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35–536 PDF 2008

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UP, UP, AND AWAY! GROWTH TRENDS IN

HEALTH CARE PREMIUMS FOR ACTIVE AND

RETIRED FEDERAL EMPLOYEES

HEARING

BEFORE THE

OVERSIGHT OF GOVERNMENT MANAGEMENT, 

THE FEDERAL WORKFORCE, AND THE 

DISTRICT OF COLUMBIA SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 18, 2007

Available via http://www.access.gpo.gov/congress/senate

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL 

WORKFORCE, AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE 

DANIEL K. AKAKA, Hawaii, Chairman 

CARL LEVIN, Michigan 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

GEORGE V. VOINOVICH, Ohio 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

JOHN WARNER, Virginia

RICHARD J. KESSLER, Staff Director 

JENNIFER A. HEMINGWAY, Minority Staff Director 

EMILY MARTHALER, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Akaka .................................................................................................. 1

Senator Voinovich ............................................................................................. 2

Senator Warner ................................................................................................ 20

WITNESSES 

FRIDAY, MAY 18, 2007

Nancy Kichak, Associate Director, Strategic Human Resources Policy Division, and Chief Actuary, U.S. Office of Personnel Management (OPM) .......... 4

John E. Dicken, Director, Health Care Team, U.S. Government Accountability 

Office (GAO) ......................................................................................................... 6

Stephen W. Gammarino, Senior Vice President, National Programs, Blue 

Cross Blue Shield Association ............................................................................. 16

Alan G. Lopatin, Legislative Counsel, National Active and Retired Federal 

Employees Association ......................................................................................... 18

ALPHABETICAL LIST OF WITNESSES

Dicken, John E.: 

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 33

Gammarino, Stephen W.: 

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 46

Kichak, Nancy: 

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 27

Lopatin, Alan G.: 

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 52

APPENDIX 

Background .............................................................................................................. 66

(1)

UP, UP, AND AWAY! GROWTH TRENDS IN 

HEALTH CARE PREMIUMS FOR ACTIVE AND 

RETIRED FEDERAL EMPLOYEES 

FRIDAY, MAY 18, 2007

U.S. SENATE,

SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT

MANAGEMENT, THE FEDERAL WORKFORCE,

AND THE DISTRICT OF COLUMBIA, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:32 a.m., in 

room SD–342, Dirksen Senate Office Building, Hon. Daniel K. 

Akaka, Chairman of the Subcommittee, presiding. 

Present: Senators Akaka, Voinovich, and Warner. 

OPENING STATEMENT OF CHAIRMAN AKAKA 

Chairman AKAKA. Good morning and aloha. The Subcommittee 

on Oversight of Government Management, the Federal Workforce, 

and the District of Columbia will come to order. 

Today, the Subcommittee meets to consider the average growth 

rate of health care premiums for active and retired Federal employees and their families. The Federal Employee Health Benefits 

(FEHB) Program is the Nation’s largest employer-sponsored health 

care program in the country. Boasting a hefty 8 million participants, it is regarded as a model program for the public sector and 

Medicare. 

This is something we can all be very proud of. I believe that as 

we look to the future of the Federal workforce, it is critical that the 

FEHB Program continue to provide quality care choices at the lowest possible cost to employees and retirees. It is critical to attracting and retaining top-flight talent. 

Without any doubt, the FEHB Program is competitive with the 

private sector and other areas of the public sector. Federal employees and retirees have roughly 280 health care plans to choose from. 

Every year OPM uses its leverage as the Nation’s largest employersponsored health benefit plan to keep premiums as low as possible 

for our enrollees and their families, while maintaining high-quality 

care services. 

From 1998 to 2005, premiums rose on average more than 7 percent a year. From 2001 to 2003, average premiums grew by double 

digits. While this was mostly in line with overall premium growth 

2

in the marketplace, active and retired employees still felt the impact on their wallets. 

After years of growing premiums, OPM used reserve funds to reduce the average premium growth rate by 7 percent. Over the last 

2 years, the premium increases were kept lower. This was especially helpful to retirees on fixed incomes who did not get to choose 

what prescription drugs or services they need. However, premium 

growth is still a problem because it consistently outpaces the costof-living adjustments and average annual pay raise. 

What really concerns me is that premiums fell not because OPM 

negotiated better rates or market forces drove down health care 

costs, but because they dipped into reserve funds. Premiums would 

have been lower if OPM had applied the drug subsidy. OPM has 

a good story to tell. They would have had a better story and Federal workers and retirees would have paid less if OPM had used 

all of the resources available to them. 

Last year, I requested that GAO conduct a review of the trends 

in FEHB Program premiums. The report, ‘‘Federal Employee 

Health Benefits Program Premium Growth Has Slowed and Varies 

among Participating Plans,’’ was released in December 2006. Today’s testimony will review the results of the GAO report and discuss the impact of FEHB Program premiums on administrators, 

providers, and enrollees. 

I disagree with OPM’s decision not to apply the Medicare subsidy. Also I was disappointed that OPM denied the Postal Service, 

an independent agency which does not receive appropriated funds, 

the subsidy as well. I believe we all have a common goal: To offer 

a range of comprehensive health care plans and ensure that the 

lowest possible premiums are there. So, I thank you again for being 

here today. 

Senator Voinovich, please proceed with your statement. 

OPENING STATEMENT OF SENATOR VOINOVICH 

Senator VOINOVICH. Good morning, Mr. Chairman, and thank 

you for holding this hearing this morning to examine the Federal 

Employees Health Benefit Program. I share your concerns about 

the rising cost of health care, not just for approximately 8 million 

people in the FEHB Program, but for all individuals in my home 

State of Ohio and across the Nation. 

My remarks this morning, Mr. Chairman, are really more geared 

toward the big picture, and you have done a really good job of narrowing it down to the report by the GAO. But I think everyone 

should recognize that spending on health care in the United States 

has reached $1.9 trillion, almost 16.5 percent of the GDP, the largest share ever. And despite all that spending, 47 million Americans, or 15 percent of the population, have no health care coverage. 

For those with access to insurance, the costs continue to rise, and 

that is what we are concerned about. Within the FEHB Program, 

premiums have increased every year since 1998. However, the Office of Personnel Management has demonstrated its ability to keep 

premium increases at or below the national average. 

In managing the FEHB Program, OPM has a difficult job. The 

FEHB Program is recognized as a model health insurance program. 

Isn’t it interesting that it is always referred to as an example of 

3

quality coverage. We have got to provide all citizens with access to 

the same quality health care that the Federal employees have. The 

expectations of the Executive Branch, of Congress, and of the Federal employees are that plans will provide comprehensive coverage 

across the Nation, both in rural and in urban environments, at reasonable prices for all Federal employees. 

In the private sector employer-sponsored health insurance markets, it is even harder to keep the cost of coverage affordable. Individuals who receive their insurance from private employers were 

faced with an average premium increase of 7.7 percent between the 

spring of 2005 and the spring of 2006. Fortunately, that was a 

lower growth rate than the 9.2-percent increase in 2005 and the 

11.2-percent income in 2004. 

Yet, despite the slowdown, premiums continue to increase much 

faster than overall inflation, 3.5 percent, and wage increases, 3.8 

percent. Premiums for family coverage have increased by 87 percent since 2000. These statistics are startling, and it is beyond time 

that we do something about them. 

Now, for too many years, I have listened to my colleagues on 

both sides of the aisle talk about the rising cost of health care and 

the growing number of uninsured Americans without much 

progress at the Federal level to come up with an inovative solution 

to the Nation’s problems regarding access to quality, affordable 

health care. That is why, Mr. Chairman, Senator Bingaman and I 

have introduced a bipartisan bill that presents inovative solutions 

called the Health Partnership Act. It was introduced in the House 

by Tammy Baldwin, Democrat from Wisconsin, and Dr. Tom Price, 

Republican from Georgia. The House version has more than 65 cosponsors. The bill would support State-based efforts to reduce the 

uninsured, reduce costs, improve quality, improve access to care, 

and expand information technology. 

Over a 5-year period, Congress would then evaluate whether the 

States are meeting the goals of the Act and evaluate whether various State’s approah’s do not work in order to make recommendations for Federal health care reform. I know that Secretary Leavitt, 

the National Governors Association, the Heritage Foundation, and 

The Brookings Institution, are all supportive of this legislation. 

While I continue to work to advance the Health Partnership Act, 

I also plan to introduce legislation next week with Senator Carper 

to establish and maintain an electronic personal health records system for individuals and family members enrolled in the FEHB Program. Our legislation was the result of a Subcommittee hearing 

earlier this year, which examined the use of health information 

technologies. Experts agree that a widespread adoption of health 

information technologies, such as electronic health care records will 

revolutionize the health care profession. In fact, the Institute of 

Medicine, the National Committee on Vital and Health Statistics, 

and other expert panels have identified information technology as 

one of the most powerful tools in reducing medical errors and improving the quality of care. Not only can EHRs save lives and improve the quality of health care, they also have the potential to reduce the cost of delivering of health care. 

According to the Rand Corporation, the health care delivery system in the United States could save approximately $160 billion anVerDate 0ct 09 2002 09:10 Jan 17, 2008 Jkt 035536 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 P:\DOCS\35536.TXT SAFFAIRS PsN: PAT
4

1The prepared statement of Ms. Kichak appears in the Appendix on page 27. 

nually with the widespread use of electronic medical records, and 

that is why, Mr. Chairman, I would like to see us get legislation 

that would require our health system to do this. We would set the 

example for the rest of the country. 

So I look forward to hearing what the witnesses have to say 

today and, again, thank you for holding this hearing. 

Chairman AKAKA. Thank you very much, Senator Voinovich. 

Senator Voinovich and I have worked closely together. He has 

been a leader in these areas, and I would tell you that he has set 

the pace for this Subcommittee as we continue to work on issues 

that we need to, to try to flesh out problems and to try to improve 

those conditions as well. 

We are so happy that we have been able to have you as witnesses, and as you know, our Subcommittee has rules that require 

that all witnesses testify under oath, and, therefore, I ask our witnesses to please rise and raise your right hand. Do you solemnly 

swear that the testimony you are about to give this Subcommittee 

is the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Ms. KICHAK. I do. 

Mr. DICKEN. I do. 

Chairman AKAKA. Thank you very much. Let the record note 

that the witnesses responded in the affirmative. 

We have two witnesses before us today. First is Nancy Kichak, 

Associate Director and Chief Actuary, Strategic Human Resources 

Policy Division, U.S. Office of Personnel Management; and John 

Dicken, Director of the Health Care Team, U.S. Government Accountability Office. Good to have you, and may I ask you, Ms. 

Kichak, to begin with your statement. 

TESTIMONY OF NANCY KICHAK,1 ASSOCIATE DIRECTOR, STRATEGIC HUMAN RESOURCES POLICY DIVISION, AND CHIEF 

ACTUARY, U.S. OFFICE OF PERSONNEL MANAGEMENT (OPM) 

Ms. KICHAK. Thank you, and thank you for inviting me here 

today to represent the Office of Personnel Management and to discuss the recent premium trends within the Federal Employees 

Health Benefits Program (FEFB), as well as the initiatives OPM 

and the health insurers who participate in the program use to provide top-quality health care at a reasonable cost to approximately 

8 million Federal employees, retirees, and their families. 

The FEHB Program offers competitive health benefits products 

to Federal workers, like other large employer purchasers, by contracting with private sector health plans. For 5 consecutive years, 

rate increases in the FEHB Program have declined. In fact, for 

2007, the rates increased only 1.8 percent. The result: Approximately 63 percent of FEHB Program enrollees incurred no premium increase, while another 15 percent saw increases of less than 

5 percent. For the past 5 years, the rate increases were lower than 

industry averages. 

We believe these low increases are the result of the continued efforts by OPM and the Administration and our carriers to provide 

FEHB Program enrollees with health care choices that meet their 

5

respective individual and family health care needs at affordable 

prices. Among those efforts, OPM has taken steps to further promote market-based competition by providing a range of quality 

health care options that include high-deductible health plans and 

consumer-driven plans. We have also introduced flexible spending 

accounts and new dental and vision programs. 

Under authority provided by law, OPM has provided guidance to 

agencies to allow them to pay the full cost of premiums for Federal 

employee reservists for up to 24 months, while they are deployed 

in harm’s way. Agencies have shown their support for our reservists by accepting this responsibility. 

Over the past several years, OPM’s annual guidance for benefit 

proposals in the FEHB Program has encouraged carriers to add 

benefits to their respective coverage options. Those benefits have 

included coverage for a variety of preventive services such as 

screenings for osteoporosis, colorectal cancer, abdominal aortic aneurysm, and cholesterol, as well as a variety of immunizations. In 

addition, we have consistently encouraged carriers to place emphasis on care management programs and practices to address the 

complex health care needs of enrollees with chronic conditions. 

As part of the annual rate negotiation process, OPM makes use 

of its authority to use excess reserves to mitigate premium increases. As OPM stated during the past year’s Open Season rollout 

period, we negotiate with FEHB Program plans to exercise this option. The recent Government Accountability Office (GAO) report on 

premiums confirms OPM’s ability to use reserves in this manner 

and to generally mitigate fluctuations in premiums from year to 

year. This is the third time in the last 5 years our bilateral negotiations with insurance carriers have resulted in some planned reduction in reserves. 

Regarding the use of the Medicare Part D employer subsidy to 

assist with offsetting premiums in the program, the intent of the 

subsidy is to encourage employers to continue providing prescription drug coverage to their Medicare-eligible retirees. As part of the 

fiscal year 2006 budget process, the potential use of the subsidy 

was evaluated by the Federal Government. This review found no 

good rationale for the Federal Government to pay itself to continue 

providing prescription drug coverage to Federal retirees, especially 

since OPM has no plans to eliminate this coverage. As OPM moves 

forward, we will continue to seek innovative benefit proposals from 

FEHB Program carriers that provide quality, value, and affordable 

health care options. 

We are proud of our record in administering the program and believe it offers Federal employees and retirees a wide variety of options from which to select the health benefits and premiums that 

best meet their needs. 

I appreciate the opportunity to testify and will be glad to answer 

any questions. Thank you. 

Chairman AKAKA. Thank you very much, Ms. Kichak. Mr. 

Dicken. 

6

1The prepared statement of Mr. Dicken appears in the Appendix on page 33. 

TESTIMONY OF JOHN E. DICKEN,1 DIRECTOR, HEALTH CARE 

TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO) 

Mr. DICKEN. Mr. Chairman and Senator Voinovich, I am pleased 

to be here today to discuss the findings from our December 2006 

report entitled ‘‘Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed and Varies among Participating Plans.’’ About 8 million Federal employees, retirees, and 

their dependents receive health coverage through more than 280 

plans participating in the FEHB Program. As you noted, Mr. 

Chairman, this makes the FEHB Program the largest employersponsored health insurance program in the country. Federal employees’ health insurance premiums have increased on average 

each year since 1997. These increases posed higher costs for the 

Federal Government and for enrollees who combined will pay about 

$35 billion in premiums in 2007. 

My remarks today, based on our December report, will focus on 

three areas: One, recent FEHB Program premium growth trends 

compared to those of plans offered by other purchasers; two, the 

factors that contributed to average premium growth trends across 

all FEHB Program plans; and, three, the factors that contributed 

to differing premium growth among selected FEHB Program plans. 

In summary, the average annual growth in FEHB Program premiums has slowed each year since 2002. From 2003 through 2007, 

the FEHB Program premium growth was generally lower than the 

growth for other purchasers. The key factors driving most of the 

growth in premiums were increases in the cost and utilization of 

health care services and prescription drugs. However, the premium 

growth for 2006 and 2007 was moderated by projected withdrawals 

from reserve funds. 

To elaborate, growth in average FEHB Program premiums 

peaked at 12.9 percent for 2002 and has slowed to 1.8 percent for 

2007. This represents the lowest average growth in FEHB Program 

premiums since 1997. The average annual growth rate in FEHB 

Program premiums from 2003 through 2007, 7.3 percent, has been 

slower than that of other purchasers. For example, premiums for 

the Nation’s second largest public employee health benefits program, the California Public Employees’ Retirement System, grew at 

14.2 percent on average during this period. Similarly, premiums for 

employers surveyed annually by the Kaiser Family Foundation 

grew at 10.5 percent on average during this period. 

Projected increases in the cost and utilization of health care services and prescription drugs accounted for most of the average annual premium growth across all FEHB Program plans for 2000 

through 2007. Absent projected decreases in the costs of other factors, these increases will have raised 2007 average premiums by 

about 9 percent—6 percent due to higher cost and utilization of 

services and 3 percent due to higher prescription drug costs. Enrollee demographics, particularly the aging of the enrollee population, were projected to have less of an effect on premium growth. 

At the same time, projected withdrawals from reserves offset average premium growth in the past 2 years, particularly for 2007. 

Officials from several plans stated that OPM monitored their plans’ 

7

reserve levels and worked closely with them to build up or draw 

down reserve levels gradually to avoid wide fluctuations in premiums from year to year. Projected additions to reserves nominally 

contributed to average premium growth by less than 1 percentage 

point for 2000 through 2005. However, projected withdrawals from 

reserves offset average premium growth by about 2 percentage 

points for 2006 and 5 percentage points for 2007. Other factors, including benefit changes that resulted in less generous coverage and 

enrollees choosing lower-cost plans, slightly offset average premium 

growth for 2000 through 2007. 

Premium growth varied among plans. Premium growth rates for 

the 10 largest plans by enrollment, accounting for about threequarters of total enrollment, ranged from 0 to 15.5 percent for 

2007. The variation was even wider across the smaller plans. Officials from several plans cited two key drivers of this higher than 

average premium growth: Higher than average increases in the actual costs and utilization of services and increasing shares of elderly enrollees. 

In closing, FEHB Program premiums are driven in large part by 

plans’ actual costs and utilization of health care services in prior 

years, projecting for future changes in benefits, enrollment, and 

health care expenditures. While for the last 2 years anticipated 

withdrawals from reserves have moderated FEHB Program premium growth, this strategy cannot be sustained indefinitely. As 

costs and utilization of prescription drugs and other health care 

services continue to increase, the FEHB Program, like other employer plans, will continue to face premium pressures in the future. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer questions that you or Members of the Subcommittee may 

have. 

Chairman AKAKA. Thank you very much, Mr. Dicken. I want 

both of you to know that your full statements will be placed in the 

record. 

To both of our witnesses, according to GAO, one of the reasons 

the premium rate slowed over the past 4 years was due to ‘‘less 

generous coverage.’’ OPM disagreed with GAO’s characterization. 

While we all want lower premium increases, we do not want to see 

a loss of service. 

What services do you each consider to be generous types of services? Let me ask first Ms. Kichak and then Mr. Dicken. Ms. 

Kichak. 

Ms. KICHAK. We believe that in recent years we have done a very 

good job in improving coverage for preventive services. We are covering more screenings than ever before. We are covering more immunizations. Although there have been some changes in our prescription drug programs in recent years, we feel we have been able 

to maintain the value of the drug programs by good management 

of pharmacy benefit programs and substitutions of generics which 

are the same quality drug at a lesser price. 

We have increased our preventative services and maintained 

some of our most costly services by good management of the benefits. 

Chairman AKAKA. Thank you. Mr. Dicken. 

8

Mr. DICKEN. Certainly the plans offered by the FEHB Program 

offer comprehensive benefits and, like other large employers, OPM 

has been looking at those benefits. The plans have made some 

changes which in some recent years have had a modest effect on 

reducing the premiums. As Ms. Kichak noted, a number of those 

changes are in the area of prescription drugs where a number of 

plans have made changes in their cost sharing to enrollees, in some 

cases increasing that cost sharing or else restructuring the cost 

sharing to try to encourage the use of generic drugs or other costeffective drugs. 

Chairman AKAKA. Ms. Kichak, after Congress authorized employees to apply for a Medicare Part D drug subsidy, the Postal Service 

took advantage of the program and spent hundreds of thousands of 

dollars to apply for the employer supplement. OPM denied the application as the administrator of the FEHB Program. However, 

GAO found that had the Postal Service’s application been approved, retirees would have saved money on their premiums. 

Doesn’t OPM look at whether or not retirees would reduce their 

premium costs in deciding on a course of action? And if not, why 

don’t they? 

Ms. KICHAK. I think OPM is extremely concerned with the cost 

of health care, which is why we work so hard to have a competitive 

program open to all different kinds of coverages so that folks have 

a choice and can find what they want. 

As far as the Medicare subsidy is concerned, the Federal Government pays a significant portion of the premium, in the same way 

that the government subsidizes a part of Medicare Part D. The government was paying for this coverage anyway for the Part D drug. 

The particular legislation that authorized the application only said 

that employers, including the FEHB Program, could apply. But it 

did not specify that went to reduced premiums. Other employers 

have used that money to offset their total costs, which enables 

them to continue to provide the coverage. Likewise, the FEHB Program, had they applied, could have used that money to offset the 

cost of their contribution for annuitants. 

So, really, when we looked at it, it was a question of was the government going to spend the money through the Medicare program 

or through the FEHB Program. We felt that it made no sense to 

go through the complex application process for the subsidy to move 

money from the Medicare program to the FEHB Program or vice 

versa. 

Chairman AKAKA. Ms. Kichak, one of the stated reasons OPM 

said it did not apply for the subsidy was that it would be ‘‘the government paying itself.’’ However, the Postal Service does not receive appropriated funds from Congress. Did OPM expect the Postal Service to receive other Federal funds to supplement premium 

coverage and is that the reason they chose to deny the Postal Service the subsidy? 

Ms. KICHAK. The Postal Service is part of the FEHB Program, 

and their annuitants, when they retire, are paid out of the Civil 

Service Retirement and Disability Fund, and they are part of the 

same group. When their claims are filed, they are identified as civil 

service annuitants, not postal annuitants, and they are treated like 

everyone else. In fact, this is an instance where, when they are an 

9

employee, they get a different subsidy from the Postal Service than 

other Federal employees, but when they retire, they become paid 

the same as anyone else. 

So, first of all, in our data pool that we would need to refer to 

to apply for the subsidy, it would be hard for our carriers to distinguish the costs of postal annuitants as opposed to non-postal annuitants. So they are part of our system. We are not going to reduce 

the drug benefits, so we do not need the subsidy to protect the drug 

program in the FEHB Program. And so it was just difficult to treat 

them differently than the rest of the Federal Government. 

Chairman AKAKA. You said in your testimony the Federal Government evaluated participation in the Medicare subsidy. Who specifically reviewed this? 

Ms. KICHAK. OPM looked very carefully at all of the options 

under the Medicare program. We consulted with CMS to make sure 

we understood the options. Remember, this was a new program. It 

had a lot of options. It was not quite clear. Everything was not 

known on day one when the legislation passed it. They provided us 

some assistance in evaluating our level of drugs versus their level 

of drugs. And then we consulted throughout the Administration. 

Chairman AKAKA. Thank you for your responses. Senator Voinovich. 

Senator VOINOVICH. Thank you. I was one that was very supportive of the Medicare retirees subsidy to other retirement systems in the country, both public and private, to encourage them to 

stay in the program. Many of us were concerned that if we did not 

provide the subsidy, some employers like General Motors and others would just drop their prescription drug coverage and tell their 

retirees to enroll in Medicare. I have been pleased with the way it 

has worked out because most retiree and retirement systems have 

stuck with the program, and it has made a difference. 

In the case of the Federal Government, your calculation was—

and correct me if I am wrong—that if you applied for that subsidy, 

the money would have come in and it would have been coming from 

the Federal Government. It would have increased the cost of Medicare, the Part D program, because you would have got the money. 

Ms. KICHAK. Right. 

Senator VOINOVICH. Now, one would argue that if you had done 

that, that would have given you more money so that you could 

have reduced your overall costs to the program and perhaps passed 

that on to your participants who pay a percentage of the cost. What 

is it, about 28 percent average? 

Ms. KICHAK. About 28 percent. 

Senator VOINOVICH. So I would like you to respond to that issue. 

That is my first question. 

Second is, from what I understand some of the folks from the 

Postal Service claim that they fund their retirement system or benefit programs similar to a State program, like California or Ohio, 

where you have retirees in it, and that because of the fact that you 

did not apply for that, you put them at a disadvantage so they 

were not able to get the benefit of this additional money. 

Could you just clarify that for me on that rationale again? 

Ms. KICHAK. First of all, you are absolutely right. Had we applied for the subsidy, it would have cost the Medicare program 

10

more. And the FEHB Program also relies on general revenues from 

the Federal Government to pay the government’s share of the 

health insurance for the non-postal retirees. 

Senator VOINOVICH. OK. So your logic is that the general fund 

comes up with the money for Medicare. It also provides money to 

you, for you to do the job, but it would just be taking money out 

of one pot and putting it into another. 

Ms. KICHAK. Yes. 

Senator VOINOVICH. OK. 

Ms. KICHAK. If you look at how the private sector uses the subsidy—and we do not have good statistics—but they were getting 

the subsidy to help defray their costs so they would continue to 

provide the coverage. So the money goes back to the employer, and 

it is not specified how the employer uses it other than the employer 

cannot cancel the coverage. That is the point of the subsidy. 

So, yes, applying it to premiums would have been one option, but 

it was not a requirement. The money could have all come directly 

back into the general fund and then used to defray rate increases. 

Now, the Postal Service is a separate issue because they do fund 

differently. But it is very hard in the FEHB Program with 8 million enrollees and 4 million enrollments and 285 plans to identify 

those drug costs for postal versus non-postal. One of the reasons 

the FEHB Program is cost efficient is we have extremely low administrative expenses, and it would have been a very difficult process to try to identify the drug costs. 

The application process with CMS is not simple. It would have 

placed a great burden on our enrollees to try to identify that money 

for a relatively small group of folks, not the entire program. 

Senator VOINOVICH. Are you saying the Postal Service, in terms 

of their retirement system, is separate and is funded by premiums 

that the folks in the Postal Service pay for their health care benefits? 

Ms. KICHAK. For their retirees, they pay——

Senator VOINOVICH. No. For their active employees. Is the premium about the same as retiree’s pay for their health care. 

Ms. KICHAK. Well, the postal employees are in the same risk 

pool, so the total premium is the same. One of the hallmarks of the 

FEHB Program is the premium is the same whether you are a 

postal employee, a non-postal employee, or a retiree. Everybody is 

in the same risk pool. 

Senator VOINOVICH. So the Postal Service is in the FEHB Program? 

Ms. KICHAK. They are in the FEHB Program. The Postal Service 

has historically paid a higher portion of the total premium for employees, higher than the 72 percent. That ceases when the person 

retirees, and then when they become a postal retiree in our civil 

service system, then the contribution of their health insurance is 

based on the 72 percent formula. 

Senator VOINOVICH. All right. So if the Postal Service would have 

applied for the 28 percent subsidy, both retired and active workers 

premiums would have been reduced. 

Ms. KICHAK. It could have helped them reduce their costs, yes. 

Senator VOINOVICH. And you distinguish that, or do not distinguish that from—you are not going after it? 

11

Ms. KICHAK. For one segment of the population, yes. 

Senator VOINOVICH. Well, for a lot of them, it is fairly confusing. 

The other problem that we have heard about is the problem of providing health care in rural areas of our State. It is becoming more 

difficult, and I understand it is not just Ohio but a national problem. What are you doing about that in terms of people who live in 

rural areas that are Federal employees to make sure that they 

have got access to health care? 

Ms. KICHAK. There are a couple things. First of all, we have national plans. Blue Cross, who is going to be on the next panel, 

serves the Nation governmentwide, and we look to make sure that 

their preferred provider networks are comprehensive, as there are 

other plans in the program that are nationwide—GEHA, Mail Handlers, NALC, APWU—and, I am sure I am forgetting someone. 

In addition, this year, for 2008 in our Call Letter we are trying 

to do some things to encourage more HMOs to participate. We have 

many. It has been said before that we have 285 plans. We have 

had some problems with pricing of HMOs because we have not previously allowed them to offer benefit packages unless they were already in place, which meant if an HMO wanted to do something 

different, we would not accept it until it had a proven track record. 

Now we are going to be looking at some different packages in 

HMOs. Maybe this will be a way to get more HMOs to come in and 

expand that provision of care also. 

Senator VOINOVICH. On another subject, have you seen more of 

your retirees go into Medicare Advantage as a result of the 4D program? 

Ms. KICHAK. Yes, we have. 

Senator VOINOVICH. Do you know what percentage it is? 

Ms. KICHAK. No. We do not have the data on that, but it is a program that they are starting to move into. 

Senator VOINOVICH. I would like to find out the percent, if you 

could. 

Ms. KICHAK. Well, we will get you——

Senator VOINOVICH. I would also be interested to know why they 

are moving to the Medicare Advantage program. There is a budget 

controversy about that right now. There are some that say that the 

costs are too high and more than what they would be if they were 

not in Medicare Advantage. But from my perspective, as I have 

traveled around Ohio and talked to many people—people like it because they get a little better deal. Also they feel more comfortable 

because they have been able to establish a relationship with a 

health care provider on a regular basis, rather than the fee-forservice that you get under the other program. 

Ms. KICHAK. One of the things that we see even in the FEHB 

Program, in our HMOs, is if folks have been with them as employees, they like to stay with them when they retire because of that 

doctor-patient relationship. So, I will find out anything I can about 

our participation and get that for the record.

INFORMATION SUBMITTED FOR THE RECORD 

About 2.5 percent of retirees (49,200) are in Medicare Advantage.

12

Senator VOINOVICH. Yes, because that is going to be from your 

perspective. I would like to see it because we are going to have 

some debate about this issue. Could you try to look at our mandated costs for the Federal Government, particularly in the Medicare area? 

Ms. KICHAK. Yes. Thank you. 

Senator VOINOVICH. Thank you. 

Chairman AKAKA. Thank you very much. I will start a second 

round of questions here. 

To both of you, as you know, the Office of Personnel Management 

is responsible for negotiating the terms of service, such as what the 

premium rates will be and the services provided for those premiums. I am concerned OPM lacks sufficient negotiating authority 

to address specific problems such as prescription drug costs. 

Do you believe that OPM has enough negotiating authority, or 

are there areas that OPM could do a better job of negotiating for 

lower premiums if they had that authority? Ms. Kichak. 

Ms. KICHAK. First of all, I would like to point out that we negotiate with our carriers, but it is our carriers who negotiate with the 

doctors, the providers, the drug companies, etc. Having said that, 

it appears to me that we have sufficient authority. What we seem 

to be getting are very good prices for the drugs we have. I understand that drugs are expensive, but when we introduced the PBMs 

in the program, we were able to increase benefits for people who 

used those pharmacies through the savings we and our carriers 

achieved on our behalf from those drug companies. So, in my mind, 

it seems to be working. 

Also, OPM has the authority to negotiate a level of benefits to 

ask the carriers to go out and agree with the providers at a certain 

level of benefits, and we exercise it. I think we deliver a good product. So, I am not looking for any more authority. Thank you. 

Chairman AKAKA. Mr. Dicken. 

Mr. DICKEN. As Ms. Kichak indicated, as OPM is negotiating 

with about 200 different plan options, they will be looking at the 

differences among those plans and they are keeping all the plans 

that meet minimum standards. FEHB Program, as contrasted to 

some other large employers, will be negotiating with a large group 

of plans that meet their minimum standards. Other employers may 

negotiate with one or fewer plans and be able to select only those 

that have the best value for their options. 

Certainly OPM has indicated that in the past they have been 

able to negotiate down from the initial bids that come in during the 

Call Letter process. And also as Ms. Kichak noted, a key part of 

this is the plans themselves, often working with pharmacy benefit 

managers, negotiating the most effective prescription drug costs 

and ensuring that some of those savings are passed on to FEHB 

Program and its enrollees. 

Chairman AKAKA. As we all know, there are many plans, approximately 280. And so, OPM negotiates with the large, medium, 

and small health care providers to offer a significant range of options for employees. Hopefully this competition helps keep the costs 

down. 

13

To both of you, do you think the fact that OPM negotiates with 

so many plans impedes OPM’s ability to negotiate each plan’s premium rates? 

Ms. KICHAK. Well, it is a lot of plans, but we have been able to 

manage it, I think very well. We put our most experienced folks on 

the plans that cover the most enrollees. Therefore, we are able to 

focus our efforts where it is most important that we do. 

But we look at every plan in the program, and innovation can 

come from any corner. We work very hard with each and every carrier to get their best ideas, and then I know in a competitive model 

like we have, the other carriers are looking to see what their competition is doing. And this is how we get new ideas into the program. But we are definitely able to negotiate with every plan. 

Chairman AKAKA. Mr. Dicken. 

Mr. DICKEN. Here is where FEHB Program is unique in having 

8 million enrollees in all parts of the country, they require a large 

number of plans so that there can be both the national options as 

well as regional options that are available locally. OPM is relying 

on its competitive model to have a number of plans that will allow 

enrollees to choose the benefits that are available in their area and 

at their cost. Other employers may choose other ways, employers 

like GM and CalPERS that may instead select a small number of 

plans. It is just two different approaches for how to negotiate. 

Chairman AKAKA. Ms. Kichak, wellness and preventive care can 

do a lot to keep people healthy and reduce the costs of more serious 

illnesses, like heart disease. In the 2008 Call Letter, you asked carriers to address preventive care in their proposals. How do you 

make wellness and preventive care a priority in FEHB Program 

plans? 

Ms. KICHAK. We ask for it every year. I think if you look at our 

history of Call Letters, you will see something almost every year 

in the preventive area. I do not know exactly when cholesterol 

screening was added, but it was very recent. 

We rely on the accrediting bodies that determine when the best 

time is for mammograms, immunizations, and things like that. We 

make sure that our carriers are aware of what those schedules of 

preventive services are and that they comply with them so that we 

are in step with what the medical community and the providers are 

telling the Nation is the best kind of preventive care to offer. 

Chairman AKAKA. My last question before I call on Senator 

Voinovich is to Ms. Kichak. According to OPM’s 2007 numbers, the 

President’s HealthierFeds Initiative has almost 39,000 employees 

and retirees enrolled, but only 20 percent have completed the challenge. What else is OPM really doing to encourage participation in 

the HealthierFeds program beyond advertising it on the website? 

Ms. KICHAK. We have a very active network, e-mail network, of 

HealthierFeds coordinators in the agency. So, the website itself was 

not the major part of that campaign. We had a webcast from the 

Department of Health and Human Services when we kicked it off. 

We have worked with the President’s Council on Physical Fitness 

and have had leaders from that area work with us. But there is 

somebody in virtually every agency trying to get that agency to get 

healthier. 

14

Even though our HealthierFeds challenge has ended, during Public Service Recognition Week we had HealthierFeds walks at lunchtime throughout the entire week. So, we are keeping that campaign 

going even though those numbers were very discouraging. 

Chairman AKAKA. Thank you very much. Senator Voinovich. 

Senator VOINOVICH. On the same thing, I would suspect that all 

of the companies that cover folks are also encouraging them to be 

as fit as possible and setting up programs to try and deal with the 

whole issue of wellness. 

Ms. KICHAK. Very definitely. 

Senator VOINOVICH. In other words, you are doing it as a system? 

The companies within the system, I am sure, are doing everything 

they can, I have met with some of the major insurance companies. 

They say, ‘‘We are really trying to get the people we cover to do 

some things differently to keep the costs down.’’

Ms. KICHAK. HealthierFeds is a workplace initiative. Yes, the 

carriers are doing a lot and they have a very good story to tell. 

They are identifying chronic diseases and working with individuals 

to manage those chronic diseases, so that if there is an individual 

who has something like diabetes and is not keeping up with their 

medication program, they are in contact with them. 

We are always working with new programs in that area. In my 

house, we get lots of mail from the health plan that my husband 

has selected telling him what he needs to do. I am glad I do not 

have to make those directives to him. And it is very encouraging 

to see the health plans reach out to the enrollees and try to encourage good health. 

Senator VOINOVICH. Are you familiar with the legislation that 

Senator Carper and I have introduced in terms of health information technology, specifically the personal health care records, in the 

FEHB Program? 

Ms. KICHAK. No, I am not familiar with your specific piece of legislation. 

Senator VOINOVICH. Have you ever looked at the issue of the 

Federal Government negotiating directly with the pharmaceutical 

companies? Under the current Medicare FEHB Program structure, 

that compete for business, they compete against each other to try 

and deal with as large a formulary as possible and also as reasonable a cost as possible. Have you ever looked at the option of eliminating the PBM’s role and requiring the government to regotiate 

directly with any companies. 

Ms. KICHAK. We have definitely looked at that option. I believe 

there was a legislative proposal along those lines. I have been with 

OPM a long time. Probably that legislative proposal could have 

been as long ago as 10 years ago. It did not receive very strong support. 

We also have conducted a couple of studies about how our carriers are doing in negotiating with PBMs, and one of the studies 

showed that they were doing very well. So we have not continued 

to push that option because of our consideration of how we think 

our carriers are doing. 

Senator VOINOVICH. OK. So it is the carriers that negotiate with 

the PBMs. 

Ms. KICHAK. The PBMs, yes. 

15

Senator VOINOVICH. At this stage of the game, no one is looking 

to do it differently because you feel that the smorgasbord of options 

in terms of the formulary and the costs seem to be OK because of 

the fact you have got competition among the plans. 

Ms. KICHAK. They seem to be working, and our Inspector General is providing increased oversight of the carriers’ agreements 

with the PBMs. And that is providing us some assurance that we 

are getting money back through those arrangements. 

Senator VOINOVICH. Mr. Chairman, I have no other questions. 

Chairman AKAKA. Thank you very much, Senator Voinovich. 

I want to thank both of you for your testimony and your responses to our questions. I want you to know that we may have 

other questions for you to respond to, and we will keep the record 

open for one week for other Members to do that. 

Again, thank you so much. You have been helpful, and we look 

forward to seeing you again at another hearing. Thank you. 

Chairman AKAKA. I would like to call forward our second panel: 

Stephen Gammarino, Senior Vice President, National Programs, 

Blue Cross Blue Shield Association; and Alan Lopatin, Legislative 

Counsel, National Active and Retired Federal Employees Association. 

I want to welcome both of you and to tell you that we have a requirement that we swear in witnesses before this Subcommittee. 

Would you please rise? Do you solemnly swear that the testimony 

you are about to give this Subcommittee is the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. GAMMARINO. I do. 

Mr. LOPATIN. I do. 

Chairman AKAKA. Thank you very much. Let the record note 

that the witnesses responded in the affirmative. 

I want to thank you again for coming and before I call on Mr. 

Gammarino, I just noticed that our good friend and colleague, Senator Warner, has arrived, and I want to ask him for any statement 

or comment he has before your testimony. 

Senator WARNER. Thank you, Mr. Chairman. I would just simply 

ask that my prepared opening statement appear following the 

Chairman’s and the Ranking Member’s opening statements in the 

record. I thank you. 

Chairman AKAKA. Thank you very much, Senator Warner. It will 

be included in the record. 

[The prepared opening statement of Senator Warner follows:]

PREPARED OPENING STATEMENT OF SENATOR WARNER 

Chairman Akaka and Senator Voinovich, I thank you for holding this important 

hearing today to examine the growth trends in health care insurance premiums for 

active and retired Federal employees, an issue that impacts a number of my constituents in the Commonwealth of Virginia. 

Access to affordable health care is a critical issue for everyone. While Federal employees enjoy the ability to choose among a wide variety of health plans to best suit 

their needs, substantial increases in Federal Employee Health Benefits Program 

(FEHBP) premiums could unfortunately threaten to make health insurance coverage cost prohibitive for many Federal employees, their dependents, and Federal 

retirees. 

To address the escalating cost of health insurance, a Presidential directive issued 

in 2000 extended the concept of premium conversion, the ability to pay health insurance premiums with pre-tax dollars, to active Federal employees who participate in 

FEHBP. This benefit is already available to many private sector employees and 

16

1The prepared statement of Mr. Gammarino appears in the Appendix on page 46. 

State and local government employees. While premium conversion does not directly 

affect the amount of the FEHBP premium, it helps to offset some of the cost by reducing an individual’s Federal tax liability. 

Regrettably, our retired civil servants, who pay the same premiums as Federal 

employees, do not have this same opportunity. In the Senate, for the last several 

Congresses, I have introduced legislation to extend premium conversion to our retired Federal employees, many of who are fixed incomes. This benefit is estimated 

to result in average savings of $820 per year for annuitants. 

I look forward to hearing from the distinguished witnesses, and their examination 

of the issue and suggestions on ways to ensure that FEHBP continues to be one of 

the leading health insurance plans in terms of its coverage and cost effectiveness. 

Thank you.

Chairman AKAKA. Mr. Gammarino, would you please proceed 

with your statement? 

TESTIMONY OF STEPHEN W. GAMMARINO,1 SENIOR VICE 

PRESIDENT, NATIONAL PROGRAMS, BLUE CROSS BLUE 

SHIELD ASSOCIATION 

Mr. GAMMARINO. Good morning. Thank you for this opportunity 

to discuss premiums in the Federal Employees Health Benefits 

Program. We appreciate your interest in this program and look forward to working with you and the Subcommittee to address this 

and other issues that are so important to Federal employees and 

retirees. 

The Blue Cross and Blue Shield system is proud to have offered 

the Service Benefit Plan from the beginning of the program in 

1960. Today, we provide health insurance to more than 4.7 million 

active and retired Federal employees and dependents. We believe 

we have been successful because, in large part, Federal employees 

and retirees recognize our commitment to offer high-quality, affordable health care coverage. Our goal is to ensure that the right person gets the right treatment at the right time, and we work hard 

to do that while maintaining competitive rates. 

One factor benefiting Federal employees and retirees is the very 

structure of this market-oriented, employer-sponsored program in 

which risk-bearing carriers compete with one another for an individual’s business. This retail competition and the fact that all the 

competitors are at risk compel carriers to develop actuarially sound 

products that offer attractive benefits at competitive prices. 

Through their choices, enrollees help to keep premiums in check. 

Federal employees and retirees have also benefited from the 

OPM’s sound stewardship and its focus as the employer on maintaining this as an attractive employment benefit to assist in recruitment and retention of a well-qualified workforce. This has contributed significantly to this program’s reputation as a model employer-sponsored health benefits program. Congress has also played 

an important role in the success of the program through its diligent 

oversight. 

The FEHB Program is, of course, integrally tied to the private 

health care industry. Federal employees and retirees see the same 

doctors and hospitals as their neighbors who work for private employers. Accordingly, the program is also affected by the same 

forces at work in health care in general. These forces include increased usage of prescription drugs and provider services, advances 

17

in medical technology and drug therapies, national demographic 

trends, and, of course, customer expectations. 

This program is also affected by the demographics of the Federal 

population. Retirees make up over 46.1 percent of the FEHB Program and 47 percent of our program. In 2006, the average age of 

contract holders in the Service Benefit Plan’s Standard Option—

that is our largest program—was almost 61 percent and Basic Option was over 45 percent. I am, however, very pleased that this 

year, for the third consecutive year, there was no change in premiums for our Basic Option. Additionally, the individual’s share of 

the premiums for our Standard Option, which covers almost 4 million people, actually declined slightly, while the premium increased 

by only 1 percent. 

I am even more pleased that we accomplished this while making 

enhancements to our benefits. As the Members of this Subcommittee know, the act expressly provides that funds in a carrier’s contingency reserve may be used to stabilize premiums. We 

were able to use our reserves to that effect in 2007. 

I would also like to review for the Subcommittee three relatively 

new initiatives designed to improve the quality of health care that 

our enrollees receive. 

Working closely with OPM, we are developing a member-centric 

program called Care Coordination. Care Coordination applies 

health information technology to an integrated database in order to 

improve our members’ ability to receive higher quality of care. It 

specifically focuses on members with chronic conditions, such as diabetes, who would benefit from our disease or case management 

initiatives. 

The second initiative is called Blue Distinction. This is a nationwide program of Blue Cross Blue Shield that helps foster the development of a more consumer-centered, knowledge-driven health care 

system. Blue Distinction is an important step toward providing 

health care consumers with cost and quality information similar to 

what they expect when they buy other types of goods and services. 

Consumers will have access to the information necessary for sound 

decisionmaking through Blue Distinction’s: 

Special care centers for bariatric surgery, cardiac care, and transplant services. These centers must meet clinically valid standards 

and deliver better outcomes; 

Nationwide hospital measurement program and improvement 

program; 

And, last through demonstration of various transparency 

projects. We believe Blue Distinction will lead to healthier lives 

and, over time, lower health care costs as doctors and patients improve their interaction. 

Third, the Blue Cross Blue Shield Association has recently proposed a legislative initiative to create a new independent institute 

to support clinical research comparing the effectiveness of medical 

procedures, drugs, devices, and biologics. The institute would disseminate its findings to providers and in reader-friendly form to 

consumers. We believe this approach would ultimately be the best 

path to assuring affordability by reducing ineffective, inappropriate, or redundant care while maximizing the quality of care. 

18

1The prepared statement of Mr. Lopatin appears in the Appendix on page 52. 

In conclusion, let me assure the Subcommittee that we are committed to providing Federal employees, retirees, and their families 

affordable coverage so they may obtain high-quality health care. 

We look forward to working with OPM and Congress in order to 

achieve that objective. 

This concludes my prepared remarks, and I would be very 

pleased to answer any questions you may have. 

Chairman AKAKA. Thank you very much. Mr. Lopatin. 

TESTIMONY OF ALAN G. LOPATIN,1 LEGISLATIVE COUNSEL, 

NATIONAL ACTIVE AND RETIRED FEDERAL EMPLOYEES ASSOCIATION 

Mr. LOPATIN. Thank you, Mr. Chairman and Senator Warner. On 

behalf of our Nation’s 4.6 million Federal employees, retirees, and 

survivors, I appreciate the opportunity to express the views of the 

National Active and Retired Federal Employees Association on 

FEHB Program premiums. 

Chairman Akaka, NARFE commends you for requesting the GAO 

report we are considering today and for your leadership on trying 

to help Federal employees and annuitants shoulder higher health 

care costs. We were pleased that you specifically asked the nonpartisan GAO to determine how FEHB Program premiums would 

have been affected had OPM applied for a payment provided under 

the Medicare Modernization Act of 2003. 

The MMA provides that all employers who furnish drug coverage 

to their retirees age 65 and older, at least as generous as the new 

Medicare Part D, are eligible to receive a subsidy of 28 percent of 

the per enrollee cost for drug coverage—an average of $670 per 

Medicare beneficiary, according to CMS. GAO found that premium 

growth in one of the largest FEHB Program plans with a high 

share of older enrollees could have been 3.5 to 4 percent lower in 

2006 and 2 percent lower across all the FEHB Program plans had 

the payment been accessed. 

NARFE has long held that the FEHB Program is the best group 

health insurance plan in America today and should serve, as we 

have all said, as a model for others. Even in years of double-digit 

rate hikes, we have said that OPM does a better job negotiating 

premium increases than any other employer. But we are bewildered by the action—or, more appropriately, inaction—of the Federal Government in not taking advantage of a $1 billion subsidy to 

which its health plan is entitled. It just does not make street sense. 

The goals of the Federal Government as an employer should be 

to attract and retain the best and the brightest to serve this country. OPM, as the chief steward of the civil service, must keep its 

focus on that goal in decisions affecting our competitive edge. 

This decision also denied the U.S. Postal Service access to a payment that would benefit its competitive status and its ratepayers, 

including you and me. OPM has cited two reasons for the Administration’s decision to forego the payment. First, they said they did 

not need to take advantage of the payment since they had no plans 

to change the drug coverage of Federal annuitants age 65 and 

older. Yet other public and private employers with no intention of 

19

reducing their retiree drug benefits decided to apply for the payment anyway. 

Second, OPM claims that they do not believe it is appropriate for 

the Federal Government to be paying itself for this purpose. Such 

intragovernmental transfers are not unusual. In fact, the Federal 

Government pays itself for future retirement obligations when Federal agencies make contributions from annual appropriations to the 

retirement trust on behalf of their employees. 

In response to several years of quickly rising premiums, the demand for lower-cost FEHB Program plans has increased. This has 

been helpful to some enrollees who want to cut costs. Lower-wage 

and younger workers naturally gravitate to lower-cost plans. In 

many instances, the higher-cost plans have more comprehensive 

coverage and better provider access than lower-cost options. As a 

result, individuals with greater health care needs tend to remain 

in higher-cost plans, and the opposite is true for healthier persons. 

With fewer healthier enrollees, greater claim experience with the 

higher-cost plans contributes to even higher premiums. 

The GAO report confirms NARFE’s fear that this migration could 

mean a race to the bottom where workers and annuitants are limited to plans with less coverage, smaller provider networks, and 

greater out-of-pocket costs. As it is, the shift of enrollees combined 

with the weighted average formula for government fair share contributions result in disproportionately higher enrollee premiums in 

the most popular plans for retirees. 

No option has more potential for separating the risk pool than 

the combination of a health savings account and a high-deductible 

health plan. Healthier enrollees tend to be attracted to HSAs because, as low health care utilizers, they can be rewarded with 

unspent balances or credits at the end of each year. Less healthy 

enrollees avoid HSAs because they could end up paying thousands 

of dollars in out-of-pocket costs. Without precautions against HSAinspired risk selection, the introduction of these new plans could 

ultimately be the death knell for fee-for-service and many traditional HMO options. 

The Administration’s fiscal year 2008 budget would give lackluster enrollment in HSAs a jump start by allowing Blue Cross to 

offer the controversial option. Blue Cross plans are the largest and 

most popular in the FEHB Program, and as a result, the insurance 

carrier’s brand loyalty and considerable marketing resources could 

significantly increase HSA enrollment if Blue Cross was allowed 

and decided to offer such an option. NARFE opposes further expansion of HSAs because of their potential adverse effect on comprehensive plans. 

The higher utilization of health care by older enrollees is a welldocumented reality of what happens to us as we age. Most annuitants started their careers in Federal service when they were 

younger and healthier and paid more into health insurance than 

they got out of it. Now that they have retired, some of them get 

more out of health insurance than they pay into it. This contract 

between generations has been a fundamental principle of group 

health insurance for decades. NARFE strongly believes that the 

cost of providing health care to older enrollees could be mitigated 

if: First, the Administration agreed to apply for and accept the 

20

Medicare employer payment; and, second, if FEHB Program plans 

were allowed to buy prescription drugs for their enrollees at the 

discount mandated by the Federal supply schedule. Given substantial congressional support for allowing Medicare to directly negotiate drug prices, it is time for this Subcommittee to revisit using 

the same leverage to make prescription drugs less expensive in 

FEHB Program. 

Finally, Mr. Chairman, I would be remiss were I not to put in 

a plug for NARFE’s top legislative agenda in this arena, especially 

at this moment—namely, the enactment of premium conversion 

legislation introduced by Senator Warner as S. 773, a matter referred to the Senate Finance Committee. The measure would allow 

Federal annuitants and military personnel to pay for their health 

insurance premium with pre-tax dollars in the same manner as 

current employees are allowed. This modest step would make 

health insurance premiums more affordable. 

For 47 years, the FEHB Program has minimized costs and provided a wide choice of comprehensive health insurance plans to 

nearly 9 million Federal employees, retirees, and their families. 

NARFE stands ready to work with this panel, with others in Congress, OPM, and insurance carriers to find the ways and means to 

contain out-of-control health care costs without sacrificing quality, 

and to ensure that the Federal family has access and coverage, 

without resorting to proposals that only shift costs to enrollees, or 

circumvent risk sharing in our group health plan. 

Thank you so much. 

Chairman AKAKA. Thank you very much. 

It is always a pleasure to have Senator Warner here. I am going 

to ask Senator Warner to proceed with his comments or questions. 

Senator Warner. 

OPENING STATEMENT OF SENATOR WARNER 

Senator WARNER. Thank you, Mr. Chairman. I have to leave to 

go to Arlington for a soldier from Virginia who was lost in Iraq. 

I would like to go back to S. 773 that you referred to, Mr. 

Lopatin. Do you feel that as it is drawn up, it largely addresses a 

considerable segment of this problem? 

Mr. LOPATIN. It would certainly help to alleviate the increase in 

premiums if Federal retirees could use pre-tax dollars much as employees do right now. They find sticker shock when they go from 

employment to retirement and notice that they are not getting that 

same subsidy, if you will, or at least tax advantage. And I think 

it would help greatly. 

Senator WARNER. Within your organization, is it well received? 

Mr. LOPATIN. NARFE is a thousand percent supportive, and 

every one of our members is pushing——

Senator WARNER. Given that you are working on this 24 hours 

a day, 7 days a week——

Mr. LOPATIN. Twenty-five hours on some days. 

Senator WARNER. How do you feel this legislation is being received by other Members of Congress? 

Mr. LOPATIN. I only wish it were before this Subcommittee instead of the Senate Finance Committee, just because we have so 

many friends here. But it is being well received. We have got a 

21

good number of cosponsors working with your office on both sides 

of the Hill, and Congressman Davis’ bill in the House. We are 

hopeful, but we are trying to do whatever we can to also help mitigate the cost so that we can move the legislation forward. 

Senator WARNER. Well, you have got a marvelous organization, 

and I am delighted to be associated and to work with it, and I 

thank you very much. 

Mr. LOPATIN. We appreciate your leadership. 

Senator WARNER. I thank the Chairman and Ranking Member. 

Chairman AKAKA. Thank you very much, Senator Warner. 

I want to pursue questions about wellness and preventive care, 

as I did with the first panel. Mr. Gammarino, as a provider, what 

is your policy on covering wellness services like gym memberships 

and preventive care? 

Mr. GAMMARINO. First of all, we have very comprehensive benefits with what I call our core health insurance program relative to 

preventive services. The types of services that you just mentioned—

gym memberships, other types of what we call ‘‘affinity programs’’—are not in our core product, not associated with the actual 

cost as it relates to the premium. We do actively have these affinity 

programs, and we offer what we call discounted nationwide programs that allow our members, if they sign up through our affinity 

programs, various discounts for joining those types of entities. 

Chairman AKAKA. Mr. Lopatin, as an association representing 

the interests of active and retired employees, how are you promoting those issues in your membership? 

Mr. LOPATIN. Well, NARFE is 100 percent behind active retirees, 

not just in the legislative arena but to get out, get exercise, get 

help behind them and in front of them. We have encouraged it 

through our federation conventions. Our President, Margaret 

Baptiste, is on the road right now or would otherwise be here. Our 

members come out to these meetings, and the type of social networking that they are able to do helps to keep them healthy by exchanging information about what is available out there, especially 

for seniors. We are foursquare behind civic engagement. NARFE 

members, as you can imagine, are dedicated civil servants with a 

lifetime of experience and are trying to contribute that experience 

back to their communities by staying active and keeping healthy 

that way. 

Chairman AKAKA. Because of the size of your organization and 

the active participation, the retirees feel the burden of health care 

costs more than most as a result of being on fixed incomes. What 

do you see retirees doing to deal with the growing premium rates? 

Mr. LOPATIN. Unfortunately, retirees every day, and not just 

Federal retirees, are faced with making tough decisions between affording prescription drugs, putting food on the table, and the other 

everyday costs of living. Often, Federal retirees have seen their 

premiums outpace their cost-of-living adjustments, and they are 

lucky to have those cost-of-living adjustments which we hope to retain and that we do not expect to expand. But it still is hard to 

make ends meet. 

We find that Federal retirees in a very generous or at least a 

reasonably generous and competitive retirement program keep Federal retirees in a place where they are in a bit of a better place 

22

than some other retirees. But it is a tough time, especially with 

spiraling health care costs, especially for prescription drugs, notwithstanding Medicare. 

Chairman AKAKA. I would like to ask both of you about the impact of health savings accounts. OPM continues to promote the use 

of health savings accounts as an alternative to traditional health 

care options. Some feared that HSAs would increase the premiums 

for traditional coverage. 

What do you believe the impact of health savings accounts has 

been on active and retired employees’ health care premiums? Mr. 

Gammarino. 

Mr. GAMMARINO. When this particular plan was first introduced, 

there was a lot of concern among a number of different groups that 

somehow these new products would take the better risk from the 

older, well-established insurance programs, like Blue Cross Blue 

Shield. I know at the time the agency was very focused on ensuring 

when they did introduce it, they introduced it in a way that it 

would reduce that type of impact. And I think they succeeded. I 

think today you would say those products are in the market. Blue 

Cross Blue Shield very much encourages choice and availability of 

different choices within the market. We think that is a good thing. 

We think the way they were introduced was appropriate, and materially, they have not affected the program as a whole, and they 

have not specifically affected Blue Cross Blue Shield in their ability 

to ensure affordable health care products. 

Mr. LOPATIN. Mr. Chairman, if I could also add to that, luckily 

the small uptake in the HSAs available in the current FEHB Program have had a negligible effect. But time and again we are seeing, as lower-income employees, as younger and healthier employees migrate to more attractive plans and the incentives behind 

HSAs of having balances available to you at the end of the year 

can only have a deleterious effect on the premiums for the plans 

where retirees want to have the continued relationship with their 

doctor, want to get that preventive care, have the right incentives. 

We are concerned that if HSAs were to blossom, we would see more 

risk selection going on as a consequence, potentially see the undermining of all other FEHB Program plans. 

Chairman AKAKA. Let me ask each of you, how have HSAs affected the overall premium market? Mr. Lopatin. 

Mr. LOPATIN. I believe in FEHB Program, again, the effect has 

been negligible, only because of the small enrollment numbers in 

HSAs. We are just concerned that would not last. 

Chairman AKAKA. Mr. Gammarino. 

Mr. GAMMARINO. In terms of Blue Cross Blue Shield, we serve 

98 million people nationwide. It is a growing segment of our market, particularly as it relates to what I would call small groups and 

individual markets. We do see that it provides an opportunity in 

some cases for affordable health care products where one did not 

exist. So we do see some small groups that are enrolling that were 

not enrolling before because of the cost of health care. 

So we think it is a good option to have out there, and it is a 

growing option relative to the private market. 

Chairman AKAKA. We will have a second round. Now, Senator 

Voinovich. 

23

Senator VOINOVICH. Ninety-eight million people? 

Mr. GAMMARINO. Yes, sir. 

Senator VOINOVICH. That is a lot of people. 

Mr. GAMMARINO. We are very proud of that. Almost 100 million. 

We are looking forward to that day, too. 

Senator VOINOVICH. We just talked about HSAs. Do you see any 

marked movement from people that are in regular plans to HSAs? 

Or as you just said, is it mostly in areas where they do not have 

access to that, that HSAs have become an option for folks that 

heretofore might not have insurance coverage? 

Mr. GAMMARINO. Yes, it is basically what I referred to before and 

what I would call the small and individual group market. 

Senator VOINOVICH. And Mr. Lopatin basically said he is worried 

about some of the people moving off from more comprehensive coverage to HSA plans. 

Mr. LOPATIN. From the large group health environment. 

Senator VOINOVICH. They are already covered and saying they 

are in good health and so they choose lower cost HSAs. And then 

you pull them out of the larger risk pool, and then what is left are 

the people that are more sick, and as a result of that, premiums 

rise for every one else. Is that what you are saying? 

Mr. LOPATIN. We have already seen it in the risk segmentation 

that has gone on because of new moves to consumer-driven plans. 

Mr. GAMMARINO. On the private sector, there are other large employers that are pretty much doing the same thing that OPM is, 

meaning they have a cafeteria of products. They are introducing 

this newer product as one of many choices, and the uptake is—it 

can vary depending upon how the employer decides to incent this. 

But, bottom line there is always that issue of new product introductions and cascading of poorer risk relative to better risk. It is something that we, the Blues, have seen over our 40 years. It is not necessarily only focused on this particular product. You can have this 

evidence in other products as well. 

Senator VOINOVICH. To what do you attribute the lower rate of 

increase in premiums? Well, let’s put it this way: Taking our Federal program and comparing it with lots of other programs in the 

country, why is it that our premiums have stayed pretty competitive compared to, say, some of the other places? 

Mr. GAMMARINO. That is a great question, because it is something that we are very sensitive to, and I think we are very proud 

to be part of what I would call a great competitive choice model 

that is probably the most effective that is out there in terms of allowing a competitive environment to drive the best value for the 

members. And it is not just price. It is also what we provide that 

makes, what we think, this program very valuable to Federal employees and retirees. 

Senator VOINOVICH. Is the coverage available under this program 

pretty much the same as what it is around the country? 

Mr. GAMMARINO. Relatively to large employers, yes. It is a very 

comprehensive program, but it is similar to any of what I would 

call the Fortune 500 relative to the comprehensive set of benefits. 

Senator VOINOVICH. So the thing is you cover 8 million people 

and have various providers competing for their business. And as a 

24

result of that, competition providers are required to offer good coverage and lower costs to keep the folks that you have. 

Mr. GAMMARINO. Right. What does distinguish the FEHB Program is—there was some concern on the other panel that there was 

a large number of health plans and does that hurt. We think it 

helps. We actually think the large choice and then the only way 

you can succeed long term in this program is to be very focused on 

this population, be very sensitive to the needs, and provide a price 

point that is reasonable with a set of benefits. And if you cannot 

do that, you will not last long in this program. 

It is something unique, something that I think other people 

should certainly try to emulate. It works. 

Senator VOINOVICH. Of the people in the program, how many of 

them are retirees? 

Mr. GAMMARINO. In our program, 47 percent are retirees. In the 

entirety of the FEHB Program, I believe it is 46.1 percent are retirees, so that is a very large percentage. 

Senator VOINOVICH. I asked the question of the Advantage program. Do you see people moving more toward Advantage or are 

they pretty well staying with what they have? 

Mr. GAMMARINO. I have not seen any significant movement. Most 

of our members are long-term members. They are going to need a 

significant reason to leave our program, and given our value proposition, that does not occur very frequently. 

Senator VOINOVICH. Mr. Lopatin, in terms of retirees, if you compare the cost of health care by retirees with, say, a large system 

like California, what is the participation and the percentage that 

the retiree contributes to the plan? 

Mr. LOPATIN. In CalPERS? 

Senator VOINOVICH. Yes. 

Mr. LOPATIN. I do not know offhand. 

Senator VOINOVICH. In other words, the percentage that our retirees contribute is about 28 percent. Is that basically——

Mr. LOPATIN. On average, yes, under the fair share formula. But 

we find that retirees and enrollees are having a larger premium increase because of the weighted average as more folk move to lowercost plans. This is true because of the way the Federal Government 

contributes—putting in 72 percent of the cost of health insurance 

in the aggregate. As you move to lower-cost plans, that aggregate 

number becomes lower and shifts those costs especially to retirees 

who do not move from the plan. 

Senator VOINOVICH. But nationally that is what is happening? 

Mr. LOPATIN. Correct. 

Senator VOINOVICH. I am familiar with some of the public retirement systems, and they are all feeling the pinch of it and they are 

raising the costs to their retirees because that is what they have 

to do. 

Mr. LOPATIN. We are more concerned with keeping the FEHB 

Program healthy because it has been successful for almost five decades. 

Senator VOINOVICH. And the people in the program, one of the 

things that I think that is an attractive aspect of the Federal program is the fact that if you are in it, once you retire you can continue to remain in the program; whereas, some other retirement 

25

systems, particularly now we are seeing in the private sector, they 

are whacking them out, and they are without——

Mr. LOPATIN. And I myself personally am a deferred annuitant 

and do not have access to the FEHB Program. I will talk to your 

staff about how we might be able to remedy that in time. [Laughter.] 

But, when the day comes, I hope to come back and work for the 

Federal Government and finish out my retirement and go out as 

an immediate annuitant, a benefit that I sorely miss. 

Senator VOINOVICH. That is a big deal, isn’t it? 

Mr. LOPATIN. Huge. 

Senator VOINOVICH. Yes. 

Mr. LOPATIN. Because what I buy in a Blue Cross plan on the 

private market is not nearly as generous as what you get through 

the Federal Government plan. 

Senator VOINOVICH. Yes. Well, I know that you are promoting 

the concept that they should be able to pay for it with pre-tax dollars. But I have to say to you that if we did that for Federal retirees, you know very well that everybody else would be then asking 

for——

Mr. LOPATIN. We are happy to endorse your legislation opening 

it to everybody else. [Laughter.] 

Senator VOINOVICH. Well, to be candid with you, it butts up 

against this whole issue of entitlements and where we are going as 

a country in terms of dealing with it, though I understand that you 

have a reason to be promoting it. 

But I would say, Mr. Chairman, that overall, God bless the 

FEHB Program. It is one of the great benefits of people who work 

for the Federal Government. Thank you. 

Chairman AKAKA. Well, thank you very much, Senator Voinovich. Let me conclude before we adjourn. As a provider, Mr. 

Gammarino, you are the gatekeeper for employees, retirees, and 

their families’ access to health care. This care is important for all 

enrollees, but, in particular, to families with children and also the 

retired. 

How can you improve the customer service for those in your 

plan? 

Mr. GAMMARINO. Well, we are working at it every day, Senator. 

I would like to talk a little bit about what we are doing to try to 

work with employees to provide even greater value, which I know 

you strongly support. With an aging population, one of the things 

that we are focused on is providing services to enrollees. We have 

various patient advocate programs today that actually reach out to 

members. We have a very rich database. We can pinpoint people 

that may need some help navigating the health care system, and 

we focus on that today to try to reach out and, through a voluntary 

approach, allow people to help provide that gatekeeper approach 

for members as they navigate this system and get the care they 

need and make sure that we maintain an affordable product. 

So we are working at that day in and day out, from just general 

customer service, now we are entering a new phase of what I would 

call this patient advocate, where we are reaching out to members, 

providing the service they need to get better health care. 

26

Chairman AKAKA. Mr. Lopatin, from your perspective, what do 

you think carriers can do to be more customer friendly to the participants and their programs? 

Mr. LOPATIN. To the extent they can have efficient customer 

service phones that get answered, reasonableness in reviewing accounts and claims, and a consumer-friendly and a health-friendly 

workplace so that we can maintain not only the relationship that 

we have with doctors but with our health plans. NARFE members 

are very satisfied with the plans that they have. We would hope 

that the best thing that most of these plans could do is keep up 

the good work. Certainly the lion’s share of our members are Blue 

Cross members as well, and we continue to hope and pray that we 

will have that service there year in, year out. 

Chairman AKAKA. Well, thank you very much, both of you, for 

your testimony and your responses. 

The hearing record will remain open for 1 week from today for 

Members of this Subcommittee to submit additional statements or 

questions. 

You have been very helpful to this Subcommittee, and I just 

want you to know that we are doing this to try to find better ways 

of providing the best service to our people. 

So, with that, I want to thank you very much. The hearing is adjourned. 

[Whereupon, at 12:02 p.m., the Subcommittee was adjourned.] 

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