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HEALTH CARE INFLATION AND ITS IMPACT ON

THE FEDERAL EMPLOYEES HEALTH BENEFITS

PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

AND AGENCY ORGANIZATION

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

OCTOBER 16, 2001

Serial No. 107–63

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE CIVIL SERVICE AND AGENCY ORGANIZATION

DAVE WELDON, Florida Chairman

CONSTANCE A. MORELLA, Maryland

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

C.L. ‘‘BUTCH’’ OTTER, Idaho

——— ———

DANNY K. DAVIS, Illinois

MAJOR R. OWENS, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

GARRY EWING, Staff Director

SCOTT SADLER, Clerk

TANIA SHAND, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on October 16, 2001 .......................................................................... 1

Statement of:

Coburn, Dr. Tom A., M.D., a former Representative in Congress from

the State of Oklahoma .................................................................................. 41

Flynn, William E., III, Associate Director, Retirement and Insurance

Services, Office of Personnel Management; Stephen W. Gammarino,

senior vice president, Blue Cross Blue Shield Association; Colleen M.

Kelley, president, National Treasury Employees Union; Lawrence

Mirel, commissioner, District of Columbia, Department of Insurance

and Securities Regulation; and Robert E. Moffitt, director, domestic

policy studies, the Heritage Foundation ..................................................... 58

Letters, statements, etc., submitted for the record by:

Coburn, Dr. Tom A., M.D., a former Representative in Congress from

the State of Oklahoma, prepared statement of .......................................... 45

Flynn, William E., III, Associate Director, Retirement and Insurance

Services, Office of Personnel Management, prepared statement of .......... 61

Gammarino, Stephen W., senior vice president, Blue Cross Blue Shield

Association, prepared statement of ............................................................. 67

Mirel, Lawrence, commissioner, District of Columbia, Department of Insurance and Securities Regulation, prepared statement of ....................... 79

Moffitt, Robert E., director, domestic policy studies, the Heritage Foundation, prepared statement of .......................................................................... 87

Morella, Hon. Constance A., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 9

Weldon, Hon. Dave, a Representative in Congress from the State of

Florida:

Prepared statement of ............................................................................... 3

Prepared statements of Mr. Atwater and Mr. Harnage ......................... 11

(1)

HEALTH CARE INFLATION AND ITS IMPACT

ON THE FEDERAL EMPLOYEES HEALTH

BENEFITS PROGRAM

TUESDAY, OCTOBER 16, 2001

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CIVIL SERVICE AND AGENCY

ORGANIZATION,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 1:23 p.m., in room

2247, Rayburn House Office Building, Hon. Dave Weldon (chairman of the subcommittee) presiding.

Present: Representatives Weldon, Morella, Souder, Davis of Illinois, and Norton.

Staff present: Garry Ewing, staff director; Scott Sadler, clerk;

Tania Shand, minority professional staff member; Earley Green,

minority assistant clerk; and Teresa Coufal, minority staff assistant.

Mr. WELDON. Good afternoon. The meeting will come to order.

We will begin the hearing of the subcommittee.

I certainly want to welcome everyone to this hearing on the Federal Employees Health Program. The purposes of this hearing are

to examine the causes of the steep rise in health insurance premiums under the FEHBP program for 2002, to also examine the

continuing exodus of HMOs from the program, and to examine any

limitations in current law or practice that might restrict competition and innovation in the program.

There have also been other important developments in the

FEHBP that are of interest to the subcommittee. In particular, the

merger of the Blue Cross/Blue Shield High Option and Standard

Option plans and the creation of a new, lower-cost option is a matter of great interest to many.

For the 5th straight year, premiums in the program will increase

sharply. According to the Office of Personnel Management, on average those premiums will rise by 13.9 percent. Fortunately, the

FEHBP is a market-oriented program. Employees and retirees

have the opportunity to choose among competing plans during an

open season in the fall of each year. The Office of Personnel Management estimates that consumer choice will reduce the average

increase from 13.9 percent to 13.3 percent.

The FEHBP is one of the most important programs this subcommittee oversees. As a physician myself and the Representative

of Florida’s 15th District, I am keenly aware of the importance of

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the FEHBP. Approximately 9 million Federal employees, retirees,

and dependents rely on it for high-quality health care options at affordable prices.

And I share their concern with the continued escalation of

FEHBP premiums, which have risen by 46 percent since 1997. I believe that it is imperative that Congress understand the forces

driving up health care premiums in the FEHBP and private plans.

We must, however, avoid legislative actions or other heavy-handed

governmental intervention to satisfy short-term political goals at

the expense of the long-run health of the program.

I look to our witnesses today for a clear explanation of the causes

of these premium increases. I will also ask them to recommend

ways to address those causes while we work to preserve competition and consumer choice. These key features have made the

FEHBP a widely admired model employer-sponsored health care

program.

I am also concerned about the continuing decline in the number

of HMOs participating in the program. Since 1996, many HMOS

have left the program or withdrawn from specific service areas.

That trend continues. At the end of this year, 28 HMOs will leave

the program, and HMOs are withdrawing from 20 service areas.

The loss of these HMOs reduces the choices available to Federal

employees and retirees. In some cases, this reduction is severe. No

HMO in Delaware will participate in the FEHBP. In North Carolina the number of participating HMOS will drop from five to one,

and in West Virginia the number of HMOs will go from three to

one. I will ask our witnesses, particularly the Office of Personnel

Management, to recommend ways to make the FEHBP more attractive to HMOs.

In addition, I am also concerned that current law and practices

may unduly restrict competition and innovation in the program.

Today, for example, the Office of Personnel Management has only

limited authority to contract with fee-for-service plans. Plans are

also restricted to offering two levels of benefits only.

Mandates, whether imposed by Congress or the Office of Personnel Management, also restrict competition and limit innovation.

They drive up costs and reduce the ability of carriers to design affordable benefit packages that will be attractive to Federal employees and retirees.

I will ask our witnesses for recommendations that this subcommittee and the administration should consider to foster competition and innovation in the FEHBP. I look forward to hearing

the testimony of our distinguished witnesses today, and I thank

them for appearing.

[The prepared statement of Hon. Dave Weldon follows:]

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Mr. WELDON. I would like to now ask unanimous consent that all

members of the subcommittee be permitted to place any opening

statement in the record. Without objection, so ordered.

[The prepared statement of Hon. Constance A. Morella follows:]

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Mr. WELDON. I ask further unanimous consent that all witnesses

be permitted to include their written statements in the record.

Without objection, so ordered.

We will hear the opening statement from the ranking member

when he arrives. As I understand it, his plane just touched down

a little while ago.

This morning the subcommittee received a letter from Mr.

Charles W. Jarvis, chairman and chief executive officer of the

United Seniors Association, and written statements from Frank G.

Atwater, president and chief executive officer of the National Association of Retired Federal Employees, and Bobby Harnage, national

president of the American Federation of Government Employees. I

ask unanimous consent that these items be entered into the record.

Without objection, so ordered.

[The information referred to follows:]

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Mr. WELDON. I will introduce our first witness. I would like to

ask our first witness to come forward.

Ms. NORTON. Mr. Chairman?

Mr. WELDON. Yes?

Ms. NORTON. I would like to offer an opening statement.

Mr. WELDON. Well, go ahead.

Ms. NORTON. Thank you, Mr. Chairman. I have been on this

committee for 11 years, and there has never been any reluctance

to allow members to offer an opening statement. This is a very important hearing, and I appreciate your calling this hearing. I would

like the opportunity to express my own concerns concerning what

has happened to this very important program.

Mr. WELDON. Would the gentlelady yield? Let me just share with

you why I wanted to limit it to Mr. Davis and me.

Ms. NORTON. Yes, I would appreciate it.

Mr. WELDON. This is a relatively small committee. You are the

only person here, but I have been in the Congress for 7 years and

I have gone to a lot of hearings where Member after Member

makes an opening statement. Frequently, witnesses fly in from faraway places and sit and listen to Members. I personally prefer a

policy where the chairman and the ranking member make their

statement and the other Members submit them for the record.

As I said, it is a small group. I would be happy to let you go

ahead and make your opening statement.

Ms. NORTON. Yes, I would ask the chairman not to break the

longstanding policy of this very small committee to allow Members

to express their views in opening statements, particularly since on

FEHBP there is usually only one hearing per year, and I assure

you, Mr. Chairman, most of the witnesses here have flown in from

OPM and other far-flung parts of the District of Columbia.

If I may, I am very concerned and want to have the opportunity

to express that concern because I think only when those concerns

are expressed will there be the kind of response and pressure that

we need when we see the kinds of costs we are seeing in the

FEHBP program. I would not want to hide my disappointment at

what has happened to this program since I have been a Member

of Congress for 11 years.

Today the last thing the Federal workers and other Americans

need now are large increases in health care, but what FEHBP is

offering is not only inflation, but hyperinflation. This really takes

us back to the bad old days that we haven’t seen in years now,

where you have an almost 50 percent increase in FEHBP premiums over a period of 4 years. So that I just want to say that this

Member who has been fond of calling FEHBP a model program for

the country is going to cease doing so, because I think now FEHBP

compares unfavorably to other plans in the country.

For example, people in the Federal sector and elsewhere embraced HMOs in order to cut costs, and yet we see in our program

that the HMOs have increased slightly more than the fee-for-service, 14 percent for HMOs, 13 percent for fee-for-service. We see

HMOs fleeing FEHBP. So, clearly, they don’t consider this a hospitable program.

I am concerned that the usual suspects such as drug costs, while

significant, are not even the main culprit. One of the things I want

40

to ask the witnesses concerns this category called utilization technology and medical inflation, which apparently accounts today for

the most important part of the increase. There is something called

medical inflation which accounts for 60 percent of this category of

increase. I will certainly want to know what in the world that is

because it is undefined.

When I look at what has happened to FEHBP over the years

that I have watched this program, I am inclined to compare what

is promoting increases to the usual suspects. Mandates, for example, are 1.5 percent of the additional cost. Well, that is more than

I would like, but that doesn’t compare to 9.5 percent, which is

caused by utilization technology and medical inflation.

You would think demographics, another of the usual suspects,

would account for a greater part of the cost, of the increase in cost,

because the average employee for the Federal Government is retiring age, ladies and gentlemen, at 58. That is why we are going to

see an exodus of Federal employees in very large numbers in the

next year or two. But you have a 0.7 percent for the average employee who is 58 and the average retiree is 71 percent. So that

doesn’t account for this large increase.

I just want to say, Mr. Chairman, this is some model—with the

FEHBP premium increase more than the average for all employers.

So we are behind other employers who don’t have this full range

of competition in their plans. It is some model when almost half

of all employers in the country pay 100 percent of the premium, almost half, for health insurance for their employees, and FEHBP

still is stuck at 72 percent. The country is falling behind, not moving ahead in health care, and FEHBP is falling behind even further.

A major problem may be that we do not manage administrative

costs in the various health care plans. We simply proliferate administration. So one plan does costly administration and the next

plan does costly administration, and we get to pay for all of that.

Medicare administrative costs are 1.7 percent. Medicaid administrative costs are 4.4 percent. I am not sure what the average administrative cost is for a plan like Blue Cross/Blue Shield. That is

something I would very much like to know.

FEHBP, we know this, is a model of competition. It would be

hard to find any plan that had 180 carriers. It has many cost-saving HMOs, so-called cost-saving HMOs, but the results are not

what competition and cost-cutting plans are supposed to give us.

Mr. Chairman, these annual hearings have had no effect whatsoever on the same problems. They go up each year. I believe that

the time has come for thinking beyond the boundaries that Congress and the OPM have brought to the problem, that we ourselves

have to take responsibility for allowing this to get out of control.

Thank you, Mr. Chairman.

Mr. SOUDER. Mr. Chairman?

Mr. WELDON. Does the gentleman have an opening statement?

Mr. SOUDER. I would like to submit my opening statement for

the record and go on record as saying I believe it should be the

chairman and the ranking member that generally do the statements. That is the way we do most of the Government Reform committees. There are exceptions that we can do, but that, combined

41

with the late start, I have two other things I have to go to. I am

not going to now be able to hear more of the witnesses, and I am

frustrated.

Ms. NORTON. Because one member gave an opening statement?

Mr. WELDON. No, we were delayed waiting for Mr. Davis. His

plane arrived late.

Mr. SOUDER. I basically agreed with your points, but I hear them

all the time.

Mr. WELDON. Well, I understand the gentleman’s frustration and

we will go ahead and proceed.

I would like to introduce our first witness, Dr. Tom Coburn. Dr.

Coburn is a distinguished former Member of the House, having

represented the 2nd District of Oklahoma from the 104th Congress

through the 106th. During that time he was an active and articulate spokesman on health care issues, and he is today a practicing

physician.

Dr. Coburn, I welcome you to this hearing and I look forward to

hearing your testimony. If you could please stand and allow me to

give you the oath?

[Witness sworn.]

Mr. WELDON. Note for the record that the witness responded in

the affirmative.

Dr. Coburn, you are recognized. If you could please try to summarize your statement to 5 minutes, we would appreciate it.

STATEMENT OF DR. TOM A. COBURN, M.D., A FORMER REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA

Dr. COBURN. I would be happy to do that.

First of all, let me thank you and say it is good to see Ms. Norton

and Mr. Souder. I miss my times with you in the House, but I thoroughly enjoy myself in medical practice today.

I think that it is important that this hearing not just concern

itself with the increases that you are seeing in the FEHBP arena

because it is only one symptom of what is actually occurring out

there, and it is based on multiple factors.

I also think that you ought to have a realistic perspective of what

has happened in medicine. Medicine is no longer an altruistic, benevolent profession. It has been turned into a hard-core business,

and decisions about people’s lives and their health have more to do

with dollars than they have to do with caring of the individuals,

and that is unfortunate in this country. I think we ought to try to

put incentives into place that would move us back to that of the

science that is based on care of the individual.

I also would say that many of the people who are participating

in the field of medicine are not unbiased, as I am not myself. I am

a purchaser of multiple plans of health care for businesses that I

have. I also am biased in that I am one of the providers in health

care. I tend to bias toward my own advantage. Therefore, everything that I say, as well as every other person who is giving testimony here, has a vested interest in their own perspective that

makes their testimony somewhat suspect.

But I do have the ability of having been in Congress, also having

practiced medicine, also having been a purchaser, a large purVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
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chaser of health care benefits. I have seen what I think to be are

multiple numbers of the problem.

The first thing is it looks like this last year we spent $1.4 trillion

on health care, of which about $400 billion of it had nothing to do

with helping someone get well. That is a large number. It is somewhere estimated that the paperwork costs alone with medicine are

around 19 percent. That is atrocious.

When we quote what Medicare and Medicaid is, that has nothing

to do with the real cost of the paperwork because that has all been

shifted to the providers. Medicare and Medicaid are wonderfully efficient now that they don’t have the responsibility of providing any

of the documentation or paperwork associated with it.

The Federal employees’ program is a great program. It is one of

the best in the country. It allows the most choice. It allows the

greatest freedom of opportunity. It allows people to make decisions

about their own lives.

Ms. Norton noted that it is markedly increasing. The reason the

private sector’s prices are not increasing as much is because all the

people who are providing those are cutting benefits to maintain

and control costs. The reason that they are having trouble controlling the cost is because the government isn’t funding the actual

cost of Medicare and Medicaid. It is being tremendously cost-shifted to all the other sectors.

So we can run around and look for the cost-drivers, and there’s

multiple cost-drivers, but one of the most important is the lack of

proper funding for the health care programs that we provide for

the elderly and indigent in this country. Therefore, we tax everybody else in this country indirectly through their health care premiums for providing those services. To deny that is to stick our

head in the sand and say that we are not causing the prices to go

up by what is happening in Washington the way they fund Medicare and Medicaid and at the States.

The one criticism I would have of the Federal employees, and one

of the reasons that it would tend to go down rather than go up, is

if they had a truly high deductible policy that would incentivize

people to not overutilize the system, I think, No. 1.

The second real problem with cost-drivers in health care is perverse incentives. There is no incentive not to overutilize the system

and there is every incentive, especially with low deductible and

managed care plans, to overutilize the system. There are no strong

incentives throughout the country for preventative care. One of the

things that we can do that will make a tremendous difference in

the long run: preventative care in terms of diabetes, preventative

care in terms of hypertension, preventative care in terms of giving

the deductible to anybody who decides to choose to have a preventative health care exam so that they can get the benefits of knowing

what they can do to change their life, so that they won’t succumb

to an illness in the future that will cost all of us, including them.

Great examples of that are pneumo-vacs for seniors. We have

less than 50 percent of our seniors immunized against the No. 1

cause of hospitalization, which is pneumococcal pneumonia. Yet the

drug companies that make that and several other people can show

us that would be a cost benefit. Why wouldn’t we want to

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incentivize the physicians to immunize their seniors, like we do

with flu vaccine?

Vaccine programs for children, we are now shifting all that to the

health departments around the country because the absolute cost

of paperwork alone to administer vaccines to children is a losing

proposition for every pediatrician, family practice, and internal

medicine doctor in this country. We lose money every time we vaccinate a child. That has to stop.

So what happens is we shift the cost. We send them to the health

department. Consequently, many of them don’t get immunized. We

have a program to immunize children, but because it is not reimbursed to a point where it can be justified, we lose.

I will wrap up here real quick just by saying I think another significant thing is pharmaceutical costs. We are the only Nation I believe in the world that allows direct consumer advertising. There

was recently a study put out by Lancit that questioned the motivations and the advertising techniques and the truthfulness of that.

There are significant consequences to that in terms of doctor/patient relationship, in terms of overutilization. We now have to reeducate patients when they come to our office about why they don’t

need a medicine that the pharmaceutical company convinced them

they did through a TV ad. That takes time. That increases cost.

That increases complexity. $2 billion is going to be spent this year

on TV advertising by the pharmaceutical industry for prescription

drugs, without adequate advertising limitations, which the FDA

recognizes and as does the general medical field.

Finally, one of the most perverse incentives in a study out of Indiana in 1993 discusses the cost of ordering tests that aren’t necessary. That is all based on a tort system that says medicine is to

be perfect, and it is not. It is an art. We tend to want to think of

it only as a science. It is an art that utilizes science to affect the

medical or scientific result.

Because of that, one-third of all the tests that are ordered in this

country are unnecessary. That has been documented. So if we decrease that, we could save another $10 billion just by reforming the

tort system in this country so that we order tests—or put the system to a point where it is arbitration, something that says we won’t

continue to order the tests.

Now if you look at that study, it said even the doctors who said

they don’t order tests to protect their back side, when looked at in

retrospect, it said they did. So we all do, because none of us wants

to get sued. So we order tests to justify and defend our positions

for the future that has nothing to do with the care of the individual.

Finally, Medicare has designed a system that is designed to be

defrauded. It is easy to defraud Medicare. If you look at what

HCFA, which has now changed its name, said about echocardiograms by cardiologists in this country, and that about 500,000 are

done each year that don’t need to be done, and yet we have not

seen any decrease in that number since that statement was made,

there have to be some questions as to whether or not the system

is designed to be overutilized and defrauded.

The last thing the government needs to do is to make more regulations in the health care industry that will require more bureauVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
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crats chasing more paperwork. What I believe that the government

needs to do, and for Federal employees as well, is create a program

that incentivizes preventative care and incentivizes against overutilization.

With that, I will end my testimony.

[The prepared statement of Dr. Coburn follows:]

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Mr. WELDON. I thank the gentleman for his testimony, and I recognize myself for 5 minutes for questioning.

Were you recommending, as you got to the conclusion of your

statement there, that FEHBP offer a high deductible option for employers kind of like a medical savings account? Do you have any

experience—you said you have been an employer for many years— either as a provider with medical savings accounts or as an employer with medical savings accounts?

Dr. COBURN. I have two separate plans, Congressman, that have

over 40 employees in them and we now utilize medical savings accounts. We have saved the first year $87,000; the second year,

about $60,000, in terms of cost to my businesses for their health

care. With that, we put $100 a month into a medical savings account. We cover the entire family, which none of our competitors

do. Our employees don’t contribute anything. For their first hospitalization, until their medical savings account meets the deductible, we pay the deductible. So they have a no-cost program that

has, in essence, saved us a tremendous amount of money. It would

have saved us money if we would have had a 20 percent utilization

rate at the hospital.

So the idea of a high deductible policy that incentivizes people

not to overutilize and incentivizes people to have preventative care

is something that lowers cost, improves health care, and decreases

internal costs in terms of health care providers. There is no paperwork to shuffle.

Mr. WELDON. Could you elaborate a little more on the plan that

you are using in your business in terms of the premium structure,

how it works? Then you have commented a little bit on preventative health care. Have you monitored that at all within your medical savings account plan?

Dr. COBURN. We have I think it’s a $3,800 deductible this year.

Last year the maximum we could have was set by Congress, and

it was something lower than that. We are raising the deductible

every year as we go, but we are also increasing the amount of

money that we are putting monthly into their medical savings accounts, which they have an option to go use on dental or drugs or

anything related to health care that they can or they can leave it

there and earn tax-free earnings on it.

But our monthly premiums were cut by two-thirds as we converted to that system over where we were in an indemnity fee-forservice plan or a PPO plan that we were in. So we have effected

great savings for us, and we have increased the care for our employees and their families and actually cut their costs. It is because

of the incentives to not overutilize it.

Every day in my practice, Congressman, I have 10 people who

are in my office who don’t need to be there. They have no need to

be there.

Just one point on that: The No. 1 reason——

Mr. WELDON. By the way, I practiced medicine.

Dr. COBURN. I understand.

Mr. WELDON. I saw the same thing.

Dr. COBURN. The No. 1 reason that I have seniors in my office— and my practice is about 65 percent Medicaid, about 15 percent

Medicare, and the rest private practice. So I have a large Medicaid/

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Medicare practice. The No. 1 reason that seniors are in my office,

and this is my summation of why I believe they are there, is they

are lonely. The last time they heard from their son or their daughter or their brother or their sister—they are isolated and lonely.

They need someone. So, consequently, what is a better deal? Get $30—you pay 20 percent; if you have met your co-pay, you can go and talk to your doctors. It is a great way. So there are all sorts of social motivations

that we have that impact our utilization rates. It is not just as simple as economics. There are other issues as well.

Mr. WELDON. In the remaining time I have, let me ask you explicitly: We are dealing with FEHBP right now. That is the committee’s jurisdiction. Is there one thing that you could recommend

for us to do as we look at FEHBP in the future, making changes

in the program? Is it offering this high deductible medical savings

account option? Are there other structural changes that you think

we can or should be making?

Dr. COBURN. I think it would be interesting to offer a high deductible. I think you would be surprised at the number of people

who would take the difference in what they pay and put it into a

checking account and save it for whatever emergency they might

have or borrow against some other method for a hospitalization.

The real thing that I believe we have to get to for not only Federal employees is we have to have catastrophic health insurance in

this country for everybody. We have enough waste in the present

system to cover everybody out there that is not presently covered

with health insurance. There is $250 billion worth of waste in the

present system, in my estimation. If we had a system that was

properly incentivized, that cared for those who couldn’t care for

themselves, made sure we kept our commitments to the seniors,

did not underfund the cost of that, then we could, in fact, improve

everybody’s care and control some of the cost.

The American public knows how to purchase everything except

what we think they can’t purchase, which is health insurance.

They don’t have enough knowledge, savvy to do that. That has

been our estimation through the years, and we have never decided

we were going to let them do that. I believe they would do just as

well at that as they do every other aspect of purchasing, whether

it is autos, homes, or clothes.

Mr. WELDON. Thank you. The Chair recognizes the gentlelady

from the District of Columbia for a question.

Ms. NORTON. Thank you, Mr. Chairman, and I appreciate very

much your testimony, Dr. Coburn, given your experience both in

the Congress and in the practice of medicine.

By the way, I will be interested, in light of what you said about

the way in which high deductibles are disincentivized, overuse, I

will be interested to hear from our OPM witnesses about whether

or not people are in fact being driven more and more to higher deductible plans, because I would imagine that would be one way of

saving the cost of the premium.

I note that two of the things that you mentioned, shifting of costs

of Medicare and Medicaid, as a factor in the increasing cost to all

the rest of us is important to note. You also testified that we need

incentives for preventative care. It seems to me that both of those

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would add cost to somebody. I take it the cost would be added to

the Federal Government.

For example, if Medicare and Medicaid costs are not shifted to

younger people and insurance plans, then somebody would have to

pay the cost. Who do you imagine should pay those costs then?

Dr. COBURN. They are paying them already, Congresswoman.

Ms. NORTON. Well, we are paying them, you said.

Dr. COBURN. No, no. We are paying them. The private sector is

paying those costs today through inflated premiums because the

Federal Government does not cover the cost of care for those people

who they have committed—— Ms. NORTON. See, that is your point. I take your point, and I am

saying, suppose that this cost-shifting was not going on. Would

that not mean that the Federal Government would be paying billions more? Is that what you are saying should occur, that we

should just step up to the plate and pay for the cost of Medicare

and Medicaid instead of shifting the cost to private parties such as

those in the FEHBP plan?

Dr. COBURN. I believe it would help you better manage the programs. Today you are making decisions on false assumptions of

what the costs are. If the Federal Government assumes the cost,

that means we all assume the cost. So we are going to pay for it

either way, but the goal ought to be to effectively manage it.

I think we have a culture that has developed while I have been

a doctor. It is, how do you stay ahead of the game? I think this is

a real important point. We are out there figuring out—I am budgeting for next year in my practice of five doctors. How do we stay

ahead of the game? How do we stay even as our revenues are declining from the private sector, what they are willing to pay us for

delivering a baby or caring for a family, and we are getting a small

increase from Medicare and no increase from Medicaid. Our costs

of doing business are going up. How do we manage to stay even?

Ms. NORTON. You don’t. You don’t because people—— Dr. COBURN. Oh, yes, we are figuring it out. Here is what you

are seeing: You are seeing increased utilization of testing and resources and overutilization because that is a human response in

this market. You will never control the costs in health care until

you reconnect the purchaser with some of the money coming out of

their pocket. That is my whole point with high deductibles. That

is why you see a decreased utilization, and it is not an underutilization. You are bringing it back down to the level it should be.

The number of young mothers who now don’t come into my office

because their deductible is high, they make a phone call: ‘‘Should

I watch my child with this fever?’’ We have children overutilizing

primary care facilities like crazy simply because we have raised a

generation that has been taught to do so because there has been

no financial cost to utilize that resource.

All I am saying is we have to reconnect the cost with the utilization of the resource. If we do, we can still have great medicine, and

we can still take care of all those—actually, we can do a better job

of taking care of those who have no insurance today, if we would

do that.

Ms. NORTON. By paying providers, by the government paying

providers what it cost the government, one point I take from your

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testimony is that, instead of spreading the cost to albeit a large

number, but, nevertheless, other insured people, we spread it to an

even wider base because you spread it to the entire country

through the tax system. I agree, I think that makes better sense.

We had just as well face it, somebody’s paying for it.

Dr. COBURN. Right.

Ms. NORTON. And the real question is, does somebody who is a

Federal worker who can hardly afford insurance payments as it is,

is that who the cost should be shifted to?

Let me ask you about your really interesting point, one that has

struck me as I look at these ads on TV that, as you indicate, invite

us all to try to get whatever is advertised. Would you make the

cost of those ads less deductible than ordinary costs? I mean, how

would you go at that, understanding that censorship and the like

is not, of course, allowed in our country?

Dr. COBURN. Oh, it is.

Ms. NORTON. Would you just say you don’t get the same rate off

for that?

Dr. COBURN. No, it is. The FDA has the power today to withdraw

those ads.

Ms. NORTON. And you think they should?

Dr. COBURN. Absolutely. They are a wasted resource in terms of

improving the quality of health care in this country.

Mr. WELDON. The gentlelady’s time has expired.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. WELDON. The Chair recognizes the gentleman from Indiana,

Mr. Souder, for 5 minutes.

Mr. SOUDER. Thank you. I first want to say I am glad to see you

still have your passion and your idealism and haven’t gone all soft

and flabby now that you are gone from the Congress.

Dr. COBURN. Thank you, Congressman.

Mr. SOUDER. I have a couple of questions I want to ask you for

the record. You have testified about the danger of rationing associated with government-imposed price controls on health insurance

premiums. Are you aware of any evidence that some government

workers would rather have health insurance plans that they think

are less likely to deny them needed care even if they have to pay

for it?

Dr. COBURN. I think the opposite is true. I think you have probably seen through the experience of the Federal employees, and I

think it is the standard family policy where you have seen, even

though premiums have gone up, you have seen a marked increase

in utilization of that plan.

I believe the American consumer is a smart consumer, and they

will make the best choices. Unfortunately, in this country we have

manipulated the system to not give them every choice that they

should be able to have, which one thing that is missing is a high

deductible policy for everybody, so that they can once again be responsible for their health care.

Mr. SOUDER. In other words, you are saying some will at least

pay more to get more?

Dr. COBURN. Absolutely.

Mr. SOUDER. Because some of us are concerned that, in fact,

those choices may deprive individuals. One of the arguments is,

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some people argue that it is unfair to let some Federal workers

who would pay more for a program that, for example, is less likely

to ration health care because it would be unfair to those Federal

workers who can’t afford to pay for it. What is your argument?

Dr. COBURN. Well, you are just going to shift costs away, so they

are going to end up having to pay more. They are going to end up

getting less care. So all that is going to do is accentuate the costshifting that we have going on right now. So they are less likely

to get care if you limit that because you will shift more cost.

Mr. SOUDER. Well, it is a model plan and I hope we can continue

to have that model.

I want to ask you one other basic type of question. As a former

Member, your idealism was there on the catastrophic, but I think

it is important for the record to show that you said, and I would

like to ask you to kind of rethink that in this context: You said you

believe catastrophic should be covered if we could eliminate the

waste, could control the Medicare and Medicaid, presumably have

tort reform, and a number of other things.

For example, having been a Member of this body and banged our

heads against a body that is two-thirds attorneys, do you really

think we can get tort reform? Do you really think we are going to

pay for Medicare and Medicaid? Do you really think Chairman

Burton and I are going to vote against Eli Lilly being able to advertise? Do you really think that we are ever going to get a hold of

the waste? In other words, that is an idealistic goal, but is it a realistic goal?

Dr. COBURN. I don’t know how to answer that, Congressman,

without offending you.

Mr. SOUDER. You do all the time. [Laughter.]

Dr. COBURN. I believe if the Members of Congress will search

their hearts to do what is in the best interest of the country, not

what is in the best interest of their region, that in fact all of us

would be better off. To do less than that penalizes us every day.

Eli Lilly was making lots of money before they started advertising on television. What we have now is the money that they are

making is causing an inflated cost elsewhere in the health care industry because we are spending time and charging Medicare more

money now because we have a much more complex visit that is covering several other things that you are paying for. So it is wonderful to support our constituency, but the No. 1 oath that we take

when we come up here is to defend the Constitution, not our constituents.

Mr. SOUDER. I could make a pretty good argument on behalf of

advertising, as somebody in marketing, that in fact that is one way

the market sorts through. But rather than do that, let me rephrase

my question, and it is my last question.

Would you favor instituting catastrophic health insurance coverage if these other things don’t occur?

Dr. COBURN. We would not have to have catastrophic health in- surance if some of the other things would occur. If you have $1.4

trillion, and if I am right, which I honestly believe, and all my

staff, we researched this all the time I was in Congress, almost 30

percent of that goes nowhere to help somebody get well—just silly

rules that Medicare imposes on a hospital that ends up creating

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bureaucracies that have nothing to do with quality of care and

have everything to do with pushing paperwork, so somebody in a

position of power at a Medicare payer can have higher control.

Then, yes, we could save a ton of money in health care.

My whole point is: Incentivize the proper utilization of this

scarce resource. If you allow people a choice to do that, and allow

the market to work within a framework that gives preventative

care the No. 1 priority that it should be, which will save us dollars

down the road, then I think you can save a ton of money. You can

lower the cost of Medicare. You can lower the cost of Medicaid. You

can get a whole lot more for the dollars that you spend.

Tort reform in the states, it has happened; we are seeing the

tests go down. So we know it works. The question is—in my State

it is one of the worst.

Mr. WELDON. The gentleman’s time has expired. The Chair now

recognizes the ranking member, Mr. Davis, who will make his

opening statement and then proceed to questions.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Let me, first of all, apologize for being late at your first hearing,

but let me also congratulate you on being named chairman of this

subcommittee and indicate that I look forward to working with you.

I was intrigued by the dialog that has taken place. I would like

to just make a brief opening statement, and then I do have a question, too, that I would like to ask.

Mr. Chairman, over the last several years the subcommittee has

held hearings on the dramatic increase in premiums in the Federal

Employees Health Benefits Program. Next year these premiums

are expected to rise an average of 13.9 percent. This follows a 10.5

percent increase in 2001 and a 9.3 percent increase in 2000.

The Office of Personnel Management has cited increased use in

prescription drugs and medical services, advances in medical technology, and an aging Federal work force as reasons for the dramatic hike in 2002 premiums. Health care inflation, Federal mandates, and increased prescription drug costs have also been cited as

reasons for increased premiums.

Regardless of the causes, Federal employees are bearing the

brunt of these increases. The question we must ask is, how do we

address increased premiums in the Federal Employees Health Benefits Program?

Last year OPM established, and was forced to cancel, a pharmaceutical pilot project for the Special Agents Mutual Benefit Association [SAMBA]. SAMBA is a small health plan in the FEHBP that

provides coverage for 16,000 active and retired Federal law enforcement employees.

Under the pilot, SAMBA would have purchased mail order pharmaceuticals off the Federal Supply Schedule, generating savings to

the government, SAMBA, and enrollees in the health plan. However, the three companies that dominate the pharmaceuticals market, Pfizer, Merck, and Parke-Davis, refused to supply their products to SAMBA from FSS. This I think was unfortunate because

the pilot program would have provided useful information about alternative methods for controlling the escalating costs of prescription drugs.

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Alternatively, Representative Steny Hoyer introduced H.R. 1307,

a bill that would increase the government contribution for Federal

employee health insurance. Currently, the Federal Government

and enrollees jointly pay FEHBP premium costs according to a

statutory formula. The government contributes 72 percent of the

FEHBP premiums. H.R. 1307 would increase the government’s contribution to 80 percent of these premiums.

Federal employees are feeling the effects of these increased costs

every day. Therefore, the subcommittee should hold bipartisan

hearings on these and other proposals that specifically address how

we can stabilize, if not decrease, premium rates for the approximately 9 million enrollees in the FEHBP program.

I thank you, Mr. Chairman, and certainly would like to engage

in questions with Dr. Coburn.

Mr. WELDON. The gentleman is recognized.

Mr. DAVIS OF ILLINOIS. Thank you very much. Doctor, I certainly

want to welcome you and indicate that I have always been intrigued listening to your positions relative to health care delivery,

coverage, and how we might be able to shape our system in such

a way that we get the most benefit for the money that is being paid

or the greatest bang for the buck.

Let me ask you, do you think that there is a way to actualize cost

in such a manner that whoever is receiving the service actually

pays that cost? I am saying, whatever payment mechanism that is

used is actually paying that cost, saying it is not being shifted any

place other than right there.

Dr. COBURN. I think it is reasonable to assume that such a market would do that, but you have to have a true market, I believe,

to allocate that cost to the individual consumer. What you see in

a free market is that costs end up reflecting supply and demand.

What we have not done, and the worst thing we can do, is put more

price controls on the health care industry.

You did not see health care inflation prior to the imposition of

Medicare. You did not see significant health care inflation prior to

the imposition of Medicare price controls. When Medicare became

a price-controlled system and out of the fee-for-service, totally controlled, that is when you saw health care inflation take off everywhere else in this country. It simply reflects a disruption in the

market and shifting of the cost.

So the only way I believe that you could actually see that is go

back to actually a free market system. I am not sure we could do

that. I am not sure we could go back to a free market system. We

have tremendous moral problems in health care in terms of billings, overutilization. And I am talking about my own profession.

I am not talking about just patients, and I am not talking about

just doctors. I am talking about every aspect of the system sees a

pot of gold out there and grabs in and puts its hand in.

That is why the first part of my statement I said this has become

a business; it is no longer an altruistic profession to care for somebody’s health. It is driven by business concerns, not health concerns. We need to get back to health concerns.

Mr. DAVIS OF ILLINOIS. Since that is the case, since you cannot

orchestrate market conditions—I mean, the market is the market,

and this isn’t to suggest by any stretch of anybody’s imagination

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that you would be in favor of what I am going to ask you. Could

a national health plan, where everybody is in, the costs have been

determined, and everybody gets service based upon whatever their

needs are—obviously, some of the incentive will be gone in terms

of certain kinds of practice and certain kinds of practice conditions

and all, but would that even in any kind of way the playing field?

Dr. COBURN. No, I don’t think it would. Even though it might

change some of the cost pressures, what it does is ration care.

What you are going to see is end-of-life issues. You are going to see

that the elderly have no value under that system. That is ultimately where we will go. The value of life, once somebody becomes

dependent on the health care system, will no longer have value because the cost associated with that value will be so high.

You cannot put a system together like that. Just look at Canada.

They ration care now. We have three orthopedists in my home

town now who moved to my home town from Canada simply because they couldn’t do the things that people needed to have done

for them. Now that is not to say that people in Canada don’t get

adequate care, but there is rationing going on.

I would tell you that my own organization, the American Academy of Family Physicians, has endorsed a national payor system

because the physicians are fed up trying to chase this monkey. But

it is not in the best interest—I would go back and here would be

my statement: I believe that in every area in our country, of all resources, that if we allow a true market to work, the most people

will get the best benefit if we allow that to happen. We have nothing close to that now in health care, and that is why you have the

cost inflation that you have.

Mr. DAVIS OF ILLINOIS. Of course, as long as we have advertising

as a part of our society the way that we do, of course, that would

never exist either. I mean, because people will be influenced and

certainly influenced to the extent—— Dr. COBURN. But they are not the payors today, Congressman.

We have advertising right now, but they are not the payors. So you

get it utilized without it costing you anything. It costs your employer or it costs the Federal Government, but there is no cost to

you personally for utilizing it. So you don’t have a market. So, yes,

you could have that, if there was a reconnection to your billfold

when you overutilized the system. We don’t have any of that. So

there are these perverse incentives: Since it cost me nothing, I am

going to utilize the system. That is the problem where we are today

in health care, and that is one of the reasons, one of the main reasons besides greed among all in this system, of driving the cost up.

Mr. DAVIS OF ILLINOIS. Tom, let me thank you very much. You

do remind me, when we start talking about payment of something,

what Frederick Douglass was supposed to have said one time, and

that is: He knew one thing if he didn’t know anything else, and

that is in this world we may not get everything that we pay for,

but we most certainly will pay for everything that we get. [Laughter.]

If we don’t pay one way, we will pay the other.

Dr. COBURN. Well said.

Mr. DAVIS OF ILLINOIS. Thank you.

Dr. COBURN. Thank you.

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Mr. WELDON. The gentleman’s time has expired.

I want to thank Dr. Coburn for coming here from Oklahoma.

Your testimony was very informative, and we certainly look forward to hearing from you again in the future on these issues.

Thank you very much.

I would like to now call up the second panel. This will include

our first witness, Mr. Ed Flynn. He is the Associate Director of Retirement and Insurance Services at the Office of Personnel Management. He has appeared frequently before this subcommittee to

discuss FEHBP.

The second witness is Steve Gammarino, senior vice president of

the Blue Cross/Blue Shield Association. Mr. Gammarino has also

testified a number of times before this subcommittee on FEHBP.

Colleen Kelley, our third witness, is president of the National

Treasury Employees Union and represents many Federal employees who rely on FEHBP.

Our fourth witness is Lawrence Mirel, the commissioner of the

District of Columbia’s Department of Insurance and Securities Regulation. Commissioner Mirel is an expert on insurance, including

health insurance. He has thought carefully about some of the problems affecting health insurance today.

Bob Moffitt is our final witness on this panel. Mr. Moffitt is the

director of domestic policy studies at the Heritage Foundation. He

has studied the FEHBP for years and has developed a real expertise in this area.

I thank all of our witnesses for participating and I am looking

forward to hearing your testimony. I see you know the drill. You

remain standing.

[Witnesses sworn.]

Mr. WELDON. Note for the record that the witnesses responded

in the affirmative.

I would like to go ahead and recognize Mr. Flynn for 5 minutes.

STATEMENTS OF WILLIAM E. FLYNN III, ASSOCIATE DIRECTOR, RETIREMENT AND INSURANCE SERVICES, OFFICE OF

PERSONNEL MANAGEMENT; STEPHEN W. GAMMARINO, SENIOR VICE PRESIDENT, BLUE CROSS BLUE SHIELD ASSOCIATION; COLLEEN M. KELLEY, PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION; LAWRENCE MIREL, COMMISSIONER, DISTRICT OF COLUMBIA, DEPARTMENT OF INSURANCE AND SECURITIES REGULATION; AND ROBERT E.

MOFFITT, DIRECTOR, DOMESTIC POLICY STUDIES, THE HERITAGE FOUNDATION

Mr. FLYNN. Good afternoon, Mr. Chairman and members of the

subcommittee. Thank you very much for your invitation.

You have already entered my prepared remarks, and I will just

summarize from those, with your approval, Mr. Chairman.

I would like to focus my remarks on this year’s average premium

increase in the Federal Employees Health Benefits Program, the

changes that will occur in the Blue Cross and Blue Shield Plan,

and the need to do something about the continuing withdrawal of

health maintenance organizations.

At OPM we run the Nation’s largest employer-sponsored health

insurance program. Since its inception, it has provided high-qualVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
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ity, affordable health care to almost 9 million Federal employees,

retirees, and family members. The program is part of the government’s overall compensation package and it helps government attract and retain its share of the talent needed to carry out critical

public work.

Almost 85 percent of employees sign up for the program, and our

surveys indicate a high degree of satisfaction with participating

health plans, satisfaction levels that have remained stable even

with the premium increases of the last several years.

The average increase next year will be just over 13 percent. No

one is happy about that, least of all the Director of OPM and all

of us who work on this program. There are, however, three key

points I want to make about next year’s increase.

First, market competition, consumer choice, and intensive negotiations with health plans do work to provide comprehensive benefits at an affordable cost. At the same time we are operating in a

market where, according to USA Today, and I might just mention

according to the New York Times of today, health insurance prices

nationally are soaring and will range from 13 to 50 percent next

year. Other surveys and some announcements by major public and

private employers bear this out.

Second, we bargained hard for what we were able to get this

year. Shortly after being sworn in, we briefed Director James on

the key aspects of the program. Her charge to us was clear. She

wanted us to get the best deal possible for participants without cutting benefits across the board or making major changes, and we did

just that.

Initial proposals from health plans would have led to a premium

increase of almost 16 percent. Through intensive bargaining, we

shaved 2 points off that number and project an overall average of

just over 13 percent at the end of open season.

Finally, there are trends we can identify that do affect the cost

of this program. As has been the case in past years, the rising utilization and cost of prescription drugs tops the list, accounting for

over one-third of the total. Other factors include overall utilization,

technology advances, medical inflation, and a covered population

that gets older on average each year.

Responding to our guidance and the same trends we were seeing

in health care generally, the Blue Cross and Blue Shield Plan will

introduce several major changes next year. They will merge their

High Option Plan into the Standard Option and create new, lowercost Basic Option which provides benefits essentially for in-network

providers only. Had Blue Cross and Blue Shield not made this proposal, about 125,000 elderly participants in the High Option Plan

would have faced a premium increase in the 30 to 35 percent

range.

I might also add at this point that it is not unusual for health

plans to merge, add, or drop options. That has always been a part

of this program, reflecting its market orientation. We carefully consider proposals like these and we paid special attention to the Blue

Cross/Blue Shield proposal because of its scope and the importance

of the program overall.

In addition, throughout the spring and summer several participating health plans learned of the outline of the Blue Cross proVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
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posal and expressed concerns about its impact. We met with the

Coalition to Preserve Choice and others to ensure we understood

and addressed their concerns as we negotiated with Blue Cross and

Blue Shield. While we are confident we made the right decision in

accepting the Blue Cross proposal, we will carefully monitor both

its implementation and its effects to ensure the continued strength

of the program.

Next year approximately 30 health maintenance organizations

will leave the program. Because of that, almost 150,000 participants will have to select new plans. This continues a trend we have

seen over the past several years. While we know that plans are

leaving for business reasons unrelated to our administration of the

program, it is, nonetheless, an area of concern to us. We have

taken a number of concrete steps in the last several years to increase the number of health plans, albeit with limited success.

The President’s budget reflects, among other things, a commitment to consider options to ensure that the program offers quality

and cost-effective health plans not only now, but for the future. We

are exploring ways to increase the health care options available to

Federal employees, thereby increasing competition within the program. We look forward to working with you and the members of

the subcommittee and others on this issue.

Mr. Chairman, that concludes my statement. I will be happy to

answer any questions you may have.

[The prepared statement of Mr. Flynn follows:]

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Mr. WELDON. Thank you, Mr. Flynn. Now, Mr. Gammarino, you

are recognized for 5 minutes.

Mr. GAMMARINO. Good afternoon. I am Steve Gammarino, senior

vice president at the Blue Cross/Blue Shield Association. On behalf

of the Blue Cross/Blue Shield plans, I thank you for the opportunity to appear before you today.

With your permission, Mr. Chairman, I would like to submit my

written statement for the record.

Mr. WELDON. Without objection.

Mr. GAMMARINO. In your letter of invitation you requested that

I address several questions on health care trends and efforts by

Blue Cross/Blue Shield to manage the rising cost of health insurance premiums. In addition, you requested that we discuss the new

Basic Option Plan and any other issues that are important to the

continued viability and stability of the Service Benefit Plan.

For 2002, overall health insurance premiums for the Blue Cross/

Blue Shield Standard Option Plan will rise 15 percent. The premium increases we are experiencing are similar to industrywide

trends. To gain insight into the trends in health care, it is useful

to explain what we are experiencing in the marketplace. I call

them the three ‘‘C’s’’: cost, consumerism, and coverage.

First, premiums are being driven today by increased costs in all

areas of health care. Prescription health costs continue to be driven

by the rapid development of new, more expensive therapies which

often substitute for less costly, existing therapies; rising prices for

existing drugs and heightened demand and use of prescription

drugs, fueled by the ever-increasing direct-to-consumer advertising.

Under Blue Cross/Blue Shield’s Standard Option Plan, drug costs

today represent almost 30 percent of our benefit cost. In addition,

over the past couple of years we have begun to see an increase in

cost for provider services which is due to rising prices in the use

of hospital and physician services.

It is also important to realize that the FEHBP is dealing with

an aging population. For example, the average Blue Cross/Blue

Shield Service Benefit Plan enrollee today is 60 years old, and the

average FEHBP member is 54. This is a much older population and

a higher-risk group than most health plans in the private sector.

The second ‘‘C’’ is consumerism. In today’s marketplace, especially in a competitive and individual choice market such as

FEHBP, the consumer drives decisions. With the combined forces

of the backlash against managed care restrictions on access and direct consumer advertising on prescription drugs, the consumer has

become a key force in health care decisionmaking today.

The third category of health care trends is the changing perception of health coverage. Over the years expectations of what health

insurance should cover have shifted. The original intent of insurance was to protect against catastrophic or acute situations while

consumers paid for day-to-day expenses, similar to how car insurance works today.

However, today health care covers both catastrophic needs and

routine care. Consumers have come to expect and demand from

their State and Federal legislatures that health insurance plans

cover a wide range of treatment that includes preventative care,

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care that is experimental, and even care that is yet to be proven

scientifically.

As the Service Benefit Plan continues to face increasing cost

trends and an aging population, we are constantly exploring ways

to manage those costs. While we are concerned about the trends

and keeping overall costs contained, we are equally, if not more,

concerned about the overall health outcomes and ensuring that our

members receive quality care. To that end, we have also focused resources on strategies and programs that will improve patient safety

and quality outcomes.

In your letter of invitation, you asked me to address our 2002

benefit changes; in particular, the rationale for merging High Option and introducing a new Basic Option. As you are aware, Blue

Cross and Blue Shield currently offers two options: High and

Standard. Each year we take a close look at our products to ensure

that they provide value to our customers. Our research consistently

shows that the Federal employees and retirees are very concerned

about the cost of health care and that they want the best value

when selecting a health plan.

Blue Cross/Blue Shield decided to merge High Option into Standard Option because High Option is no longer a viable product. Due

to exceedingly high benefit costs, it has become a tremendous challenge to keep the product affordable.

In response to the demand for cost-effective health care coverage,

we are introducing a new option for Federal employees and retirees. This new option, called Basic Option, is a preferred provideronly benefit package that includes co-payments for many services,

no deductibles, and preventative dental coverage. It is designed to

provide Federal employees and their families with a premium that

is lower in cost than the majority of health plans in the FEHBP.

We believe it is a ground-breaking product and offers what most

individuals look for in a health care plan; that is, choice, access,

and simplicity.

With regard to your inquiry on ways in which FEHBP can be improved, in our experience there has to be an appropriate balance

between incentives and risk. With the reduction in the number of

health plans participating today, we would suggest that the subcommittee might want to further examine the financial incentives

and the significant underwriting and compliance risk required by

a carrier participating in the program.

Finally, your letter of invitation expressed an interest in any

matters beyond the specific focus of this hearing. One that is critical to Blue Cross/Blue Shield’s continuing participation in the

FEHBP is the exemption from the inappropriate application of the

cost accounting standards. For the past 3 years, Congress has

passed an appropriations act, a full statutory waiver requirement

related to these requirements, and we urge the subcommittee to

seek final resolution of this matter.

The Blue Cross and Blue Shield Association is proud of its role

it has played in the Federal employee marketplace. I hope my remarks will help you in your deliberations and discussions. We look

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forward to working with you to find ways to preserve and improve

the strength and stability of this program. Again, thank you for the

opportunity to appear before you today. I will be pleased to answer

any questions you may have.

[The prepared statement of Mr. Gammarino follows:]

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Mr. WELDON. Thank you. Ms. Kelley, you are recognized for 5

minutes.

Ms. KELLEY. Thank you, Chairman Weldon. As the national

president of the National Treasury Employees Union and the

150,000 Federal employees who we represent, I would like to congratulate you on your chairmanship of this subcommittee and look

forward to working with you in the future on these important

issues.

Mr. WELDON. Thank you very much.

Ms. KELLEY. The Federal Government faces a human capital crisis today with inadequate pay and benefits being the primary obstacles to both attracting and retaining highly qualified employees

by the Federal Government. The FEHBP used to be considered a

crown jewel in the Federal employee benefit package, but today it

has become prohibitively too expensive for lower-paid employees

and unattractive to prospective employees.

More than 9 million Federal employees, retirees, and their families depend on the FEHBP for coverage, and they are alarmed over

the recent dramatic premium increases. OPM’s announcement of

over 13 percent on the average rate increases for 2002 follow premium hikes the past 3 years of 10.5 percent, 9.3 percent, and 9.5

percent in 1999.

Since 1997, FEHBP premiums on the average have increased a

total of more than 46 percent. To put this in perspective, during

the same timeframe from 1997 through 2001, Federal employees’ salaries increased an average of 17 percent.

Mr. Chairman, Florida’s 15th Congressional District is the home

to more than 23,000 Federal employees and retirees. An employee

in the district saw their FEHBP premiums consume 8.6 percent of

their take-home pay in 1998. By 2001, that amount has increased

to over 11 percent.

For these reasons, it is critical that the FEHBP receive careful

scrutiny. NTEU does not believe that occurred this year. Earlier

this year NTEU raised concerns about Blue Cross’s proposal to

merge its High and Standard Option programs. To date, we do not

know the impact of that merger on future rates or on the stability

of the FEHBP or even whether there is a need for the new Blue

Cross plan. We do know that this will result in increased premiums

for those in the Blue Cross Standard Option and the need for a

major education campaign of both employees and retirees, so that

they know and understand the changes in the Blue Cross plans.

We all agree that the government needs to better use the size of

the FEHBP pool to obtain better rates from insurance carriers and

from health care providers. According to the Kaiser Family Foundation’s Employer Health Benefits Annual Survey for 2001,

FEHBP premiums increased at a rate higher than many other

large employers: over 13 percent for FEHBP and an average of only

10.8 percent in 2001 for firms and companies with 5,000 or more

employees. The numbers were similar in the year 2000, when the

Kaiser Survey reported an average premium increase of 7.1 percent

and the FEHBP premiums increased 10.5 percent.

But the differences the Annual Kaiser Survey reveals do not stop

here. As an employer and as Ranking Member Davis has noted, the

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ployees pay the other 28 percent. As the chart attached to my testimony shows, the average employee in employer-sponsored health

insurance pays 15 percent of the premium for single coverage and

27 percent for family coverage.

Not surprisingly, when asked by Kaiser, employers cited recruitment and retention of employees as one of the main reasons that

they absorbed most of the health insurance premiums for their employees. Most State and local government employers today pay at

least 80 percent of the premium.

To help address the effect that health insurance premiums have

had on the human capital crisis for the Federal Government,

NTEU worked with Congressman Steny Hoyer on bipartisan legislation, H.R. 1307, that would increase the employer’s share of the

FEHBP premiums to the most common industry standard of 80

percent. Without competitive pay and benefits, the Federal Government will be unable to compete for the talent that it needs. NTEU

asks that you hold hearings on this important legislation.

Nothing is driving premiums increases as rapidly as prescription

drug costs. We have heard that already from a number of speakers.

In the year 2000 OPM stated that prescription drugs represented

$1 of every $4 in FEHBP costs, and when announcing the 2001

premium increases OPM stated that 40 percent of the premium increase was the result of the drug costs.

NTEU thinks that OPM should negotiate discount prescription

drug rates for the FEHBP similar to those that are available under

the Federal Supply Schedule. Ranking Member Davis described in

great detail the SAMBA pilot that was canceled in 1999. This was

a lost opportunity for a potential solution to the prescription cost

at least of the FEHBP. But lost, too, were the taxpayer savings

that were inherent in negotiating the discount prescription drug

rates. The SAMBA pilot was estimated to save $2.4 million a year,

savings that would have flowed to both Federal employees and to

taxpayers.

Reducing drug costs programwide in the FEHBP holds the potential to save much more. This idea continues to merit exploration,

and NTEU asks that this subcommittee pursue this issue.

This concludes my remarks. Thank you very much, and I would

be glad to answer any questions you have.

Mr. WELDON. Thank you very much for your testimony. We will

now hear from Mr. Mirel. Did I pronounce your name correctly?

Mr. MIREL. Yes, you did, thank you. Most people don’t.

Mr. WELDON. OK.

Mr. MIREL. I appreciate that.

Mr. WELDON. You are recognized for 5 minutes.

Mr. MIREL. Chairman Weldon, members of the subcommittee,

Delegate Norton in particular, my Representative in the Congress,

I am Larry Mirel, commissioner of insurance for the District of Columbia. The agency that I head was created originally in 1901 by

Congress to regulate the business of insurance in the District of

Columbia. It is now part of the home rule government that was

created in 1974. Although I am a member of that government, I am

testifying here today on my own behalf and not on behalf of the

Williams administration.

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Our Department regulates all lines of insurance, including health

insurance. But I have to tell you that I have not seen the kind of

anger with any other line of insurance that we see regularly with

health insurance. I can’t tell you how many people call my office

or come in and complain that items that they thought were covered

in their insurance it turns out were not covered. I hear from doctors all the time furious with the kinds of hoops they have to go

through to get themselves paid for services that they have provided; hospitals who come in and complain that they are facing

bankruptcy because they cannot get reimbursed for services that

they have actually provided.

And the insurance companies are not happy either. They don’t

like the mandates that are enacted that throw off their calculations, and the system in general, it seems to me, could not be designed to be worse, to create that kind of anger. I don’t think I am

alone in that view. I think many Americans share that view of our

health payment system.

I have thought a lot about the reasons why this should be the

case. I think really there are two fundamental flaws with the current system of health insurance in this country, paying for health

care.

The first is that a large portion of what is paid for is just not

insurable and should not be covered by insurance. I take the point

that Mr. Flynn, I guess it was, made before, which is that originally you bought insurance to protect yourself against catastrophic

loss; that is, the loss from serious illness or injury. But over the

years the concept has been expanded and now covers what used to

be considered routine health care costs that you paid out of your

pocket.

The problem with that is that we have left the entire system in

the hands of insurers. Insurers are just the wrong people to run a

system like that. It is the wrong mindset for routine health care.

Insurers are very cognizant of utilization. A good insurance company is one that limits the number of claims that are filed. The essence of insurance is underwriting.

The idea of limiting claims is a good one if you are talking about

major illness or injury. To give just one example, Workers Compensation insurers spend a lot of time and money and energy trying to make the workplace safer, so that there will be fewer claims.

They do it for the noblest of reasons, which is they earn more

money when there are fewer claims. That is how insurance companies think.

The problem is you can’t apply that same kind of thinking to routine health care. You want people to go to the doctor. You want

them to get inoculated. You want them to do the kinds of preventative things that they should to take care of their health.

When you put it in the hands of insurance companies, what they

do is they start managing it the way they would any other kind of

claims to reduce the number of claims. So you get the kind of paperwork that you have, and you have the kinds of managed care

issues that you have—all of which adds enormous costs as well as

frustration to the system. That is the first problem.

The second problem, in my view, is that health insurance is a

contract; that is, it doesn’t cover anything that goes wrong with you

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in a health context. It covers only the things that are specified in

the contract and are not excluded.

The contract, however, is negotiated between the employer, who

pays for it, and the insurance company that provides the coverage,

the health plan that provides the coverage. The people who are

mostly affected by that contract, however, are the employees, the

ones who are covered, and the providers, those who provide that

coverage. Neither of them are part of the negotiating process. This,

in my view, is a very bad way to do business.

It is bad in another way, too, and that is that insurance is a very

competitive business. Employers are always looking for ways to

save money. They, therefore, look to cheaper insurance plans. The

insurers know this. So they vie with each other to provide cheaper

plans, so that they will be able to pick up a larger share of the

market.

There are really only two ways to reduce the cost of insurance,

in my view. One is to reduce the benefits that are provided, and

the other is to pay the providers less. Insurance companies are

doing both. They are dropping coverages that they used to routinely cover, and they are continually squeezing the providers to do

more for less money—to the point where the providers are finding

themselves strapped and unable to provide what they think of as

good medical costs.

Are there solutions to this kind of a situation? I believe that

there are, and I believe that the solution lies in something that Dr.

Coburn talked about before, which is a high deductible policy that

covers catastrophic loss of illness and injury, and then covering the

rest by a medical savings account; that is, taking the money that

is saved by buying a high deductible policy which is cheaper and

putting it in individual medical accounts for the employees. The

employees would then be able to control their own medical care,

pay for the things they want to pay for, and have more direct connection with the doctors and the providers that they deal with.

I will stop at this point. My entire statement I believe is in the

record. I would be glad to answer questions.

[The prepared statement of Mr. Mirel follows:]

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Mr. WELDON. Thank you very much, and we will conclude with

our witness from the Heritage Foundation, Mr. Moffitt.

Mr. MOFFITT. Thank you very much, Mr. Chairman and members of the subcommittee. My name is Robert Moffitt. I am the director of domestic policy studies at the Heritage Foundation. In

that capacity, I oversee the Foundation’s analytical work in the

area of health care policy, including the financing and delivery of

health care services and government programs. It is an honor and

a privilege to appear before the subcommittee today to discuss the

current status and the future of the Federal Employees Health

Benefits Program. It should be understood that the views I express

here today are my own and do not necessarily represent those of

the Heritage Foundation.

I ask that my written statement be submitted for the record, Mr.

Chairman.

Mr. WELDON. Without objection.

Mr. MOFFITT. The Federal Employees Health Benefits Program

is, as Mr. Flynn pointed out, the largest group health insurance

program in the world. It provides health care coverage to all members of the Federal Government, including Congress, the White

House, the Federal judiciary, as well as approximately 9 million

Federal and Postal workers and retirees and their families.

This is an unusual program. It is run largely on the free market

principles of consumer choice and market competition. No other insurance-based system of financing and delivery in the United

States provides patients with such a broad range of choice of plans

and benefits.

It is virtually the only system in the country in which individuals

and families can choose from a broad range of health care plans,

picking the kinds of benefits and treatments they want at prices

they wish to pay, while pocketing the savings of wise choices. In

that key respect, Mr. Chairman, it is virtually the only health care

delivery system that even vaguely resembles anything that looks

like a normal market in the area of health insurance.

The Office of Personnel Management, the Federal agency that

administers the FEHBP, has broad authority, repeatedly upheld in

Federal courts, to negotiate premium rates and benefits on behalf

of Federal employees. As the Congressional Research Service observed in 1989 in the most comprehensive analysis ever published

on this program, the basic structure of the FEHBP is ‘‘sound’’ despite changes in administration and the health care sector of the

economy.

While the FEHBP retains a sound structure and a superior performance as a health care delivery system for its enrollees, it is,

nevertheless, in 2001 a troubled program. Its problems are rooted

in shortsighted government policies that are incompatible with its

structure. The structure is the structure of consumer choice and

competition, and the solutions to those problems are likewise rooted in government policies that are not only compatible with its

structural advantages, but also would enhance consumer choice

and competition.

For the next year, OPM projects an average premium increase of

13.3 percent among FEHBP plans. This does continue a painful

pattern of significant premium increases over the past several

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years. While these premium increases have been less than those

commonly found in the private sector, they are, nonetheless, worrisome to Federal employees and retirees and their families.

As Mr. Flynn pointed out and Mr. Gammarino, these cost increases surely reflect the broader changes that are taking place in

the health care system, particularly the growing patient demand

for high-quality prescription drugs delivered through the mechanism of health insurance. But there are also other factors which

are peculiar to the program that are driving the cost increases in

the FEHBP and these factors are not inherent in the structure of

the program.

The first, of course—Mr. Flynn had mentioned it, so did Mr.

Gammarino—is the artificially skewed demographics of the Federal

work force, which is significantly older than the private sector work

force and is rapidly aging. Health care costs of older workers are,

of course, significantly higher than those of younger workers. Related to the aging of the work force is the disproportionately large

number of Federal employee health policyholders, roughly 40 percent, who are retirees. In contrast, many private sector companies

have ceased or limited coverage for retirees.

A second reason for recent cost increases is the recent tendency

of OPM to break with what the Congressional Research Service

once described as its passive management of the program and

adopt a much more aggressive regulatory approach to program

management. Between 1990 and 2001, the executive branch, either

independently or sometimes at the urging of Congress, made 44

specific benefit decisions relating to different aspects of health care

benefits. If understood as ancillary to the basic statutory benefit requirements established clearly in Chapter 89 of Title V, these additions would have the equivalent economic impact of health care

benefit mandates that are a prominent feature of State health insurance laws.

While it is true that any one of these benefit additions taken

alone could be justified as fulfilling some particular need or desire,

and while the degree of the impact of these benefit decisions on

cost is a matter of some dispute, there is no debate that they add

to premium cost. Whatever the merits of any particular intervention, mandates impose higher costs. The more mandates, the higher the costs.

My colleagues have pointed out that Members of Congress should

maintain some perspective on the FEHBP increase, and they are

right. Even with the 13.3 percent projected increase, when all is

said and done, when the numbers are over and submitted in the

year 2002, FEHBP is still likely to outperform private sector health

insurance, particularly the corporate health insurance. Note that

FEHBP benefits have, in fact, been increasing in value over the

past 15 years; that is to say, the number and the quality of the

benefits. Second, the annual projected increases in the FEHBP do

not automatically translate into actual premium increases.

I have a number of suggestions, Mr. Chairman, to improve the

program, which I have submitted in my testimony, but let me just

make two fundamental points. One, FEHBP needs fresh blood. You

have to get a change in the actuarial pool of this system or you are

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creases that are not reflective of what is going on in the general

economy.

The second point is that you must start to examine the impact,

the economic impact, of the mandate system or the regulatory initiatives that have been taken over the past 10 or 15 years to get

a clearer idea of how that is affecting the cost. You should also

change the underwriting system in the FEHBP and do what Mr.

Mirel suggests: Allow people to pay for health care services directly

without imposing any kind of a tax penalty for doing so. Flexible

spending accounts that are very common in the private sector for

millions of Americans are one way to do it. Another option, of

course, is medical savings accounts. But, in either case, make the

health insurance system in the FEHBP operate more rationally, in

accordance with and make it compatible with the basic structure

of the program which, as the Congressional Research Service said,

is structurally sound.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Moffitt follows:]

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Mr. WELDON. Thank you, Mr. Moffitt. I want to thank all of our

witnesses. This has been very informative and certainly stimulates

a lot of areas for questioning.

I recognize myself for 5 minutes. The one I want to touch on first

is the issue of the mandates. I am a little bit uncertain as to the

full impact of the cost of the mandates. I have seen some data out

of OPM that these mandates have had a negligible impact. I am

curious if you, Mr. Moffitt, agree with that analysis, if you feel that

we should get an independent analysis of that through an entity

like GAO. There are a lot of mandates coming down from States

on health plans, and how much the collective impact of these mandates is having on premiums I think needs to be explored in more

detail.

Mr. MOFFITT. Exactly. Mr. Chairman, let me respond. I said in

my testimony, borrowing a line from my old boss, Ronald Reagan,

trust but verify. I trust OPM. I think they do a great job. I used

to work at the Office of Personnel Management. I have profound

respect for the staff.

The point that I made in my testimony is simply this: If you look

at their analysis of the overall impact of 44 changes in benefits

over the past 10 years and you look at the professional literature,

the peer-reviewed journals of econometric analysis of benefit mandates at the State level, what you are finding is a significant difference.

The General Accounting Office did, indeed, do an analysis of the

impact of mandates at the State level in 1996. In fact, I mentioned

this to Congresswoman Morella’s staff. I cited this in my testimony.

The GAO estimated that State-mandated benefit laws accounted

for 12 percent of the claims cost in Virginia, which had then 29

benefit and managed care mandates, and 22 percent in Maryland,

which in 1996 had 36 mandates. This covers everything from mandatory chiropractor coverage to substance abuse, in vitro fertilization, you name it, psychological counseling. In Maryland today I

think it is well over 50, maybe 54 or 55 mandates.

My point is that I think that you need, in the interest of Federal

employees and the families who are paying these premiums, you

have got to be clear in your own minds that the Office of Personnel

Management is absolutely right. Because my point is that study

after study shows that mandated benefits do, in fact, increase cost

significantly. But two widely respected economists have indicated

that one out of four of the people in the United States who are uninsured are uninsured because they have been priced out of the

market by State-mandated benefits.

So my point is that you have a discrepancy here. I am not saying

that OPM is wrong. I am saying it is our responsibility and the responsibility of the Bush administration to make sure that our understanding of the economic impact of these mandates is correct.

Mr. WELDON. Mr. Flynn, did you want to counter to that or add

to that at all?

Mr. FLYNN. Mr. Chairman, I would simply say that we would

welcome verification. I think the list of 44 mandates that Mr.

Moffitt talks about is the same list that we prepared that I believe

you and members of the subcommittee have seen. It covers a period

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over the course of the past 10 years. The net effect of those changes

at the Federal level was about 1.5 percent.

Even if you put aside for the moment the effect of mandates that

decrease costs in the program, over that same 10-year period we

have seen premiums rise in the program approximately 72 percent,

and the mandates that increase cost amount to a little bit less than

4 percent. So I think in the context, while it is true that every time

you add a benefit, you tend to add cost, I think it is important to

look at it in the context of what has been going on in the program

overall.

The other one quick thing that I would just simply say is that

there is a lot of discussion in health care today about mandates,

particularly those that are imposed at the State level. In the Federal Employees Health Benefits Program we have what is known

as a preemption provision, where with the single exception of

health maintenance organizations that are domiciled and operate

solely within a State, we preempt State-mandated benefits.

For example, we don’t have the Blue Cross and Blue Shield plan

providing State-mandated benefits in California, Pennsylvania,

West Virginia, New York, and what have you. It is a standard benefit package across the United States because of the preemption

authority that we have in the FEHBP law. So the effect of mandates at the State and local level is very, very minor, we estimate

about one-quarter of 1 percent of the total cost of the program. But

those that have occurred at the Federal level, whether imposed by

Congress or as part of the administration, we think, setting aside

those that have actually reduced costs, amount to about 4 percent

of that 72 percent increase in premiums over the same period.

But we would welcome GAO, anybody, to come in and look at our

numbers. We think we have pretty good data.

Mr. WELDON. My time has expired. I would like to now recognize

the ranking member, Mr. Davis, for 5 minutes.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

I listened rather intently to the discussion, and I must confess

that I really appreciate the testimony that each one of you has provided. It seemed to me that, as I was listening, that there are, in

fact, ways, based upon experiences that I have seen, to reduce cost,

but of course oftentimes those are unacceptable to the users or it

decreases users’ satisfaction.

My question is a rather generic one. The more options and

choices that consumers have, the more likely they are to use those.

I am saying, if there are more choices, there are more options, the

greater the use of those, which has a tendency to drive up costs.

So my question is: Is there a way to provide the consumers what

they need and at the same time get the cost down for what they

would find satisfactory?

Mr. MIREL. Mr. Davis, let me take a crack at that. The alternative that I was talking about, which I think is the same thing

that Dr. Coburn talked about in his testimony, is, first of all, a voluntary choice. We are talking about offering a choice that is not

now offered through the Federal Employees Health Benefits Plan.

That is a high deductible choice. With that would come additional

nontaxable compensation, payment, in the form of additional

untaxed salary that would be put into the individual employee’s

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medical savings account. The individual employee then could spend

that money any way he saw fit, knowing that once the deductible

had been met, $3,800 or whatever it is at the moment, the backup

plan would kick in.

That means that you don’t have to go through the difficult task

of deciding what should be in the plan and what shouldn’t be in

the plan. It is up to the employee. If the employee wants to spend

it on eyeglasses, he can spend it on eyeglasses. If he wants to

spend it on dentistry, he can spend it on dentistry. It is his choice.

What it does is it cuts out an enormous amount of the transactional cost that now exists in the plans. What I would like to see

happen is to have this offered as an option and see what happens,

if people will take it and if they will like it, and if it will, in fact,

reduce costs. I think it will have all of those effects.

Mr. DAVIS OF ILLINOIS. Why don’t I just ask Ms. Kelley, would

the unions be up in arms about such a plan, the high deductible

choice?

Ms. KELLEY. We have a lot of concerns about the high

deductibles and the medical savings accounts, most of which we are

on record for. Would we be up in arms? I don’t know. But we have

concerns, and they are based around a number of things.

First of all, the choices that you described that Federal employees have today, in fact, have been one of the hallmarks of the

FEHBP, that employees have had those choices. Yet, what we have

seen every year is choices have decreased and yet premiums have

increased. So decreasing the choices has not had the impact on the

premiums that some would have hoped.

I think there are a number of issues around the high deductibles

and the fear that employees would enroll in a program that

wouldn’t meet their needs, and they would find themselves later in

a situation where they needed to move back into a traditional plan

in the FEHBP. There is that movement every year now where employees have that choice, and they make a lot of use it. We know

that.

So there are a lot of concerns that we would have and that employees would have. The fear is that they would be losing benefits,

and that once those deductibles kicked in, where would the coverage come from? Maybe if there was a formal plan out there, we

would be more than willing to look at it and to provide specific

comments, but as a general rule, yes, we have a lot of concerns

about the high deductibles and the medical savings accounts.

We would much rather see something that we had started to

work on and have seen the beginning of, the pre-tax flexible spending accounts that were mentioned by Mr. Moffitt, which now are

available to Federal employees for their premiums only, not for

their out-of-pocket expenses. Expanding that to Federal employees

for their out-of-pocket expenses would be something that would be

very much supported, and Federal employees have asked for this

for years because the rest of the country has access to that, and

yet Federal employees don’t.

Mr. DAVIS OF ILLINOIS. Thank you.

Mr. WELDON. The gentleman’s time has expired. The Chair now

recognizes the gentlelady from the State of Maryland, the great

State of Maryland.

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Mrs. MORELLA. Thank you. The great State of Maryland. Thank

you, Chairman Weldon.

I want to congratulate us and to congratulate you on your chairmanship of this important committee. It is one that I have been on

during my 15 years because I think that, if you have a thriving democracy and a good democracy, you have a good civil service. I am

pleased that you take over the chairmanship at a time when confidence in public service has been elevated. So this is a good time

for us to move forward with recognition and encouragement of our

public service.

OK, I am going to start off. This is a good panel. I am going to

start off with Mr. Flynn. Nice to see you, and I think the panel was

excellent.

The Center for Studying Health System Change has released a

new study that shows employees nationwide pay lower premiums

on average than those in the FEHBP program. I know that the

FEHBP program has an older age population, as has been mentioned, but that increases premiums by less than 1 percent, according to your own data. I wondered if you might comment on that

disparity?

Mr. FLYNN. Thank you, Mrs. Morella. It is good to see you again

as well.

We actually have looked at that report. I think the first thing

that I would do is comment on the year-to-year changes going back

over the past 4 years that report comments on. If I recall it correctly, if you go back over the past 4 years, not counting the rate

increase for 2002, it indicates that Federal premiums are 8.7 percent higher than private sector premiums.

I might just point to testimony from several of the witnesses, but

actually go back 10 years and say to you that Federal premiums

have increased 72 percent while private sector premiums have increased 87 percent. So a lot of times it depends on the time period

you are looking at, the particular methodological assumptions that

you make, whether they are pre- or post-negotiation increases, and

so on and so forth.

I think, Mrs. Morella, the point that I would make is actually

whether you looked at 4 years or whether you looked at 10 years,

and I’ve seen actually studies that go even further which show that

the differences are actually narrower, I am amazed that the figures

are as close as they are when you consider all of the numbers and,

as I say, some of the methodological differences that go into this.

I think what either set of numbers would reflect is a health care

system at large, not just the FEHBP, which has seen increases

over the past 4 years, over the past 10 years, that are well above

the rate of inflation and that, for one reason or another, we have

been largely unable to contain. In that respect, the FEHBP is no

different.

Mrs. MORELLA. You present the broad-brush looking back. I

guess there is some validity to that. But let me ask you about an

offshoot of that. For the last several months I have been looking

into different ways to try to alleviate the high cost of the FEHBP

plan premiums and to lower costs. One approach was to lower prescription drug costs by taking advantage of the number of FEHBP

participants. The idea was to create a programwide drug benefit inVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
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corporated into each FEHBP that employs pharmaceutical benefit

managers—I noticed that Mr. Gammarino had mentioned that—to

leverage the Federal community’s large economy of scale. I know

that OPM has looked into this because we have discussed this before. I am interested if there is any new information that you

might offer about this concept.

Actually, maybe I could just also throw in the idea that Mr.

Gammarino would note that the Blue Cross switched to a pharmacy benefit manager in its prescription drug benefit and received

significant cost savings. Maybe you could, if I have time, Mr.

Gammarino, comment on whether or not FEHBP should look at

that.

Mr. FLYNN. I will try to do this very quickly to give Mr.

Gammarino some time to respond to that as well. You are absolutely correct, Mrs. Morella, we have had discussions with you,

your staff, and others about the possibility of doing something like

this.

The first thing I would say is that, whether it is the mail order

benefit or prescription drug benefits in general, they are already

largely managed by the 180 health plans that participate in the

Federal Employees Health Benefits Program. Mr. Gammarino can

talk about that design in the Blue Cross/Blue Shield program.

So the first thing that I want to make sure we are all clear on

is that it is not a situation where we have completely undiscounted

drugs being made available to Federal participants today versus

moving to prescription drugs being purchased in the aggregate and

getting those discounts. It is a question of the marginal difference

between the discounts that are currently being achieved under

pharmacy benefit management programs versus those that might

be achieved through the aggregation and use of the entire Federal

Employees Health Benefits Program population as one purchasing

pool.

It has been discussed already, the experience that we had with

the SAMBA program last year. I think, had that program moved

forward, we would have demonstrated modest savings, but savings,

nonetheless, for those program participants. I think this is an area

that continues to be worth analyzing, discussing with all the stakeholders. But it does come up against some of the arguments that

you have heard from Mr. Moffitt having to do with large numbers

of health plans competing with one another through informed consumer choice and the impact that has on the market as well. It is

an area that we need to continue to explore, but I can’t provide you

with a definitive outcome.

Mrs. MORELLA. OK.

Mr. GAMMARINO. Yes, I could give you a couple of observations.

Mrs. MORELLA. I know my time has expired though.

Mr. WELDON. Go ahead and answer the question.

Mr. GAMMARINO. Congresswoman Morella, we would not support

a government carveout of the prescription drug program and do direct contracting. One, philosophically, it is not consistent with the

FEHBP, which is built on a private individual choice market with

individual underwriting.

Two, as a manager of a health plan, I guess my question would

be: Who’s managing the shop? Am I doing it or the government?

102

Clearly, the intent of the FEHBP is that the private sector manage

this.

Third, you are getting at probably a marginal issue. If price of

the products were the only thing driving the trends that you are

seeing, maybe we would all jump on board, but it would make a

marginal difference in the rates you are seeing. Drug costs today

are driven not as much by price as it is by use and the introduction

of new drugs which provide a new pricing platform in which to

start.

Mrs. MORELLA. Thank you. Thank you, Mr. Chairman.

Mr. WELDON. The gentlelady from the District of Columbia is

recognized for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. Flynn, I note that you say in your testimony—well, first, let

me say that, as you may remember from the time that President

Clinton tried to get us into a national health care program, there

were many of us who thought that the FEHBP might lead the

whole Nation. I don’t think a lot of us think that way anymore,

frankly. We are not sure how to lead the whole Nation.

You say in your testimony that the fact that 85 percent of the

eligible work force participate in the Federal Employees Health

Benefits Program attests to its popularity. I wouldn’t take that to

the bank. I think people participate because they are intelligent

people, they need health care, and they don’t have any alternative.

I would rather go to the part of your testimony which is more

explorative of ways to make that popularity more than something

that people would almost have to do for their own sake, rather

than risk being here without any health insurance. That is on page

10, where you say you are exploring ways to increase health care

options available to Federal employees, thereby increasing competition within the program. This is, of course, the great savior that

we all are looking for.

Of course, we see the opposite trend, for reasons, frankly, far beyond your control. When it is 245, there were 245, now 180, I know

full well that has almost nothing to do with FEHBP, but with

structural problems in health care in our country.

But what some of us were leery of, the notion of opening of

FEHBP to kind of the great unwashed herd out there because we

weren’t sure that it wouldn’t do anything but drive up rather than

keep what was then fairly stable costs. It is as if the insurers were

afraid that there was going to be some real government mandate

to deal with health care for all the American people, and it was almost, ‘‘Let us keep these costs down,’’ because the moment that

went away, health care began to rise again. We had a few years

of extraordinary stability. I think it was absolutely artificial.

If we look now at FEHBP, even though, according to your own

records, the demographics don’t account for very much of this

hyperinflation, one can’t help but look at this average age of 48, for

God’s sake, for the FEHBP, and 71, the average age for the retirees, and wonder how much longer you can keep a viable plan going

that way.

I lay that predicate to ask this question, noting what Blue Cross/

Blue Shield has done: Here Blue Cross/Blue Shield has collapsed

its High Option, and if it hadn’t, according to the testimony, then

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it would have become untenable. It collapsed probably because the

High Option people were people who used health care most often.

So they mixed up their pool.

Is there any way to—and here I am not advising spreading

FEHBP the way we in our wild imaginations thought might be possible just a few years ago—but is there any way to think about selective opening of FEHBP to sectors that might have some incentive to come into such a plan, which in many other ways may be

very efficient, so that we could mix the pool up a bit and begin to

reduce costs the old-fashioned way, by having a broader pool of

those who are insured?

Mr. FLYNN. Ms. Norton, that is an extremely interesting question. Let me preface my comments about it by just simply mentioning, you mentioned the stable premiums in the FEHBP and how

that was seen as a model or something to sort of move toward during the debate on health care reform. It has not always been the

case that premiums in this program have been stable. We were seeing a period of increases that are of great concern to us now in the

late 1980’s; 1987, 1988, 1989, premiums were going up close to 20

percent a year; then in the late 1970’s/early 1980’s a similar period

of premium increases.

Ms. NORTON. So why did it stabilize for those few years?

Mr. FLYNN. Well, you know, I guess I should say I am not an expert in health care policy. I think I am reasonably expert in acting

as a purchaser of health insurance for an employer that wants to

sponsor that as part of its compensation program. That is actually

the avenue of my answer to your question, which is I would be very

concerned about opening this program up to groups of people who

have something other than an employment relationship with the

Federal Government.

This is part of the compensation program. It is in that respect

the same thing that General Electric and General Motors and other

employers offer their employees, and in some cases retirees, although, as Mr. Moffitt says, retiree health benefits in this program

actually stand unique from what other employers tend to do. So I

would be very concerned about that.

I do think, however, that while I would be very concerned about

opening this up to new groups of participants, I am less concerned

about looking for ways in which we could perhaps open this up to

new groups of health care delivery mechanisms. We have talked

about the exodus of HMOs. We have done specific things to try to

get health plans into the program over the past several years, but

we are limited by the Federal Employees Health Benefits statute

in terms of admitting plans other than health maintenance organizations.

I think that is an area where, working with the committee, working with other stakeholders and others who have an interest in this

program, we may very well be able to come to some consensus

about bringing in, for lack of a better term, other health insurers

or health care delivery mechanisms to increase the level of competition in the program and have the kind of salutary effect that has

been talked about by many of the people who have given testimony

today.

Ms. NORTON. Thank you, Mr. Chairman.

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Mr. WELDON. The gentlelady’s time has expired.

I would like to thank all of our witnesses. It has been very informative.

None of you really commented on the exodus of HMOs directly.

Am I to interpret that to mean good riddance? Is that what you are

all saying? [Laughter.]

Mr. FLYNN. Mr. Chairman?

Mr. WELDON. Yes?

Mr. FLYNN. I would be happy to offer just a quick comment on

that. Going back to Mr. Moffitt’s earlier testimony, this is an area

where actually GAO came in and did verify that health maintenance organizations were leaving the program largely because of

business reasons unrelated to the administration of the Federal

Employees Health Benefits Program itself.

Congresswoman Norton mentioned the fact she was not surprised by the reduction in HMOs because it is largely what is going

on in the national economy. So from that standpoint, it is something that we can live with, but at the same time it is something

we need to think seriously about in terms of looking at ways we

can enhance competition and give people more choices as we go forward, because I think that is one of the strengths of the program.

Mr. WELDON. Again, I want to thank all the witnesses. It has

been a very informative hearing. This hearing is now adjourned.

Mrs. MORELLA. Could I ask another question or would you prefer

that I submit the question?

Mr. WELDON. Is the lady asking for a second round of questioning?

Mrs. MORELLA. Only if it is amenable to you, because if not, I

will submit it in writing.

Mr. WELDON. OK, well, why don’t we just have a second round

of questioning. I think I already took about a minute asking one

question. So let me give myself another 4 minutes.

Under the plan, as I understand it, you have to offer two plans,

correct? If you are in the FEHBP, is that true?

Mr. FLYNN. In the Blue Cross/Blue Shield Service Benefit Plan

there are two options required by law, but not all plans are required to offer two options.

Mr. WELDON. OK. So they can have three options, four options?

There is no limitation on the number of options?

Mr. FLYNN. No, I am sorry, I believe the issue is not more than

two options.

Mr. WELDON. Not more than two?

Mr. FLYNN. Though the Service Benefit Plan is required to have

two options. This is an area where it might be worthwhile to discuss whether or not additional options on the part of participating

plans might be warranted. It is another area to think about, Mr.

Chairman.

Mr. WELDON. Would that require a change in statute?

Mr. FLYNN. Yes, sir, it would.

Mr. WELDON. OK. If you had that kind of flexibility, would that

have changed how you dealt with the situation you were in this

year, Mr. Gammarino?

Mr. GAMMARINO. It certainly would have given us more flexibility. However, the High Option was in trouble.

105

Mr. WELDON. Now when you say ‘‘High Option was in trouble,’’ the demand was just not there?

Mr. GAMMARINO. Well, yes, but we haven’t mentioned this word,

and that is ‘‘adverse selection.’’ That is, you had a group of enrollees that had significant health care needs. The pooling of insurance

where you have users and non-users really didn’t work too well

with High Option. You primarily had high users and they needed

medical care. So the issue of cost for that group was really not an

issue at all. They needed care and they needed somebody to pay

for it.

Mr. WELDON. And that is why the premium, if you had kept that

in place, would have gone up 30–50 percent?

Mr. GAMMARINO. It was based upon the experience of that group.

In order to continue to underwrite that group and have the revenues to pay the expenses, you would have had to increase our

rates. Just a reminder that plans like ours are experience-rated.

Our premiums reflect the actual experience of the group.

So getting back to your question, would we have done something,

we probably would have considered a third option. It would have

been easier. It would have been easier to do. But the fact remained

that the High Option product in terms of long-term viability had

significant issues.

Mr. WELDON. Mr. Flynn, as I understand it, within FEHBP you

can only charge individual or family, and you cannot prorate or adjust the family rate based on the number of dependents?

Mr. FLYNN. Right.

Mr. WELDON. Is that correct? What is going on in the private sector in that arena? Is that the standard in the private sector? It is

either individual or family, or do they tend to adjust premiums

based on the size of the family and the number of dependents?

Mr. FLYNN. Mr. Chairman, if you would allow me, I would like

to do some confirming back at the office, but there is no sort of

standard out there, but I would say that there are more health

plans that center on the sort of self-plus-family, which is the family

enrollment, without distinguishing in terms of one spouse, one

spouse/one dependent, one spouse/two dependents, and things like

that.

We have actually done some studies of what the effects of that

might be on premiums, and they are sort of counterintuitive, but

I think the dominant practice is still individual coverage, family

coverage.

Mr. WELDON. Mr. Gammarino, in the private sector is that basically the way it is handled as well?

Mr. GAMMARINO. Yes, I would agree. I mean, there are exceptions to that, but primarily the major employers pretty much have

the same type of health plans in terms of family and single coverage.

Mr. FLYNN. Where you do see some differences, Mr. Chairman,

is that there is a larger proportion of employers, private employers,

who will typically pay 100 percent of the self-only coverage and

then ask the individual being covered to pick up the difference between that and family coverage. Again, that is not a predominant

practice, but you see that more frequently in the private sector

than you do in the public sector.

106

Mr. WELDON. My time has expired. Mr. Davis, did you have a

question for the second round?

Mr. DAVIS OF ILLINOIS. Yes, thank you, Mr. Chairman.

Mr. Moffitt, I believe you mentioned the fact that we need to get

some new blood or we needed to mix the demographics, that we

needed a different composition. Then I noted that Delegate Norton

mentioned the fact that 58 is an average age.

Mr. MOFFITT. Right.

Mr. DAVIS OF ILLINOIS. Are you suggesting in any way that we

need to place more emphasis on factoring in the age of the population group that we are dealing with or that we need to do something to shift part of that age group out of the program?

Mr. MOFFITT. No. Congressman, what I am saying is basically

expand the program. I think Mrs. Norton actually put her finger

on it. We want to be careful how we do this. A suggestion that I

made in my formal testimony is to expand it to people who do have

a direct relationship with the Federal Government. That group are

young military families who are enrolled right now in the military

health care system. You are talking about between 5 and 6 million

people.

Young military families are healthy. Their national representatives have testified before Congress that they would like to be in

the Federal Employees Health Benefits Program. But the central

value of it would be that it would improve the actuarial profile of

the pool. As a result, it would stabilize and possibly even bring

down premiums and give young military families access to what is

clearly a superior health care delivery system than what they have

got today.

So that is my view, Congressman. I think that there is an opportunity here and I think we ought to take advantage of it because

we have a large number of people who would, in fact, benefit directly by having the opportunity to enroll in the best group health

insurance program in the world, despite its minor flaws.

Mr. WELDON. Would the gentleman yield?

Mr. DAVIS OF ILLINOIS. Yes.

Mr. WELDON. Are you saying dependents——

Mr. MOFFITT. Yes.

Mr. WELDON [continuing]. Only?

Mr. MOFFITT. I’m not talking about—no, the military health care

system is divided. You have a military health care system which

is designed for military combat, and that is covering military personnel. I am talking about the program that covers dependents,

which is a different program.

Very frankly, Mr. Chairman, this debate has been going on for

some time internally within the Department of Defense, and certainly I am sure it is going to go on within this administration. But

Department of Defense officials have recognized that there is an inherent tension between providing military services for basically civilians who are dependents of military personnel and the demands

of a combat-ready medical system.

My argument is that we have a 9 million pool right now that is

rapidly aging, which has an unusually large number of retirees

compared to any other group health insurance system in the counVerDate 11-MAY-2000 10:58 Sep 09, 2002 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 C:\DOCS\79433.TXT HGOVREF1 PsN: HGOVREF1
107

try. We can actually improve that pool by allowing young military

families to take advantage of it.

What I said in my testimony is we can do this in a budget-neutral fashion. That is to say, let them come in on the terms and conditions that apply to Federal employees, but allow them to keep

any of the benefits that they would reap by entering the FEHBP

with either pay increases or rebates directly to those families.

Mr. DAVIS OF ILLINOIS. Well, let me ask Mr. Flynn. Mr. Flynn,

how would you respond, OPM respond to that suggestion?

Mr. FLYNN. Mr. Davis, as Mr. Moffitt has indicated, this is an

issue that has been discussed over a number of years and under

a number of different administrations. There are views on the matter within the Defense Department and within the administration.

I am going to express the view that we have always expressed

when it comes to this program and how it might serve as a model.

We stand ready at any time and at any place to help people, employers and others, satisfy the health care needs of their employees, populations, what have you. But when it comes to fundamental

changes to the nature of the FEHBP, we want to make sure that

we understand exactly what it is we are being asked to do and

what the pros and cons of any such step might be.

I will admit to you that at first blush there are some attractive

notions associated with bringing military dependents into this program, but I also know, given the discussions that have gone on for

as long as I have been in this job and before, that there are some

very serious issues that need to be considered, not the least of

which is the adequacy of the military health care system to serve

its combat role on an ongoing basis under such a structure.

So I would simply say that is something else that clearly should

be discussed. I am somewhat fine when we talk about new blood.

I was saying to Director James that if we just hired 500,000 new

Federal employees, we would bring premiums down in a heartbeat.

[Laughter.]

But she keeps reminding me that I shouldn’t be talking like that.

[Laughter.]

But fresh blood, however it would be characterized, would have

that type of effect on premiums in the long run.

Mr. WELDON. The gentleman’s time has expired. The gentlelady

from Maryland is recognized for 5 minutes.

Mrs. MORELLA. Mr. Chairman, thank you for allowing this second round.

Mr. WELDON. Yes.

Mrs. MORELLA. I did want to ask our two gentlemen, Mr. Mirel

and Mr. Moffitt, about MSAs. You both have commented on being

supporters of them, but I just wondered if you are aware that there

was a 1998 CBO report that stated that imposing MSAs in the

FEHBP Program would result in nearly $1 billion in new costs to

the taxpayers and enrollees, and it would siphon off relatively

healthy enrollees. Although it sounds good on the surface, I think

that is a really pertinent point to consider with regard to MSAs.

I might add another part to the question, too. Is there anything

that you think would stop an individual from so-called ‘‘gaming the

system’’ by switching to a comprehensive plan during the FEHBP

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annual open season in any year that they know that their health

expenses, health care expenses are going to be higher?

So I put these two points out because I think that it seemed to

us there were problems.

Mr. MOFFITT. Congresswoman, they are excellent questions. I

will go first, and Mr. Mirel is chomping at the bit, but he will have

patience, I’m sure. [Laughter.]

The CBO did make that analysis, and I am, frankly, only superficially familiar with it. So I don’t want to comment on something

that I am not thoroughly familiar with.

I think that this is one of those areas where either the committee

or the Congress or the administration should make an effort to run

some kind of a demonstration program in the Federal Employees

Health Benefits Program to find out exactly what the effect would

be of introducing a medical savings account option, the standard

medical savings account option, like a high deductible plan with a

catastrophic piece.

The CBO has said that this will cost money and that there will

be significant adverse selection. The Rand Co. did a study in 1996;

the subject of it was, ‘‘Can Medical Savings Accounts for the NonElderly Reduce Health Care Costs?’’ The Rand researchers predicted that, if all insured non-elderly Americans switched to MSAs,

their health care expenditures would decline by as much as 13 percent.

You’ve got a competition here in terms of analysis. I think we

have to study that further. But I would say one way to do this

would be to run a demonstration project of maybe 100,000 or

200,000 Federal employees. Run it for a couple of years and see

how it works.

With regard to the other question you are talking about, which

is the gaming of the system, that goes on now. That goes on now

because neither OPM nor the Congress has yet to address the issue

of adverse selection in the Federal Employees Health Benefits Program, even though this has been going on, this debate has been

going on as long as I can recall.

I have made a suggestion in my testimony to deal with that, and

that is to vary the contributions among enrollees based on their

age. That is to say, allow underwriting on the basis of risk, and at

the same time vary the contributions of the government on the

basis of that risk, in order to protect high-cost elderly or high-risk

employees against substantial premium increases. That is an old

idea actually. It has been kicked around by economists, who are familiar with the FEHBP, for many years, but nobody has ever acted

on it.

But what you have got now is an irrational system. You have a

system where, if you are an 88-year-old smoker, as I said in my

testimony, or a 22-year-old jogger, you pay the exact same premium. So that means that every single time you have an elderly

person enroll in a health care plan and that drives up utilization

or the cost, it is an incentive for younger people to leave the program. If you would vary the contributions and allow a rational adjustment for risk, you would actually improve dramatically the

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tion system rather than trying to do it through the insurance market.

Mrs. MORELLA. If I could comment on the demonstration project,

the National Association of Retired Federal Employees did submit

separately a testimony. In looking it over, it indicates the fact that

‘‘adverse selection and subsequent premium increases in comprehensive plans occurred when the plans were offered to public

employees in Ada County, ID and Jersey City, NJ. As a result, the

county and city stopped offering MSAs to their employees.’’ So we

have had an example or demonstration program in that regard.

I guess I don’t have more time. I will submit another question

to you later.

Mr. WELDON. The gentlelady’s time has expired.

Mrs. MORELLA. Thank you.

Mr. WELDON. The gentlelady from the District of Columbia is

recognized for 5 minutes.

Ms. NORTON. This question is to Mr. Flynn, and it is based on

the assumption that the further we get from the present system in

our recommendations, the less likely it is that those changes will

be made by Congresses as diverse as this one. So, Mr. Flynn, for

example, whether we are talking about MSAs or—I mean, Mr.

Souder made this point—whether you are talking about MSAs or

whether you are talking about the government paying the full cost

of Medicare and Medicaid, if it is not within the pattern, it is not

likely to happen.

That is why I am a little disappointed, Mr. Flynn, in your response to Mr. Moffitt’s suggestion because your response was very

much in the box: ‘‘We are a health care plan like GM. We are an

employer. We are set to offer a plan the way employers do’’—even

given the fact that you have a very atypical work force in many

ways because it is older and getting older. It is likely to get older

before it gets younger because of what is happening. Young people

are certainly not coming to the Federal Government. They are

going to the dot.coms or wherever else they go.

I would like to follow Mr. Moffitt’s suggestion with even suggestion on top of Mr. Moffitt’s suggestion. Mr. Moffitt’s suggestion

talks about young families. I mean, I have gone just since September 11th to send off young men and women from our National

Guard who are leaving people at home without health benefits. I

think that is a disgrace. Yet, it seems to me this Congress in a bipartisan way would be more likely to accept dependents of people

going off to fight as a result of our country being attacked than it

is to do some of the other things that some of us have suggested.

I was going to suggest I like Mr. Moffitt’s suggestion, particularly

coming as it does, which drives home the inequity of leaving people

here to take care of themselves with no often major person who

earns the funds. But I would like to go even further.

What is increasingly happening to the government is that we

contract out much of our business. So I would like to ask, especially

since some of those contractors are virtually permanent employees,

whether you would count at least those people—at least those people—as Federal employees, since for all intents and purposes those

are Federal employees and are likely to be far younger than the average Federal employee or the increasing rise in our work force.

110

Would you accept those as people that we might look to, even

though it might make it bureaucratically a little more difficult for

you to run? Don’t worry, we will study it first. But would you be

willing to look at that as a pool that might bring down the age, diversify the actuarial pool, and help cut costs?

Mr. FLYNN. Ms. Norton, if I conveyed from my earlier response

that we don’t want to talk about dependents of military members

at all——

Ms. NORTON. That is what I got, sir. I didn’t hear you say, yes,

that is something we ought to look at.

Mr. FLYNN. Let me quickly correct that. All I simply meant to

say was that there is a long history of discussions of that we need

to take into account. We certainly can continue discussions within

the Defense Department and the administration on the desirability

of doing that.

Similarly, with respect to——

Ms. NORTON. See, that is exactly what I am after. I am asking

whether or not somebody is willing to fish or cut bait on, one, taking care of finding a way to expand health care benefits and, two,

diversifying the actuarial pool of the Federal Government. What

you are telling me is something we should continue to discuss. That

is what we have been doing every year since I have been on this

committee, with inflation taking away whatever there used to be

for FEHBP.

I am asking, is OPM willing to take some initiative in trying to

diversify the work pool by moving this discussion beyond the discussion phase and seeing if we can come back to this committee

with a proposal?

Mr. FLYNN. Ms. Norton, I am willing to take that back and to

get the appropriate people around the table to talk about it——

Ms. NORTON. Thank you.

Mr. FLYNN [continuing]. Without question.

The one quick point I wanted to make was the point you made

about Reservists leaving and leaving their dependents behind without health care coverage. There is a law that affects most employers. I don’t know exactly the title of it, but it is called USARA. It

affects the Federal Government and it affects private employers.

If individuals are called to Reserve duty and ship out with their

units, employers generally are maintaining health insurance for dependents. So if they had health insurance when the call-up occurred, I think generally you are finding that is going to be continued at least for some period of time.

Ms. NORTON. Suppose they didn’t. Many of my constituents did

not. If, in fact, the person who earned the income is going off, it

does seem to me that you are going to cover him now because he

is going to be in the Persian Gulf, but his family is left here with

nobody to cover them.

Mr. FLYNN. Yes, I don’t know—you know, I am not technically

expert in that. If they didn’t have it to begin with, I doubt that the

protections of that law would come into play. But I think for most

people who did have it, there are significant protections for health

insurance and other benefits under that law.

Mr. WELDON. The gentlelady’s time has expired.

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I want to again thank all of the witnesses for your very informative testimony.

The hearing is now adjourned.

[Whereupon, at 3:45 p.m., the subcommittee adjourned, to reconvene at the call of the Chair.]

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