Background

FEHBP is the largest employer-sponsored health insurance program in the  country, providing health insurance coverage for about 8 million federal  employees, retirees, and their dependents through contracts with private  insurance plans. All currently employed and retired federal workers and  their dependents are eligible to enroll in FEHBP plans, and about   85 percent of eligible workers and retirees are enrolled in the program. For  2007, FEHBP offered 284 plans, with 14 fee-for-service (FFS) plans, 209  health maintenance organization (HMO) plans, and 61 consumer-directed  health plans (CDHP). About 75 percent of total FEHBP enrollment was  concentrated in FFS plans, about 25 percent in HMO plans, and less than   1 percent in CDHPs.
Total FEHBP health insurance premiums paid by the government and  enrollees were about $31 billion in fiscal year 2005. The government pays a  portion of each enrollee’s total health insurance premium. As set by  statute, the government pays 72 percent of the average premium across all  FEHBP plans but no more than 75 percent of any particular plan’s  premium. The premiums are intended to cover enrollees’ health care  costs, plans’ administrative expenses, reserve accounts specified by law,  and OPM’s administrative costs. Unlike some other large purchasers,  FEHBP offers the same plan choices to currently employed enrollees and  retirees, including Medicare-eligible retirees who opt to receive coverage  through FEHBP plans rather than through the Medicare program. The  plans include benefits for medical services and prescription drugs.
By statute, OPM can negotiate contracts with health plans without regard  to competitive bidding requirements. Plans meeting the minimum  requirements specified in the statute and regulations may participate in the  program, and plan contracts may be renewed automatically each year.  OPM may terminate contracts if the minimum standards are not met.
OPM administers a reserve account within the U.S. Treasury for each  FEHBP plan, pursuant to federal regulations. Reserves are funded by a  surcharge of up to 3 percent of a plan’s premium. Funds in the reserves  above certain minimum balances may be used, under OPM’s guidance, to  defray future premium increases, enhance plan benefits, reduce  government and enrollee premium contributions, or cover unexpected  shortfalls from higher-than-anticipated claims.
As of January 1, 2006, Medicare began offering prescription drug coverage  (also known as Part D) to Medicare-eligible beneficiaries. Employers  offering prescription drug coverage to Medicare-eligible retirees enrolled  in their plans could, among other options, offer their retirees drug  coverage that was actuarially equivalent to standard coverage under Part  D and receive a tax-exempt government subsidy to encourage them to  retain and enhance their prescription drug coverage. The subsidy  provides payments equal to 28 percent of each qualified beneficiary’s  prescription drug costs that fall within a certain threshold and is estimated  to average about $670 per beneficiary per year. OPM opted not to apply for  the retiree drug subsidy.

	Growth in Average FEHBP Premiums Has Recently Slowed and Was Lower Than That of Other Purchasers

The average annual growth in FEHBP premiums slowed from 2002  through 2007 and was generally lower than the growth for other  purchasers since 2003. Premium growth rates of the 10 largest FEHBP  plans by enrollment varied to a lesser extent than did growth rates of  smaller plans from 2005 through 2007. The growth in the average FEHBP  enrollee premium contribution generally tracked average premium growth  and was generally similar to recent growth in enrollee premium  contributions for surveyed employers.

		Growth in Average FEHBP Premiums Slowed and Was Lower Than That of Other Purchasers in Recent Years

After a period of decreases in 1995 and 1996, FEHBP premiums began to  increase in 1997, to a peak increase of 12.9 percent in 2002. The growth in  average FEHBP premiums began slowing in 2003 and reached a low of   1.8 percent for 2007. The average annual growth in FEHBP premiums was  faster than that of CalPERS and surveyed employers from 1997 through  2002—8.5 percent compared with 6.5 percent and 7.1 percent, respectively.  However, beginning in 2003, the average annual growth rate in FEHBP  premiums was slower than that of CalPERS and surveyed employers—  7.3 percent compared with 14.2 percent and 10.5 percent, respectively.  (See fig. 1.).

		FEHBP Premium Growth Varied Less for Large Plans Than for Smaller Plans from 2005 through 2007

The premium growth rates for the 10 largest FEHBP plans by enrollment— accounting for about three-quarters of total FEHBP enrollment—ranged  from 0 percent to 15.5 percent in 2007. The average annual premium  growth for these plans fell within a similar range for 2005 through 2007.  (See table 1.)
Premium growth rates across the smaller FEHBP plans in 2007 varied  more widely, from a decrease of 43 percent to an increase of 27.1 percent.
The average premium growth in 2006 also varied by such characteristics as  plan type, plan option, geography, and share of retirees.
Premium growth for FFS plans (6.0 percent) was lower than for HMO  plans (8.5 percent).
Premium growth for low-option plans (2.6 percent) was lower than that  for high-option plans (7.3 percent).
Premium growth was higher for regional HMO plans in the southern  United States (9.2 percent) than for regional HMO plans elsewhere (from  7.2 percent to 8.7 percent).
Premium growth for plans with 20 percent or fewer retirees (4.5 percent)  was lower than for plans with greater than 20 percent retirees (7 percent).

		Growth in Average FEHBP Enrollee Premium Contributions Tracked Average Premium Growth and Was Comparable with That of Surveyed Employer Plans

Growth in average FEHBP enrollee premium contributions generally  paralleled premium growth from 1994 through 2007. The average annual  growth in enrollee premium contributions during this period was   6.9 percent, while premium growth was 6.1 percent. After decreasing in  1995, average enrollee premium contributions began to increase, rising to  a peak of 12.8 percent in 1998. Paralleling premium growth trends, the  average annual growth in enrollee premium contributions has slowed  since 2002, except for an upward spike in 2006. (See fig. 2.)
The growth in average FEHBP enrollee premium contributions was  generally similar to that of surveyed employer plans. (See fig. 3.) From  1994 through 2006, the average annual growth in FEHBP enrollee premium  contributions ranged from a decrease of 1.2 percent to an increase of   12.8 percent, compared with a decrease of 10.1 percent to an increase of  20.9 percent for surveyed employer plans. From 2003 through 2006, the  average annual increase in FEHBP enrollee premium contributions—  8.8 percent—was comparable with that of surveyed employer plans.
The growth in enrollee premium contributions for the 10 largest FEHBP  plans by enrollment ranged from negative 1.1 percent to 51.5 percent in  2007. The growth in enrollee premium contributions for smaller FEHBP  plans varied more widely, from negative 62.6 percent to 86.8 percent.

	Projected Growth in Several Factors Contributed to Average FEHBP Premium Growth

Projected increases in the cost and utilization of services and in the cost of  prescription drugs accounted for most of the average premium growth  across FEHBP plans. However, projected withdrawals from reserves offset  much of this growth from 2006 through 2007. Officials we interviewed  from most of the FEHBP plans said that the retiree drug subsidy would  have had a small effect on premium growth had OPM applied for the  subsidy and used it to offset premiums. Our interviews with officials from  two large plans and our analysis of the potential effect of the subsidy  showed that it would have lowered the growth in premiums and enrollee  premium contributions for 2006. OPM officials stated that the subsidy was  not necessary because its intent was to encourage employers to continue  offering prescription drug coverage to Medicare-eligible enrollees, and  FEHBP plans were already doing so. The potential effect of the subsidy on  premium growth would also have been uncertain because the statute did  not require employers to use the subsidy to mitigate premium growth.

		Projected Increases in the Cost and Utilization of Health Care Services Accounted for Most of the Premium Growth but Were Mitigated by Use of Reserves in Recent Years

Projected increases in the cost and utilization of health care services and  the cost of prescription drugs accounted for most of the average FEHBP  premium growth from 2000 through 2007. Absent projected changes  associated with other factors, projected increases in the cost and  utilization of services alone would have accounted for a 6 percent increase  in premiums for 2007, down from a peak of about 10 percent for 2002.  Projected increases in the cost of prescription drugs alone would have  accounted for about a 3 percent increase in premiums for 2007, down from  a peak of about 5 percent for 2002. Enrollee demographics—particularly  the aging of the enrollee population—were projected to have less of an  effect on premium growth. Projected decreases in the costs associated  with other factors, including benefit changes that resulted in less generous  coverage and enrollee choice of plans—typically the migration to lower  cost plans—generally helped offset average premium increases for 2000  through 2007.
Officials we interviewed from most of the plans stated that OPM  monitored their plans’ reserve levels and worked closely with them to  build up or draw down reserve funds gradually to avoid wide fluctuations  in premium growth from year to year. Projected additions to reserves  nominally increased premium growth—by less than 1 percent—from 2000  through 2005. However, projected withdrawals from reserves helped offset  the effect of increases by about 2 percent for 2006 and 5 percent for 2007.  (See fig. 4.) According to OPM, increases in the actual cost and utilization  of services in 2006 were lower than projected for that year, and therefore  the projected withdrawals from reserves were not made in 2006. Because  of the resulting higher reserve balances, plans and OPM projected even  larger reserve withdrawals for 2007.
Detailed data on total claims expenditures and expenditures by service  category actually incurred were available for five large FEHBP plans.  These data showed that total expenditures per enrollee increased an  average of 25 percent from 2003 to 2005. Most of this increase in total  expenditures per enrollee was explained by expenditures on prescription  drugs and on hospital outpatient services. (See table 2.)

		Plan Officials Differed on Whether OPM’s Decision Not to Accept the Retiree Drug Subsidy Would Have Affected FEHBP Premium Growth

Officials we interviewed from several plans stated that the retiree drug  subsidy would have had a small effect on premium growth because of two  factors. First, drug costs for Medicare beneficiaries enrolled in these plans  accounted for a small proportion of total expenses for all enrollees, and  the subsidy would have helped offset less than one-third of these  expenses. Second, because the same plans offered to currently employed  enrollees were offered to retirees, the effect of the subsidy would have  been diluted when spread across all enrollees. However, officials we  interviewed from two large plans with high shares of elderly enrollees  stated that the subsidy would have lowered premium growth for their  plans. Officials from one of these plans estimated that 2006 premium  growth could have been 3.5 to 4 percentage points lower.
Our analysis of the potential effect of the retiree drug subsidy on all plans  in FEHBP showed that had OPM applied for the subsidy and used it to  offset premium growth, the subsidy would have lowered the 2006 premium   growth by 2.6 percentage points from 6.4 percent to about 4 percent.  The reduction in premium growth would have been a onetime reduction  for 2006. Absent the drug subsidy, FEHBP premiums in the future would  likely be more sensitive to drug cost increases than would be premiums of  other large plans that received the retiree drug subsidy for Medicare  beneficiaries.
Officials from OPM explained that there was no need to apply for the  subsidy because its intent was to encourage employers to continue  offering prescription drug coverage to enrolled Medicare beneficiaries,  which all FEHBP plans were already doing. As such, the government  would be subsidizing itself to provide coverage for prescription drugs to  Medicare-eligible federal employees and retirees. The potential effect of  the subsidy on premium growth would also have been uncertain because  the statute did not require employers to use the subsidy to mitigate  premium growth.

	Changes in the Cost and Utilization of Services and Enrollee Demographics Accounted for Differing Premium Growth among FEHBP Plans

Officials we interviewed from most of the plans with higher-than-average  premium growth stated that increases in the cost and utilization of  services as well as a high share of elderly enrollees and early retirees were  key drivers of premium growth. Our analysis of these plans’ financial and  enrollee demographic data showed that these plans experienced faster- than-average growth in the cost and utilization of services and faster-than- average growth in their share of elderly enrollees and retirees in recent  years. Officials we interviewed from most of the plans with lower-than- average premium growth cited adjustments made for previously  overestimated projections of cost growth. Officials also cited benefit  changes that resulted in less generous coverage for prescription drugs.  Our analysis of financial data provided by two of these plans showed that  the increase in their per-enrollee expenditures for prescription drugs was  significantly lower than average in recent years. In addition, our analysis  of enrollment data found that these plans experienced greater declines  than average in their share of aging enrollees.

		Plans with High Premium Growth Had Higher-Than- Average Increases in the Cost and Utilization of Services and Faster Rising Shares of Elderly Enrollees

Officials we interviewed from most of the plans with higher-than-average  premium growth cited large increases in the actual cost and utilization of  services as one of the key cost drivers of premium growth. Our analysis of  financial data provided by six of these plans showed that the average  increase in total expenditures per enrollee from 2003 through 2005 was  about 40 percent, compared with the average of 25 percent for the five  large FEHBP plans.
Although enrollee demographics were projected to have a small effect on  premium growth in the average FEHBP plan for 2006, change in enrollee  demographics was cited as a key cost factor for most plans with higher- than-average premium growth. Officials we interviewed from five of these  plans stated that an aging population and higher shares of early retirees  were factors driving premium growth for their plans. For example,  officials from two plans cited a high concentration of elderly enrollees in  their respective service areas of southern New Jersey and Pennsylvania,  while officials from another plan cited an aging population in its service  area of San Antonio, Texas.
Our comparison of the demographic characteristics of the eight plans with  higher-than-average premium growth with those of all FEHBP plans from  2001 through 2005 supports the officials’ statements that unique  demographic profiles contributed to higher premium increases. (See   table 3.)

		Plans with Lower-Than- Average Premium Growth Cited Adjustments for Previously Overestimated Cost Growth and Benefit Changes and Had Greater Declines in the Shares of Elderly Enrollees

Officials we interviewed from most of the plans with lower-than-average  premium growth for their plans in 2006 cited adjustments for previously  overestimated projections of cost growth. Officials from two of these  plans stated that projections for a new low-option plan they had recently  introduced were pegged high because of concerns about potential  migration of high-cost enrollees from their high-option plan. The actual  cost increases of enrollees in the low-option plan in 2004 (the basis for  2006 rates) turned out to be lower than projected. Officials from two other  plans said that the projected cost growth of 14 percent to 20 percent in  2004 (the basis for 2006 rates) for those plans was much higher than the  actual cost growth in 2006 of about 5 percent to 8 percent.
Officials we interviewed from three plans with lower-than-average growth  cited lower-than-anticipated rates of increase in prescription drug costs  caused by benefit changes that resulted in less generous coverage to  explain low rates of premium growth for their plans. Our analysis of  financial data provided by two of these plans showed that per-enrollee  expenditures for prescription drugs increased by 3 percent for one plan  and 13 percent for the other from 2003 through 2005, compared with   30 percent for the average of the five large FEHBP plans. The six plans  with lower-than-average premium growth also had greater declines in their  share of elderly enrollees compared with all plans from 2001 through 2005.  (See table 4.)

	Agency Comments and Our Evaluation

We received comments on a draft of this report from OPM (see app. II).  OPM said the draft report confirms that growth in average FEHBP  premiums has slowed and has been lower than that of other large  employer purchasers for the last several years. Regarding the projected  withdrawals of reserves for 2007, OPM said that the actual drawdown  could be lower if the actual increase in the cost and utilization of services  in 2007 is less than projected. We agree this could occur, and as we noted  in the draft report and as OPM said in its comments, the projected  withdrawals of reserves for 2006 were ultimately not made because of  lower than expected increases in the cost and utilization of services in that  year. Regarding the manner in which premiums are set, OPM said that rate  negotiations between OPM and the plans are guided by projections of  future costs that are based on a retrospective analysis of actual costs, and  that adjustments to the reserve accounts of most plans are made when  actual costs differ from the projections. OPM said that, as a result, these  reserve adjustments help stabilize premium growth over time and ensure  that premiums ultimately reflect actual cost increases. We agree with this  characterization of the effect of reserve adjustments. Regarding our  discussion of benefit changes that resulted in less generous coverage for  prescription drugs, OPM said that some plans modified their prescription  drug benefit to create incentives to use generic medications, and that this  does not result in a less generous benefit. While we agree that plans can  change benefits to encourage generic drug utilization without resulting in  less generous coverage, officials from three of the six plans we  interviewed with lower-than-average premium growth said that they made  benefit changes that resulted in less generous coverage. OPM provided  other comments describing aspects of FEHBP and provided technical  comments that we incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution of it until 30 days from  its date. At that time, we will send copies of this report to the Director of  OPM and other interested parties. We will also make copies available to  others upon request. In addition, this report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Randy Dirosa, Assistant Director; Iola D’Souza; Menq-Tsong  P. Juang; and Timothy Walker made key contributions to this report.

Appendix I: Scope and Methodology

To identify growth trends in the average Federal Employees Health  Benefits Program (FEHBP) premiums and enrollee premium  contributions, we analyzed trend data for 1994 through 2007 from the  Office of Personnel Management (OPM). To identify the variation in  premium trends across plans by plan characteristics, we analyzed detailed  plan-level premium data and enrollment data for 2003 through 2006 from  OPM. We examined the variation in premiums based on plan type—fee- for-service (FFS), health maintenance organization (HMO), and consumer- directed health plan (CDHP)—plan option (high option, low option);  geography (West, Midwest, South, Northeast); and share of retirees.
To compare FEHBP premium trends with those of other purchasers, we  obtained premium trend data for 1994 through 2007 from the California  Public Employees’ Retirement System (CalPERS)—the second largest  public purchaser of employee health benefits after FEHBP—and from  surveys of employer-sponsored health benefits conducted by KPMG Peat  Marwick from 1993 through 1998 and by Kaiser Family Foundation/Health  Research and Educational Trust (Kaiser/HRET) from 1999 through 2006.
To identify factors contributing to average FEHBP premium growth trends  for all plans, we obtained and analyzed OPM summary reports on the  projected effects of various factors on premium growth for all FEHBP  plans from 2000 through 2007. We analyzed more detailed data obtained  individually from five large FFS plans on actual growth in per-enrollee  expenditures by service category, including prescription drugs, hospital  outpatient care, hospital inpatient care, and physician and other services,  from 2003 through 2005.
To examine the reasons for differing premium growth trends among  FEHBP plans, we conducted interviews with officials from 14 plans with  higher- or lower-than-average premium growth in either 2006 or the 3-year  period from 2004 through 2006, and analyzed financial data provided by  some of these plans. We limited our study sample to plans participating in  FEHBP for at least 3 years and with at least 5,000 enrollees in 2005.  Among these plans, we identified those with premium growth for 2006 or  the average annual growth for the 3-year period from 2004 through 2006 of  above or below one standard deviation of the mean. Of the 23 plans  meeting these criteria, we selected 14 plans. (See table 5.)
We analyzed aggregate data on the actual growth in per-enrollee  expenditures by service category from 2003 through 2005 provided by  officials from some of these plans and demographic enrollment data from  2001 through 2005 from OPM.
We also explored with officials from OPM and the selected plans the  potential effect of the retiree drug subsidy on premium growth had OPM  applied for the subsidy and used it to offset premiums. To estimate the  effect the subsidy would have had on average premium growth, we first  calculated the total annual amount of the subsidy that would have been  available for all Medicare-eligible beneficiaries in FEHBP using 2006  enrollment data and an estimate by the Centers for Medicare & Medicaid  Services of the average annual subsidy per Medicare beneficiary in 2006  (about $670). We then divided this amount by total annual premiums for  all FEHBP enrollees in 2005.
We did not independently verify the data from OPM, the selected FEHBP  plans, CalPERS, or the Kaiser/HRET surveys. We performed certain quality  checks, such as determining consistency where similar data were provided  by OPM and the plans. We collected and evaluated information from OPM  regarding collection, storage, and maintenance of the data. We reviewed  all data for reasonableness and consistency and determined that these  data were sufficiently reliable for our purposes. We conducted our work  from January 2006 through December 2006 in accordance with generally  accepted government auditing standards.

Appendix II: Comments from the Office of Personnel Management

Summary:
Why GAO Did This Study

Average health insurance premiums for plans participating in the Federal Employees Health Benefits Program (FEHBP) have risen each year since 1997. These growing premiums result in higher costs to the federal government and plan enrollees. The Office of Personnel Management (OPM) oversees FEHBP, negotiating benefits and premiums and administering reserve accounts that may be used to cover plans' unanticipated spending increases. GAO was asked to evaluate the nature and extent of premium increases. To do this, GAO examined (1) FEHBP premium trends compared with those of other purchasers, (2) factors contributing to average premium growth across all FEHBP plans, and (3) factors contributing to differing trends among selected FEHBP plans. GAO reviewed data provided by OPM relating to FEHBP premiums and factors contributing to premium growth. For comparison purposes, GAO also examined premium data from the California Public Employees' Retirement System (CalPERS) and surveys of other public and private employers. GAO also interviewed officials from OPM and eight FEHBP plans with premium growth that was higher than average, and six FEHBP plans with premium growth that was lower than average to discuss premium growth trends and the variation in growth across plans.

What GAO Found

Growth in FEHBP premiums recently slowed, from a peak of 12.9 percent for 2002 to 1.8 percent for 2007. During this period FEHBP premium growth was generally slower than for other purchasers. Premium growth rates for the 10 largest FEHBP plans by enrollment ranged from 0 percent to 15.5 percent in 2007, while growth rates among smaller FEHBP plans varied more widely. The growth in average enrollee premium contributions--the share of total premiums paid by enrollees--was similar to the growth in total FEHBP premiums from 1994 through 2006, and was generally comparable with recent growth in enrollee premium contributions for surveyed employers. Projected increases in the cost and utilization of health care services and in the cost of prescription drugs accounted for most of the average premium growth increases for 2000 through 2007. Other factors, including benefit changes resulting in less generous coverage and enrollee migration to lower cost plans, were projected to slightly offset premium increases. In 2006 and 2007, projected withdrawals from reserves significantly helped offset the effect of other factors on premium growth. Officials from most of the plans with higher-than-average premium growth cited increases in the cost and utilization of services as well as a high share of elderly enrollees and early retirees. GAO's analysis of financial and enrollment data found that these plans generally experienced faster-than-average growth in the cost and utilization of services and faster-than-average growth in their share of elderly enrollees and retirees in recent years. Officials from most of the plans with lower-than-average premium growth cited adjustments for previously overestimated projections of cost growth. Officials also cited benefit changes that resulted in less generous coverage for prescription drugs. GAO's analysis of financial data provided by these plans found that that their increase in per enrollee expenditures for prescription drugs was significantly lower than average in recent years. In commenting on a draft of this report, OPM said the draft confirms that growth in average FEHBP premiums has slowed and has been lower than that of other large employer purchasers for the last several years.