, facilitate enrollee plan
comparisons and selections. 10 During each open season, federal workers
and retirees are free to switch to other plans for the next calendar year,
regardless of any preexisting health conditions. Thus, enrollees can
determine which plans best meet their needs. OPM data show that in 2000
and 2001 less than 5 percent of enrollees switched plans. 11 Thirteen FFS
plans participated in FEHBP in 2002. Overall, about 70

percent of federal employees and retirees who participate in FEHBP were
enrolled in FFS plans. Enrollees in these plans can choose their own
physicians and hospitals and the plan reimburses the provider or the
enrollee for the cost of each covered service provided up to a stated
limit. In addition, 11 of the 13 FFS plans had preferred provider
organization (PPO) networks, and by using providers in these networks,
enrollees can spend less in cost- sharing requirements compared to non-
PPO providers.

9 For example, the service benefit plan* BCBS* must include hospital,
surgical, in- hospital medical, ambulatory patient, supplemental, and
obstetrical benefits. An indemnity benefit plan would have to provide
hospital care; surgical care and treatment; medical care and treatment;
obstetrical benefits; prescribed drugs, medicines, and prosthetic devices;
and other medical supplies and services. Employee organization plans and
HMOs must provide the same types of benefits as the service benefit or
indemnity plans, or both. The core benefits that plans must provide have
been expanded over time by federal laws and

executive orders. 10 In testimonies commenting on information provided to
Medicare beneficiaries, we have identified OPM as a model in how it
presents information to facilitate plan comparison and

choice. See, for example, U. S. General Accounting Office, Medicare+
Choice: HCFA Actions Could Improve Plan Benefit and Appeal Information,
GAO/ T- HEHS- 99- 108 (Washington, D. C.: Apr. 13, 1999). 11 In addition,
about 2 percent of enrollees were newly enrolled in or disenrolled from
FEHBP.

Page 7 GAO- 03- 236 Federal Employees' Health Premium Growth

The FEHBP statute establishes the rate- setting process for FFS plan
premiums. 12 FFS plans are experience rated* that is, the premiums are to
be updated each year based on past claims experience and benefit
adjustments. As a result, premiums are designed to cover the cost of all
claims filed for enrollees as well as plan profit and administrative costs
and, therefore, will differ for each FFS plan. 13 In 2002, all active
federal workers and retirees could enroll in the BCBS service benefit plan
and in six of the FFS employee organization plans. (See table 1.) The
remaining six FFS organization plans were available only to members of the
sponsoring organizations.

Table 1: FFS Plans Participating in FEHBP, 2002 FFS plans open to all FFS
plans open only to specific

groups

Blue Cross and Blue Shield Alliance Health Plan American Postal Workers
Union Health Plan Government Employees Hospital Association, Inc. Mail
Handlers National Association of Letter Carriers Health Benefits Plan
Postmasters Benefit Plan Association Benefit Plan

Foreign Service Panama Canal Area Rural Carrier Benefit Plan Special
Agents Mutual Benefit

Association Secret Service

Source: OPM, FEHBP 2002 Guide: Guide to Federal Employees Health Benefits
Plans for Federal Civilian Employees (Washington, D. C.: Nov. 2001).

In 2002, 170 HMOs, located in local markets throughout the country,
participated in FEHBP and accounted for about 30 percent of FEHBP
enrollees. 14 HMO enrollees must generally use a plan*s provider network
to obtain services. OPM has established the rate- setting process for HMOs

12 5 U. S. C. S: 8902( i). 13 OPM negotiates the profit amount (also
called the service charge) with each FFS plan. When negotiating the profit
amount, OPM considers such factors as the contractor*s performance, cost
control, and risk. While OPM does not guarantee a minimum profit, its
negotiating objective is that a plan*s profit may not exceed 1. 1 percent
of the projected

incurred claims and administrative costs. 14 The total number of
participating HMOs has declined over time. From 2000 through 2002, while
the number of FFS plans remained constant, the total number of HMOs
participating in FEHBP declined from 276 to 170 as HMOs have either
withdrawn from the program or have merged with other plans. See U. S.
General Accounting Office, Federal Employees* Health Program: Reasons Why
HMOs Withdrew in 1999 and 2000, GAO/ GGD- 00- 100 (Washington, D. C.: May
2, 2000).

Page 8 GAO- 03- 236 Federal Employees' Health Premium Growth

participating in FEHBP in regulations. For most HMOs, OPM bases the FEHBP
premium rate on the rates paid to the HMO by the two other employer-
sponsored groups with the most similarly sized enrollments in that
community. 15 This ensures that FEHBP obtains a rate that is at least
comparable to the lower of the rates paid by two other similarly sized
groups, with adjustments to account for differences in the demographic
characteristics of FEHBP enrollees and the benefits provided. The number
of HMOs available to federal workers and retirees depends on the area
where they live or work. In 2002, 11 states 16 had no HMOs participating
in FEHBP and, in the other states and the District of Columbia, the median

number of HMOs available to federal enrollees was two. Some local markets
had higher HMO participation. For example, the Washington, D. C., area and
southern California had at least four HMOs in which federal workers and
retirees could enroll in 2002.

A few plans accounted for the largest share of FEHBP enrollment. The
largest plan* the BCBS service benefit plan* had about half of the 2002
enrollment. The three largest plans, including BCBS, were all FFS plans
and accounted for almost two- thirds of FEHBP enrollment. About twothirds
of the 183 participating FFS plans and HMOs enrolled fewer than 5,000
active federal workers and retirees, and slightly less than a third of all
plans enrolled fewer than 1,000 in 2002.

The three other large purchasers we reviewed varied in the extent to which
they provide coverage through HMOs, FFS plans, and PPOs as well as in the
number of plans they offer. GM, the largest private- sector purchaser of
employer- sponsored health insurance, purchased coverage for about 1.2
million workers, retirees, and their dependents through 81 FFS plans, 31
PPOs, and 136 HMOs in 2002. About 71 percent of the unionized employees
and retirees and about 63 percent of the salaried employees and retirees
were enrolled in FFS plans and PPOs. CalPERS purchased coverage in 2002
for about 1.2 million active and retired state and local government public
employees and their family members who obtained coverage through nearly
1,100 local government agencies,

15 As most HMOs are paid on a per- person basis rather than for each
service they provide, few have enough experience with paying claims or
have the claims data needed to be paid on a FFS basis. Eighteen FEHBP HMOs
are experience rated in the same way as the FFS plans. Premiums are based
on the claims expenditures for FEHBP enrollees for past years along with
amounts to cover profit and administrative costs.

16 The 11 states were Alaska, Arkansas, Delaware, Idaho, Maine,
Mississippi, Montana, Nebraska, New Hampshire, South Carolina, and West
Virginia.

Page 9 GAO- 03- 236 Federal Employees' Health Premium Growth

including schools, and the state of California. About 74 percent of
CalPERS enrollees were in 7 HMOs, with the remainder in 2 PPOs and 3 plans
covering members of such associations as the association of highway
patrolmen in 2002. PBGH, a California employer coalition, purchased HMO
coverage through its Negotiating Alliance for 19 large employers. About
350,000 workers, retirees, and dependents were in PBGH*s 7 HMOs in 2002.
This represented about 70 percent of participants in these employers*
plans. Participating employers made their own

arrangements for non- HMO coverage, primarily through PPOs, for the
remaining employees.

From 1991 through 2002, health insurance premiums for FEHBP increased on
average 5. 9 percent a year compared to 6.4 percent for large employers*
those in the Kaiser/ HRET survey with 5,000 or more employees* and 5.8
percent for CalPERS. 17 (See fig. 1.) FEHBP average premium increases have
exceeded 10 percent beginning in 2001, but higher premium increases were
partially offset by some plans reducing benefits* mostly increased
enrollee cost sharing* and some enrollees switching to plans with lower
premiums.

17 By comparison, annual spending for Medicare increased, on average, by
7.5 percent annually (from $109.7 billion in 1990 to $242. 4 billion in
2001). Rise in FEHBP

Premiums Has Been Similar to Increases for Other Large Purchasers

Page 10 GAO- 03- 236 Federal Employees' Health Premium Growth

Figure 1: Average Annual Change in Premiums, 1991 through 2003

a The 1991 premium increase for large employers includes mid- and large-
sized firms because the survey did not separately report premiums for
employers with 5,000 or more employees. b In 2001, premium increases for
FEHBP were 10.5 percent and for large employers were

10.8 percent. c In 2002, premium increases for FEHBP were 13.3 percent and
for large employers were

13.0 percent. d The Kaiser/ HRET survey data for large employer premium
increases for 2003 were not available at

the time of our work.

Generally, FEHBP premiums increased at a lower rate than premiums for
other large employers and CalPERS during the first half of the last
decade, but increased faster during the second half. For example,
cumulatively

from 1991 to 1996, premiums increased on average about twice as fast for
large employers (6.1 percent per year) than for FEHBP (3.2 percent per

1991 a 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 b 2002 c 2003 d
Calendar year

FEHBP Large employers (5,000 or more employees) CalPERS

-10 -5

0 5

10 15

20 100

25 Percentage

Source: OPM, Kaiser Family Foundation/ Health Research and Educational
Trust (HRET) employer surveys, and CalPERS.

Page 11 GAO- 03- 236 Federal Employees' Health Premium Growth

year). Premiums for CalPERS also increased faster (5.1 percent per year)
on average during this period than for FEHBP.

During the mid- 1990s, the rate of change in premiums was negative for
both FEHBP and CalPERS and as a result average premiums declined
temporarily. FEHBP premiums declined on average by about 4 percent in
1995, while CalPERS premiums declined on average from 0.8 to 4 percent per
year from 1995 to 1997.

Cumulatively from 1997 to 2002, FEHBP average premiums grew about 2
percentage points per year faster than those of CalPERS and large
employers* 8.6 percent per year compared to 6.5 and 6. 7 percent per year,
respectively. Much of the difference in premium increases between FEHBP
and other major purchasers during this period occurred in 1998 and 1999.
OPM attributes much of FEHBP*s premium growth in these years to changes
made to the reserve balances maintained by FEHBP plans. FEHBP*s average
premium increase of 13. 3 percent in 2002 was similar to increases for
other large purchasers, 18 but about 4 percentage points higher than the
CalPERS increase.

OPM announced in September 2002 that average premiums would increase by
11.1 percent in 2003 for all FEHBP plans. Premiums for FEHBP*s FFS plans
were expected to increase on average by 10. 5 percent, while HMO premiums
were expected to rise an average of 13. 6 percent. This represents the
third straight year of double- digit premium increases for FEHBP, but this
increase was less than FEHBP*s average increase in 2002, and less than
those many other employers anticipate. While 2003 premiums for many large
employers were still being negotiated at the time

of our work, two employee benefit consulting firms reported preliminary
findings from surveys of employee health benefits managers that
anticipated overall premium increases of from 13 to 15 percent, and
average HMO premium increases of 16 percent, for 2003. 19 CalPERS in

18 The Kaiser/ HRET survey found that premiums for large employers
increased by about 13 percent in 2002. See the Kaiser Family Foundation/
HRET, Employer Health Benefits 2002 Annual Survey (Menlo Park, Calif.:
2002).

19 See Hewitt Associates, *Health Care Cost Increases Expected to Continue
Double- Digit Pace in 2003,* http:// www. hewitt. com/ hewitt/ resource/
newsroom/ pressrel/ 2002/ 10- 14- 02. htm (downloaded Nov. 4, 2002), and
Towers Perrin, *Towers Perrin Forecasts 15% Increase In Health Care Costs*
Highest Percentage Increase in More Than a Decade,* http:// www. towers.
com/ towers_ news/ news/ PressRelease_ 2002/ pr100202. htm (downloaded
Nov. 4, 2002).

Page 12 GAO- 03- 236 Federal Employees' Health Premium Growth

particular is facing a significant premium increase in 2003. Premiums for
CalPERS* HMOs* which enroll the bulk of its participants* were expected to
increase an average of 26 percent in 2003. Premiums for CalPERS* two PPOs
were expected to increase about 19 and 22 percent.

FEHBP*s premium increases in recent years would have been higher but for
increased cost- sharing requirements for employees and retirees as well as
shifts in enrollment to plans with lower premiums. Over the last 6 years,
FEHBP plans have been required to cover certain new benefits, 20 but plans
have also had some offsetting benefit reductions* mostly increased
enrollee cost sharing* thereby resulting in a net benefit reduction. Like
many FEHBP and other large employers* health plans, from 2000 through
2002, three large FFS plans increased or introduced cost- sharing features
such as copayments or coinsurance for prescription drugs and physicians as
well as deductibles for other services, as the following examples
illustrate.

 BCBS raised its standard option employee copayment for PPO home and
physician visits from $12 to $15, and raised its annual deductible from
$200 to $250 per individual and from $400 to $500 for families. BCBS also
introduced cost sharing for mail- order prescription drugs for Medicare
beneficiaries, which the plan had previously waived.  The Government
Employees Hospital Association, Inc. (GEHA) raised the

copayment for a physician office visit from $10 to $15, and raised
employee coinsurance for non- PPO providers from 20 percent to 25 percent.
In addition, GEHA raised its annual deductible from $250 to $300 per
individual and from $500 to $600 for families, and increased the maximum
annual out- of- pocket limit from $4,500 to $5,500.  Mail Handlers raised
the standard option deductible from $200 to $250 per

individual, and from $600 to $750 for families. Enrollees who have shifted
to plans with lower premiums have also reduced FEHBP*s average premium
increases. Specifically, OPM*s actuarial estimates indicate that FEHBP
enrollees who switch to plans offering lower premiums have reduced average
premium increases about 1 percent per year since 1997. For 2003, OPM
anticipated that this

20 Since the late 1990s, federal law or executive orders have required
coverage for several benefits by FEHBP plans, including certain
prescription drugs, nonexperimental bone marrow transplants, mammography
screening, minimum benefits for childbirth and mastectomies, and parity
between specified aspects of mental health and substance abuse benefits
and medical and surgical benefits.

Page 13 GAO- 03- 236 Federal Employees' Health Premium Growth

phenomenon would offset the overall premium increase by about 1.2 percent
from what it otherwise would have been. Our analysis shows that, from 1999
to 2002, more than two- thirds of plans with premium increases lower than
the median FEHBP premium increase gained enrollment. 21 FEHBP premium
increases are related to prior years* increased claims expenditures, which
for the three largest FEHBP plans from 1998 to 2000

were in large part driven by increasing expenditures for prescription
drugs and hospital outpatient care. 22 Increasing plan payments per drug
dispensed accounted for most of the increase in expenditures for drugs,
while increasing utilization accounted for the increase in hospital
outpatient care expenditures. 23 Our analysis of 1998 to 2000 claims data
for FEHBP*s three largest plans*

all FFS plans* indicate that per- enrollee claims expenditures increased
by about 12.6 percent, including increases of about 8.6 percent from 1998
to 1999, and about 3.7 percent from 1999 to 2000. 24 We specifically
examined claims expenditures for these three plans because HMOs typically
do not track or report claims data to OPM and the three plans we reviewed

represented about 90 percent of FFS enrollees and about two- thirds of 21
Specifically, of the 88 FEHBP plans whose premium changes from 2001 to
2002 were less than the median premium increase, 67 gained enrollment and
21 lost enrollment. Similarly, of the 109 plans with premium changes less
than the median from 2000 to 2001, 74 gained

enrollment and 35 lost enrollment; and of the 138 plans with premium
changes less than the median from 1999 to 2000, 91 gained enrollment and
47 lost enrollment. Some of the observed changes in enrollment may be due
to individuals leaving or entering FEHBP plans for reasons other than
cost, such as individuals entering or leaving employment with the federal
government.

22 Our analysis is based on claims expenditures paid by FEHBP plans, and
excludes expenditures paid for FEHBP enrollees by Medicare and other
payers, and FEHBP enrollees* cost sharing. Data for hospital outpatient
care are for two of the three plans because comparable data were not
available for the third plan.

23 We derived plan payments per service from the cost per unit of each
category of care, such as the payment per prescription drug dispensed,
outpatient hospital case, inpatient hospital day, or physician visit. 24
Claims expenditures are one of the key components OPM and FEHBP*s
experience- rated plans evaluate in negotiating premiums. However, there
is a lag between changes in claims and premiums because future premiums
are based on actuarial projections estimated from past claims. In 1999,
the average increases in premiums and claims expenditures for the three
plans were similar, while in 2000, the average increase in premiums was
more than

double the average increase in claims expenditures. Increases in

Expenditures for Prescription Drugs and Hospital Outpatient Care Drove
Most of Recent Rise in Premiums for FEHBP*s Largest Plans

Page 14 GAO- 03- 236 Federal Employees' Health Premium Growth

total FEHBP enrollees. Claims expenditures for prescription drugs and
hospital outpatient care accounted for more than 70 percent of the overall
increase in per- enrollee claims expenditures for these plans from 1998
through 2000, while hospital inpatient care and physician visits accounted
for most of the remainder. Increases in claims for prescription drugs
accounted for the largest share (47 percent) of the overall increase in
claims expenditures from 1998 to 2000 and increased at the fastest rate
during this period* by nearly one- fourth. (See table 2.) 25 Table 2: Cost
Drivers for the Three Largest FEHBP Plans, 1998 to 2000

Per enrollee claims expenditure Expenditure (percentage change) Category
1998 1999 2000

Increase (percentage of total) 1998 to

2000 Percentage

change 1998 to 2000

Prescription drugs $946 $1,156 (22. 2%) $1,181 (2.1%) $235 (47.1%) 24.8
Hospital outpatient care a 706 757 (7.2%) 825 (9.0%) 119 (23.8%) 16.8
Hospital inpatient care 867 899 (3.6%) 924 (2.8%) 57 (11.3%) 6.5 Physician
visits b 461 482 (4.5%) 506 (5.0%) 45 (8.9%) 9.7 All other c 981 1,009
(2.9%) 1,025 (1.6%) 44 (8.8%) 4.5

Total $3,961 $4,303 (8.6%) $4,460 (3.7%) $499 (100%) 12.6

Source: GAO analysis of OPM claims expenditure data. Note: Analysis
includes FEHBP plan expenditures only, and does not include expenditures
for FEHBP enrollees by other payers (such as Medicare) and FEHBP
enrollees* cost sharing. The three plans whose claims expenditures we
analyzed represent 90 percent of the enrollment in all FEHBP FFS plans and
almost two- thirds of all FEHBP enrollees. Numbers may not add to totals
due to rounding. a Data for hospital outpatient care are for two of the
three plans because comparable data were not

available for all 3 years. b Includes inpatient, outpatient, and out- of-
hospital physician visits, but not surgery or other physician

services that the plans reported to OPM in other categories.

25 While prescription drugs are the primary driver of claims expenditures
for FEHBP plans, two studies have shown that increasing inpatient hospital
expenditures have represented a larger share of overall increases in
health care expenditures. For example, see Bradley C. Strunk, Paul B.
Ginsberg, and Jon R. Gabel, *Tracking Health Care Costs,* Health Affairs
(Web Exclusive) (Bethesda, Md.: Sept. 26, 2001), http:// www.
healthaffairs. org/ WebExclusives/ Strunk_ Web_ Excl_ 92601. htm
(downloaded Nov. 4, 2002). FEHBP plans* claims expenditures may not be as
sensitive to inpatient hospital expenditures because a large portion of
these hospital costs is paid by Medicare for FEHBP enrollees who are
Medicare- eligible.

Page 15 GAO- 03- 236 Federal Employees' Health Premium Growth

c Includes services such as surgery, dental care, laboratory services,
alcohol/ substance abuse and mental health treatment, and other ancillary
services.

The increase in per- enrollee claims expenditures for each of these
services represents changes in plan payments per service and utilization
for these categories. Specifically, figure 2 shows that increasing plan
payments per service played the larger role in changing claims
expenditures for prescription drugs, hospital inpatient care, and
physician visits* 66 percent of the $235 increase in expenditures for
prescription drugs, 76 percent of the $57 increase for hospital inpatient
care, and 93 percent of the $45 increase for physician visits. Utilization
increases accounted for all of the increase in expenditures for hospital
outpatient care and the remainder of the increases for prescription drugs,
hospital inpatient care, and physician visits.

Page 16 GAO- 03- 236 Federal Employees' Health Premium Growth

Figure 2: Change in Per- Enrollee Claims Expenditures due to Plan Payments
and Utilization for Major Categories of Health Care Services for the Three
Largest FEHBP Plans, 1998 to 2000

Note: The three plans included in this analysis represented 90 percent of
the enrollment in all FEHBP FFS plans and almost two- thirds of all FEHBP
enrollees. Data for hospital outpatient care are for two of the three
plans, because comparable data were not available for the third plan for
all 3 years.

Aging FEHBP enrollees and the changing health care market may have
contributed to increasing plan payments and utilization. Increased
utilization was in part associated with FEHBP*s aging enrollee population.
OPM actuaries estimate that a 1- year increase in the average age of the
FEHBP population translates into almost a 3.3 percent increase in total

health costs. From 1998 through 2000, the average age of FEHBP enrollees
increased by about half a year, from 61.6 years to 62.1 years. Recently,
higher payments have also resulted from providers* negotiations with
managed care plans. In the early and mid- 1990s, managed care plans were
able to extract significant discounts from providers that they included in

Source: GAO analysis of claims data for the three largest FEHBP plans.

-50 0

50 100

150 200

250 Hospital

inpatient care Hospital

outpatient care Prescription

drugs Physician

visits

Change due to utilization Change due to plan payment per service

In dollars

Page 17 GAO- 03- 236 Federal Employees' Health Premium Growth

their networks. However, in recent years studies have indicated that
providers have secured higher payments in part due to consolidations*
particularly among hospitals in some major metropolitan areas* that may
have increased their market power. 26 In addition, there is some evidence
in these studies that physicians are demanding and receiving higher fees.

Consistent with the design of FEHBP, which encourages enrollee choice, OPM
relies on competition among plans and its annual negotiations with
participating plans to moderate FEHBP plans* premium increases. To
maximize enrollees* choices among plans, OPM contracts with all plans
meeting minimum standards and allows plans to propose varying benefit
designs. In its annual negotiations with the plans, OPM suggests various
cost containment strategies for plans to consider as they prepare their
benefit and premium proposals, and for 2003 placed more emphasis on
encouraging the plans to propose approaches to control cost increases.
Other major purchasers, such as CalPERS, PBGH, and GM, adopt different
approaches in developing their health benefit offerings such as
negotiating

based on a standardized benefit package and contracting only with plans
with which they reach a satisfactory agreement. As large purchasers face
escalating premiums, they continue to look for new ways to help control

costs, including offering plans that make enrollees more sensitive to the
costs of health care by giving them more control over their health care
spending, charging enrollees more when they go to higher cost hospitals,
or focusing more attention on managing chronic health care conditions.

OPM contracts with all plans meeting certain standards and requirements.
As long as plans continue to meet the minimum standards, OPM does not
exclude them from the program. Although the statute gives OPM the
authority to remove plans from FEHBP under certain circumstances, OPM
officials said that they have not recently exercised this authority
primarily

26 For example, see Bradley C. Strunk, Paul B. Ginsberg, and Jon R. Gabel,
*Tracking Health Care Costs,* Health Affairs (Web Exclusive), and William
M. Mercer, Incorporated, Mercer/ Foster Higgins National Survey of
Employer- Sponsored Health Plans 2001 (New

York, N. Y.: 2002). OPM*s Reliance on

Competition among Plans and Annual Negotiations to Contain Premium
Increases Differs in Some Ways from Other Large Purchasers

FEHBP Encourages Enrollee Choice and Competition for Enrollment among
Plans

Page 18 GAO- 03- 236 Federal Employees' Health Premium Growth

because they wanted to maximize enrollee choice and minimize enrollee
disruption, especially in less populated areas of the country. 27 While
FFS plans and HMOs do not have to compete against one another to

participate in FEHBP, they do have to compete with other plans to attract
enrollees. One way plans compete is by the benefits they offer. Since the
FEHBP statute does not define a specific benefit package, but rather

requires plans to offer a core set of benefits, plans propose the benefits
they will offer to remain competitive within their own market areas,
whether national or local. Each year, OPM negotiates each plan*s benefits
package, ensuring that the costs for any new benefits proposed by the plan

are offset by reductions in other benefits. Plans also compete for
enrollees based on their premiums. By statute, premiums must *reasonably
and equitably* reflect the cost of the benefits provided by the different
plan types participating in FEHBP. 28 Premiums for FFS plans are
experience rated. Over time, their premiums approximately equal average
service expenditures, administrative costs,

and profits. If OPM and the plans set premiums too high or too low in one
year, OPM makes appropriate adjustments to premiums and reserve balances
in subsequent years. To set FEHBP premium rates for the HMOs, OPM relies
on the negotiations that these plans conduct with two similarly sized
purchasers in each market, requiring FEHBP to receive the lower of the two
rates. OPM*s Office of the Inspector General conducts periodic audits to
assure the validity of these rates. 29 The government*s method for setting
premium contributions provides

plans an incentive to price their products competitively since enrollees
pay less for lower cost plans and pay the entire cost exceeding the

27 OPM can withdraw its approval of a contract if a plan fails to meet the
minimum eligibility requirements, but only after providing its reason for
doing so and giving the plan an opportunity for a hearing. In addition,
the statute gives OPM the authority to terminate a

contract if during the preceding 2 contract years the plan did not have
300 or more federal workers or retirees enrolled. In 2002, OPM data show
that 24 participating HMOs had fewer than 300 active workers and retirees
enrolled. 28 5 U. S. C. S: 8902( i).

29 According to OPM officials, in the past one of the most common findings
of these audits was that the plans selected for comparison were not
similarly sized groups. For example, one plan recently agreed to pay over
$87 million* a record amount* to settle allegations that it charged FEHBP
higher rates than its commercial customers.

Page 19 GAO- 03- 236 Federal Employees' Health Premium Growth

maximum government share. 30 For example, for a plan with a self- only
premium of $3,200 per year, the enrollee would pay $800 and the government
would pay the other 75 percent ($ 2,400). For a plan costing $3,400, the
enrollee would pay $856 while the government would pay the maximum $2,544.
For any plan costing more, the enrollee would have to

pay the entire additional cost* a plan costing $3, 600, for example, would
require a $1,056 annual premium from the enrollee while the government
share would remain at $2, 544. Few plans have premiums much higher than
the amount where the enrollee would receive the maximum government

share: Only 19 of the 183 plans in 2002 had premiums more than 10 percent
above $3,392 (the premium equivalent to the maximum government share of
$2,544), while 97 had premiums at least 10 percent below this amount.

Each year, OPM*s *call letter* provides its negotiation objectives and
calls for the plans* new benefit and premium proposals. OPM uses its
annual letter to give guidance regarding the goals to be achieved and the
types of cost containment efforts plans may want to consider to help
contain premium increases. OPM encourages plans to consider implementing
cost containment strategies each year as they draft their FEHBP benefit
and premium proposals.

During negotiations over benefits and premiums, OPM tends to focus its
cost containment efforts on plans that submit proposals with the highest
premium increases or those that are outliers in some other way. To some
degree, OPM relies on the competitive nature of the program to achieve
results in that each plan must weigh the potential effect of its benefit
offerings and premiums on its market share. Changes in benefits, and any
resulting premium changes, can affect a plan*s enrollment, but there is a
trade- off since increased benefits may be attractive to potential
enrollees while the associated increased premium may deter enrollment.

OPM has encouraged plans to consider several strategies to help moderate
premium increases. For example, for contract year 1998, OPM encouraged FFS
plans to expand and strengthen their existing PPO arrangements by

30 Under the statute, the government generally pays 72 percent of the
weighted average premium of all plans, but no more than 75 percent of any
plan*s premium. In 2002, the maximum government share of the premium was
$2,544 for self- only coverage and $5,809 for self and family coverage. In
addition, the Postal Service pays a higher share of Postal

Service employees* premiums. In 2002, it paid 85 percent of the weighted
average premium but no more than 88.75 percent of any plan*s premium. OPM
Uses Annual

Negotiations with Plans to Help Moderate Premium Increases

Page 20 GAO- 03- 236 Federal Employees' Health Premium Growth

obtaining discounts when cost effective. For that year, it also encouraged
all plans to consider proposing a point- of- service (POS) product. OPM*s
call letter stated that POS products were an effective way to introduce
enrollees to the concept of managed health care. For contract years 2001
and 2002, OPM*s call letters encouraged ways to control rising
prescription drug costs including use of drug formularies and three- tier
drug benefits* that is, lower cost sharing for generic and brand name
drugs on a plan*s formulary than for drugs not included on the formulary.
31 Even more than in past years, OPM*s latest call letter for contract
year

2003 challenged plans to identify ways to reduce premium increases. OPM
asked plans to propose innovative ideas to help contain these increases.
32 For 2003, OPM also encouraged plans to consider several specific cost

containment strategies including increasing enrollees* out- of- pocket
costs, reemphasizing the need to manage prescription drug costs, and
putting more emphasis on care management for enrollees who have chronic
conditions. In addition, the call letter told plans to expect very tough
negotiations, a specific direction OPM did not include in past letters.

On September 17, 2002, OPM announced that FEHBP premiums would increase by
an average of about 11.1 percent for 2003, about 2 percentage points less
than in 2002. In addition, OPM officials indicated that, while some
individual plans increased or decreased benefits, overall benefit levels
would be largely similar to those available in 2002. OPM officials
reported that the initial proposals submitted by the plans would have
resulted in a 13.4 percent increase for 2003. Following negotiations with
OPM on benefits and premiums, the average increase was reduced to 12.4
percent. OPM officials anticipated that the remaining savings from the
initial proposals would result from FEHBP enrollees switching to lower
cost plans during the open enrollment season.

31 A plan*s formulary is a list of drugs that physicians and enrollees are
encouraged to use. 32 In response to OPM*s request for innovative ideas,
one FEHBP plan is offering a new *consumer- driven* option in 2003. Under
this option, enrollees will receive a personal

spending account of $1,000 for single coverage and $2,000 for family
coverage to be used to cover health care expenses. Enrollees exhausting
this spending account must pay an outof- pocket deductible of $600 for
single coverage or $1,200 for family coverage before insurance coverage
begins.

Page 21 GAO- 03- 236 Federal Employees' Health Premium Growth

Whereas OPM contracts with all plans meeting minimum standards and
negotiates benefit packages that can vary with each plan, other large
purchasers we reviewed follow a different approach. CalPERS, GM, and PBGH
conduct negotiations based on a standardized benefit package. At the end
of the negotiations, these purchasers can decide not to contract with a
plan that does not meet their standards in such areas as cost or quality.
Some of these purchasers also reward enrollees by paying more of the
premiums when enrollees choose plans the purchasers consider to be the
best value. Continuing premium increases have caused these and many other
large purchasers to search for ways to reduce their premium costs.

While many purchasers first look to shift more of the costs to their
employees by taking such actions as increasing plan deductibles, some are
also exploring new strategies to help contain these increases. The three
large purchasers we reviewed rely on a standardized benefits

package when conducting negotiations, particularly in negotiations with
HMOs. CalPERS standardized benefits and copayments across its HMOs in 1993
to be able to better assess differences in plans* costs, and GM also
negotiates with HMOs using a standardized benefits package. PBGH, in
conjunction with other national purchasers, developed an annual request
for proposals that it uses for its standardized HMO benefit package. 33
Along with using standardized benefit packages, some large purchasers

exclude plans if they cannot negotiate a satisfactory agreement with them.
During its negotiations for benefit year 2002, for example, CalPERS
rejected bids from all participating HMOs as too high and then allowed
them to resubmit revised bids. CalPERS rejected the bids because the
proposed increases were twice as high as those that occurred in the past 5
years and were considerably higher than what CalPERS had expected.

CalPERS ultimately dropped 3 of its 10 HMOs at the end of its negotiations
that year. For benefit year 2003, CalPERS dropped 2 of the remaining 7
HMOs at the end of its negotiations to help control premium increases and
to provide the best value for those premiums. GM reviews and scores HMOs
on the basis on quality and cost. Plans scoring relatively low will either
be dropped or be given a year to improve.

33 PBGH also has HMOs bid on several benefit modifiers and adjusters in
addition to the standardized benefit package. For example, HMOs bid on
pharmacy benefits with both two- tiers and three- tiers of cost sharing.
Participating employers can decide which level they want to include in
their benefit packages. Other Large Purchasers

Use Different Approaches in Negotiations and Cost Containment

Three Other Large Purchasers Offer Standardized Benefits, Facilitating
Comparisons for Purchasers and Enrollees, and May Not Contract with All
Plans

Page 22 GAO- 03- 236 Federal Employees' Health Premium Growth

Like FEHBP, some other large purchasers vary the premiums some employees
pay to encourage enrollment in certain plans. 34 For example, as part of
its value purchasing strategy, which the company started in 1997, GM
evaluates HMOs for quality and value and encourages salaried employees to
enroll in those plans it rates as higher value plans. For salaried
employees, GM covers a larger share of the premiums for HMOs designated as
higher value. 35 GM estimates that it saves about $4.6 million annually by
having its salaried employees move into HMOs designated as higher value
and that these employees save about $2 million in premiums. 36 Also, PBGH
states that it focuses its purchasing efforts on plans it has

identified as high quality and some employers participating in the group
support PBGH*s effort by setting their premium contributions to encourage
employee enrollment in plans considered to be high value. 37 Over the next
several years, analysts predict that double- digit health

insurance premium increases will continue. 38 As a result, many large
purchasers are searching for ways to slow this growth. Shifting more of
the costs to employees is one of the first cost containment strategies
employers consider as premium rates escalate. In particular, many of the
largest employers have increased deductibles for PPO plans. For example,

employer survey data show that the average annual deductible for selfonly
in- network PPO coverage increased from $175 in 1999 to $310 in 2002,
while out- of- network deductibles increased from $272 in 1999 to $529 in
2002. 39 Similarly, very large employers are increasingly using multiple-
tier

34 CalPERS allows participating employers to determine how much to
contribute toward their employees* premiums. 35 GM*s value purchasing
strategy does not apply to unionized workers, who represent 74 percent of
active GM workers enrolled in health benefit plans and whose benefits and
premiums are negotiated through collective bargaining agreements.

36 In 2001, GM paid about $235 million in HMO premiums for salaried
employees. 37 However, GM and PBGH*s approaches may not be widespread;
most large employers do not set contributions to encourage their employees
to use higher value plans. See James Maxwell, et al, *Corporate Health
Care Purchasing Among Fortune 500 Firms,*

Health Affairs (May/ June 2001). 38 For example, see Jon Gabel, et al,
*Job- Based Health Benefits In 2002: Some Important Trends,* Health
Affairs (September/ October 2002) and William M. Mercer, Incorporated,

Mercer/ Foster Higgins National Survey of Employer- Sponsored Health Plans
2001

(2002). 39 See the Kaiser Family Foundation/ HRET, Employer Health
Benefits 2002 Annual Survey (2002) and Employer Health Benefits 1999
Annual Survey (1999). Some Large Purchasers

Consider New Strategies to Control Rising Premiums

Page 23 GAO- 03- 236 Federal Employees' Health Premium Growth

cost sharing for prescription drugs as a cost containment strategy.
According to another employer survey, 22 percent of PPOs had a three- tier
drug copayment in 2000, but the number increased to 40 percent in 2001. 40
Some large purchasers, including OPM and those we reviewed, are

beginning to explore new strategies to help reduce escalating costs. For
example, some are in the early stages of considering *consumer- driven*
plans that provide employees with more financial incentives to be
sensitive to health care costs and more control over their health care
spending decisions. As this concept covers a wide range of possible
approaches, there is no single definition. However, all approaches tend to
shift more decision- making responsibility regarding health care from
employers to employees. For example, they could provide employees with a
personal spending account, which the employer would fund at different
levels. One plan funds these accounts at $1,000 for an individual or at

$2,000 for a family. Employees could use this money to pay medical
expenses. If employees spend all the money in their accounts, they would
have to spend their own money until a deductible amount* which for one

plan was $600 for an individual employee and $1, 200 for a family* is met.
Then, coverage through an insurance policy purchased by the employer would
begin. In some approaches, employees who do not spend all the money in
their accounts could carry the money over from year to year. To date, as
these plans are so new, few people are enrolled* several studies

have estimated that fewer than 1 percent of enrollees with
employersponsored health insurance are in some form of consumer- driven
health plans. 41 Other new strategies that some purchasers are considering
include plans

that contain provisions to help reduce hospital costs and costs for
enrollees with chronic conditions. For example, CalPERS and PBGH are
exploring the use of financial incentives for enrollees when choosing from

40 See William M. Mercer, Incorporated, Mercer/ Foster Higgins National
Survey of Employer- Sponsored Health Plans 2001 (2002) and Mercer/ Foster
Higgins National Survey of Employer- Sponsored Health Plans 2000 (2001).

41 For example, see Jon R. Gabel, Anthony T. Lo Sasso, and Thomas Rice,
*Consumer- Driven Health Plans: Are They More Than Talk Now?* Health
Affairs (Web Exclusive) (Bethesda, Md.: Nov. 20, 2002), http:// www.
healthaffairs. org/ WebExclusives/ Gabel_ Web_ Excl_ 112002. htm
(downloaded Nov. 22, 2002), and Mercer Human Resource Consulting, *Are
Consumer- Directed Health Plans Good Medicine?* http:// www. mercerhr.
com/ knowledgecenter/ reportsummary. jhtml? idContent= 1068735

(downloaded Nov. 22, 2002).

Page 24 GAO- 03- 236 Federal Employees' Health Premium Growth

which hospital to receive care. Such plans are now becoming available but
represent a very small share of the market. These plans offer tiered
copayments for enrollees that are lower for hospitals that offer the best
rates and are higher for those that are more expensive. Another approach
attracting attention among many large employers is disease management,
which focuses attention on chronic illnesses such as asthma, diabetes, and
heart disease that generate a large amount of health care expenditures.
For example, CalPERS, PBGH, and GM are all actively involved in pursuing
disease management programs. Also, in its call letter for contract year
2003, OPM encouraged FEHBP plans to consider using disease management
programs. However, according to one employer survey, many purchasers said
that disease management programs are too new and data

are not yet available to assess the benefits compared to the costs. We
provided a draft of this report to OPM, CalPERS, GM, and PBGH for their
review. OPM generally concurred with our study findings, highlighting its
negotiating strategy as contributing to average FEHBP premiums for 2003
being below national trends. OPM also indicated that in the coming year it
will strengthen its efforts by adding enhanced consumer education to
provide enrollees with additional information for making informed choices.
CalPERS and GM also concurred with our findings. PBGH, along with OPM and
CalPERS, provided technical comments, which we incorporated as
appropriate. (App. II contains the full text of OPM*s comments.)

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. We will then send copies to the Director of OPM, other
interested parties, and appropriate congressional committees. We will also
make copies available to others on request. In addition, this report will
be available at no charge on GAO*s Web site at http:// www. gao. gov.
Comments from OPM

and Other Reviewers

Page 25 GAO- 03- 236 Federal Employees' Health Premium Growth

Please call me at (202) 512- 7118 or John Dicken at (202) 512- 7043 if you
have any additional questions. N. Rotimi Adebonojo and Joseph Petko were
major contributors to this report.

Kathryn G. Allen Director, Health Care* Medicaid

and Private Health Insurance Issues

Appendix I: Methodology Page 26 GAO- 03- 236 Federal Employees' Health
Premium Growth

To compare premium trends for the Federal Employees Health Benefits
Program (FEHBP) and other large purchasers over the last decade, we
obtained data from the Office of Personnel Management (OPM), the
California Public Employees* Retirement System (CalPERS), and surveys of
private employer- sponsored health benefits conducted by the Kaiser Family
Foundation and the Health Research and Educational Trust (Kaiser/ HRET). 1
To identify factors driving FEHBP*s recent premium growth, we analyzed
several OPM data sources, including summary reports it received from the

three largest nationwide plans on enrollees* health care service
utilization and related plan payments for 1998 through 2000. These three
plans are all fee- for- service (FFS) plans and accounted for 90 percent
of FEHBP enrollment in FFS plans and almost two- thirds of the total FEHBP
enrollment. 2 We analyzed expenditure and utilization data for services,
including hospital inpatient care, hospital outpatient care, physician
visits, prescription drugs, laboratory services, surgery, and mental
health and substance abuse 3 for 1998 through 2000 for the three largest
plans. 4 These

summary data are submitted to OPM by each FFS experience- rated plan,
reporting utilization and expenditures incurred by the plan in a calendar
year and paid in that calendar year and through the first 9 months of the
next calendar year. Because each plan reports its data to OPM slightly
differently, we aggregated expenditures and utilization for multiple

1 Kaiser/ HRET has been conducting surveys of private employer- sponsored
health benefits since 1999. These surveys capture data from employers
ranging in size from 3 workers to 300,000 or more workers. In earlier
years, KPMG Peat Marwick conducted the surveys.

2 Generally, federal workers and retirees can enroll in two types of
health care plans* FFS plans and health maintenance organizations (HMO). 3
One plan did not provide a separate breakout of utilization and
expenditures for mental health and substance abuse. 4 We requested data
for several years prior to 1998, but these data were available for only
one of the three plans. Data since 2000 were not available from OPM at the
time of our analysis. Appendix I: Methodology

Appendix I: Methodology Page 27 GAO- 03- 236 Federal Employees' Health
Premium Growth

categories of services, including hospital inpatient, 5 hospital
outpatient, 6 prescription drugs, and physician visits* and all other
services. We adjusted each plan*s expenditures by enrollment as reported
by the plans to OPM to calculate per- enrollee expenditure and
utilization, and calculated a payment per unit for each category of
service. We weighted the expenditure and utilization for the three plans
by their respective enrollments for each year from 1998 to 2000. We
calculated the increase in per- enrollee claims expenditure attributable
to increased plan payments

from 1998 through 2000 using the change in plan payments over the 3 years
and assuming utilization remained steady at the 1998 level. Similarly, we
calculated the increase in per- enrollee claims attributed to increased
utilization using the change in utilization from 1998 to 2000 and assuming
plan payments were constant at the 2000 level.

In addition, using OPM*s data for all FEHBP plans, we compared each plan*s
premium and enrollment changes from 1999 through 2002. We could only do
this analysis for those plans that participated in FEHBP in each of the
comparison years* for example, in both 2001 and 2002. We identified how
many plans with premium changes less than and greater than the

median premium gained and lost enrollment. These counts do not include
plans that dropped out of FEHBP because we do not know what type of
premium and enrollment changes these plans would have experienced in the
following year. 7 We also reviewed the literature and interviewed OPM
officials and actuaries at the Hay Group, Hewitt Associates LLC, and

William M. Mercer, Inc. To examine the steps OPM takes to control FEHBP
costs, we interviewed officials in OPM*s Office of Insurance Programs and
Office of the Actuary. 5 One of the plans we analyzed changed the way it
reported inpatient data from 1998 to

1999. Utilization for maternity services was included with inpatient
services data reported to OPM for 1998 for this plan, but was reported
separately in 1999 and 2000. To be consistent across years, we added these
expenditures and utilization to the plan*s inpatient data for 1999 and
2000. In 1999 and 2000, maternity services for this plan represented about

2.1 percent and 3.4 percent, respectively, of its inpatient expenditure
and hospital days. 6 Due to a change in the way that one of the plans
reported its outpatient utilization and expenditure data from 1998 to
1999, we were unable to compare outpatient data for this plan across all 3
years. Therefore, the data presented for outpatient care exclude
utilization and expenditure data reported by this plan.

7 Our prior work indicated that plans withdraw from FEHBP for several
reasons, including low enrollment and noncompetitive premiums. See U. S.
General Accounting Office,

Federal Employees* Health Program: Reasons Why HMOs Withdrew in 1999 and
2000,

GAO/ GGD- 00- 100 (Washington, D. C.: May 2, 2000).

Appendix I: Methodology Page 28 GAO- 03- 236 Federal Employees' Health
Premium Growth

To obtain the plans* perspectives, we interviewed officials at the Blue
Cross Blue Shield Association 8 and at Kaiser Permanente* two large plans
participating in FEHBP. We also interviewed representatives from two
federal employee unions* the American Federation of Government Employees
and the National Treasury Employees Union.

To examine how other large purchasers negotiate health benefits and
attempt to control costs, we reviewed the literature and employee benefit
surveys; interviewed employee benefit consultants; and interviewed
officials of three large purchasers of employer- sponsored health
insurance, including CalPERS* the largest public purchaser of health
insurance after the federal government, Pacific Business Group on Health
(PBGH)* a California- based purchaser representing 19 large employers,

and General Motors (GM)* the largest private purchaser of
employersponsored health benefits. See table 3 for selected
characteristics of FEHBP and the other large group purchasers.

8 The Blue Cross Blue Shield Association negotiates the contract for the
Blue Cross and Blue Shield (BCBS) service benefit plan.

Appendix I: Methodology Page 29 GAO- 03- 236 Federal Employees' Health
Premium Growth

Table 3: Selected Characteristics of FEHBP Compared to Health Benefit
Programs Offered through CalPERS, PBGH, and GM Characteristics FEHBP
CalPERS PBGH GM

Enrollment for 2002 About 8.3 million active workers, retirees, and
dependents

About 1.2 million active workers, retirees, and dependents

About 350,000 active workers, retirees, and dependents

About 1.2 million active workers, retirees, and dependents Coverage areas
Nationwide and outside the country Primarily California Primarily
California Nationwide and outside the country

Enrollment by plan type 70% FFS/ PPO 30% HMO

23% PPO 74% HMO 3% association plans

100% HMO a Hourly workers: 71% FFS/ PPO 29% HMO Salaried workers: 63% FFS/
PPO 37% HMO Number of plans for 2002 7 FFS plans available

to all, 6 FFS plans open to specific groups, and 170 HMOs b 2 PPOs
available to all, 7

HMOs, 2 association HMOs, and 1 association PPO

7 HMOs 81 FFS 31 PPOs 136 HMOs

Participating employers Civilian federal agencies 1,099 California public
sector agencies 19 California private

sector companies GM Source: GAO analysis of information from FEHBP,
CalPERS, PBGH, and GM. a PBGH negotiates HMO but not other types of
coverage for participating employers. Therefore, the

350,000 active workers, retirees, and dependents covered through PBGH are
all in HMOs. However, this represents about 70 percent of participants in
these employers* health plans. The remainder are primarily in PPOs offered
directly by the employers. b To arrive at the number of FEHBP plans, we
used data OPM provided on plan enrollment. We

counted the number of FFS plans and HMOs as indicated by OPM*s plan codes.
If a plan had two benefit options, we counted this as one plan. Starting
in 2002, BCBS was listed under two separate codes (one for the service
benefit plan and one for the basic plan). We counted this as one FFS plan

to be consistent with our counts for the previous years.

Appendix II: Comments from the Office of Personnel Management Page 30 GAO-
03- 236 Federal Employees' Health Premium Growth

Appendix II: Comments from the Office of Personnel Management

Appendix II: Comments from the Office of Personnel Management Page 31 GAO-
03- 236 Federal Employees' Health Premium Growth (290141)

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