16

and Blue Shield system take very seriously and to which we devote extensive effort and
energies.

Like major private-sector health plans, the Government-wide Service Benefit Plan is
experiencing an increase in our health care trends. The cost of providing prescription
drugs is by far the fastest growing component of the increase. We are now at a point
where prescription drug costs are approaching 30 percent of total benefit costs in the
Service Benefit Plan and are increasing at a rate that can fairly be described as
alarming.

Of course, much of our drug cost is understandable and justified, given the large
number of older people in our Plan. The average age of Standard Option enrollee’s is
60; in High Option the average age is 70. And, new drugs have revolutionized health
care and made dramatic improvements in the quality of care. In many instances,
prescription drugs have become effective alternatives to hospital admissions and
surgery. At the same time, we know that we cannot permit our prescription drug costs
to rise unabated. Just as we have to look continually for new ways to keep all benefit
costs under control, the cost of providing prescription drugs presents a particular
challenge. As we seek more sophisticated tools to control these costs, we also will be
forced to rely on existing techniques, such as benefit designs. Actually, greater
flexibility in benefit design is an area offering near-term promise and is an area of
continuing discussion between Blue Cross and Blue Shield and the Office of Personnel
Management.

General Perspective on the FEHBP

The FEHBP is the largest employer-sponsored health care program in the world. Most
observers agree that the program has been extremely successful in delivering
affordable and high quality health care coverage to millions of federal employees and
their dependents for almost forty years.

We strongly believe that the FEHBP's success is due primarily to the critical and
delicate— balancing of the roles of the Government, the participating carriers and other
entities in the health care industry, and the all-important enrollees.

These roles, in brief, have the following attributes:

Page 3 of 5


37

them tell you what’s wrong with the drug, with all the precautions
and things. So you’re saying with that kind of advertising, the pa-
tient goes in and says, “Doc, they just said there’s something for
hair loss, and I heard about it. I’ve been hearing it over and over
again. Prescribe that.”

That’s the kind of person you're talking about?

Mr. GAMMARINO. Yes. It’s unrelenting pressure. I mean, they’re
getting it from the drug companies and they're getting it from the
consumer about the value-added of a particular drug.

Then you couple that with—you know, to this day, it’s relatively
low cost sharing. The consumer wants it and they’re willing to pay
that low copay. They're not really tasked with the cost of that drug,
which could be quite hi; igh.

Mr. CUMMINGS. My last question. You know, when you look at
a drug like Viagra—and I understand what insurance companies
are doing with regard to that—but I think Viagra put a spotlight
on the issue of drugs which might be making life more enjoyable.
A lot of people look at Viagra, but I’m sure there are many other
drugs out there that have nothing to do with sex but just make
people’s lives better and is not necessarily dealing with a particular
ailment.

Is that a part of the problem, too? I’m just curious. I mean, drugs
that don’t fall under that category, where you can say we're not
going to pay for them, but I assume there are many other drugs,
too, that are life enhancing and making people feel better, what
have you. Is that a part of the problem, do you think?

Mr. GAMMARINO. For us, Viagra is not a problem, because we
have an exclusion. But it certainly would have been’a significant
problem. It is an issue of what you call the life enhancement qual-
ity drugs. Consumers want them. If they are covered by a plan,
you're going to have high utilization.

I think companies like ours are going to have to make choices,
because where are you going to put that bucket of money? Is it
evenly spread between life enhancements and those drugs that ac-
tually cure life-threatening diseases? You know, if we have to make
those choices; I know we're going to put it in the bucket with life-
threatening diseases and chronic ailments. We'll probably carve
out—we may be carving out what are called life-enhancement
drugs from coverage.

Mr. CUMMINGS. Thank you very much.

Mr. Mica. I thank the gentleman.

The gentlelady from Maryland, Mrs. Morella, is recognized.

Mrs. MoRELLA. Thank you, Mr. Chairman.

Speaking of life-enhancement. drugs, we passed on the floor of
the House, and now passed in our appropriations bill, the concept
of gender equity in prescriptions, which means contraceptives. Tm
wondering, is this going to have any kind of a cost impact on pre-
miums?

Mr. GAMMARINO. For Blue Cross Blue Shield, it’s nominal. We
have been gender equal for years. We have been paying for contra-
ceptives, for example. It’s already built into our premiums.

rs. MORELLA. You have been, all kinds, right. I don’t know
whether or not Mr. Latanich wanted to comment on that, or as we
expand, what we’re asking to have covered in terms of drugs.


33

cause I do have to pay a portion of it.” That type of dialog doesn’t
have to occur

Mr. Mica. I understand there is also some controversy relating
to the cost accounting standards language. Will Blue Cross sign the
1999 contract if it contains the cost accounting standards lan-
guage?

Mr. GAMMARINO. We have told the agency that we cannot sign
a 1999 contract with the clause they had in 1998. We are looking
for what we think is fair relief in that area for us to continue par-
ticipation in the program. Hopefully we’re working with both the
agency and the CAS Board to get that relief. If that relief isn’t com-
ing there, we do need congressional support in legislation to help
us in that arena.

Mr. Mica. And if it doesn’t work out, we'll just lose the carrier
that provides coverage for 40 percent of our covered population?

Mr. GAMMARINO. If it doesn’t work out, as I told the agency, we
have 56 independent companies that make up the Blue Cross Blue
Shield system, and they'll each make independent decisions, very
much like some of the HMO’s made them this year.

Mr. Mica. I have additional questions, but I want to give at least
5 minutes to start with to the ranking member for questions. I be-
lieve they’ve called a vote on us, so go ahead, sir.

Mr. CUMMINGS. I was just listening to your testimony and I was
trying to figure out—we have savings by using prescriptions be-
cause we reduce our hospital stays, I take it, and we also save on
perhaps a lot of procedures. But I guess the factor that kicks in,
you would think that as one goes up, the other ought to be coming
down. I guess what happens is, it’s because the aging population
keeps the hospitalizations and whatever going up.

Is that a fair—it just seems like one is saving so one would be
coming down.

Mr. GAMMARINO. That’s the argument that the drug manufactur-
ers put on the table. The bottom line is, if that was a true 1-to-
1 savings, you wouldn’t be seeing the increases we're having today.
The fact of the matter is there is not a clear offset in the enhanced
drugs that are out there versus the reduced hospitalization and
maybe other types of services.

Mr. CuMMINGS. In other words, you’re saying you don’t see that,
that you don’t necessarily agree with that?

Mr. GAMMARINO. No. Certainly there are individual drugs man-
aging individual medical situations that do benefit in that area.
But across the board, no, that’s not the case.

Mr. Cummines. Let’s talk about generics. You make generics
also, is that correct?

Mr. LATANICH. We ensure that they are widely used within the
program. We don’t make generics.

Mr. CumMINGS. I’m sorry. Say again. I didn’t hear you.

Mr. LATANICH. What we do is we encourage within our own phar-
macies and plans other than FEHBP, we administer both mail and
retail—we encourage, to the maximum extent possible, the use of
generics.

Mr. CumMinGs. You know, there was some controversy not too
long ago where there was a question as to whether generics were
as effective as the originals. Are we beyond that now?


42

FDA policy certainly has an impact on drug costs. On June 30,
I wrote to OPM to ask them about a proposed guidance published
by the FDA in January on product promotion by managed care or-
ganizations. I understand that your organizations, along with the
Blue Cross and Blue Shield Association, NARFE, and several
FEHB carriers, have expressed strong concerns with that draft.

In a letter to me of August 5, Director of OPM Lachance stated
her view, “We do not see how guidance, as drafted, could possibly
adversely affect the FEHB, as long as our plans and their phar-
macy benefit managers act responsibly.”

Mr. Latanich, do you agree with OPM’s, and if not——

Mr. LATANICH. No; not at all.

Mr. Mica. Why not?

Mr. LaTANICH. The FDA’s draft guidance essentially said, or
could be read—and it was very ambiguous—but it essentially said
that, if you accept rebates or discounts from a manufacturer, we’re
going to treat you as a manufacturer, and what manufacturers can
say about their Products is very, very limited, generally to the la-
beling that the FDA has approved.

In general medical practice, the best medical practice standards
are very different than what’s been approved by the FDA. For ex-
ample, if a best medical practice standard says, after you have a
heart attack, add a drug out of this class, a manufacturer can’t say
that because their drug is a specific drug and doesn’t have what
is called a class effect. Every one is slightly different.

But as a pharmacy benefit manager working with a plan like Mr.
Gammarino’s, we would try to educate doctors about the best way
to treat people, the best way to manage their health conditions.
But most of what we say would be outside of what a manufacturer
would be allowed to say by the Food and Drug Administration. So
you're faced with a very difficult choice if you’re a health plan: ei-
ther stop telling your physicians and your patients how to best
manage their medical care, or give up the rebates and discounts
you're receiving from the manufacturers.

Because essentially what the FDA is saying is that, by accepting
these dollars for rebates—which we would argue are being nego-
tiated by you because you have leverage over them, not leverage
over you—that if you accept those rebates, you’re acting on their
behalf. So I would disagree very significantly. I think the plans are
seriously at risk of losing their rebates if that FDA guidance is
adopted.

Mr. Mica. Speaking of rebates, are the discounts and rebates you
receive from drug companies passed on to FEHBP plans and their
subscribers?

Mr. LaTANICH. Yes. They show up in our pricing and they show
up in rebate guarantees. They show up in—virtually all rebates are
passed through.

Mr. Mica. A couple of quick final questions for Mr. Gammarino.

What do you believe is the single most important thing Congress
could do to ensure that FEHBP remains affordable for our Federal
employees and retirees?

ir. GAMMARINO. Promote competition, have a healthy, individual
choice market that allows a number of competitors to compete and
allows them to deliver products that they think are necessary for


10

OPENING STATEMENT OF THE
HONORABLE ELIJAH E. CUMMINGS

RANKING MEMBER
SUBCOMMITTEE ON CIVIL SERVICE
HEARING ON
“FEHB Premium Increases for 1999”

Thursday, September 24, 1998

Mr. Chairman, thank you for holding this hearing at my request.
As one can surmise from the debate on health care reform, health
insurance is a necessity for a healthy and productive life, but many
Americans either don’t have access to it or can’t afford it.

This is the third hearing being held in the last year on Federal
Employee Health Benefit Program (FEHBP) premiums. The first
hearing was held in September of last year when OPM announced a
8.5% increase in 1998 premium costs. The second hearing was held in
March of this year when Chairman Mica called a hearing to examine

what impact the President’s Patients’ Bill of Rights would have on 1999


10

HMO may not request additional payments from its contingency reserve to recover losses due
to an under-estimation of the rates.

The FEHB rating package for HMOs requires the plan to complete an extensive questionnaire
which asks for detailed documentation of the proposed community rates.

If an HMO uses traditional community rating or community rating by class, the main concern
for OPM actuaries is that the FEHB Program receives a rate equivalent to the rates the plan
charges other groups who contract with the plan. Each HMO must provide written certification
that this is the case. Further, HMOs with more than 1500 FEHB enrollees must include, as
part of their rate proposal, detailed documentation for how it derives rates for the two groups it
contracts with that are closest in size to the plan’s FEHB group. These two groups are known
as "similarly sized subscriber groups" (SSSGs). OPM actuaries carefully analyze the rate
derivations of the SSSGs for conceptual soundness and technical accuracy. The OPM audit
staff subsequently verifies all SSSG data HMOs submit.

An HMO using the complex adjusted community rating methodology must also submit detailed
documentation of its rate derivation. The HMO must indicate the experience period it used to
derive the FEHB group rates and show precisely how the proposed rate follows from the stated
experience. OPM actuaries scrutinize all assumptions and calculations.

‘The FEHB rate package also requires each HMO to provide details on rate loadings for any
additional benefits (above and beyond the plan's community benefit package for other groups)
that OPM requires the plan to offer FEHB enrollees, such as, including dependent children as
family members to age 22. Finally, all HMOs must compute rate loadings to account for the
fact that the FEHB Program offers Medicare-cligible retirees the same health plans as other
enrollees. Each HMO coordinates its benefits with Medicare benefits in cases of retired FEHB
enrollees with Medicare eligibility and must include adjustments to the community rates, if
appropriate. The Office of Actuaries analyzes all rate loadings for accuracy and conceptual
soundness.

‘The purpose of the FEHB contingency reserve for a community rated HMO is to enable OPM
to mitigate rate fluctuations for FEHB enrollees. If a plan's contingency reserve exceeds the
preferred minimum balance, OPM may make the reserve available to pay any amounts owed
the plan for any reason (e.g., to cover Variations from expected community rates for the plan's
other group contracts that occur subsequent to FEHB negotiations, to comply with audit
findings in the plan's favor). Access to the FEHB contingency reserve for the HMO avoids
increases in the plan's FEHB premium rate to cover prior payment deficiencies.


52

DISCOUNTS ARE DIFFICULT TO OBTAIN AND HAVE LESS IMPACT ON RISING

MEDICAL COSTS.

NATIONALLY, TECHNOLOGICAL ADVANCEMENTS ARE DRIVING COSTS

HIGHER. THE FEHB PROGRAM IS STRUCTURED TO ALLOW BENEFITS TO
EVOLVE IN RESPONSE TO MEDICAL PRACTICE SO THAT PROGRAM
PARTICIPANTS ARE ASSURED ACCESS TO QUALITY AND UP TO DATE HEALTH

SERVICES.

NATIONALLY. AN AGING POPULATION IS PUTTING EVER MORE PRESSURE ON
THE HEALTH CARE DELIVERY SYSTEM. THE AVERAGE AGE FOR ENROLLEES
IN THE FEDERAL EMPLOYEE PROGRAM (EXCLUDING DEPENDENTS) HAS

INCREASED FROM 56.18 IN 1996 TO 57.08 IN 1998

FINALLY, THE WYATT SURVEY IDENTIFIED PRESCRIPTION DRUG BENEFITS AS
A MAJOR COST DRIVER. LARGELY DUE TO USAGE AND MANY NEW AND.
EXPENSIVE DRUGS COMING TO MARKET. FOR 1999, IT PREDICTED
PRESCRIPTION DRUG INCREASES OF UP TO 22 PERCENT. THE MOST RECENT
FEHB EXPERIENCE IS 17 PERCENT, WITH ABOUT 20 PERCENT OF TOTAL FEHB

PREMIUMS EXPENDED FOR DRUG BENEFITS.

SUBSEQUENT TO THE INVITATION TO TODAY'S HEARING, THE CHAIR ASKED

Se


$5.02 THE PREVIOUS YEAR).

THE COMBARATIVELY LARGER INCREASE IN GOVERNMENT CONTRIBUTIONS
WILL BE A ONE-TIME OCCURRENCE CAUSED BY THE MOVE FROM THE BiG-6 TO
THE FAIR SHARE FORMULA. IN FUTURE YEARS, WE EXPECT RATES OF
CHANGE IN AVERAGE CONTRIBUTIONS FOR BOTH THE GOVERNMENT AND THE
ENROLLEES TO CLOSELY APPROXIMATE THE RATES OF CHANGE IN THE

OVERALL PROGRAM

IT [S IMPORTANT TO NOTE THAT OPM’S PROJECTION OF AVERAGE PREMIUM.
COSTS AT THE CONCLUSION OF CONTRACT NEGOTIATIONS ASSUMES THAT
ENROLLEES WILL STAY IN THEIR PRESENT HEALTH PLANS DURING THE
UPCOMING YEAR. BUT. ALL ELIGIBLE PARTICIPANTS HAVE THE OPTION OF
CHANGING HEALTH PLANS DURING THE ANNUAL OPEN ENROLLMENT PERIOD-
-WHICH IN 1998 WILL RUN FROM NOVEMBER 9 TO DECEMBER 14. CHOICE
AMONG A WIDE VARIETY OF HIGH QUALITY HEALTH COVERAGE, AND
CAREFULLY DESIGNED MATERIALS THAT HELP ENROLLEES COMPARE HEALTH
PLANS AND SELECT AN AFFORDABLE PLAN TO MEET THEIR NEEDS, ARE
HALLMARK FEATURES OF THE FEDERAL EMPLOYEES HEALTH BENEFITS
PROGRAM. AS A RESULT OF THE OPEN SEASON PROCESS FUNCTIONING AS
INTENDED, THE ACTUAL 1998 AVERAGE INCREASE IN INDIVIDUAL ENROLLEE

COSTS WAS 12.5 PERCENT, CONSIDERABLY LOWER THAN THE PROJECTED



56

WHILE ANY INCREASE IN COSTS IS ALWAYS A CONCERN FOR US, OPM.
BELIEVES THAT THIS YEAR'S AVERAGE INCREASE WILL LIKELY BE LOWER
THAT THE;AVERAGE INCREASE IN PRIVATE SECTOR EMPLOYER PROGRAMS. AS
HAS BEEN THE CASE FOR MOST OF THIS DECADE. OUR PROGRAM IS A
RECOGNIZED LEADER IN THE PROVISION OF QUALITY, AFFORDABLE HEALTH

CARE AND OPM IS COMMITTED TO MAINTAINING THAT POSITION,

OPM WILL CONTINUE TO LOOK FOR WAYS TO MODERATE COST INCREASES,
WHILE CONTINUING TO MONITOR THE QUALITY OF CARE DELIVERED TO
FEDERAL ENROLLEES. LIKE OTHER LARGE EMPLOYERS, WE BELIEVE THAT
STRATEGIES THAT PROMOTE VALUE-BASED PURCHASING CAN ACHIEVE THESE
RESULTS, WE WILL BE EXAMINING APPROACHES THAT HAVE BEEN USED
EFFECTIVELY BY OTHERS IN THE PURCHASER COMMUNITY TO SEE IF AND HOW

THEY MIGHT BE APPLIED IN THE FEHB PROGRAM.

I WILL BE HAPPY TO ANSWER ANY QUESTIONS YOU HAVE AT THIS TIME.



60

break on their share of the premium if they join up with those
health plans. That’s one idea, one example of the types of things
that can be done.

A second thing that can be done was referred to, in general, by
Mr. Latanich, having to do with limiting choices. Limiting choices
can come about in a number of ways. In this program, we have al-
most 300 plans. Last year, we had 350. Plans come into this pro-
gram on the basis of being able to meet certain financial, licensing,
and other kinds of requirements.

We could impose other types of requirements, such as minimum
standards of performance, minimum levels of health care quality
outcomes, and by limiting plan participation, create larger insured
Populations. Where the expense of health care is spread over a
larger population, you can have some moderation in costs.

Another area has to do with carving out benefits. We have talked
a lot this morning about prescription drug benefits. Prescription
drug benefits, believe me, are a great concern to us. It may be that
instead of having 285 prescription drug benefits programs in the
Federal Employees Health Benefits Program, we ought to have one.
And it may be we ought to have one pharmacy benefit manager
and use the purchasing power collectively of almost 9 million peo-
ple to keep costs under control. That’s one example.

Another example of where carve outs might be effective is in
mental health.

Finally, things that others have talked about have to do with
standardizing benefits, so that people make cost decisions from one
plan to another on the basis of exactly equal benefits.

Now, each one of those suggestions, Mr. Chairman, deals with
some important conceptual underpinnings of the Federal Employ-
ees Health Benefits Program that have served it well over its his-
tory. But if we are concerned about increases in the cost of care,
then I do believe that the integration of a focus on quality health
care outcomes and some of these other ideas is, in fact, necessary
today to see if there’s not a way to move this to a higher level and
continue to provide quality care at an affordable price.

Mr. Mica. Well, I guess that was a pretty long answer. I guess
we have to get back to the specific questions. The testimony that
we've had here today has called for more flexibility, less regulation,
and more choices, and you're saying less choices and more regula-
tion will solve the problem, is that it?

Mr. FLYNN. No, sir; I’m not saying that at all. In fact, the panel
before me suggested that one of the ways to deal with this was less
choice. I was simply saying that, from the standpoint of plans and
their participation in the program, I was essentially agreeing with
the point that they made. That limiting plan participation is one
way of looking at controlling costs in the program.

I'm not here espousing that. I’m saying there is a range of things
that we need to look at if we want to hold level or slow down the
rate of increase in this program.

Mr. Mica. We have an immediate crisis facing us. The largest
carrier, the Blue Cross folks, it doesn’t appear that they intend to
sign a contract with the current cost accounting standards lan-
guage that is being required by OPM.

What's going to happen there? Why is this so important?


48

STATEMENT OF
WILLIAM E. FLYNN, III
ASSOCIATE DIRECTOR FOR RETIREMENT AND INSURANCE
U.S. OFFICE OF PERSONNEL MANAGEMENT
at an oversight hearing of the
SUBCOMMITTEE ON CIVIL SERVICE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES
on

FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM
1999 PREMIUM RATES.

SEPTEMBER 24, 1998

MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE:

THANK YOU FOR THIS OPPORTUNITY TO DISCUSS THE RESULTS OF OPM’S
RECENTLY CONCLUDED NEGOTIATIONS ON 1999 BENEFITS AND RATES UNDER
THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM. AS YOU KNOW, 1999
WILL BE THE PROGRAM'S FIRST YEAR USING THE NEW GOVERNMENT
CONTRIBUTION FORMULA. WHICH CONGRESS APPROVED AS A PART OF THE

BALANCED BUDGET ACT OF 1997.

THE SIGNIFICANT NEWS FOR FEDERAL EMPLOYEES AND RETIREES IS THAT
THE PROJECTED INCREASE IN THE ENROLLEE SHARE OF HEALTH PLAN
PREMIUMS FOR 1999 IS ABOUT ONE-HALF OF THE 1998 RATE INCREASE THAT

OPM ANNOUNCED LAST FALL. WHILE PREMIUM RATES FOR THE FEDERAL


20

apy. Utilization of many drugs translates into better health out-
comes, improved quality of life, and in some instances, cost savings
to the plan in the form of reductions in other medical expenditures,
such as doctor visits and hospitalizations.

If you look back just a very short period of time, there were no
cures and there were no treatments for ailments like HIV and
AIDS. There are a number of conditions where breakthrough drugs
have, in fact, done a remarkable job in improving the quality of life
and productivity.

Chart 2, which I think is also really critical, shows that utiliza-
tion is occurring at all ages across the age spectrum. While these
data are not FEHBP specific, they are representative of our experi-
ence with the FEHBP. If you look at chart 2, what you see—and
we have provided you with really 3 years’ worth of data, with the
1998 data for a half-year extrapolated. But what you're seeing is,
year by year, a person of the same age is using more medicine, and
generally a function of more and better drugs available to treat
conditions that previously did not have a medicine to treat them.

The mix of prescribed medicines is also changing in a way that
increases costs. The introduction of new breakthrough drugs can
have a substantial impact on the total cost of pharmaceutical bene-
fits. One example is the introduction of a new, very effective medi-
cine for migraines. Prior to the availability of this new medicine,
the average daily cost of medicines to treat migraines was about
$3.40. The new product, which shortens the duration and dramati-
cally mitigates the intensity of migraines, costs $14 per day. We es-
timate that the current impact of the changing drug mix adds
about 3 to 4 percent per year on the cost of pharmaceutical bene-

its.

The third principal factor in increases in the cost of the pharma-
ceutical benefit are increases in the price of pharmaceuticals them-
selves. Prescription drug price inflation has been relatively modest
in recent years. According to the Bureau of Labor Statistics, drug
price inflation in 1997 was about 2.5 percent. So if you look at the
overall numbers in terms of what’s driving that 15, 18, 20 percent
increase, it’s really being driven by utilization and new break-
through drug therapies that are available to people to improve
their medical condition and quality of life.

We continue to work with FEHBP plans to control the cost of
pharmaceutical benefits. In fact, FEHBP plans, including the Blue
Cross plan that Steve mentioned, which we serve, have been
among the leaders in adopting new, innovative programs in health
management that work with patients and physicians to improve
health outcomes, while reducing costs.

We are pleased that the GAO, in its February 1997 report to this
committee, cited the benefits of the activities of Merck-Medco and
some of our competitors in controlling cost in the pharmaceutical
benefit. That report cited savings of 25 to 27 percent in pharma-
ceutical costs as a result of the innovative programs that we use.
So, absent those techniques, the trends that you’re seeing would be
even higher.

Among the most important techniques that we employ to control
costs are aggressive use of generic substitution, the use of
formularies, drug utilization review, the use of mail service phar-


38

Mr. LaTANIcu. I think that, generally speaking, the plans that
we deal with are uncomfortable with mandates, because it elimi-
nates their ability to control what’s being used.

Congressman Cummings pointed out that there are life-enhanc-
ing drugs, there are life-saving drugs. Unfortunately, it’s not usu-
ally that stark. One of the issues that most faces women today is
that they are underdiagnosed for coronary disease. As you look at
some of the different treatments—and I'll use hypertension as an
example—the data showed that after 1 year, only 30 percent of the
people who were taking hypertension medication are still compli-
ant.

One of the major reasons is that those drugs often have side ef-
fects. So, if you have a new drug that comes out and is more expen-
sive, but it eliminates some of those side effects, and encourages
compliance, is that something which is life enhancing because it
eliminates a side effect? Or is it something which is medically nec-
essary in order to eliminate or help the medical condition?

I think what the plans face, and what Mr. Gammarino’s plans
face, all of them, is that they are all gray decisions, so they are
very, very difficult. There is no magic bullet to control drug utiliza-
tion or drug cost. You really have to look at every drug, at every
class of drugs, and have a strategy that says what is my strategy
in this class to control the use of drugs.

To your earlier question, Congressman Cummings, I think that
patients have come to expect that the closing act with the physi-
cian is going to be the prescription. If you go to somebody and say
to them what you need to do is eat less and exercise, the patient’s
reaction is “I didn’t need to spend $70 to come in and have some-
body tell me to lose weight and exercise.” So I think there is a
mindset that says that I, as a doctor, need to do that, but that’s
coupled with the fact that usually the drug will have a benefit. I
mean, it is going to help that patient, and therein lies the dif-
ficulty.

Mrs. MoRELLA. There’s no doubt that these are difficult choices.
I think they change with time. The more you learn, the more you
know how they can save money in the long run, et cetera. So there
is this evolving situation.

I think the gender equity concept that we passed is a good one.
I think it’s valid, and I don’t think that’s what you’re responding
to in terms of the differences.

But as one general question, since so many have been asked, my
NARFE members, the National Association of Retired Federal Em-
plovees, and my other Federal employee at NIH and NIST, say
“Why are these costs going up? You had a hearing. What did you
learn from the hearing?”

Now, of course, Mr. Flynn is going to succeed you, and we'll have
a series of questions for him. But I guess it’s, “You're older, and
you're getting older, and you're using more prescriptions, using
more medicine. I don’t see any end to it.” Is that what I say to
them, about why that increase is higher than it is with other

ups?

Mr. GAMMARINO. Today that’s the answer. Is it the answer for to-
morrow? You know, I hope not. But there are a number of avenues
that we hope will be taken.


Projection of Future B: .

Based on trend projections for both the particular plan and for the FEHB Program as a whole,
and the other factors which would affect claims experience such as proposed benefit changes
and enrollment characteristics, the OPM actuaries project each plan’s claims for the upcoming
year (the year for which rates are being set). ‘The actuaries scrutinize the plan’s proposed
Premium rates to determine if they satisfy the requirements for adequate funding of benefits
and OPM reserve targets.

‘The actuaries also evaluate the plan's rate proposal in relation to past premiums and anticipated
future premium requirements, to ensure that the plan’s premiums will be reasonably stable,
represent good value for the benefits provided, and remain competitive with other FEHB
plans. To achieve these multiple goals sometimes requires OPM actuaries to work closely
with the plan to reach consensus on what additional actions are necessary. This may be as
simple as an adjustment to the proposed premium, but may involve additional measures such
as benefit changes, cost saving measures, or insurance arrangements.

OPM's actuaries continue discussions with the plans throughout the summer, until negotiations
on rates and benefits are finalized by the middle of August. This deadline is essential to allow
sufficient time for the printing of brochures and the dissemination of other informational
‘material so that enrollees may make an informed decision when choosing a health plan during
the open season.

Community Rated Health Plans

The majority of FEHB plans are HMO plans and use community rating. OPM accepts three
different types of community rating. The first is "traditional community rating” which
requires the HMO to charge the FEHB group rates that are essentially the same as rates it
charges all other groups the plan does business with.

‘The second community rating method is "community rating by class" which allows a bit more
flexibility than traditional community rating. Specifically, under community rating by class,
the rate the HMO charges the FEHB group (and all of the plan's other groups) may be
adjusted on the age-sex composition of the group.

The third community rating method is "adjusted community rating” which allows the HMO to
base the FEHB group rate on the actual experience of the group. This method differs from the
type of experience rating OPM uses for its "experience rated" plans in that it is a prospective
rating method. ‘That is to say, although the HMO may use the experience of the FEHB group
to set rates, once rates are set for a year, there is will be no retrospective adjustments. The

3


FEHBP PREMIUM INCREASES FOR 1999

THURSDAY, SEPTEMBER 24, 1998

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room
2203, Rayburn House Office Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.
ne resent: Representatives Mica, Pappas, Morella, Cummings, and

orton.

Staff present: George Nesterczuk, staff director; Garry Ewing,
counsel; Edward J. Lynch, senior research director; Jeffrey Shea,
professional staff member; John Cardarelli, clerk; and Tania
Shand, minority professional staff member.

Mr. Mica. Good morning. I would like to call this meeting of the
House Subcommittee on the Civil Service to order.

This morning’s hearing relates to the Federal Employees Health
Benefits Program premium increases for 1999. I am pleased to con-
duct this hearing this morning, at the bipartisan request of Mrs.
Morella, the gentlelady from Maryland, and also Mr. Cummings
our ranking member, also from Maryland.

We expect, in just a few minutes, most of our subcommittee
members on the minority side. They have been down at the White
House and should return shortly. But, with their consent, we are
going to proceed. I will start with an opening statement, as usual,
and then will defer to other Members. Hopefully they will join us
as we begin, for the sake of saving time and moving forward with
the hearing.

This morning we have scheduled this hearing to examine the
causes of increases in next year’s health care premiums in the Fed-
eral Employees Health Benefits Program. The Office of Personnel
Management announced on Friday, September 11, 1998, that
FEHBP premiums will increase by an average of 10.2 percent for
1999,

This, in fact, is the second straight year in which FEHBP pre-
miums have dramatically increased. As a result of these increases,
premiums in 1999, on average, will be about 20 percent higher
than in 1997. These steep increases in health care premiums con-
front our Federal workers, and in fact, will devastate Federal retir-
ees who will, on average, see their COLA’s nearly wiped out by
these increases.

As I observed at last year’s hearing, however, averages mask
considerable differences among our various plans. For example, the

(ey)


12

Mr. Chairman and Members of the Subcommittee. The National Association of Chain Drug
Stores (NACDS) appreciates the opportunity to present testimony for the record regarding
prescription drug benefit programs under the Federal Employees Health Benefits Program
(FEHBP), and our perspectives on the recent announcement made by the Office of Personnel
Management (OPM) that that FEHBP premiums would increase on average by 10,2 percent next
year.

Founded in 1933 and based in Alexandria, Virginia, the National Association of Chain Drug Stores
(NACDS) membership consists of 135 retail chein community pharmacy companies. Collectively,
chain community pharmacy comprises the largest component of pharmacy practice with over
91,000 pharmacists. The chain community pharmacy industry is comprised of 19,000 traditional
chain drug stores, 6,300 supermarket pharmacies and neatly 5,000 mass merchant pharmacies, The
NACDS membership base operates more than 30,000 retail community pharmacies with anus!
sales totaling over $135 billion including prescription drugs, over-the-counter (OTC) medications
and health and beauty aids (HBA). Chain operated community retail pharmacica fill over 60% of
the more than 2.7 billion prescriptions dispensed annually in the United States. Additionally,
‘NACDS memborship includes more than 1,300 suppliers of goods and services to chain community
pharmacies. NACDS international membership has grown to include 86 members from 20 foreign
countries.

NACDS shares concerns expressed by you and Members of the Subcommittee regarding the
FEHBP premium increases for 1999, We are particularly concemed by the fact that a significant
portion of these premium increases is being driven by increases in the prescription drug benefit
component of the program. As you know, the agency attributed part of this premium increase to
22 percent rise in total prescription drug expenditures, which included increases in the price of
drugs, an increase in the use of drugs, and the costs of expensive new drugs. About one-fifth of
all total FEHBP expenditures are for prescription medication costs.

1996 COPAYMENT CHANGE HAD NEGATIVE IMPACT ON PROGRAM
EXPENDITURES, RETIREES, PHARMACIES

Under the FEHBP program, cach of the approximately 300 FEHBP plans is responsible for
providing their own prescription érug benefit program. Many of the plens contract with private-
sector pharmaccutical benefit management companies (known as PBMs) to arrange for the
delivery of a prescription drug benefit. These plans uso various cost containment mechanisms,
such as drug formularies, and negotiate discounts and rebates with drug manufacturers to reduce
overall costs, They also negotiate the dispensing fees that reteil pharmacies are paid by the PBM
to provide prescriptions and pharmacy services to FEHBP enrollees. There are no OPM
guidelines, however, on how these drug programs should be structured or how costs should be
controlled.

Testimony submitted to the Subcommittee on Civil Service
House Committee on Government Reform and Oversight
Prepared by the National Association of Chain Drug Stores
10/02/1998

Page 2


71

Mr. FLYNN. I think we can do that without any difficulty.

mts MorELLA. Is there any other comment you would like to
e?

Mr. FLYNN. I know you're ready to go, and I’m about to lose my
voice. So I appreciate very much the opportunity to be here.

Mrs. MoRELLA. We very much apprec reciate having you here. I’ve
often wondered if maybe we should have had the three of you to-
gether, as was originally planned, so that we could have had a

ack-and-forth kind of discussion. You are kind of spread out here,
so I apologize for that.

You've been great to be here. We look forward to continuing to
work with you as we have in the past, and thank all of you.

I will now adjourn the Subcommittee on the Civil Service. Thank
you very much.

Mr. FLYNN. Thank you.

{Whereupon, at 1:55 p.m., the subcommittee was adjourned.]

{Additional information submitted for the hearing record follows:]


14

However, appropriate and reasonable patient cost sharing helps to discourage unnecessary
utilization, which is as significant a problem to the health care system as is overutilization, and
helps to control overell costs. In short, in order to better control utilization and manage care, an
increasing number of public and private prescription drug benefit plans are implementing
reasonable cost sharing amounts, not climinating them. Waiving the mail order copayment
defies this logic and marketplace trends,

‘Data presented by Merck-Medco at the September 24" hearing demonstrate a significant
increase in utilization of prescription medications for the FEHBP retiree population since 1996,
the first year that the copayment was waived for retirees obtaining their prescriptions through the
mail, While it is not possible to conclude from these data that these increases resulted solely
from the copayment change, or that these increases in prescription drug utilization were
unnecessarily or medically unjustified, it can be reslistically concluded that the lack of a mail
service prescription copayment contributed to part of the significant utilization increases,
Moreover, to compare utilization patterns before and after the copayment was implemented,
Merck-Medco should have also presented pre-1996 utilization trend data for this retiree
population group, not just post-1996 data,

The concerns about the impact of this copayment change on out-of-pocket payments for retirees
obtaining their prescription druge at retail pharmacies Were confirmed in a letter that OPM sent
te Chairman Mica in April 1996, Ta tht loti, OFM sated at

bimeficiary copayments Only 37 percent resulted from use ofthe mailorder program. This
demonstrated that many retirees continued to opt to use local retail pharmacies rather than send
their prescriptions to a mail service provider. This copayment unfairly penslizes those retirees
who want fo use their local reteil pharmacy,

In the same April letter, OPM attributes these mail order savings to volume discounts thet plans
are able to negotiate with drag manufacturers and savings from using lower-cost generic
substitutes, Other reports issued by the GAO indicete that using mail order pharmacy services
may not generate any significant savings from increased efficiency.

Taken together, these data suggest that a disproportionste share of the cost containment burden
resulting from this copayment change has been placed on Federal retirees that use local retail
pharmacies and the pharmacies themselves, not drug manufacturers. This scems unfair, given
that drug manufacturer product costs ususlly represent about 75 percent of total drug program
spending. At this point, we are unsure about the exact nature and amount of savings being
realized by the use of this mail order prescription program.

Testimony submittad to the Subcommittes on Civil Service
‘House Committee on Government Reform and Oversight
Prepared by the National Association of Chain Drug Stores
10/02/1998
Pages


31

Mr. GAMMARINO. Primarily it is. Let me just give you our figures
in that arena.

Overall we’re seeing trends of about 7 or 8 percent. In other
areas, like hospitalization, the hospital cost, and physician out-
patient costs, we are seeing trends at or around the CPI, 2 to 4 per-
cent, with the hospital cost being the lowest of those two.

Clearly, absent the pharmacy cost increases, you would be seeing
rate increases in line with probably the medical CPI for our pro-
gram. It is clearly the compounding trends on the drugs that are
causing the type of increases that I think this committee is con-
cerned about, and we are concerned as well.

As Mr. Latanich just indicated, what is scary, the trend lines
aren’t getting any better, with these new drugs coming on the mar-
ket. As most of you know, today the FDA has what’s called a fast-
track way of approving drugs. There are over 50 new, high-tech
drugs in the pipeline this year coming out on the market. That
compares with the mid-80’s of about 20. So you have those types
of pressures being put on payers such as us. But, of course, these
new technologies are also adding value to the population.

Mr. Mica. Then why would private sector health insurance have
risen at 3.3 percent when they’re going to be experiencing similar
increases in drug costs? Is it particularly the utilization factor,
or—

Mr. GAMMARINO. Utilization. I would have to research that fig-
ure. I can tell you, for Blue Cross Blue Shield, in general, our pri-
vate business is seeing increases significantly higher than what
you quoted. So that is not the norm in terms of what private pay-
ers are paying Blue Cross Blue Shield plans in the private sector.

Mr. Mica. Again, I'm just wondering if it can totally be attrib-
uted to drug costs.

Has Blue Cross Blue Shield instituted any measures to try to
bring drug costs under control?

Mr. GAMMARINO. Well, we have a number of measures that we
have in place. First, and foremost, is discounts that we get from
manufacturers and from the retail pharmacy area. That is the pri-
mary area in which we enjoy savings in the pharmacy area today,
and we're going to have to get more diligent in that area, particu-
larly in the area of new breakthrough drugs, which are quite ex-
pensive.

We have a number of drug utilization review programs that pro-
vide intervention, where we think we can talk to a physician, inter-
vene and work with the physician, to move a patient off a more ex-
pensive drug to a like-class drug that is less expensive.

We have disease management programs that look to secure over-
all higher quality for our patients while at the same time improv-
ing our costs. We have a number of areas that we look at today.

I can tell you some things that we don’t do that we could, but
we think it would inflict pain to our consumers that they do not
want and are unwilling to accept. For example, our pharmacy net-
work is one of the broadest in the country. We certainly could re-
duce the size of those networks and have them more restrictive,
have less choice for our consumers, and probably obtain better dis-
counts with fewer numbers. We have chosen not to do that.


17

+ The Congress must play a vital role in providing clear policy direction and
vigorous oversight;

+ The Office of Personnel Management, as the administering agency, must serve
as an objective “market regulator’, charged with maintaining a “level playing field”
among competing carriers and an environment in which enrollees can make
intelligent choices;

+ Participating carriers and other health care organizations must come to the
market each year with a product that provides quality coverage at an affordable
price and must continually seek product improvements that will attract a broad
segment of the FEHBP population; and

+ Individual enrollees— as the ultimate arbiter of the marketplace— must study the
offerings and make the selection most appropriate to their needs and family
requirements.

Clearly, the role-balancing scenario | have outlined requires candid exchanges of views
and a great deal of communication. In that regard, we commend you Mr. Chairman,
and the Members of this Subcommittee, for holding this hearing and for your very
evident interest in maintaining the success of this program.

| would be remiss if | failed to take this opportunity to express our appreciation to the
Members of the Subcommittee and your staffs— as well as the Chairman and staff of
the full committee— for your assistance in trying to obtain a resolution of the problem
posed by the inappropriate application of the Cost Accounting Standards to FEHBP
contracts. Although we were having substantive, and potentially productive,
discussions with OPM about this issue prior to Congressional involvement, your
intervention clearly has served to intensify these discussions, to secure the involvement
of other interested parties, and to heighten the sense of urgency. While we do not have
resolution yet, we are much closer to that objective than we would have been without
Congressional assistance, so we thank you.

Page 4 of $


Analysis of Cost Increases

Over the past several years all health plans, whether public or private sector, have experienced
significant increases in the cost of their pharmaceutical benefit. For most health care plans, the
pharmaceutical component has been increasing at an annual compounded rate of 15 to 20 percent.
FEHBP’s experience is not different from what is occurring in other private sector plans, In the
balance of my testimony I hope today to provide the Committee with some insight into the factors
that contribute to these cost increases.

‘The FEHBP plans that we serve are experiencing pharmaceutical cost increases for a number of
seasons. First, the average age of plan members is increasing and with increasing age comes the
need for more prescription medicines. Second, plan members are using more medicines and a
more costly mix of medicines. Third, and perhaps least significant, the price of medicines is rising.

I would like to review each of these trends in turn and estimate their impact.
Aging of the FEHBP Population

‘The first major factor in increasing costs is the aging of the FEHBP population. In Chart 1 we
show the correlation between age and the days supply of prescription drugs used. For example,
using 1997 data, the average 40-49 year old used 327 “days supply” of medicine. This means that
an average patient used fewer than one prescription medicine each day. In contrast, the average
50-59 year old used 577 days supply or more than one and one-half prescription medicines each
day -- 76.4 percent more. The same trend holds true for.the retiree population.

As OPM stated in its press release announcing the premium changes, the average age of an
FEHBP retiree is now 71. Again, using 1997 data, the 70-75 year old uses 1,016 days supply
compared to the 903 days supply used by those in between 65 and 69, or a 12.5 percent
difference. While the numbers we present are from Merck-Medco’s overall experience with the
plans we manage, they are consistent with the experience of the FEHBP drug plans we administer.

‘The Increased Use of Prescription Drugs

‘The second major factor is that physicians are prescribing drugs more frequently as drugs have
become availabie to treat a broader range of illnesses. Today, prescription drugs are replacing
more invasive medical procedures and treating diseases which formerly had no cure or no
effective therapy.

Chart 2 shows the increase in utilization at all age levels. For example, the average 62 year old
patient in a funded health benefit plan in 1996 used 711 “days supply” of medicine. This means
that an average patient used approximately 1.9 medicines each day. In 1997 that number had
grown to 757 days supply or an average of 2.1 medicines per day, an increase of 6.4 percent, Our
figures for the first half of 1998 show continued increases, Again, while these data are not FEHBP
specific, they are representative.


19

Mr. Mica. Thank you, Mr. Gammarino.

We will turn now to Mr. Latanich, who is with Merck-Medco.
Welcome, sir. You are recognized.

Mr. LATANICH. Thank you very much. I will submit my longer
written statement for the record.

Mr. MIcA. Without objection, so ordered.

Mr. LaTANICH. Good morning, Mr. Chairman, Congressman
Cummings, and other members of the committee. My name is
Terry Latanich and I am senior vice president of Merck-Medco
Managed Care, which is a subsidiary of Merck & Co. We appreciate
the opportunity to discuss the role of pharmaceuticals in contrib-
uting to the recently announced premium increases in the Federal
Employees Health Benefits Pro; .

As the pharmaceutical benefit manager for several Federal Em-
ployees Health Benefits Program plans, we serve the prescription
needs of more than 4 million Federal employees, retirees, and their
dependents. Through better management on the use of prescription
drugs, we work with patients, local pharmacists, physicians, and
plan Sponsors to improve the quality of patient care and reduce
medical costs.

Our working relationship with the FEHBP provides us with a
unique viewpoint on the committee’s concerns about the rising cost

f pharmaceutical benefits. Over the past several years, all health
plans, whether public or private, within the FEHBP or outside of
it, have experienced significant increases in the cost of the pharma-
ceutical benefit. For most health care plans, the pharmaceutical
component has been increasing at an annual compounded rate of
15 to 20 percent, so the numbers that you're hearing and are bei
cited are, indeed, accurate on a compounded basis. But FEHBP’s
experience is not different from what we’re seeing in other parts of
the private sector that we manage.

In addition to the 4 million lives that we m: e in the FEHBP,
overall on a national basis we manage over 50 million lives in man-
aged care plans, so we have a very broad base of experience.

The plans that we serve are experiencing pharmaceutical cost in-
creases for a number of reasons. The first major factor, and really
the principal factor, is the aging of the FEHBP population. As you
can see from chart 1, which is attached to my testimony, which I
think maybe is the single-most critical piece of what’s driving costs
here, is the increasing age of the population. Chart 1 demonstrates
the increasing utilization and how rapid it is when associated with
age. The curve, as you can see, is extremely steep in terms of the
amount of medicine that is used by the average person as a func-
tion of age. That’s very critical and is something we can and should
talk about.

The second major factor is that physicians are prescribing drugs
more frequently as new drugs have become available to treat a
broader range of illnesses. We estimate that the increased utiliza-
tion results in approximately a 10 to 12 percent increase in health
plans on an annual basis. And that’s on a compounded basis going
forward.

But that 10 to 12 percent needs to be put in Perspective. Today’s
prescription drugs are replacing more invasive medical procedures
and treating diseases which formerly had no cure or effective ther-


32

We could have what is called a closed formulary, which means
there would be a list of drugs that would be required, mandated,
for use, and it would reduce the choice of our subscribers. So there
are some steps we can take, and there are some steps we have
taken.

The choices we have are difficult. There is no easy answer to this
cost push right now. It’s going to have to involve a number of play-
ers, the ones here at the table, people like Medco, Blue Cross Blue
Shield, but we need to involve both the physicians, consumer, and
the drug manufacturer if we’re to rein in these double digit in-
creases.

Mr. Mica. You talked about your mail order pharmacy benefit
very briefly, and it stirred a lot of controversy several years back.
We heard from the retail drug stores that said it was unfair for
Blue Cross to charge a copayment when an individual fills a pre-
scription at the local pharmacy, but not when he fills it by mail.

‘ave you considered instituting a copayment for mail orders, and
if not, why?

Mr. GAMMARINO. We currently have copayments for our non-
Medicare B population. We have tried for the last 2 years to add
some form of cost sharing to our Med B population, without suc-
cess.

We have not convinced the agency to this date about the value
of this. We think it’s of significant value because it puts the con-
sumer as a key decisionmaker in this process. Certainly we think
it would result in a more judicious type of decisionmaking in terms
of the selection of drugs.

Mr. Mica. You are negotiating I know with OPM, and have been,
to come up with a benefit package. Has OPM prevented you from
modifying your benefit package for 1999 to help control costs in any
way? What’s your opinion? Are they providing roadblocks, or what
they are doing to not help you control costs?

Mr. GAMMARINO. They certainly have provided a very high hur-
dle that we haven’t been able to get over yet. We certainly might
need your assistance.

Mr. Mica. Could you describe the hurdle?

Mr. GAMMARINO. Well, the hurdle is “No, you’re not going to get
your benefit design change.”

Any other questions? [Laughter.]

Mr. Mica. Again, we’re trying to find ways to help you reduce
costs, and we’re hoping the agency would work with you to find
some measures that can be instituted to control costs. You know,
you're on the firing line, so we look to you for direction.

Is there anything the committee can do to help open any doors,
any specific areas?

Mr. GaMMaRINo. Well, I think to encourage an open and objec-
tive review of this issue. Clearly, we’re one of the few health care
plans left in the country that has no cost sharing for drugs for a
certain population. I know we have worked with our PBM’s, such
as Medco and PCS and others, and they've helped us support an
objective assessment. This would help us reduce what we think
would be in some cases overutilization and sometimes inappro-
priate utilization. It does put the consumer there with his physi-
cian saying, “Doctor, is this the most cost-effective drug for me, be-


14

prescription drugs are approaching 30 percent of total benefit costs
in the service benefit plan, and are increasing at a rate that can
fairly be described as alarming.

Of course, much of our drug cost is understandable and justified,
given the large number of older people in our plan. The average
age of the standard option enrollee is 60; in our high option plan,
the average age is 70. And new drugs have revolutionized health
care and made dramatic improvements in the quality of care.

In many instances, prescription drugs have become effective al-
ternatives to hospital admissions and surgery. At the same time,

e know that we cannot permit our prescription drug costs to rise
unabated. Just as we have to.look continually for new ways to keep
all benefit costs under control, the cost of providing prescription
drugs presents a particular challenge. As we seek more sophisti-
cated tools to control these costs, we will also be forced to rely on
existing techniques, such as benefit designs. Actually, greater flexi-
bility in benefit design is an area offering a near-term promise and
is an area of continuing, discussion between Blue Cross and Blue
Shield and the Office of Personnel Management.

Second, I would like to give you the general perspective on the
FEHBP. The FEHBP is the largest employer-sponsored health care
program in the world. Most observers agree that the program has

en extremely successful in delivering affordable and high-quality
health care coverage to millions of Federal employees and their de-
pendents for almost 40 years.

We strongly believe that the FEHBP’s success is due primarily
to the critical and delicate balancing of the roles of the Govern-
ment, the participating carriers and other entities in the health
care industry and, of course, the all-important enrollees.

Clearly, the role balancing scenario requires candid exchanges of
views and a great deal of communication. In that regard, we com-
mend you, Mr. Chairman, and members of this subcommittee, for
holding this hearing and for your very evident interest in maintain-
ing the success of this program.

I would be remiss if I failed to take this opportunity to express
our appreciation to the members of the subcommittee and your
staffs, as well as the chairman and staff of the full committee, for
your assistance in trying to obtain a resolution of the problem
posed by the inappropriate application of the cost accounting stand-
ards to FEHBP contracts. Although we have had substantive and
potentially productive discussions with OPM about this issue prior
to congressional involvement, your intervention clearly has served
to intensify these discussions, to secure the involvement of other
interested parties, and to heighten the sense of urgency. While we
do not have a resolution yet, we are much closer to that objective
than we would have been without congressional assistance, so we
thank you.

In summary, Mr. Chairman, the Blue Cross and Blue Shield As-
sociation is proud of our role in the FEHBP and we look forward
to a continuing close relationship with the Congress and the Office
of Personnel Management in maintaining and, indeed, enhancing
the very successful Federal Employees Health Benefits Program.

Thank you. I will be pleased to answer any questions.

[The prepared statement of Mr. Gammarino follows:]


73

Most disturbing about these recently-announced prescription drug cost increases is the fact that
OPM made a high-profile change in 1996 in their largost prescription drug benefit program - the
Blue Cross/Blue Shield program - which was designed fo reduce escalating prescription drug
program costs.

Until 1996, Federal retirees paid x 20 percent copayment on a prescription whether it was
obtained from

prescription is obtained through the mail order pharmacy service, which is operated by Merck-
Medco. The ostensible purpose of this change was to generate savings for the program by
encouraging the use of mail order prescription services, which some perceive to be less costly
than obtaining prescriptions at retail pharmacies.

At the time of the copayment change, many Members of Congress and retail pharmacies
questioned the wisdom of this policy move. Thet is because patient copayments are time-tested
method to encourage appropriate utilization of health care services, and help to involve patients
in making decisions about their care.

Many expressed concerns that the lack of copayment on mail order prescriptions would
encourage overutilization of prescription medications. Moreover, there were concerns that most
of any program savings from the change would reault from copayments made by many Federal
retirees who would want to continue fo obtain their prescriptions from local retail pharmacies,
not the mail service provider. Finally, while OPM and Blue Cross/Blue Shield contended that
retireea still had the "choice" of using their retail pharmacy, many viewed the copayment change
a nothing less than "economic coercion’ to encourage the use of the mail order service, which
thas not proved to reduce costs.

COPAYMENT CHANGE HELPED FUEL INCREASE IN PRESCRIPTION DRUG
COSTS, BURDENED RETIREES OBTAINING PRESCRIPTIONS AT RETAIL
PHARMACIES

NACDS believes that many of the original concerns it expreased about this copayment chenge
have been validated. For example, instead of helping to better manage oversll

costs, the copayment change may have helped fuel the explosion in these costs that the program
is now experiencing.

NACDS strongly supports the appropriate use of prescription medications and pharmacy
services, and believes that these arc among the most cost-effective therapy in the health care
system. Study after study documents the value of pharmacy services in reducing the
inappropriate use of medications, which is estimated to result in up to $100 billion in edditional
and unnecessary health care costa,

Testimony submitted to the Subcomnities on Civil Service
‘House Committee on Government Reform and Oversight
Praparad by the National Association of Chain Drug Storas
10/02/1998
Page}


58

Mr. Mica. Well, we will go back and look at those figures. I’m
not sure if they jibe with what we had calculated.
Mr. FLYNN. Well, there may be several reasons for that dif-
ference. First of all, remember that a very significant proportion of
the population that is in this program is in the Postal Service. We
don’t count increased costs to the Government resulting from the
increase to the Postal Service.
Mr. Mica. That’s the difference. I see what you're calculating. All
right.
We have gone through some of the figures before, and you've
heard them, about what the private sector medical care cost in-
creases have been in similar periods of time. They appear to be ap-
proximately half of what we’re experiencing.
Why are FEHBP premiums rising faster than private sector em-
ployer-sponsored plans?
Mr. FLynn. I don’t think they are rising faster than employer-
sponsored private plans, Mr. Chairman. I think you heard Mr.
Gammarino before we began this morning indicating that the expe-
rience we’re having in the Federal Employees Health Benefits Pro-
gram precisely mirrors the experience they're having in their pri-
vate sector lines of business.
You did quote several studies that suggest that they might be
different, and I might provide a couple of general comments.
First of all, I am sort of reminded of the adage, “liars figure and
figures lie.” You have to make sure that you’re looking at the same
numbers when you make these comparisons.
A June 1998 report by Watson Wyatt, the benefits consulting
firm, suggested that, in 1998, premiums increased in the low dou-
ble-digit range, and that they’re expected to be even higher for
1999. That, quite honestly, is troubling to a number of people. But
if you look at what we had last year and what we're projecting for
next year, it continues to put us among the cost leaders in the
area.
The second thing that I would just quickly mention is that if you
look at average premiums in the private sector and compare it to
average premiums in the Federal Employees Health Benefits Pro-

ram, the average premium, irrespective of who pays it, is about
$200 less per year in the Federal Employees Health Benefits Pro-
gram than it is in the private sector.

So I think the thing I would say is that what’s happening in this
program is precisely what is happening with other private sector,
employer-sponsored programs. We continue to have a cost advan-
tage and we want to continue to look for ways in which we can
maintain that.

That doesn’t mean that we’re not concerned. There are things
that we need to consider, in cooperation with you and others, to see
if there are ways that we can preserve the quality and value of this
program, and at the same time, if not hold health care costs level,
at least slow the rate of increase to something that is sort of less
eye popping from 1 year to the next.

Mr. Mica. I know that we have 1.9 million active Federal em-
ployees, and 2.2 million Federal retirees. Those who are in active
service probably are going to be able to absorb this a little bit easi-
er. But this is going to be pretty startling to our retirees, who are


6

Mr. Mica. I am pleased at this time to yield to the distinguished
gentlelady from Maryland, who also is one of the requesters of this
hearing today, and who does such a great job on behalf of our Fed-
eral employees.

Mrs. Morella, you are recognized for an opening statement.

Mrs. MorELLA. Thanks, Mr. Chairman.

Some of the comments you made, I noticed some of the people’s
ears perked up. I think they're going to be ready during the testi-
mony and questioning to also respond in terms of what will be nec-
essary. I appreciate very much your having this hearing.

I think it is important that we look at why all of a sudden we
have such a tremendous increase. I was deeply concerned when I
read the announcement from the Office of Personnel Management
that, on average, premiums in the Federal Employees Health Bene-
fits Program would rise by 10.2 percent in 1999, which ends up
being an average increase of 7.4 percent in the employee and re-
tiree share of the FEHBP premiums.

In fact, when you think about it, Mr. Chairman, without the
amendment that this subcommittee approved, that I was able to
offer in the first session of this Congress, creating that fair share
formula, the impact on Federal employees would be even greater.

What accounts for increases of this magnitude, being so far above
the 3.5 percent rate of medical inflation? The magnitude of this in-
crease is even more surprising considering that a recent article in
the journal “Health Affairs” reported that premiums in private em-
ployer-sponsored health plans will rise this year at the consider-
ably lower rate of only 3.3 percent. Therefore, we on this sub-
committee are very interested in knowing what the basis is for
such a discrepancy.

Because my colleagues and I are committed to ensuring that the
Federal Employees Health Benefits Program continues to deliver
high-quality health care at reasonable costs well into the future, we
need to listen to today’s witnesses discuss the specific cost in-
creases and efforts that are being made to avoid or to limit them.

For example, why are FEHBP prescription drug costs, which ac-
count for approximately 20 percent of FEHBP expenditures, rising
by as much as 22 percent? We know that the FEHB Program is the
country’s largest employer-based health insurance program, serving
the health needs of almost 10 million Federal employees, retirees,
and their families. How are FEHBP plans using this leverage to
implement meaningful cost containment mechanisms with the goal
of passing on the savings to plan members? The answers to these
questions need to be provided, and they need to be provided quick-

ly.

Open season is now before us. I have annually a forum that I
hold on open season, so that the Federal employees, retirees, and
their families can make good decisions. I’m going to have my forum
on December 4, and I know that these concerns will be raised. So
I hope that today’s hearing will give us the opportunity to discuss
ways to help keep health care affordable for Federal employees, re-
tirees, and their families.

Again, Mr. Chairman, I appreciated your opening comments, and
T am especially grateful for your having this hearing. I yield back.


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65

the group that we talked about a few minutes ago is, whether or
not that thinking causes them not to purchase a drug that they
need, as opposed to overpurchasing a drug that perhaps they don’t
need as much of. That’s what I’m trying to get at as we answer
that question about whether a copayment should be imposed.

Mr. Cummincs. I may have missed your answer to Mr. Mica’s
question, about how you predict this whole accounts issue is going
to work out. That certainly would cause a lot of people—I mean,
we have Blue Cross Blue Shield sitting here saying we’re making
progress, but if x, y, and z don’t happen, we may not be in the pro-
gram. That sends a very alarming message to Mrs. Morella’s con-
stituents and mine and many others.

That’s my last question.

Mr. FLYNN. And it alarms Ed Flynn as well, Mr. Cummings.

I am confident that we will work this out administratively for
this year, and continue to work together on a resolution of this for
the future. I don’t intend to act in any way to threaten Blue Cross
Blue Shield’s participation in the program for next year.

Mr. CUMMINGS. Thank you very much.

Mrs. MorELLa [presiding]. Thank you, Mr. Cummings.

Mr. Flynn, I know we're going to have a vote soon, and I have
another committee that I must go to, so I want to submit questions
to you, if I may. But I wanted to ask you a couple of questions.

One, I am curious about to what degree does OPM challenge and
verify the experience data that comes from health plans which they
use to justify their premium increases. Do you have staff in place,
some designation where they have the responsibility to monitor
and to audit the FEHBP plans and their costs?

Mr. FLYNN. Mrs. Morella, we have extensive monitoring of the
plans in the Federal Employees Health Benefits Program to assure
ourselves that the medical costs they’re experiencing and that they
are charging to this program are, in fact, covered, appropriate, au-
dited, and the like.

We have a number of people who work directly for me in Retire-
ment and Insurance Services who receive regular reports from all
of our participating carriers. We have all of our health actuaries in
the Office of Actuaries who are really expert in this data, who
know what to look for, how to look for it, how to analyze it, and
what questions to ask. Finally, in the independent Office of the In-
spector General, we have that same type of expertise.

I don’t think there’s any question, Mrs. Morella, that we have
good oversight of the medical trend and medical costs in this pro-

‘am, and on that basis, we can make independent judgments and

o not have to rely solely and exclusively on what we hear from
plans.

Mrs. MorRELLA. So you feel pretty comfortable feeling that your
cost accounting apparatus is in place?

Mr. FLYNN. I believe, when it comes to this issue of the cost ac-
counting standards, that we currently have a wealth of information
which enables us to make judgments about whether or not the indi-
rect costs charged by these health plans are, in fact, appropriately

to the Federal Employees Health Benefits Program, that
they're not overcharging us at the advantage of someone else and
that sort of thing. Yes; I am comfortable.


67

Documentation To Support Premium Rates Under The FEHB Program

‘The rate-setting process in the Federal Employees Health Benefits (FEHB) Program begins in
March of each year when the Office of Insurance Programs in the Office of Personnel
‘Management (OPM) sends all qualified health plans the annual Call Letter to advise them on
goals and procedures for negotiation of contracts which will take effect the following January.
In conjunction with the Call Letter, OPM’s Office of Actuaries sends each health plan a
package of rate instructions which asks for the plan’s proposed biweekly premium charges for
self only and self and family coverage and includes discrete documentation requirements based
on whether a plan uses experience rating or community rating. Plans must complete and return
contract proposals by May 31.

‘An important factor in FEHB rate negotiations is the position of a plan’s FEHB reserves. The
cost of each FEHB enrollment includes a three percent payment to fund a contingency reserve
account for the plan in the Employees Health Benefits Fund in the U.S. Treasury. Applicable
law makes contingency reserve accounts available, subject to minimum balance requirements
and other conditions reflected in OPM regulations, to defray future premium increases, to
increase benefits, or to reduce contributions of enrollees and the Government for the plan from
which the contingency reserves are derived.

‘Moreover, OPM regulations require experience-rated plans to maintain a "special reserve”
representing the cumulative difference between income to the plan from FEHB enrollments
(premiums, plus interest on investments) and plan expenses (benefit costs, plus administrative
expenses, and retentions). If at the end of a contract year, total reserves credited to an
experience-rated plan (for incurred-but-unpaid benefit claims and the "special reserve") exceed
target levels OPM regulations specify, any excess must be credited to the contingency reserve
maintained by OPM.

Experience rated Health Plans

Premium rates for the fee-for-service plans, and the few health maintenance organization
(HMO) plans which are also experience-rated, are a reflection of the plan's actual FEHB
claims experience. The most important consideration in rate negotiations is protection for
individual enrollees against plan failure due to inadequate funds. OPM rate instructions for
experience-rated plans prescribe a reserve goal that provides a cushion equal to two months of
claims and expenses in excess of the reserves necessary to satisfy all incurred liabilities to date.
(The sum of the reserves held for all incurred liabilities to date and the reserve cushion in
excess of that amount are an integration of the total reserve holdings for the plan either with

1


68

the insurer or in the Employees Health Benefits Fund in the U.S. Treasury.) The setting of
appropriate rates to achieve the preferred reserve goal must be tempered by such
considerations as rate stability, plan attractiveness and value, the size and demographics of the
plan, plan growth or shrinkage, and the long range viability of the plan.

As each experience-rated plan’s proposal comes into OPM, actuaries first price out benefit
changes to determine if they are in compliance with guidance given in the Call Letter. For
example, the actuaries must determine that any carrier-initiated changes are cost-neutral or that
changes in the plan's mental health benefits amount to a realignment but not a reduction in
benefits. Usually benefit changes are settled upon and the rate setting process is then begun,
however it is sometimes the case that because of rating ot other considerations benefit changes
are revi

The purpose of the completed rating package for experience rated plans is: to quantify the
historical experience of the plan, to estimate the plan's present position, and to project the
plan's future experience in the context of the proposed changes in benefits and rates.
Quantification of Historical Experience:

For purposes of quantifying a plan's historical experience, the actuaries compare enrollment
demographics for the present year and for several prior years. This gives an accurate picture
of trends in premium income and enrollment. The actuaries also evaluate the impact on claim
costs associated with recent benefit changes under the plan, and any other factors that bear on
benefits costs, such as the expansion of a preferred provider organization (PPO) network.

Next, the actuaries analyze the correlation between the plan's enrollment trend and the trend in
average benefit utilization.

Based on a plan’s historical patterns of claims payments and the most recent actual claims data
(e-g., a plan’s data may show that as of July 31, incurred claims for the prior year are 97
percent complete and claims for the second previous year are 99.5 percent complete), the
OPM actuaries calculate prior year incurred claims. The trend in these claims numbers, along
with the trends for enrollment and average utilization, allow determination of the historical
trends for a plan.

Estimation of Present Position:

At the time OPM and FEHB plans negotiate rates for the upcoming contract year, complete
claims data for the present year is unavailable until approximately 18 months later. Therefore,
the OPM actuaries must estimate the plan’s gains or losses in relation to current FEHB
premiums through the end of the current year and the plan’s reserve position at the end of the

year. The estimate relies on a combination of the most recent claims data and historical and
projected trends for both the specific plan and the overall program.


26

‘Through drug utilization review, or DUR, our mail service and cooperating retail pharmacists
review prescriptions to ensure that medicines are not misused or abused. These techniques not
only achieve better outcomes for patients, but are also proven to reduce unnecessary prescribing
and unnecessary costs. We also review drug utilization retrospectively to 1ook at physicians’
pattems of prescribing. In this way, we can identify physicians who may lack the best current
information on the use of medicines. Through educating these physicians, we can improve patient
care and reduce costs.

Merck-Medco’s eleven mail service pharmacies provide our FEHBP plans with a high quality,
low-cost way to fill member prescriptions. Mail service dispensing is appropriate for many
medications that patients need to take for chronic conditions such as high blood pressure,
diabetes, and depression. Several of our plans encourage the appropriate use of mail service
pharmacies by sharing with their members the savings realized through lower copayments.

Finally, through health education, we can better assure that patients take their medicines correctly
and avoid adverse events that can worsen their heaith and increase health plan costs. Education
can also reduce the use of medicines when that use is ineffective or actually harmful to a patient,

FEHBP Plans Lead in Innovation

‘As discussed above, the FEHBP is experiencing pharmaceutical cost increases roughly
comparable to other non-FEHBP, private sector plans we administer, controlling for age and
other factors. We have worked with our FEHBP plans to implement the cost control techniques I
described earlier. In fact, FEHBP plans have been among the leaders in adopting new, innovative
programs in health management that work with patients and physicians to improve health
outcomes while reducing costs.

As new concepts are developed and tried, we will continue to find new ways to improve patient
care as we reduce unnecessary prescription drug and other medical costs. One area we will
continue to review with the plans is the remaining situations in which plan members continue to
have no copayment for the purchase of medicines.

Euture Projections

We do not foresee substantial changes in the rate of cost increase in the prescription drug
component of health plans’ overall costs. Specifically, even as older medicines come off patent
and enable generic substitutes to meet patient needs at lower costs, new medicines in the research
pipeline will be introduced at a steady pace over the next several years. New medicines in the
areas of mental health, pain relief, and cancer prevention, to name just a few, will place new
demands on pharmaceutical budgets at the same time they improve patient health.

We also understand that OPM projects that the population in FEHBP plans will continue to age.
Finally, while we do not see a return to high drug cost inflation such a seen in the 1980s, we



3

I think these are some of the things we have to look at in the
next few months here. I think that Congress, in fact, may need to
redirect FEHB management away from overregulation and back to
flexibility and choice. We also may need to roll back mandates that
drive up costs and reduce choice.

Once again, I think we’ve got to look at options that lower costs,
and I think we should revisit making medical savings accounts
available to Federal employees and Federal retirees. Every in-
stance where we have conducted hearings on this in Congress indi-
cates that where they have had MSA’s in the private sector, the
premiums have been reduced for both the employer and the em-
ployee. MSA’s, in fact, permit patients to take more control over
their health care costs while lowering their insurance premiums. I
think we have been remiss in again casting aside any options that
provide us the opportunity for plans which will, in fact, lower pre-
miums and costs.

Finally, I think we have got to get serious about tort reform.
That is one Government reform that I also believe could signifi-
cantly reduce the cost of health care, not only to our Federal em-
ployees and annuitants, but also to all Americans who see the costs
of health care coverage increase. If Congress fails to act, I predict
even higher future premiums and more problems for FEHBP.

Sixty-five plans, we have been notified, are dropping out of
FEHBP. That’s almost 20 percent of participating plans. Although
they are mostly small HMO’s, their departure means fewer choices
for employees. The dropouts are telling us something about the
business climate we are fostering in the FEHB program and in the
health care industry.

I am today directing our subcommittee staff to conduct a com-
plete review of the factors leading to the withdrawal of participa-
tion by this large number of plans. It is critical that employee
groups, labor organizations, management groups, OPM, and this
subcommittee work together to find ways to bring these premiums
down, or, at least, to stem these dramatic cost increases.

However, I think we have to realize that more regulations, in-
creased mandates, narrowing options, increased paperwork, high-
sounding edicts, and a failure to stem litigation will only continue
to increase health care costs.

My goal is to strengthen the ability of Federal employees to
choose high-quality and affordable health care under this Federal
health care program. Protecting consumer choice and encouraging
competition, I believe, is the way to achieve both of these objec-
tives, to help us keep the costs down and quality up.

[The prepared statement of Hon. John L. Mica follows:]


2

premium for one union-sponsored plan will be 34 percent higher
than in 1997. Another will be up 29 percent. On the other hand,
premiums for Alliance Health Plans are actually lower in 1999
than in 1997, and the Blue Cross Blue Shield high option plans are
only up by 4 percent. The good news is that Federal employees and
annuitants are still able to cushion these increases by choosing
lower cost plans.

Around 9 million Federal employees and retirees and their fami-
lies rely on our Federal Employees Health Benefits Program for af-
fordable, high-quality health care benefits. The members of this
subcommittee are acutely aware of the impact these increased pre-
miums have on individual employees and annuitants. OPM has an-
nounced that the impact on individuals will be less in 1999 than
in 1998. Largely, this is because, under the new fair share formula
which Congress enacted in the Balanced Budget Act of 1997, the
taxpayers pick up a higher percentage of premium increases.

But the reality is that, in actual dollars, the increases are, in
fact, very significant. Average subscriber premiums rose $132 this
year, and are going up an additional $88 next year. That means
employees and annuitants spent $560 million more this year and
will spend an additional $400 more next year. That’s nearly $1 bil-
lion in extra costs in just 2 years for these folks. The Government’s
burden over those 2 years is another $2.2 billion, a staggering fig-
ure.

As we examine this issue, there are a number of questions that
we should address. For example, OPM says the factors leading to
higher premiums in FEHBP reflect overall trends in the economy.
However, recent data suggest that last year’s FEHBP increases,
which averaged 8.5 percent, were substantially higher than other
employer-sponsored plans. According to a recent article in the jour-
nal entitled, “Health Affairs,” premiums for employer-sponsored
health insurance increased by only 3.3 percent. In January 1998,
CBO forecast single-digit increases in private health care insurance
premiums through the year 2008.

I now have to wonder why this year’s FEHBP premium increase
was more than double the private sector rate. Are there factors pe-
culiar to the FEHBP that account for this difference? I think we
need to look at those differences.

Earlier this year, OPM testified that new plan requirements for
1999, including the President’s so-called Patient’s Bill of Rights,
will add around $40 million to FEHBP costs. Almost half of this
total, $17.5 million, would go toward producing Paperwork —that's
what our testimony indicated—and those efforts will have nothing
to do with medical benefits or services. If FEHB premiums are ris-
ing so rapidly, do we need to be fueling the increases with irrele-
vant requirements? I think we have to ask ourselves some of these
questions.

OPM cited a 22-percent increase in expenditures for prescription
medicines as a primary culprit in next year’s double-digit increase.
Since the prescription drug benefit now represents about 20 per-
cent of overall program costs, what are we to infer about future

remium increases? What future steps can we take to rein in costs?

e will hear from some of our witnesses in regard to the questions
we have raised here.


15

Mr. Chairman and Members of the Subcommittee:

1am Stephen W. Gammarino, Senior Vice President, Federal Employee Program at the
Blue Cross and Blue Shield Association. On behalf of the Association, | thank you for
the opportunity to appear before you today to discuss 1999 premium increases in the
Federal Employee Health Benefits Program (FEHBP) and related matters.

‘As you know, Blue Cross and Blue Shield Plans jointly underwrite and deliver the
Government-wide Service Benefit Plan. This Plan has been in the Federal Program
since its inception in 1960 and is the largest Plan in the Program. The Service Benefit
Plan currently covers over 1.9 million contracts and more than 3.7 million lives.

Iwill focus my testimony on:

+ The principal factors affecting the 1999 premium for the Service Benefit Plan;
and

. The Blue Cross and Blue Shield perspective on the FEHBP generally.
1999 Premium Increase

About ninety-five percent of all enrollees in the Government-wide Service Benefit Plan
are in our Standard Option. For 1999, these enrollees will see a bi-weekly increase of
$4.60 for self-only contracts and $5.74 for family contracts. Our premiums reflect the
cost of providing a relatively stable benefit package compared to 1998 with no major
reductions and a few modest enhancements. Thus, we are confident that our Standard
Option continues to be a superior insurance product and continues to provide excellent
value for our enrollees. During 1998, the Government-wide Service Benefit Plan will
pay over $7 billion in benefits for the health care needs of Federal employees, retirees,
and their families. In 1999, that $7 billion will increase proportionately.

‘As you know, premium charges, generally speaking, are driven by benefit changes,
changes in the cost of health care, changes in utilization patterns, and changes in the
demographics of a particular group. The major task of an insurance cartier is
understanding and coping with these changes and finding ways to mitigate their
influence on premiums. It is a constant challenge and one that we in the Blue Cross

Page 2 of S


example, OPM says that the factors leading to higher premiums in FEHB reflect overall trends in
the economy. However, recent data suggest that last year’s FEHB increases, which averaged
8.5%, were substantially higher than other employer-sponsored plans experienced. According to
a recent article in the journal “Health Affairs,” premiums for employer-sponsored health
insurance increased by only 3.3%. In January of 1998, CBO forecast single digit increases in
private health insurance premiums through 2008.

Tnow have to wonder why this year’s FEHB premium increase was more than double the
private sector rate. Are there factors peculiar to the FEHB that account for this difference?
Earlier this year OPM testified that new plan requirements for 1999, including the President’s so-
called Patient's Bill of Rights, will add around $40 million to FEHB costs. Almost half of this
total, $17.5 million, would go toward producing paperwork having nothing to do with medical
benefits or services. If FEHB premiums are rising so rapidly, do we need to be fueling the
increases with irrelevant requirements?

OPM cited a 22% increase in expenditures for prescription medicines as a primary culprit
in next year's double-digit increase. Since the prescription drug benefit now represents about
20% of overall program costs, what are we to infer about future premium increases? What future
steps can we take to rein in costs?

Congress may need to redirect FEHB management away from over regulation and back
to flexibility and choice. We may also need to roll back mandates that drive up costs and reduce
choice. Once again we must examine options that lower costs and revisit making Medical
Savings Accounts available to federal employees. MSAs permit patients to take more control
‘over their health costs while lowering their insurance premiums. Finally, we must get serious
about tort reform. That is one government reform that could significantly reduce the cost of
health care. If Congress fails to act, I predict even higher future premiums and more problems
for FEHB.

Sixty-five plans are dropping out of the FEHB. That is almost 20% of participating
plans. Although they are mostly small HMOs, their departure means fewer choices for
employees. The drop outs are telling us something about the business climate we are fostering in
the FEHB program and in the health care industry.

1am today directing our Subcommittee staff to conduct a review of actor or leading to the
withdrawal of participation by these plans. It is critical that employee groups,
organizations, and management groups, OPM and this Subcommittee work Nope to find ways
to bring these premiums down or at least to stem these dramatic increases.

However, we must realize that more regulations, increased mandates, narrowing options,
increased paperwork, high-sounding edicts, and a failure to stem litigation will only continue to
increase health care costs.

My goal is to strengthen the ability of federal employees to choose high-quality and
affordable health care under the FEHB program. Protecting consumer choice and encouraging
competition is the way to achieve both of those objectives -- keeping costs down and quality up.

2


21

macy benefits, and general health education and physician edu-
cation. We will continue to find new ways to improve patient care
as we reduce unnecessary prescription drugs and other medical
costs.

But, looking ahead, we do not foresee change in the rate of cost
increases in the prescription drug component of the plans’ overall
cost. We understand that OPM projects that the population in
FEHBP plans will continue to age, and as they continue to age,
they will continue to move to the right on that chart that I have
provided to you. Even as older medicines come off patent and en-
able generic substitutes to meet the patient needs at lower cost,
new medicines in the research pipeline will be introduced at a
steady pace over the next several years. New medicines for mental
health, pain, cancer, and a number of other diseases will place new
demands on the pharmaceutical budget, while at the same time
they improve patient health.

Finally, while we do not see a return to the levels of drug price
inflation that we saw in the 1980’s, we continue to project a modest
price inflation factor for the actual cost of the pharmaceuticals
themselves.

We feel fortunate to work with the FEHBP plans. We believe it
is, in fact, an excellent model for delivering competitive, high-qual-
ity health care, while preserving the ability of members to choose
the plan they want, the ability to “vote with their feet,” if you will.

We are always aware that Merck-Medco has excellent compe
tors who are willing to replace us, to compete with us for this busi-
ness, and we are pleased to compete for that business. We believe
we have a corporate ethic for excellence, and that pushes us to try
to do as much as we can to keep these costs down.

Again, I thank the committee for the opportunity to be here
today and look forward to your questions. I will be happy to field
them at your convenience.

[The prepared statement of Mr. Latanich follows:]



FEHBP PREMIUM INCREASES FOR 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

SEPTEMBER 24, 1998

Serial No. 105-198

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
54-586 WASHINGTON : 1999

For sale by the U.S. Goverment Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-058431-0
3



44

I don’t think it’s right to overregulate this benefit program. For
almost 40 years it has thrived because it hasn’t been overregulated.
I do think, when you continually regulate and add mandates, add
the regulatory environment that we see today, add standards such
as the cost accounting standards, through no thoughtful thinking
of the consequences, I think you stifle competition and you stifle
choice.

No; it’s not a magic cure for the trends, but it certainly will allow
us the opportunities to develop ways to respond to these issues.

Mr. CUMMINGS. With this accounting stuff, do you feel that the
discussions and negotiations have been fair to you all?

Mr. GAMMARINO. Initially, no. I think today we have a lot better
objective assessment by the Government in terms of the issues we
have. We're not there yet, though. I know the agency has asked the
CAS Board for what we think is reasonable relief, as we both look
at ways to make these standards apply reasonably, where appro-
priate. But we're not there yet, and I don’t know what the agency
and the CAS Board are going to be able to do in the long run.

If that doesn’t come through, we do need legislative relief. We
would very much appreciate the support of this committee as we
go through this because, believe me, Blue Cross Blue Shield wants
to be in this program in the long run. It’s the carrier of choice of
the enrollees and we're very serious about our commitment to
them. But we do need a reasonable playing field in order to com-
pete.

Mr. Cummincs. I want to say to you both that your testimony
has been very, very helpful. I really appreciate it.

Mr. GAMMARINO. Thank you.

Mr. Mica. Thank you, Mr. Cummings.

Mrs. Morella.

Mrs. MorRELLA. Just briefly.

The President announced the Patients Bill of Rights in my dis-
trict, and it was for Federal employees and retirees and I was
there. Would you like to comment on what impact that may have
for you as a carrier?

Mr. GAMMARINO. In the short run, it’s not going to be too signifi-
cant for us. The agency has worked with the carriers to a level
Where I think we're applying reasonable standards to implement

is.

Our program is not an HMO. It’s a preferred provider program.
Therefore, many of the restrictions that the Patients Bill of rights
was getting to don’t exist in our program. What we do have to
worry about is the rush to implement the Patients Bill of Rights,
Mrs. Morella. They have tarred the whole industry with the same
way of interacting with the patient. Therefore, you do have poten-
tial regulatory burdens on us as a PPO that don’t really need to
be there because we don’t act that way. But they will add cost to
the program unnecessarily.

Are they going to make a big difference in the rates? Not signifi-
cantly. But it is an added regulatory burden that is being placed
on all carriers. You know, we have always intended, and I think
we have proven to the market and our consumers, that we have
their rights served today in most cases.


8

I want to give you just a minute because I know you've been
down at other meetings, but you are recognized, sir. Also, I did in-
form those attending that the hearing today is at the request of
yourself and also a request from Mrs. Morella, to review the issue.
So that’s where we are.

As soon as you give your opening statement, and if we have any
other Members from your side come today, they will be recognized.
Then we will go directly to the testimony, which we have held up
until you and the other Members were here. So you are recognized,
sir. Thank you.

Mr. CUMMINGS. First, I want to thank you, Mr. Chairman, and
I want to apologize, too.

Mr. Mica. No problem. .

Mr. CuMMINGS. We were in a meeting with the President, and
I think the other Members are probably just coming from that
meeting.

Mr. Chairman, as you said a little bit earlier, it was at my re-
quest, and that of Mrs. Morella’s, that brought about this hearing.

certainly again thank you.

As one can surmise from the debate on health care reform,
health insurance is a necessity for a healthy and productive life.
But many Americans either don’t have access to it, or can’t afford
it.

This is the third hearing being held in the last year on Federal
Employees Health Benefits Program premiums. The first hearing
was held in September of last year, when OPM announced an 8.5-
percent increase in the 1998 premium costs. The second hearing
was held in March of this year, when Chairman Mica called a hear-
ing to examine what impact the President’s Patients Bill of Rights
would have on 1999 premium rates. If nothing else, these hearings
made clear the need for continued oversight by this subcommittee
of the program.

At the March hearing, Walter Francis, author of “Checkbook’s
Guide to Health Insurance Plans for Federal Employees,” testified
that “FEHBP is one of the best run programs in the Federal Gov-
ernment. So good is the FEHBP, and so widely recognized are its
accomplishments, that it has been repeatedly urged as a model for
other programs... .”

This is certainly true. FEHBP has a stellar reputation for plan
diversity and quality and customer satisfaction. For most of its ex-
istence, FEHBP has remained affordable to Federal employees and
retirees, and we want to keep it that way, particularly at a time
when Federal pay raises continue to fall short of what the Federal
Employees Pay Comparability Act provides for. There are enough
Americans suffering because they can’t afford health care.

The Office of Personnel Management has a daunting task: keep-
ing premiums affordable for Federal enrollees, while still being re-
sponsive to national trends and private market forces. OPM has
done a commendable job, and this member has not lost sight of

at.

At the same time, however, OPM must keep a close eye on fac-
tors that drive up premiums, and take the necessary steps to con-
tain them. The reasons cited by OPM for the 10.2-percent premium
increase next year—an aging population, technological advances,


7

Mr. Mica. I thank the gentlelady, and thank her again for re-
questing the hearing. Mr. Cummings will be with us shortly.

lam going to go ahead and call the first panel and swear in our
witnesses, if I could have Mr. Gammarino and Mr. Latanich come

iD.

Our hearing today is going to consist of two panels. First we will
hear from Stephen W. Gammarino, senior vice president, Federal
Employee Program, for the Blue Cross and Blue Shield Association.
The second witness on our first panel will be Terry Latanich, sen-
ior vice president of Merck-Medco Managed Care.

The second panel will follow with one individual, who is no
stranger to our subcommittee, Mr. William E. Flynn, Ed Flynn, As-
sociate Director of Retirement and Insurance Services, Office of
Personnel Management.

Gentlemen, as you know, this is an investigations and oversight
subcommittee of Congress. It is customary that we do swear in our
witnesses, so if you would please stand and raise your right hand.

{Witnesses sworn.]

Mr. Mica. We will let the record reflect that the witnesses an-
swered in the affirmative.

I see that we have been joined by the vice chairman of our sub-
committee. I’m stalling a bit to see if we can get our ranking mem-
ber and other minority members on the panel here. They are on
their way in the car from the White House.

Mr. Pappas, did you have an opening statement or remarks?

Mr. Pappas. Thank you, Mr. Chairman. I’m glad I made it in
time to see Terry, who is from a company that is based in my dis-
trict. Welcome.

Thank you for holding this hearing, Mr. Chairman.

Mr. Mica. If you will just hold on here for a couple of minutes,
we will stand in recess. I would like to have the other members of
the panel to hear your opening comments. This is a very important
issue. So if you will just stand in recess, we will wait until they
arrive.

I apologize for the delay. We had originally scheduled this hear-
ing for 10 o'clock, and then we moved it to 11 to accommodate the
other Members. As you know, I try to be most accommodating.

Mrs. MoRELLA. You are accommodating, Mr. Chairman.

Mr. Mica. We could call Ed Flynn up and I could ask him why
OPM is opting for a study of the life insurance issue after 40 years
of nonbidding on Federal employees’ life insurance. We get an op-
portunity to lower the premiums and expand the options for Fed-
eral employees so they can have higher coverage at lower cost, and
OPM is dragging its feet in the Senate. But I won’t ask him that.
{Laughter.]}

I might when he comes up and he’s under oath.

[Recess.]

Mr. Mica. The subcommittee will come back to order, as the
ranking member, Mr. Cummings, takes his chair.

Mr. Cummings, we have had the opportunity to have our side

ive their opening statements. We knew you were going to be de-
ved, so we went ahead and gave the opening statements. We
have our first panel of witnesses and they have been sworn.


57

Mr. Mica. Thank you. I would like to go ahead immediately with
some questions. I wanted to talk first about the impact of the fair
share formula.

In the Balanced Budget Act of 1997, Congress enacted a new for-
mula for determining the maximum Government contribution to
FEHBP premiums. I would like to examine how that new formula
affected the calculation of this year’s contribution and how it might
affect future premiums.

First, what are the maximum Government contributions in 1999
for self alone and family coverage, and what would they have been
if we had not passed the fair share formula?

Mr. FLYNN. Mr. Chairman, I think I know where you’re going
with that. If I might answer it in a slightly different way, if that’s
satisfactory-—

Mr. Mica. Go ahead.

Mr. FLYNN [continuing]. And then perhaps we can provide some
additional information for the record.

In 1999, use of the fair share formula means that there is an av-
erage increase for the enrollee of 7.41 percent. Now, I can tell you
how we got there, but let me compare that to what the average in-
crease would have been under the previous Big 6 formula, the old
phantom formula that we've been operating under for a number of
years or, in its absence, a Big 5 formula.

As I mentioned, in 1999, the average enrollee cost will go up 7.4
percent. Under the Big 6 formula, it would have gone up 13.11 per-
cent, and under a Big 5 formula, it would have gone up just under
36 percent.

. MORELLA. Wow.

Mr. FLYNN. So you can see the impact that the implementation
of this formula has had in this program, particularly with respect
to its impact on the individual.

Mr. Mica. Somebody’s paying the difference, and I guess it’s the
Federal Government. What's it going to cost the Federal Govern-
ment in the transition to this new formula?

Mr. FLYNN. Well, there’s only a 1-year transition to the new for-
mula.

Mr. Mica. Right.

Mr. FLYNN. Let me try and handle it this way, because I think
you can isolate the transition difference actually quite easily.

The new fair share formula calls for a distribution of the pre-
mium between the Government and the employee: 72 percent for
the Government and 28 percent for the individual employee.

In 1997, the phantom formula, had a distribution of about 71.3
percent versus 28.7 percent, if I have done my math correctly. So
the cost increase to the Government resulting from the transition
amounts to 0.7 of 1 percent of the mium differential this year.

Mr. Mica. Which is what, about $2.2 billion?

Mr. FLYNN. Well, the Government’s cost this year, in fiscal year
1999, will be about $803 million.

For purposes of comparison—yes, sir?

Mr. Mica. It doesn’t seem like that figure is correct.

Mr. FLYNN. The cost to the Government for the increase associ-
ated in 1999 is $803 million. Last year, the cost to the Government
was $831 million.



40

that, in general, we’re very supportive of our plans’ efforts to have
the maximum amount of flexibility in designing their benefits.

Certainly in the private sector plans, the non-FEHBP plans that
we serve, there is a great deal oF latitude in what they do. There
is a great deal of latitude in terms of how much cost sharing
they’re willing to negotiate in their collective bargaining agree-
ments, how much cost sharing they can impose in a nonunionized
situation.

I think there is a greater ability and a greater willingness in the
employer community to take more aggressive steps, because they're
accountable only to their stockholders, their employees, and their
ability to compete in the marketplace for good workers. So I think
there’s a different dynamic working in that market than there is
in this market.

But, you know, clearly, my belief is that in the private sector,
outside of the private plans and the FEHBP, there is a greater
willingness to impose more pain, if you will, in terms of fewer
choices, more difficult access to certain drugs. And those are hard
decisions that you're going to have to face.

Mrs. MorELLA. They are hard. For instance, when you talk about
accountability and talk about, let’s say, diabetes, the consumer ac-
countability for diabetes treatment—I mean, would it be that area,
or would it be other areas? Do you see what I’m saying? This is
avery difficult thing to appraise.

Mr. GAMMARINO. If I could respond, in those types of areas—first
of all, I think cost sharing is needed, no matter what the condition.
I really think there ought to be some financial involvement.

But I would let you know that we have a lot of programs today
that we’re working toward, on what we call disease management,
and diabetes is one of those. In that respect, Mrs. Morella, we will

robably have increased costs associated with managing that popu-
lation, for the very reason that Mr. Latanich mentioned earlier,
that some of these people are not taking their medication. So, from
that perspective, we will see probably increased costs associated
with managing those people. But we think that’s an obligation we
have for our members.

Mrs. MORELLA. Thank you, gentlemen.

Thank you, Mr. Chairman.

Mr. Mica. Thank you.

I have a couple of questions here. Back to this little impasse we
have over the cost accounting standards language with Blue Cross.
It is my understanding that Blue Cross can’t send out, or you're
not allowed to send out the 1999 brochures to the Federal employ-
ees and others who may participate, unless or until you sign a con-
tract. I think open season starts on November 9.

What is going to haj pen as we approach this deadline?

Mr. GAMMARINO. Well, it is certainly something that none of us
enjoy, and that is that we have a crisis brewing, associated with
our ability to continue participation and get information out to our
subscribers.

I mean, it is certainly our intent to be with the program next
year, but at the same time, as you know, Mr. Chairman, we need
relief from the cost accounting standards. The standards are not
appropriate—many of them are not appropriate the way theyre


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45

Mrs. MoRELLA. It appeared to me that most plans already did
have contained within it, the elements of the Patients Bill of

ights.

I was also curious because the chairman, in his opening state-
ment, said that it would cost like $40 million more, and that a tre-
mendous percentage of that, Mr. Chairman, was going to be admin-
istrative and regulatory—

Mr. Mica. That was testimony from our hearing, not my calcula-
tions. It is what was testified to in hearings on the——

Mrs. MorELLA. Right.

Would you like to comment on that, Mr. Gammarino?

Mr. GAMMaRINO. I haven’t put a price tag on it. As you indicated,
Mrs. Morella, we are in compliance with most elements of the bill
of rights.

There is going to be some administrative burdens. Our program

is approaching $8 billion, so every time we add $5 or $10 million,
it’s not going to show up in anybody’s pocketbook. But they do all
add up.
I think my feedback to you is that we have to watch out, in
terms of regulating this and other areas, that we don’t, in the
name of good intentions, add burdens that are going to compound
the administrative requirements that we have, and actually, in
some cases, reduce the level of services that we give today and then
tangentially add administrative costs.

Mrs. MORELLA. A final question, Mr. Chairman.

Do you ever meet with any of the unions, any of the Federal em-
ployee and retiree unions? Do you consult or have kind of a part-
nership liaison?

Mr. GAMMARINO. They’re competitors. No, we don’t meet with the
unions. They have their own health plans. We do meet with
NARFE as a constituents group. We do meet with our union mem-
bers who are subscribers to provide services and——

Mrs. MorELLA. I understand competition. But sometimes we
find, as we enter the 21st century, that we’ve got competition and
we've got cooperation. Both of them go hand in hand. You want to
compete, but you also have to cooperate.

Mr. GAMMARINO. And we have the Department of Justice, which
is always looking at how we cooperate.

We do talk—certainly, they do have a group, their own organiza-
tion, that we’re invited to participate sometimes in discussions. The
agency is there as well. So we do get good discussion on those
group settings.

Mrs. MoRELLA. Thank you. I thank both of you. I really appre-
ciated the testimony.

Thank you, Mr. Chairman.

Mr. Mica. I thank both of our witnesses. Hopefully this will be
good information that we can utilize to assist you in bringing down
health care costs for both our Federal employees and retirees.

If we have any additional questions, we will leave the record
open for at least a week and submit them to our panelists.

There being no further questions at this time, I will dismiss our
panelists and call forward our second panel. Our second panel is
one individual, William E. Flynn III, also known to his friends and
family and members of this committee as “Ed” Flynn, Associate Di-


27

project a modest inflation factor for each of the next several years.

FEHBP Plan Partners

Asa pharmaceutical benefit manager, we feel fortunate to work for FEHBP plans, The FEHBP's
private sector plan managers have been able to work with us to swiltly adopt innovative programs
for reducing costs and improving care, We are pleased that our services are appreciated by plan
members who consistently give us high ratings in survey of member satisfaction.

The FEHBP is, indeed, a mode! for federal health care and the area of pharmaceuticals presents a
good illustration of its successes. We are always cognizant that Merck-Medco has excellent
competitors who are eager to win FEHBP business. This, along with a corporate ethic for
excellence, pushes us on to provide FEHBP plans with quality service at the lowest possible cost.

Again, I thank the Committee for the opportunity to be here today and look forward to your
questions.



64

Mr. CUMMINGS. The reason why I asked is because when I was
in the Maryland Legislature, it was a big deal for me, because I
spent a lot of time trying to bring some Parity, some equity, with
regard to mental health benefits, because I just believe that mental
health benefits have been a: stepchild, while mental health cer-
tainly can be directly related to physical health. -

I was just wondering whether people are using it. It used to be
almost taboo to deal with mental health, and I think that that
trend is beginning to change because people are beginning to un-
derstand how significant it is. I was just wondering about that.

Mr. FLYNN. I do think, Mr. Cummings, we have got a ways to
go to make mental health benefits in this program what they
should be.

The only other thing I would add is that, just as we have seen
drug therapy operate so effectively in the area that we traditionally
regard as medical benefits, it is also operating very effectively in
the area of mental health as well, and that’s a good thing.

Mr. CuMMINGS. If you could change something with regard to
this whole prescription situation that was just talked about—about
40 percent of the testimony we’ve had was on prescriptions—what
would you change, if anything? In other words, if there was some-
thing that you could do, putting yourself in the place of these doc-
tors and the drug companies and whatever, is there something you
Pould do? It seems to me like prescriptions are having a drastic ef-
fect.

Mr. FLYNN. Right. Mr. Cummings, the only easy thing to do is
the thing that I hesitate to do, and that is, introduce greater copay-
ments. That doesn’t affect health care costs; that simply redistrib-
utes it to different pockets.

The hard thing to do is to create an awareness among plans, pro-
viders, pharmaceutical companies, and individual consumers and
employer sponsors, about drugs and their effect and their utiliza-
tion and their effectiveness, so that people become responsible pur-
chasers, if you will, of that. But that’s a much longer road to go
down, and it doesn’t offer immediate payoff like a copayment
would.

But I worry about the effect of copayments on the population, the
very population that we are trying to serve here.

Mr. CUMMINGS. Just one last question.

Mr. Gammarino implied it, but ’m not sure it was implied, that
when you have a copayment, people might think twice about pre-
scriptions. In other words, if you get things for free, you know, you
possibly open the door for abuse. That argument makes a lot of
sense. I was just wondering what your feelings are on that.

And I want to make it real clear, because I know the media gets
things mixed up. I am not advocating getting copayments for the
people who don’t presently have them.

Mr. FLYNN. And we have copayments existing in virtually every
plan—I’m sorry, in all plans in the FEHB, at the retail level, at the
mail order level, at the brand name level, and at the generic level.
So we have copayments that are widespread throughout this pro-

gram.
Yes; it does cause people to think about whether or not they
should purchase a prescription drug. What I’m trying to get at for


ae smurenincse
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Sa Bouse of Representatives SS

Pena ‘COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT eo ae
Eten 2157 Ravounn House Ornice BuLoma Seo.
— Wasrawaron, OC 20515-6143, ae
OPENING STATEMENT
‘Chairman John L. Mica

FEHBP Rate Hikes - What's Behind Them?

September 24, 1998

‘Good moming. We have scheduled this hearing to examine the causes of the increases in
next year’s health care premiums in the Federal Employees Health Benefits Program. The Office
of Personnel Management (OPM) announced on Friday, September 11, 1998 that FEHB.
‘Premiums will increase by an average of 10.2% for 1999.

‘This is the second straight year in which FEHB premiums have dramatically increased.
As a result of these increases, premiums in 1999, on average, will be about 20% higher than in
1997, These steep increases in health care premiums confront federal workers and devastate
federal retirees who will, on average, see their COLAs nearly wiped out by these increases.

As observed at last year’s hearing, however, averages mask considerable differences
‘among the various plans. For example, the premium for one union-sponsored plan will be 34%
higher than in 1997. Another will be up by 29%. On the other hand, the premiums for Altiance
Health Plans are actually lower in 1999 than in 1997, and the Blue Cross Blue Shield High
Option plans are only up by 4%. The good news is that federal employees and annuitants are
still able to cushion these increases by choosing lower cost plans.

‘Around 9 million federal employees and retirees and their families rely on the FEHB
Program for affordable, high-quality health benefits. The members of this subcommittee are
acutely aware of the impact increased premiums have on individual employees and annuitants.
‘OPM has announced that the impact on individuals will be less in 1999 than in 1998. Largely,
this is because under the new Fair Share Formula Congress enacted in the Balanced Budget Act
of 1997, the taxpayers pick up a higher percentage of premium increases.

But the reality is that in actual dollars the increases are significant. Average subscriber
premiums rose $132 this year, and are going up an additional $88 next year. That means
employees and annuitants spent $560 million more this year and will spend an additional $400
million more next year. ‘That is nearly $1 billion in extra costs in just 2 years. The government's
burden over those two years is another $2.2 billion.

As we examine this issue, there are a number of questions that we should address. For


18

Conclusion

In summary, Mr. Chairman, the Blue Cross and Blue Shield Association is proud of our
role in the FEHBP and we look forward to a continuing close relationship with the
Congress and the Office of Personnel Management in maintaining— and indeed
enhancing— the very successful Federal Employees Health Benefits Program.

Thank you and | will be pleased to answer any questions.


55

AND FAMILY COVERAGE. ENROLLEES PAY ONLY A PORTION OF THIS

AMOUNT.

NEXT YEAR A TOTAL OF 285 HEALTH PLANS WILL PARTICIPATE IN THE
FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM. DOWN FROM 350 PLANS
OFFERED IN 1998, THE DRIVING FORCES BEHIND THIS DECLINE WERE THE
SHAKE OUT OF PLANS UNABLE TO ATTRACT SUFFICIENT NUMBERS OF
FEDERAL ENROLLEES OR MAINTAIN COMPETITIVE RATES, PLAN
CONSOLIDATIONS, AND OTHER CHANGES IN MANAGED CARE AND POINT OF
SERVICE PLANS. NONE OF THE PLANS WHICH WITHDREW DID SO IN RESPONSE.
TO OPM'S INITIATIVES ON MENTAL HEALTH COVERAGE OR PATIENT
PROTECTIONS. THIS REDUCTION IN PARTICIPATING PLANS REFLECTS
NATIONAL TRENDS IN THE HEALTH INSURANCE MARKET AND WILL NOT

ADVERSELY AFFECT FEDERAL ENROLLEES.

ONLY ONE FEE-FOR-SERVICE PLAN-BENEFICIAL ASSOCIATION OF CAPITOL
EMPLOYEES WITH ABOUT 1,200 ENROLLEES-WILL CEASE PARTICIPATION IN
1999. THE OTHER PLANS WERE HEALTH MAINTENANCE ORGANIZATIONS AND
POINT OF SERVICE PLANS AND ALSO WERE AMONG THE SMALLER PLANS
PARTICIPATING. ALTOGETHER, LESS THAN 2? PERCENT OF OUR ENROLLED

POPULATION WILL BE AFFECTED BY THESE PLAN CHANGES.


62

Mr. Mica. I have additional questions, but I will yield right now
to our ranking member, Mr. Cummings.

Mr. CUMMINGS. I have just a few questions.

I have listened to your suggestions on trying to contain these
costs. I guess when I hear proposals, the question that first comes
to mind is practicality and, in dealing with the Federal Govern-
ment, how fast can things get done. You’ve heard me say it before,
that sometimes I get a little frustrated with the Federal Govern-
ment and that it seems like it takes so long to do so little. But a
lot of times those little things are the things that make a difference
in people’s lives.

With regard to your Suggestions, first of all, let’s talk about prac-
ticality; and second of all, let’s talk about time; and third of all,
let’s talk about whether we'll be talking about these same things
5 years from now. That concerns me.

Mir. FLynn. And it concerns me as well.

Let me just be very candid with you, Mr. Cummings. We can put
proposals on the table very quickly. Reaching consensus and agree-
ment on those proposals, in a political, consensus-building process,
can take and will take time. But I think those are the kinds of pro-
posals that hold out the most hope, quite honestly, for achieving
cost containment in ways that respect and build on the traditions
of this program and the strength that it exhibits.

Other things that can be done more quickly, quite honestly, are
a lot more rough around the edges, if I may say that, and often can
have some unintended side effects.

Mr. CummMIncs. I guess the suggestion that I found most inter-
esting is the one about trying to reward those companies that have
effective treatment.

Mr. FLYNN. Absolutely.

Mr. Cummincs. I want to make sure I understand it.

First of all, you take a look at various plans, is that it?

Mr. FLYNN. Yes.

Mr. CUMMINGS. Just take me through it.

Mr. FLYNN. Let me try and do it very quickly for you.

As I said, in creating the ideal, we’ve still quite a ways to go. But
if you look at this in terms of objective characteristics, process
characteristics, and outcome characteristics, in the first two
areas—objective and process characteristics—we’re pretty far
along. Things like accreditation by a nationally recognized health
care accreditation organization, things like the degree to which in-
dividual patients understand how to get treatment for certain
Kinds of things—you can pretty much measure those kinds of

hings.

Employers today create incentives for their employees to enroll
in plans that have accreditation, that score above a certain level on.
a whole series of process measures and things like that. And the
direction, the trend, is to add health care quality outcome measures
and to create incentives, combining those as well.

Those things can be done. Some of the measures today are a lit-
tle rough, but they do, in fact, moderate the increases that employ-
ers face in their health care costs from one year to the next.

Mr. CUMMINGS. I think you heard Mr. Gammarino talk about
what he predicts in costs 5 years from now. I said 25 percent and


35

What impact would the passage of this bill have on FEHBP pre-
miums, in your opinion?

Mr. LaTanicH. Thank you for the opportunity.

I think that we very clearly oppose the legislation. Our view is
that the best health policy is to allow members to shop in an envi-
ronment where they can manage their own cost and help improve
the cost of the plan.

If, as is true in the Federal plans that we serve, we can provide
a lower cost product and a lower cost delivery system to the plan
sponsor, and the member wants to take advantage of that and help
save the plan money, and the health plan wants to share part of
those savings with the member through lower cost share
deductibles or whatever, that that ought to be allowable. In fact,
it ought to be encouraged, not discouraged, because that’s one of
the ways you help health plan members assume responsibility for
their own health care. So we think that it’s well intended but its
result we think would be a substantial increase in the cost of the
FEHBP drug component.

Mr. Mica. The second question he submitted was on another bill
recently referred to this subcommittee, H.R. 4559, entitled, “The
Prescription Drug Patient Choice Act.” It is from Congressman
Brown of Ohio.

Does Merck-Medco have any views on the impact of this legisla-
tion on FEHBP patients’ access to pharmacies, and also FEHBP
costs?

Mr. LATANICH. Well, as I understand Congressman Brown’s bill,
it would essentially eliminate the ability of FEHBP plans to use
any pharmacy network in its program. Essentially every pharmacy
would have a right to participate.

As Mr. Gammarino noted, one of the real strategies for getting
better reimbursement is to limit the number of pharmacies and use
that leverage to secure better pricing. In essence, if you can show
a pharmacy that they're going to gain incremental use because
they are one of fewer pharmacies participating, you have the abil-
ity to negotiate with them and obtain better pricing. If you can’t
do that, then you’re really at the mercy of whoever the provider is.
You have got to accept their price. They don’t have to accept your

rice.

So the ability to maintain networks, whether it’s in pharmacy
medicine, or any element of health care, is really critical in your
ability to negotiate with providers. So we are not at all supportive
and would encourage this committee not to be supportive of that
bill.

Mr. Mica. Thank you.

I will yield now back to our ranking member, and then we'll go
to Mrs. Morella.

Mr. CUMMINGS. I was listening to what you just said. Of course,
we have a lot of Federal employees in Baltimore, in my district, be-
cause we have the Social Security Administration there. One of the
things that I have noticed is that more and more pharmacies have
come back to the inner cities, everywhere. I used to be able to go
a mile and maybe run into two pharmacies. I can now go a mile
and run into six.


5

In response to these collective concems, the FY 97 Treasury/Postal Appropriations bill
recommended that the OPM take actions to belp reduce the costs of FEHBP prescription drug
benefit programs. The language says thet OPM should continue to “encourage all FEHBP plans
to find alternative savings and hold down premiums.” In referencing the new 20 percent retail
pharmacy copayment in the Blue Cross/Blue Shield FEHBP program, the language said that
“much of the savings from the new prescription coverage comes directly from retail copayments,

‘OPM and its carriers should consider other commonly-used management options such as full
utilization of drug manufacturer rebates and generic drug substitution.” It is unclear whether
OPM actually took these actions, which could have helped reduce the magnitude of the current
premium increases which the agency and Federal employees and retirees are now facing.

NACDS RECOMMENDS EQUAL COPAYMENT FOR MAIL ORDER AND RETAIL
PHARMACY PRESCRIPTIONS

‘Mr, Chairman, we believe that recent information supports the position taken by NACDS in
1996 regerding this copayment change, That is, eliminating the copayment for mail order
prescriptions was and is inappropriate medical and economic policy for Federal retirces, and the
retirees who choose to utilize retail pharmacies should nat be forced to shoulder most of the cost
savings burden from this change.

At the September 24th hearing, both Blue Cross/Blus Shield and Merck-Medco suggested that
they be allowed by OPM to reinstate some form of cost sharing requirement in the mail order
component of the program to better manage utilization and control costs. However, OFM stated
that it does not believe that such a change is warranted at this point in time.

'NACDS belioves tht euch a move would sprevent ound matical nd program management

purposes. It would:

‘© maintain some form of appropriate and realistic patient cost sharing for both programs;

© not impose an unfair economic impact on Federal retirees who want to continue to use retail
pharmacy;

© improve quality of care by facilitating Federal retiree interaction with the local pharmacy
provider, and;

© help to reduce expenditures from any unnecessary utilization of prescriptions thet have
resulted from the lack of « mail service copayment.

Teatimony nimi othe Subcom om Ci Srvice
House Committee on Government Reform and Oversight
Prepared by the National Association of Chain Drug Stores
10/02/1998
Pages


36

I guess the thing that concerns me, while there would be bene-
fits, the leverage you just talked about, in maybe dealing with
fewer, at the same time I guess the other side of that is making
sure that companies are sustained. I just wanted to hear your view
on that.

Mr. LaTANICH. I can tell you our experience as Merck-Medco—
and I was involved in negotiating, early on, most of our network
contracts with pharmacies. Most health plan sponsors, when they
ask you to put together a limited network, typically give you a re-
quirement that there must be x number of pharmacies within an
x number of miles of the location of each of the people.

Most of the plans will give you a list of all of their employees and
use essentially a geomapping strategy. You are able to say, OK, for
every member of this population, I’m going to have two phar-
macies, three pharmacies, within 1 mile, 2 miles, 3 miles, whatever
the standard is that is adopted by the plan.

I think our experience has been that it has not had a negative
or more negative effect, if you will, on inner city pharmacies, rural
pharmacies. In many cases, the principal impact has been, I would
argue, on the suburban pharmacies, where there may be one on
every corner and you don’t need eight choices within 2 miles, if you
want to try to cut your reimbursement. But most plans that we’ve
dealt with have very explicitly required that we maintain coverage
standards in rural areas, maintain coverage standards in inner-city
areas,

Mr. CuMMINGS. You both talked about these prescriptions and
doctors writing prescriptions. I’m just curious. Do you think there’s
a mindset now among doctors where they feel like prescriptions are
the things to do?

I mean, as I look at my mother’s and father’s prescription cabi-
net, it looks almost like a pharmacy. They’re 72 years old. I go
through there about every 6 or 7 months and try to figure out—
you almost have to have a chart to figure out what it’s all about.

I’m just wondering, do you think there’s more of a belief with re-
gard to doctors, that they should be writing more prescriptions for
every little ailment?

Mr. GAMMARINO. I think there’s a lot of—if you would like for me
to respond to that——

Mr. CUMMINGS. Yes; please do.

Mr. GAMMARINO. Just take a look at the pressures on the physi-
cian today. First of all, you have the new high tech drugs, and you
have direct to consumer marketing. We didn’t have that 4 or 5
years ago. Drug companies are spending over $1 billion a year to
market those drugs, and they're not marketing it to anybody now
but the consumer, and they're putting the pressure on.

Additionally, the drug industry is spending billions in what we
call physician detailing. Thirty thousand drug representatives are
meeting as we speak with physicians, touting the benefits of their
drugs. So you have all that, in combination, I think exerting a lot
of pressure on the physician, and I do think today in some cases
it’s the easy way to deal with certain conditions. But I think it’s
what the consumer wants, in many respects.

Mr. CumMInGs. So when they hear these commercials—these
commercials are fascinating to me, because it seems like half of


51

INCREASE OF 15.4 PERCENT. ENROLLEE SELECTION OF MORE COST EFFECTIVE
PLANS HAS BEEN A COMMON OPEN SEASON OCCURRENCE. AND WE EXPECT
TO SEE THIS TREND CONTINUE FOR THIS YEAR'S OPEN SEASON, MAKING THE

ACTUAL 1999 AVERAGE INCREASE LESS THAN 7.4 PERCENT.

THE 1999 FEDERAL EMPLOYEE HEALTH PLAN PREMIUM INCREASES REFLECT
WHAT IS OCCURRING THROUGHOUT THE HEALTH CARE MARKETPLACE AND.
ARE IN LINE WITH INCREASES FACING LARGE AND MID-SIZED EMPLOYERS.
HEALTH COSTS ARE GOING UP. THIS PAST JUNE. A MANAGEMENT
CONSULTANT FIRM. WATSON WYATT WORLDWIDE, RELEASED THE RESULTS
OF A SURVEY THAT LOOKED AT EMERGING COST TRENDS FOR 1999 FOR
ORGANIZATIONS WITH 500 OR MORE EMPLOYEES IN MAJOR METROPOLITAN
MARKETS NATIONWIDE. THE SURVEY PREDICTED DOUBLE DIGIT INCREASES
FOR FEE-FOR-SERVICE PLANS AND SOMEWHAT LOWER INCREASES FOR HMOs.
IT ALSO PREDICTED THAT HEALTH CARE PROVIDERS WOULD BE LESS WILLING

TO NEGOTIATE FEES.

THE STUDY STATED THAT COST INCREASES WERE DUE TO CIRCUMSTANCES
THAT AFFECT BOTH THE NATIONAL AND THE FEHB HEALTH CARE MARKET.
PLACES. IN THE FEHB PROGRAM. STRONG MANAGED CARE EMPHASIS SINCE
THE EARLY 1990'S HAS RESULTED IN THE VAST MAJORITY OF ENROLLEES
ACCESSING CARE VIA HMO OR PREFERRED PROVIDER NETWORKS. DEEPER

+


24

‘The reasons for increased utilization of drugs are many. Utilization of many drugs translates into
better health outcomes, improved quality of life, and, in some instances, cost savings to the plan in
the form of reductions in other medical expenditures such as doctor visits and hospitalizations.
For example, studies document that the increased use of insulin as part of an intensive program 10
normalize blood sugar levels reduces the risk of complications by more than 50 percent. Similar
studies show that improved drag therapy for asthma patients reduces medical resource
consumption.

There are clearly instances where drug utilization can be decreased because it is inappropriate or
is being used for too long a duration or at inappropriate dosage levels. But eliminating these
problems will not, in all likelihood, reduce overall utilization in the long term. Many medical
conditions for which there is effective drug therapy are underdiagnosed. Examples include
hypertension, diabetes and congestive heart failure. Even where correct diagnosis has occurred,
many physicians are not following the “best medical practice” guidelines adopted by NIH,
AHCPR, VA or medical professional societies which often call for the addition of a drug as part
of the optimal ueatment strategy. Finally, the level of patient compliance with prescribed drug
therapy is very low. Ithas been estimated that no more than 30 percent of persons who have been
placed on medication for hypertension remain compliant with their prescribed therapy after just
one year despite the fact that high blood pressure represents a leading causing of death in our
nation. As “at risk” populations are better identified, physician knowledge increases, and patient
compliance is improved, overall utilization can be expected to increase substantially.

Increased utilization results in approximately a 10-12 percent increase in health plan drug costs on
an annual compounded basis.

‘The mix of prescribed medicines is also changing in a way that increases costs. The introduction
of new, breakthrough drugs, can have a substantial impact on the total cost of the pharmaceutical
benefit. For example, prowase inhibitors for the treatment of HIV have resulted in dramatic
improvements in both the quality and length of life for those affected, Another example is the
introduction of new, effective, migraine medications. Prior to the approval of Imitrex, the
average cost per day for medications (o treat migraines was $3.40 per day. Imitrex, which
shortens the duration and mitigates the intensity of migraines, costs $14.00 per day of therapy.
Since Imitrex is the fustest growing drug in this category the average cost of treatment in this
category is also increasing.

These are only two examples of a dynamic equation, In many classes, patented drugs are coming
off patent and are becoming generically available. This trend will reduce costs. But other new,
better drugs, will enter “generic” categories and increase costs. For example, many drugs used to
treat arthritis have the side effect of causing peptic ulcers. New drugs are in development or in
the approval process at the FDA which appear not to have this side effect. If approved, the cost
of this class of drugs will almost certainly increase, but medical costs for treating peptic ulcer
disease should decrease.

Depending on the age demographics of a specific health plan the impact of “mix” will vary, but in
general, we estimate the current impact of the changing drug mix as a 3-4 percent increase in



54

= TREATMENT PLANS PROVIDING DIRECT ACCESS TO A QUALIFIED
SPECIALIST IN PLAN PROVIDER NETWORKS FOR INDIVIDUALS WITH
COMPLEX OR SERIOUS MEDICAL CONDITIONS REQUIRING FREQUENT
CARE,

= EXTENSIVE INFORMATION ABOUT PLAN CHARACTERISTICS AND
PERFORMANCE, PROVIDER NETWORK CHARACTERISTICS, AND CARE
MANAGEMENT; AND

© A REGULATORY PROHIBITION ON ~GAGTM CLAUSES IN PROVIDER

CONTRACTS THAT COULD LIMIT COMMUNICATION ABOUT MEDICALLY
NECESSARY TREATMENT.

ALSO. PLANS WILL TAKE ANOTHER STEP FORWARD IN COVERING SERVICES
RELATED TO MENTAL HEALTH CONDITIONS LIKE SERVICES FOR OTHER
HEALTH CONDITIONS. ALL PLANS WILL NOW COVER PHARMACOTHERAPY
FOR MENTAL HEALTH CONDITIONS UNDER GENERAL MEDICAL BENEFITS
RATHER THAN MENTAL HEALTH BENEFITS. WITH NO REDUCTION IN EXISTING
COVERAGE FOR MENTAL HEALTH SERVICES. PHARMACOTHERAPY INVOLVES
THE PRESCRIPTION OF MEDICATIONS. OFFICE VISITS FOR OBSERVATION OF
PATIENT RESPONSE AND REGULATION OF DOSAGES. AND LABORATORY TESTS
‘TO MONITOR THEIR EFFECT. OPM CONCLUDED THAT IT IS REASONABLE THAT
MANAGEMENT OF THE PHYSIOLOGICAL ASPECTS OF MENTAL HEALTH
CONDITIONS SHOULD BE REIMBURSED THE SAME AS PHARMACEUTICAL
MANAGEMENT OF ANY OTHER DISEASE. THIS CHANGE WILL INCREASE
AVERAGE 1999 PREMIUMS BY A TOTAL OF 3/100 OF 1 PERCENT--OR ABOUT 80

CENTS A YEAR FOR SELF ONLY COVERAGE AND ABOUT $1.82 A YEAR FOR SELF



63

he said more than that, if we continue to go down the road we're
on now. Do you agree with that?

Mr. FLYNN, Well, I think it’s hard to know, but it could certainly
be that. It doesn’t have to be.

Mr. CUMMINGS. You know, they say when you do the same things
that you’ve been doing, you shouldn’t expect any different results.

Mr. FLYNN. Right.

Mr. CumminGs. So I'm a little bit confused about your answer.
I mean, if we continue to do what we're doing, it seems only logical
that 5 percent here, 3, 7, whatever, add up, and in 5 years you
have Federal employees paying quite an increase. So I’m trying to
figure out—maybe I’m just trying to plant something in your com-
puter, that we have to do something different or else we’re going
to get the same results. I guess that’s what I’m kind of trying to
push for.

I don’t know what that is. I have looked at the things you have
suggested, and I think you're right on track. But I am concerned
that we'll be sitting here 5 years from now talking about an in-
crease far greater than where we are now.

Mr. FLYNN. And I would be equally concerned. The only point I
would make there is that you could look 5 years from now and see
25 percent inflation not just for Federal employees but for America,

Mr. CuMMINGS. Right, all the way around.

Mr. FLYNN. And our ability to influence that is a function of how
we act as a purchaser.

Mr. CUMMINGS. You mentioned briefly mental health twice, and
you mentioned it in one of your suggestions. Can you talk about
that a little bit?

Mr. FLYNN. Well, we have been concerned for several years now
about the availability of mental health benefits in the Federal Em-
ployees Health Benefits Program. Generally speaking, if you look
at what private sector plans offer, we are not particularly attrac-
tive in that comparison. So over the past couple of years we have
tried to do things that incrementally add benefits.

The creation of mental health benefit networks, that parallel in
many respects the medical service networks that were so effective
in controlling health care costs over the past 6 or 7 years, seems
to us to be a direction we want to move in. It’s one that we have
encouraged our plans to undertake. We have had some limited suc-
cess in this area, but we want to continue to do that.

Now, the suggestion that I made was that you might want to
look at this as a benefit that you would manage on a nationwide
basis as part of a carved out program. We don’t currently have that
ability, but that’s another way that you might be able to enhance
the benefit and still control its cost.

Mr. CumMiINGs. Have you seen an increase in the use of mental
health benefits over the last 2 or 3 years?

Mr. FLYNN. I’m really not in a position to answer that knowl-
edgeably. If you don’t mind, I would like to go back and have our
actuaries look at that across the program and provide a response

to you.
T wouldn’t think so, but I would like to look to make sure.




43

that constituency. So flexibility, in terms of benefit design, and the
way we deliver products, and let the consumer, who is the ultimate
decisionmaker here in terms of who stays and who provides bene-
fits in the program, let them decide whether or not our benefit de-
sign, and our services are appropriate.

Let’s not overregulate this great program that has thrived be-
cause of individual competition.

Mr. Mica. I guess my last question is a single thing that OPM
could do, and I think you have probably answered that with your
call for flexibility and competition; is that correct?

Mr. GAMMARINO. Yes; Mr. Chairman.

Mr. Mica. Did you have anything you wanted to add, Mr.
Latanich?

Mr. LATANICH. No; I think that, in general, we agree with Mr.
Gammarino’s statements. We think the committee and the plans
are facing some very difficult decisions, because technology is going
to get better, new drugs are going to be introduced. There are cat-
egories of diseases being scrutinized now by the manufacturers
that will increase productivity, improve health status, and the
question is how much is society and Congress willing to pay to im-
prove productivity, quality of life, and increase health status. So
it’s a very difficult choice.

Mr. Mica. Thank you.

Mr. Cummings, do you have any concluding questions?

Mr. CUMMINGS. Just two or three.

Mr. Gammarino, if we continue to go down the path that we're
going down now, with no changes, then I guess in 5 years I imag-
ine we could-—basically from what I’ve heard this morning—there
could be an increase from today’s payment of at least 25 percent,
at least 5 percent a year. Is that——

Mr. GAMMARINO. At a minimum. You're going to see higher
trends than that, I’m afraid.

Mr. Cummincs. Thinking as a lawyer, if I were OPM, what
would I be saying with regard to what you’re saying? When you
talk about flexibility—and you, Mr. Latanich, you talked about how
difficult the decisions are, and I agree with you; they've got to be
very difficult—taking all of that into consideration, I’m trying to
figure out how much we have to beat up on OPM. I don’t mean
that in a negative sense. In other words, both of you are sort of
throwing it in their lap, saying OK, we need more flexibility.

But, on the other hand, they’re in a situation where they're try-
ing to keep Federal employees satisfied. That’s a heck of a balance.
I guess I want to put you all in their shoes, if you don’t mind, just
to be fair to them.

If you were in their shoes, understanding all that you know, and
listening to your testimony this morning, what would you do?
Would you do the things you have suggested?

Tm not trying to put you on the spot. But that’s where we find
ourselves.

Mr. GAMMARINO. No. 1, there’s no magic cure for these trends.
When you said we would want to put it in OPM’s lap, I’m not look-
ing to do that, in terms of responsibility. We do need flexibility; we
do need competition; we do need the consumer involved.


41

written today. They're written for a different industry altogether.
We cannot comply.

Quite simply, I have a responsibility to my board, which is made
up of plan CEO’s of the various Blue Cross Blue Shield plans, not
to put them at risk associated with compliance as a Federal con-
tractor. As a Federal contractor, we take the compliance associated
with any contract provision very seriously, and we don’t want to be
out of compliance. In this case, we cannot be in compliance. So,
until we get that relief in the contract, there may be disruption.
Hopefully we can resolve the brochure issue in the short run, but
the issues compound each other as we go forward if we don’t get
the relief we think we need.

Mr. Mica. We have heard both of our witnesses testify today
about two things: one, that drug costs are driving up the cost of
premiums and the cost to the Government for health care, that it’s
a major factor. We have also heard that both sides want some flexi-
bility to deal with these problems. I think Mr. Gammarino has tes-
tified that they want flexibility in benefit design, to help control
costs.

Mr. Latanich, do you believe that flexibility is going to help us
control some of the increased drug costs that we're faced with?

Mr. LaTANIcu. I think our reaction to that is that it will. You
know, the cost share issue for the Med B’s is a very difficult, deli-
cate, and political issue. In general, our advice to our clients is that
the presence of a copay does involve the patient to a greater extent
in decisions about their health care. So, to that extent, we have
been supportive of the plans’ efforts to look at this issue. But
it's——

Mr. Mica. You’ve had experience in serving several FEHBP car-
riers. Do you believe those carriers have the flexibility that they
need?

Mr. LATANICH. Well, they certainly have been able, for example,
on the Med B’s, to in most cases impose a copayment or coinsur-
ance strategy. I think that the Federal plans in general have been
less aggressive than their non-Federal counterparts in putting in
very restrictive formularies and putting in some of the techniques.
But if you’re looking long term strategies that are going to be able
to deflect the number of days of therapy used, you’re looking at
much more substantial—I don’t say draconian, but very restrictive
practices.

They're going to have to make some difficult choices about
whether people are going to have access to medicines. That’s a very
difficult choice for a health pian to make, and I would suspect it’s
a very difficult one for the Congress to make. When a retired Fed-
eral person comes to a Member of Congress and says, “There’s a
new drug that will do X for me; are you going to cover it?” I think
that health plans need the flexibility to deal with that. And yet it’s
very difficult in this environment.

I do think that the more discretion they have, the better, particu-
larly since this is a market where the Federal employees—and I
used to be one—have the ability every year to “vote with their
feet.”

Mr. Mica. Let me ask another question.


66

Mrs. MORELLA. A question I would like to ask you, that I also
asked Blue Cross Blue Shield, has to do with whether or not you
bring into the deliberations Federal employees. I’m not talking
about the union plans, but Federal employees and retirees.

Do they have any role to play?
per. FLYNN. They certainly do, Mrs. Morella, and we do bring
them in.

We talk to the unions in their roles as representatives of employ-
ees; we talk to the National Association of Retired Federal Employ-
ees. Last year we conducted focus groups with Federal retirees
across the country, and we’re engaging in a similar process this

ear.

In addition, over the space of the next 6 weeks, we will conduct
a series of focus groups, facilitated by the Gallup organization, with
families, Federal employee families, active and retired, to ask them
questions about the degree to which we are meeting the needs of
the family as we administer this program.

Finally, Mrs. Morella, as you know, we do a customer satisfaction
survey each year, where individuals not only have the opportunity
to tell us how they feel about the individual plans that they're a
part of, but they also have the opportunity to tell us about what
they think of the services they get ‘fom OPM.

Input from our customers—a broad term—but from Federal em-
loyees, retirees, members of their families, is important to us. We
isten in a lot of different ways.

Mrs. MoreELLA. Indeed, it should be. I do know that the customer
satisfaction rate has been pretty high, and we comment on that.

Would you in some way change that system of receiving the
input from the Federal employees, the retirees, the union rep-
resentatives? I mean, is it to your total satisfaction, or would you
streamline it?

Mr. FLYNN. I doubt that you could ever get me to say something
is to my total satisfaction.

The way in which we get input has evolved over the several
years that I have been fortunate to run this program, and will con-
tinue to do so, and not only on the basis of things that we think
might make it better, but suggestions that we get from others. We
would invite that all the time.

Mrs. MorELLA. I would like to ask if you could submit to this
subcommittee the documentation that each plan submits to justify
its premium increase request, and maybe cost containment meas-
ures. I think the other members of the subcommittee would like to
see that, too.

[The information referred to follows:]


u

premium rates. If nothing else, these hearing made clear the need for
continued oversight by this sub committee of FEHBP.

At the March hearing, Walter Francis, author of Checkbook's
Guide to Health Insurance Plans for Federal Employees, testified that,
“FEHBP is one of the best run programs in the Federal Government. So
good is the FEHBP, and so widely recognized are its accomplishments,
that it has been repeatedly urged as a model for other programs...” This
is certainly true. FEHBP has a stellar reputation for plan diversity and
quality, and customer satisfaction. For most of its existence, FEHBP has
remained affordable to federal employees and retirees, and we want to
keep it that way. Particularly, at a time when federal pay raises continue
to fall short of what the Federal Employees Pay Comparability Act
provides for. There are enough Americans suffering because they can’t
afford health care.

The Office of Personnel Management has a daunting task-~
keeping premiums affordable for federal enrollees, while still being

responsive to national trends and private market forces. OPM has done


53

FOR A HISTORY OF RESERVE LEVELS FOR OUR PARTICIPATING FEE-FOR-
SERVICE HEALTH PLANS AND AN EXPLANATION OF HOW THE RESERVES HAVE
INFLUENCED RATES. THIS INFORMATION HAS BEEN FURNISHED. BUT, I
WANT TO CLARIFY FOR THE RECORD, THAT WHILE OPM REGULATIONS
SPECIFY MINIMUM RESERVE LEVELS FOR EXPERIENCE-RATED PLANS, THE
RATE-SETTING PROCESS INVOLVES VERY JUDICIOUS USE OF RESERVES
RATHER THAN MECHANICAL DECISIONS TO DRAW DOWN OR REBUILD
RESERVES TO TARGET LEVELS IN THE SHORT TERM. IN 1999, OUR USE OF
RESERVES IN LIEU OF PREMIUM INCREASES SLOWED, CONTRIBUTING TO THE
AVERAGE PREMIUM INCREASE. WHILE OPM DOESN'T REGULATE RESERVES.
HELD BY COMMUNITY-RATED HMOs, MAINTAINING APPROPRIATE RESERVES
IS AN IMPORTANT ISSUE THERE AS WELL, AND WE PAY CLOSE ATTENTION TO

THIS IN CONTRACTING WITH THEM.

A MAJOR INITIATIVE TAKEN FOR 1999 IN COLLABORATION WITH CARRIERS
WAS THE IMPLEMENTATION OF PRESIDENT CLINTON'S PATIENT BILL OF
RIGHTS. AT AN ADDITIONAL PREMIUM COST OF LESS THAN 25 CENTS A YEAR.
SHARED BY THE GOVERNMENT AND ENROLLEES, ALL FEHB PARTICIPANTS
WILL BENEFIT FROM THE FOLLOWING:

= DIRECT ACCESS TO WOMEN’S HEALTH CARE PROVIDERS FOR ROUTINE
AND PREVENTIVE WOMEN’S HEALTH SERVICES:

TM USE OF THE “PRUDENT LAYPERSONTM STANDARD WHEN DETERMINING
THE NECESSITY OF EMERGENCY CARE VISITS FOR COVERAGE:

6


59

going to probably experience one of the smallest increases in their
cost of living, and a second big hit. Many of those people retired
with low salaries some years ago, so it’s going to be a significant
shock to them and adjustment.

What can we do—and you heard the two witnesses. They keep
coming back to mandates, regulation, inflexibility, What is OPM
going to do to help us bring the costs down, or at least assign the
costs, where we can, in an equitable fashion? Give me one, two,
three.

Mr. FLYNN. I would be happy to, Mr. Chairman.

Let me comment just for a moment on the impact of this pre-
mium increase on Federal retirees. We are as concerned as you and
every other member of this committee, and, I’m sure everybody sit-
ting behind me, about the impact of premium increases on people
who are on fixed incomes. Even if you assume for a moment that
the cost-of-living adjustment for Federal retirees next year will be
just over 1 percent, on average, that amounts to about $17 a
month, and this will cost them about half of that. So, it is signifi-
cant, and I appreciate very much the attention that you
brought to that.

Second, which gets to the larger part of your question, Mr. Chair-
man, let me just simply say, that it is not overregulation; it is not
mandates; it is not inflexibility that is driving the experience of
this program I said earlier that what we're seeing in the Federal
Employees Health Benefits Program mirrors essentially what is
going on in the private market. I think we can see very clearly that
there are not things that are going on in the Federal program that
are unique, that somehow or another contribute to added costs.

Let me offer what I think are some thoughtful, useful sugges-
tions as to how we might work cooperatively to deal with the kinds
of issues that we’re seeing from the perspective of a purchaser of
health care.

Now, I’m going to mention two things. The first thing I’m goin
to mention is the increasing knowledge and awareness of the abil-
ity to track and report on quality outcomes resulting from health
care experiences. We know today, for example, how to effectively
treat asthma, and we know today how to ineffectively treat asthma.
We can collect and organize and report data that tells us where
physicians are doing it effectively, and where they’re doing it inef-
fectively. I just use that as one example.

The science of knowing what effective treatments are is getting
better, and the technology of collecting information, analyzing it,
and using it for purchasing decisions, is getting better. We've got
a long way to go, but purchasing based on quality outcomes in
health care can have a very significant impact on health care costs.

The second thing that I want to talk about are things that pur-
chasers—and OPM, as an employer-sponsor, is a purchaser of
health care, just like General Motors or General Electric or
AT&T—things that purchasers have done in the it and that I
think warrant our looking at again as a way of adding some meas-
ure of control to the cost of health care. We might create differen-
tial employer contributions based on quality health care outcomes,
so that we reward health plans that have a good track record in
health outcomes, and we give individual employees and retirees a


13

Mr. Mica. I thank our ranking member.

I will return now to our panel, Mr. Gammarino, who is with Blue
Cross Blue Shield Association, and Mr. Latanich, who is with
Merck-Medco Managed Care.

Gentlemen, while we don’t have two big panels today, we try to
limit your oral presentation to 5 minutes. We can be a little bit
generous with that, since there is only the two of you. We will
withhold questions until we have heard Both of you testify.

We will recognize first Mr. Gammarino with Blue Cross Blue
Shield. Welcome. You are recognized, sir.

STATEMENTS OF STEPHEN W. GAMMARINO, SENIOR VICE
PRESIDENT, FEDERAL EMPLOYEE PROGRAM, BLUE CROSS
AND BLUE SHIELD ASSOCIATION; AND TERRY S. LATANICH,
SENIOR VICE PRESIDENT, MERCK-MEDCO MANAGED CARE,
LL.c.

Mr. GAMMARINO. Good morning, Mr. Chairman, and members of
the subcommittee. On behalf of the Blue Cross and Blue Shield As-
sociation, I thank you for the opportunity to appear before you
today to discuss the 1999 premium increases in the Federal Em-
ployees Health Benefits Program.

As you know, Blue Cross and Blue Shield plans jointly under-
write and deliver the Governmentwide service benefit plan. This
plan has been in the Federal program since its inception in 1960,
and is the largest plan in the program. Our plan covers over 1.9
million contracts and over 3.7 million lives.

T will focus my testimony on two areas: first, the principal factors
affecting the 1999 premium increases for our plan, and second, the
Blue Cross and Blue Shield perspective on the FEHBP generally.

First, the 1999 premium increase. About 95 percent of all enroll-
ees in the Governmentwide service benefit plan are in our standard
option program. For 1999, these enrollees will see a biweekly in-
crease of $4.60 for self-only contracts and $5.74 for family con-
tracts. Our premiums reflect the cost of providing a relatively sta-
ble benefit package compared to 1998, with no major reductions
and a few modest enhancements. Thus, we are confident that our
standard option continues to be a superior insurance product and
continues to provide excellent value for our enrollees.

During 1998, the Governmentwide service benefit plan will pay
over $7 billion in benefits for the health care needs of Federal em-
ployees, retirees, and their families. In 1999, that $7 billion will in-
crease proportionately.

you know, premium charges, generally speaking, are driven
by benefit changes, changes in the cost of health care, changes in
utilization patterns, and changes in the demographics of a par-
ticular group. The major task of an insurance carrier is under-
standing and coping with these changes and finding ways to miti-
gate their influence on premiums. It is a constant challenge, and
one that we in the Blue Cross and Blue Shield system take very
seriously, and to which we devote extensive effort and energies.

Like major private sector health plans, the Governmentwide
service benefit plan is experiencing an increase in our health care
trends. The cost of providing prescription drugs is by far the fastest
growing component of this increase. We are now at a point where


CONTENTS

Hearing held on September 24, 1998 ..
Statement of:
Flynn II, William E., Associate Director for Retirement and Insurance,
Office of Personnel lanagement vee
Gammarino, Stephen W., senior vice president, Federal Employee Pro-
, Blue Cross Blue Shield Association; and Té S. Latanich, sen-
ior vice president, Merck-Medco Managed Care, L.L.
Letters, statements, etc., submitted for the record by:
‘Curnmings, Hon. Elijah E., a Representative in Congress from the State
of Maryland, prepared statement of
Flynn II, William E., Associate Director for Retirement and Tnsurance,
Office of Personnel Management, prepared statement of ..
Gammarino, Stephen W., senior vice president, Federal Employee Pro-
gram, Blue Cross Blue Shield Association, prepared statement of ..
Latanich, Terry S., senior vice president, Merck-Medco Managed Care,
.C., prepared statement of ..
Mica, Hon. John L., a Representative in Congress from the State of
verde, repared statement of ...
ion, Constance A., a Representative in Congress from the State
More Maryland, information concerning premium rates ..

(ap


34

Mr. LATANICH. My perspective, or my company’s perspective, is
that, in general, we are. I think the physicians are accepting of the
comparability. From what we see, the patient population accepts
the concept of comparability. In fact, we make 100,000 phone calls
a year where doctors have not allowed generics, and in virtually all
cases they agreed to it. It’s more one of habit than any real medical
concern.

There are some cases where the physicians do want brand name
use, and that is always honored. But I think the rate of generic use
is extremely high, and there is very little reticence to embrace it.

Mr. CUMMINGS. Mr. Gammarino, what is your policy with regard
to generics?

Mr. GAMMaARINO. It’s the individual’s choice. The way our benefit
design is configured under the retail side, with coinsurance, the
subscriber makes the choice of what he or she would prefer. They
usually make that choice with their pocketbook in mind and that
results in over 40 percent of the retail pharmacy drugs being ge-
neric. So we have almost 90 percent of the potential being met
there without any mandates.

Similarly, on the mail side, our generic substitution rate is very
high, because unless it’s dispensed as written by the physician, we
will intervene and switch the subscriber to a generic. In most of
those cases, it is well received by both the physician and the sub-
scriber population.

Mr. CumMINGS. One interesting thing with regard to prescrip-
tions, I was recently talking to a dermatologist who—you know,
when you go to these doctors and they find out that you’re a Con-
gressman, you get the whole spiel.

But one of the things he was complaining about, he said that in
his business, there are certain types of drugs that plans don’t
cover, won’t cover. So what would happen is he has to give a weak-
er drug to the patient, and he has to use that drug for a much
longer period of time. By the end, when you add all of it up, the
patient has suffered longer and the ailment could have been cured
much faster. It ends up that the plan pays more money.

You all may not have this problem, but he was very frustrated,
because he said it ties his hands and with that longer period of
treatment, that opens the door for other kinds of things to happen.

Mr. GAMMARINO. The Service Benefit Plan does not have that
policy.

Mr. CumMINGs. Thank you. I will wait for the second round.

Mr. Mica. We have a little less than 5 minutes to vote. Why
don’t we recess for 15 minutes. We will return at 12:30 sharp.

[Recess.]

Mr. Mica. If we could call the subcommittee meeting back to
order.

Mr. Pappas has had to go to another meeting, but I’m going to
ask a couple of questions for him and then we'll go back to the
other side. These questions are for Mr. Latanich of Merck-Medco.

Congresswoman Lowey has introduced H.R. 1525, the Prescrip-
tion Drug Benefit Equity Act, which has been referred to this com-
mittee. As I understand this bill, it would prohibit FEHBP plans
from offering members lower copayments for prescriptions filled at
mail service pharmacies.


76

‘We beliove that there should be no differential in the copayment amounts between mail order
and retail pharmacy paid by Federal retirees, and urge that this policy be implemented as soon as
possible, However, we also encourage the Committee and the OPM to investigate other
opportunities for cost savings that focus on the drag product expenditure component of the
program. We do not believe that OPM has taken steps to implement the report language
included in the FY 97 Treasury/Postal Appropriations bill that encourages OPM and its carriers
to more fully utilize drug manufacturer rebates and generic substitution to hold down program
costs.

In summary, implementation of equal copayments on mail order and retail pharmacy
prescriptions, as well as more aggressive implementation of the 1997 report language, would go
a long way toward helping better manage these escalating prescription drug costs and avoid the
‘magnitude of premium increases that Federal retirees will experience next year.

We appreciate the opportunity to present our views on this issue, and look forward to working
with the Subcommittee and its staff, and the staff of OPM to continue to assure that FEHBP
prescription drug benefits are effectively and efficiently managed care delivered. Thank you,

Testimony submitted tothe Subcommilise on Civil Service
House Commitee on Government Reform and Oversight
Prepared by the Natlonal Association of Chain Drug Stores
10/02/1998
Page 6

oO


22

TESTIMONY OF TERRY LATANICH
SENIOR VICE PRESIDENT.
MERCK-MEDCO MANAGED CARE, L.L.C.
BEFORE THE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
SUBCOMMITTEE ON CIVIL SERVICE
U.S. HOUSE OF REPRESENTATIVES
SEPTEMBER 24, 1998

Good moming Mr. Chairman and members of the Committee. My name is Terry Latanich and 1
‘am Senior Vice President of Merck-Medco Managed Care L.L.C., a subsidiary of Merck & Co.,
Inc... Merck-Medco appreciates the opportunity today to discuss the role of pharmaceuticals in
contributing to recently announced premium increases in the Federal Employees Health Benefit
Program (FEHBP).

Merck-Medco

Merck-Medco manages pharmaceutical care for more than 51 million Americans on behalf of
more than 1,100 health plan sponsors. ‘These sponsors include approximately 125 of the Fortune
500 employers, one-third of the nation’s Blue Cross and Blue Shield plans, labor unions, and
‘more than 100 local, state, and federal employee and retiree groups.

Merck-Medco works with patients, tocal pharmacists, physicians, and plan sponsors to improve
the quality of patient care and reduce medical costs through better management of prescription
rug use. Merck-Medco and its subsidiaries employ approximately 11,000 people working at 27
sites in the U.S. We operate eleven state-of-the-art mail service pharmacies and two pharmacies
devoted solely to prescription medicine counseling, Through our subsidiary, Paid Prescriptions,
LIL.C., Merck-Medco works with a network of approximately 56,000 community pharmacies,
nearly all pharmacies in America. Merck-Medco employs more than 1,800 pharmacists,
physicians, and nurses.

Merck-Medco and the FEHBP

‘Merck-Medco serves as the pharmaceutical benefit manager for several FEHBP plans. These
plans include the two largest fee-for-service plans, the Blue Cross and Blue Shield Association's
Federal Employee Program (FEP) and the plan offered by the Government Employees Hospital
Association (GEHA). Merck-Medco also serves the American Postal Workers Union (APWU),
Special Agents Mutual Benefit Association (SAMBA), American Foreign Service Protective
‘Association (APS), and the National League of Postmasters.

‘Through these plans, we serve the prescription needs of more than four million federal employees,
their dependents, and retirees. Merck-Medco’s working relationship with these plans provides us
with a unique viewpoint on the Committee’s concerns with the rising cost of the pharmaceutical
benefit component of total FEHBP plan costs.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois ‘TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York GARY A. CONDIT, California
STEPHEN HORN, California CAROLYN B. MALONEY, New York
JOHN L, MICA, Florida THOMAS M. BARRETT, Wisconsin
THOMAS M. DAVIS, Virginia BLEANOR HOLMES NORTON, Washington,
DAVID M. McINTOSH, Indiana
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LATOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL “MARK” SANFORD, South DANNY K. DAVIS, Illinois

Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey HAROLD E. FORD, JR., Tennessee
VINCE SNOWBARGER, Kansas —
BOB BARR, Georgia BERNARD SANDERS, Vermont
DAN MILLER, Florida (Independent)

RON LEWIS, Kentucky
KEVIN BINGER, Staff Director
Danret R, Mout, Deputy Staff Director
Davin A. Kass, Deputy Counsel and Parliamentarian
Lisa SMITH ARAFUNE, Deputy Chief Clerk
Putt ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE CIVIL SERVICE
JOHN L. MICA, Florida, Chairman

MICHAEL PAPPAS, New Jersey ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
CHRISTOPHER COX, California pc
PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee

EX OFFICIO
DAN BURTON, Indiana HENRY A. WAXMAN, California

Grorce NeSTERCZUK, Staff Director
SEFPRET SHEA, Profestnal ee Sif Member

TANIA Suan “Minority Profesional Staff Member

aD


46

rector for Retirement and Insurance Services, Office of Personnel
Management, who is entering from the ring on the right and now
taking his last bit of liquid refreshment. [Laughter.]

Please stand and raise your right hand.

[Witness sworn.]

Mr. Mica. Mr. Flynn, welcome back. You know the ground rules.
We look forward to your testimony and response to the two pre-
vious witnesses comments. You are recognized, sir.

STATEMENT OF WILLIAM E. FLYNN III, ASSOCIATE DIRECTOR
FOR RETIREMENT AND INSURANCE, OFFICE OF PERSONNEL
MANAGEMENT

Mr. FLYNN. Thank you very much, Mr. Chairman. I apologize if
I do some coughing and wheezing here today.

With all of the representatives of the health care industry here,
I was hoping that some free samples might be passed out. [Laugh-
ter.] Apparently I’m just going to have to endure here. I apologize
for making you endure as well.

On behalf of OPM Director Lachance, thank you very much for
the opportunity to discuss the 1999 program for the Federal Em-
ployees Health Benefits Plan. As we begin this morning, I would
ike to summarize several points from my prepared statement.

First, the significant news for Federal employees and retirees in
1999 is that the projected increase in their share of health plan
premiums for next year is about one-half the 1998 rate increase
that we announced last fall. While premium rates for the Federal
employee program are projected to rise an average of 10.2 percent
next year, the impact on the average person will be considerably
less, 7.4 percent, compared to the expected increase of 15.4 percent
last year.

Under the new fair share formula, enrollees will pay an average
of $3.39 more every 2 weeks, next year, compared to an average
$5.08 increase in 1998. Depending upon choices they make during
the open season, they may pay even less.

Second, these increases are not unique to the Federal employee
health program. They reflect what is occurring throughout the
health care marketplace and are in line with increases facing large-
and mid-sized employers. I think ample evidence of that was dem-
onstrated by the two witnesses who appeared earlier. Health care
costs are going up, and the fact that they are is well documented
throughout the industry.

Cost increases in the industry are attributable to several key fac-
tors. The expanding role of prescription drugs in the overall health
equation, the need for insurers to maintain adequate levels of re-
serves in the context of overall financial performance, and the fact
that people are older, on average, and living longer, are all major
drivers in the health care economy. These are the very same fac-
tors that account for most of the increase in our program premiums
this year.

Third, we are actually quite pleased with our ability, in collabo-
ration with the health plans, to have taken major steps in ensuring
implementation of the sident’s Patients Bill of Rights. In 1999,
everyone in the program will benefit from uniform assurances of:
direct access to women’s health care providers for routine and pre-


30

Mr. Mica. Thank you, Mr. Latanich.

Mr. Gammarino, I would like to start first with you. You have
testified that the FEHBP premium increase reflects trends in the
general health insurance market and are in line with what the pri-
vate employers have experienced. The Congressional Budget Office
has told the subcommittee that medical inflation has increased by
only 3.5 percent between August 1997 and August 1998, and by 2.7
percent during 1998. Thus, medical inflation, while increasing
somewhat, is still fairly modest, as has been cited.

A recent article in the “Journal of Health Affairs”—and I think
I cited that in my opening statement—said that private employer-
sponsored health insurance has risen at 3.3 percent in 1998. That
was less than half the FEHBP’s rise of 8.5 percent, even though
expenditures for drugs have increased at double-digit rates
throughout the economy.

Has your experience with rate increases for private sector em-
ployer-sponsored plans been different than these numbers would
suggest?

Mr. GAMMARINO. Let’s turn to a couple of the indices you men-
tioned. You indicated the medical CPI is in the low single digits,
and that may be the case. I think the issue we're all feeling in the
industry is that the cost pressures aren’t necessarily driven by the
price increases. They are driven by the utilization of services, and
they are driven by the technology for new services that I don’t
think are included in the CPI.

As Mr. Latanich just testified on the drug for migraines, Imitrex,
it was three to four times more expensive than the drug it re-
placed. That isn’t calculated when they do the medical CPI because
it’s a new drug, a new product coming on the market.

Second, in terms of increases for the private sector, from my ob-
servation some of that business is being bought by insurance car-
riers. You only have to pick up any issue of the Wall Street Journal
and see significant red ink associated with health care insurance
carriers today. A lot of that is because they did not price their prod-
ucts appropriately, associated with the cost of utilization.

Third, the private sector may be more aggressive in some cases
in modifying their benefits to reflect the changing patterns. I know
in our own case we are attempting to modify our benefit structure
to have more cost sharing associated with the drug area, and I
think in the private sector they are a lot more aggressive in taking
immediate action in that area.

Mr. Mica. As I recall, I think the biggest area of increase you
experienced was in the drug area, and you attribute utilization as
the primary factor for that.

Now, as I understand it, the drug component is 20-some percent
of the total cost?

Mr. GAMMARINO. For our program, it’s 30 percent. The average
age of our enrollees is older than the average age within the
FEHBP.

Mr. Mica. OK. But there is still a 70-percent residual cost. What
are the biggest factors in the cost of that other 70 percent? It can’t
all be driven just by drug costs and utilization to get to that in-
crease.


39

The biggest one that I think we need—and it would be inter-
esting to hear what your constituents would say about this—and
that is, we need more accountability from the consumer. That
means probably from their pocketbook. Because right now, without
that involvement from them, the demand is excessive. That is fuel-
ing a lot of this, albeit very good in many cases. But the consumer
has to be involved, in my opinion, from a financial perspective, and
that means, from our perspective, we would like a modification in
the benefit design that would put them in play with us in terms
of paying for these drugs. Because I do not, Mrs. Morella, want to
be in a position of saying, because of the spiraling increases, these
drugs are in and these drugs are out. I would much rather the con-
sumer make those choices. But in order to do that, I think they
have to be financially involved.

Mrs. MorRELLA. How do you get them—and I’m not talking about
MSA’s, but——

Mr. GAMMARINO. No; no. I’m talking about just simple cost shar-
ing. As I mentioned earlier, our Med B population right now has
come to expect free drugs.

It’s like—I don’t know. The last time I went to an all-you-can-
eat buffet, I eat a little bit differently at those situations than I do
when it’s a la carte.

Mrs. MORELLA. More people get doggy bags than have doggies.

Mr. GAMMARINO. I think some of our subscribers are taking quite
a few doggy bags home right now.

Mrs. MORELLA. I don’t quite know how you handle that account-
ability or responsibility. Education, of course, is one, where you can
point out that if you use the medical services as necessary, your
costs will be lower. I’m not really too sure about how we do it, but
we would be open to any suggestions you may have.

One final question. Since OPM is going to come before us after
you, and you won’t have a chance to say anything after Mr. Flynn
talks to us, is there anything you would like to change in that part-
nership that you have? What’s the process you go through? Do you
submit annually to OPM what your requests are for premium
changes? And then what happens?

Mr. GAMMARINO. Every year the Government sends what is
called a call letter, providing what they would like in terms of
changes from us, and then we respond to that with the changes we
would like. In this case, for the last 2 years, we have wanted more
cost sharing from the consumer, particularly the Med B sub-
scribers, who get their drugs for free. That’s the biggest thing, we
think, in the short run that can start to mitigate these costs.

Will it be the “magic bullet,” as Mr. Latanich said? No; it will
not. There is a lot more we’re going to have to do collectively. As
I mentioned, there are a lot of stakeholders, when I say collectively,
from the providers to the consumers and to the manufacturers, to
the people here at this table, to work on this.

most immediate thing we could do is to have a more realistic
benefit design.

Mrs. MORELLA. Would you like to comment?

Mr. LATANICH. In general, we have no direct relationship with
OPM. Ours is derivative through the plans that we serve. I think


25

health plan drug costs on an annual basis in addition to the estimates for increased utilization.

Manufacturer Price Increase:

The third principal cause of increases in the cost of the pharmaceutical benefit is increases in the
prices of the medicines used by FEHBP plan members. Unlike the period of the early 1980s,
prescription drug price inflation has been modest in recent years. According to the U.S. Bureau
Of Labor Statistics, drug price inflation, measured by the pharmaceutical component of the
CPI-U, was 2.5 percent in 1997. ‘The CPI-U does not, however, measure rebates or discounts
extracted by health plans or their benefit administrators, such as Merck-Medco, on their behalf.

Merck-Medco Efforts to Control Costs

Working with our plans, Merck-Medco is aggressively trying to constrain prescription medicine
costs where that is consistent with improving patient care. We are pleased that the General
Accounting Office, in its February 1997 report to this Committee, cited the benefits to the
FEHBP of the activities of Merck-Medco and our competitor pharmaceutical benefit managers in
controlling costs. That report cited savings of 25 to 27 percent in pharmaceutical costs as a result
of the innovative programs we utilize,

Among the most important techniques that Merck-Medco employs to control costs are the use of
‘generic substitution, formularies, drug utilization review, mail service dispensing, and health
education, 1 would like to briefly describe each.

Generic substitution is the practice of dispensing a low-cost, generic form of a brand name
prescription medicine. This is the sume chemical as the original, brand name drug. Except where
a physician specifically indicates otherwise, all states allow pharmacies to make this substitution
without contacting the physician, In our own mail service pharmacies and the 56,000 community
pharmacies in our networks, we work to ensure that generic drugs are used whenever possible.
‘Where the physician indicates ‘dispense as written’ for a brand name medication, our mail service
pharmacies often will contact physicians to discuss with them the possibility of using a generic.
This year, our pharmacists will place more than 100,000 phone calls to physicians to encourage
the use of generics.

Where there are no generic forms of a medicine, Merck-Medco uses formularies to create price
competition that lowers drug costs in FEHBP plans. Formularies, or lists of preferred
medications, have long been a common technique in the inpatient, hospital setting. All of our
FEHBP plans use formularies. The preferred medicines on our formularies are selected based on
the clinical evaluation of independent medical experts. ‘Their work enables Merck-Medco to
leverage the market power of the FEHBP plans to seek rebates and discounts from
pharmaceutical manufacturers, To encourage the use of preferred medicines, Merck-Medco
employs programs to contact physicians to alert them to formulary medicines that offer savings to
the FEHBP plans. The physician always makes the final determination of the best medicine for
the patient,



9

fewer health plans, and an increase in prescription drug costs—will
continue to affect premiums in the future. Many of these same rea-
sons were cited for increases in this year’s premiums.

The purpose of this hearing is to determine how OPM is attempt-
ing to contain costs. In addition, we need to determine the effect
premium increases will have on enrollee retention.

As I have said on many occasions, we have one life to live. This
is no dress rehearsal. This so happens to be that life.

I thank all the witnesses for appearing before this subcommittee
today, and I look forward to your testimony on these subjects.

Thank you very much, Mr. Chairman.

[The prepared statement of Hon. Elijah E. Cummings follows:]}


61

Mr. FLYNN. First of all, Mr. Chairman, let me make clear that
the application of the cost accounting standards to the Blue Cross
Blue Shield Federal Employee Program, and several others in the
Federal Employees Health Benefits Program, was not a decision of
the Office of Personnel Management. It was a decision of the Cost
Accounting Standards Board.

We, Blue Cross Blue Shield, and other carriers, have been work-
ing very hard in an effort to come to a resolution of this that will
work for everybody. I’m certain we will do that this year and for
the future.

Mr. Mica. We also heard the call for more flexibility, for the abil-
ity of these other carriers to design—to have more flexibility in the
design of their offerings.

What does OPM plan to do in that regard?

Mr. FLYNN. Well, Mr. Chairman, all of that discussion on flexi-
bility actually had to do with one subject and one subject only, and
that was the imposition of a copayment on Medicare Part B retir-
ees who purchase prescription drugs from the mail order program
run by Blue Cross Blue Shield.

I would think, if you look across the entire spectrum of the Fed-
eral Employees Health Benefits Program, you will find that flexi-
bility is, in fact, evident in virtually every nook and cranny.

But let me talk about this drug benefit just for a moment. First
of all, let’s be clear about who it is we're talking about. Earlier
today’ you heard the beneficiaries in this program who are affected
by this issue of flexibility called Med B retirees. What that means,
Mr. Chairman, is that these are retirees who are over the age of
65, who are living on fixed incomes, and as Mr. Latanich so amply
demonstrated, more and more today rely on prescription drug
therapies for their continued health and well being.

Two years ago, Medicare Part B retirees were given an incentive,
under the Blue Cross Blue Shield program, to use mail order for
their appropriate prescription drug needs. They were given the in-
centive of no copayment requirement whatsoever. rr.
Gammarino has indicated, the very next year Blue Cross Blue
Shield suggested that a copayment was necessary for this popu-
lation.

Our response to them then, and now, was we understand the
issue that you have raised with us. But since we have so recently
made this change, we want to ensure that if we accept another, we
are accepting it because there is demonstrated overuse of prescrip-
tion drugs by that over-age-65 population.

So far we have not seen evidence that would suggest tou us over-
use of prescriptions. We have seen evidence, as again the charts
amply de monstrate, that people use drugs more and more as they
get older. But we have not seen any evidence that drugs are being
overused.

I think we want to be very careful about imposing a copayment
so quickly, after having brought these individuals into the mail
order program with the enticement of no copayment whatsoever.

The debate on this is not over, Mr. Chairman, but I think we
need some more evidence that demonstrates why this would be
warranted.


47

ventive services; use of the prudent lay person standard for emer-
gency room visits; direct access to network specialists for patients
with complex or serious medical conditions requiring frequent care;
extensive information about health plans, providers and care; and
finally, an assurance of full and open communication between doc-
tors and their patients about medically necessary treatment.

In addition, the classification of “pharmacotherapy” under the
general medical benefits structure means increased. coverage for
mental health care. These enhanced patient protections and in-
creased mental health benefits account for less than $1 per year in
individual out-of-pocket costs.

Finally, Mr. Chairman, I don’t want to leave the subcommittee
with the impression that we are not concerned about increases in
the cost of health care. We are. The Federal Employees Health
Benefits Program is a recognized leader in the provision of quality,
affordable health care, and OPM is committed to maintaining that
position. We will continue to look for ways to moderate cost in-
creases, while ensuring quality of care.

Like other large employers, we believe that strategies that pro-
mote value-based purchasing can achieve these results, and we in-
tend to examine approaches that have been used effectively by oth-
ers in the purchaser community to see if and how they might be
applied in this program.

think that pretty much summarizes what I would like to start
with, Mr. Chairman. I would be available to answer any questions
you and the other members of the subcommittee may have.

[The prepared prepared statement of Mr. Flynn follows:]


49

EMPLOYEE PROGRAM ARE PROJECTED TO RISE AN AVERAGE OF 10.2 PERCENT
NEXT YEAR, THE IMPACT ON THE AVERAGE ENROLLEE COST WILL BE
CONSIDERABLY LESS-7.4 PERCENT. BY COMPARISON, THE EXPECTED

AVERAGE INCREASE IN ENROLLEE COSTS FOR 1998 WAS 15.4 PERCENT.

FOR NEXT YEAR, THE IMPACT OF PREMIUM INCREASES ON PROGRAM
PARTICIPANTS WILL BE SUBSTANTIALLY MITIGATED BECAUSE THE
GOVERNMENT WILL ASSUME A LARGER SHARE OF PREMIUM COSTS UNDER
THE NEW “FAIR SHARE” GOVERNMENT CONTRIBUTION FORMULA THAN
WOULD HAVE BEEN THE CASE UNDER THE “BIG 6" PHANTOM FORMULA. THE
FAIR SHARE FORMULA WILL MAINTAIN A CONSISTENT SHARE OF
GOVERNMENT CONTRIBUTIONS. PEGGED AT 72 PERCENT OF THE PROGRAM-
WIDE WEIGHTED AVERAGE OF SELF ONLY AND SELF AND FAMILY PREMIUM

CHARGES.

WHILE THE PROJECTED COST INCREASE TO ANNUITANTS AND NON-POSTAL
EMPLOYEES IN 1999 WILL AVERAGE 7.4 PERCENT. THE INCREASE IN THE
GOVERNMENT CONTRIBUTION WILL AVERAGE !1.4 PERCENT: IN DOLLARS
RATHER THAN PERCENTAGES, ENROLLEES SUBJECT TO THE FAIR SHARE
FORMULA WILL PAY AN AVERAGE OF $3.39 MORE BIWEEKLY IN 1999
(COMPARED TO AN AVERAGE $5.08 INCREASE IN 1998) WHILE THE AVERAGE

BIWEEKLY GOVERNMENT INCREASE WILL BE $12.07 IN 1999 (COMPARED TO



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a commendable job and this Member has not lost sight of that.

At the same time, OPM must keep a close eye on factors that drive
up premiums, and take the necessary steps to contain them. The reasons
cited by OPM for the 10.2 percent premium increase next year: an aging
population, technological advances, fewer health plans, and an increase
in prescription drug costs, will continue to affect premiums in the future.
Many of these same reasons were cited for increases in this year’s
premiums.

The purpose of this hearing is to determine how OPM is attempting
to contain costs? In addition, we need to determine the effect premium
increases will have on enrollee retention.

I thank all the witnesses for appearing before this sub committee

today and I look forward to your testimony on these subjects.