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THE FEDERAL EMPLOYEES HEALTH BENEFITS 

PROGRAM: IS IT A GOOD VALUE FOR FEDERAL 

EMPLOYEES? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE, 

U.S. POSTAL SERVICE AND THE CENSUS 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 11, 2013 

Serial No. 113–32 

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

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

JOHN L. MICA, Florida 

MICHAEL R. TURNER, Ohio 

JOHN J. DUNCAN, JR., Tennessee 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

TREY GOWDY, South Carolina 

BLAKE FARENTHOLD, Texas 

DOC HASTINGS, Washington 

CYNTHIA M. LUMMIS, Wyoming 

ROB WOODALL, Georgia 

THOMAS MASSIE, Kentucky 

DOUG COLLINS, Georgia 

MARK MEADOWS, North Carolina 

KERRY L. BENTIVOLIO, Michigan 

RON DESANTIS, Florida 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

JACKIE SPEIER, California 

MATTHEW A. CARTWRIGHT, Pennsylvania 

MARK POCAN, Wisconsin 

TAMMY DUCKWORTH, Illinois 

ROBIN L. KELLY, Illinois 

DANNY K. DAVIS, Illinois 

TONY CARDENAS, California 

STEVEN A. HORSFORD, Nevada 

MICHELLE LUJAN GRISHAM, New Mexico 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

STEPHEN CASTOR, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL SERVICE AND THE CENSUS

BLAKE FARENTHOLD, Texas, Chairman 

TIM WALBERG, Michigan 

TREY GOWDY, South Carolina 

DOUG COLLINS, Georgia 

RON DESANTIS, Florida 

STEPHEN F. LYNCH, Massachusetts, 

Ranking Minority Member 

ELEANOR HOLMES NORTON, District of 

Columbia 

WM. LACY CLAY, Missouri 

(III) 

C O N T E N T S 

Page 

Hearing held on April 11, 2013 .............................................................................. 1 

WITNESSES 

Mr. Jonathan Foley, Director, Planning and Policy Analysis, U.S. Office of 

Personnel Management 

Oral Statement ................................................................................................. 5 

Written Statement ............................................................................................ 7 

Mr. William A. Breskin, Vice President of Government Programs, Blue Cross 

and Blue Shield Association 

Oral Statement ................................................................................................. 16 

Written Statement ............................................................................................ 19 

Mr. Thomas C. Choate, Chief Growth Officer, UnitedHealthCare 

Oral Statement ................................................................................................. 31 

Written Statement ............................................................................................ 33 

Mr. Mark Merritt, President and CEO, Pharmaceutical Care Management 

Association 

Oral Statement ................................................................................................. 41 

Written Statement ............................................................................................ 43 

Ms. Jacqueline Simon, Public Policy Director, American Federation of Government Employees 

Oral Statement ................................................................................................. 59 

Written Statement ............................................................................................ 61 

APPENDIX 

The Honorable Blake Farenthold, a Member of Congress from the State 

of Texas, Opening Statement .............................................................................. 92 

The Honorable Eleanor Holmes Norton, a Member of Congress from the 

District of Columbia, Opening Statement .......................................................... 93 

Health Plan Competition in the FEHB Program .................................................. 95 

Testimony of Walton Francis, Independent Consultant and Principal Author 

of Checkbook’s Guide to Health Plans for Federal Employees ......................... 103 

Questions for the Record to Mr. Jonathan Foley .................................................. 116 

(1) 

THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM: IS IT A GOOD VALUE FOR 

FEDERAL EMPLOYEES? 

Thursday, April 11, 2013 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL

SERVICE AND THE CENSUS, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:01 a.m., in Room 

2154, Rayburn House Office Building, Hon. Blake Farenthold 

[chairman of the subcommittee] presiding. 

Present: Representatives Farenthold, Walberg, Gowdy, DeSantis, 

Issa and Norton. 

Also Present: Representative Connolly. 

Staff Present: Molly Boyl, Majority Parliamentarian; Caitlin Carroll, Majority Deputy Press Secretary; Sharon Casey, Majority Senior Assistant Clerk; Adam P. Fromm, Majority Director of Member 

Liaison and Floor Operations; Linda Good, Majority Chief Clerk; 

Jennifer Hemingway, Majority Senior Professional Staff Member; 

Mark D. Marin, Majority Director of Oversight; James Robertson, 

Majority Professional Staff Member; Laura L. Rush, Majority Deputy Chief Clerk; Scott Schmidt, Majority Deputy Director of Digital 

Strategy; Peter Warren, Majority Policy Director; Jaron Bourke, 

Minority Director of Administration; Lena Chang, Minority Counsel; Kevin Corbin, Minority Professional Staff Member; Yvette 

Cravins, Minority Counsel; Carla Hultberg, Minority Chief Clerk; 

Adam Koshkin, Minority Research Assistant; Safiya Simmons, Minority Press Secretary; and Mark Stephenson, Minority Director of 

Legislation. 

Mr. FARENTHOLD. The subcommittee will come to order. 

As is our tradition, I would like to begin this hearing by stating 

the Oversight Committee’s mission statement. 

We exist to secure two fundamental principles: first, Americans 

have a right to know the money is taken from them from Washington is well spent and, second, Americans deserve an efficient, effective Government that works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights. 

Our solemn responsibility is to hold the Government accountable to 

taxpayers, because taxpayers have a right to know what they get 

from their Government. We will work tirelessly in partnership with 

citizen watchdogs to deliver the facts to the American people and 

2 

bring genuine reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee. 

At this point I will recognize myself for a brief opening statement. 

The Federal Employees Health Benefits Program is the largest 

employer-based health insurance program in the Country, covering 

more than 8 million Federal workers, retirees, and their family 

members through the plans participating in. Since 1960, the plan 

has offered Federal participants multiple health plan options 

through private health insurers, a hallmark of the program. 

The average health insurance premiums are on the rise. More 

specifically, the FEHB premium has risen 5.78 percent over the 

last five years. While this is a pretty small increase compared to 

what we are seeing in some private sector rates, where rates have 

risen much more, it is our duty to see how we can continue to save 

taxpayers’ hard-earned dollars and provide the best coverage for 

our Federal workforce. In these tough times, we must ensure that 

OPM is providing affordable benefits to FEHB participants in the 

most cost-effective way and giving them the best benefits that we 

can afford. 

Recently, a study by the CBO, Congressional Budget Office, 

found that, on the average, the cost of health benefits, including 

health insurance, was 48 percent higher for Federal civilian workers than for their private sector counterparts, perhaps explaining 

the lower percentage increase in the premium. But the Federal 

Government still pays, on average, $6.00 per hour more for employee benefits than in the private sector. It goes without saying 

that buying power is also important. 

Competition is critical, as well. OPM can leverage enrollees’ purchasing power to reduce costs and obtain greater value for Federal 

workers and their family, as well as for the Federal Government 

and taxpayers. The OPM must manage today for future increases 

in costs and projected increases in utilization of health care services. 

The President’s budget, announced yesterday, has several initiatives intended to improve the value of FEHB. This hearing provides committee members the opportunity to determine the impact 

these and other proposals will have on provider choice, coverage, 

and cost. As Government watchdogs, we are always looking for 

ideas that will lower costs and improve the value of FEHB without 

unnecessarily restricting consumer choice. 

With these broad goals in mind, I would like to thank our witnesses for being here today and for their willingness to testify. 

I will now recognize the gentlelady from the District of Columbia, 

Ms. Norton, for her opening statement. 

[Prepared statement of Mr. Farenthold follows:] 

Ms. NORTON. Thank you very much, Mr. Chairman. I thank you 

for bringing together these witnesses to discuss the Federal Employees Health Benefits Program, including the Administration’s 

proposals for what it calls modernizing the program. 

FEHBP is, of course, the largest employer-sponsored health insurance program in the Country, covering 8 million individuals. 

Last year it provided close to $45 billion in benefits to Federal employees, retirees, and their families. Since its creation in 1959, 

3 

FEHBP has been regarded as a model for health insurance reform, 

and private and public insurance programs such as Medicare. It 

has also been looked at as a way to expand insurance coverage to 

the non-Federal community, such as small business employees or 

the uninsured. 

FEHBP has generally performed as well or better than large private employers. Industry experts have rated the benefits offered to 

enrollees as competitive with other employers. Premium increases 

are consistently below those of other large employers. For example, 

according to Barclays U.S. Healthcare, over the last decade, 

FEHBP premiums have increased 7.7 percent, compared with 9.3 

percent in the commercial market. 

In 2012, FEHBP premiums increased by 3.8 percent, while the 

industry surveys show that private sector plans rose by an average 

of 8.1 percent. 

However, this does not mean that FEHBP is a perfect program 

or that it does not need improvement. For example, coverage for 

same sex domestic partners, while prevalent in the private sector, 

is currently not included in FEHBP. Prescription drugs are of a 

particular concern. One-third, or $15 billion, of the total FEHBP 

annual costs were for prescription drugs; and OPM estimates that, 

for 2013, 25 percent of that, or about $4 billion, will be spent on 

specialty drugs. That is a significant increase over 2009, when specialty drugs accounted for only 10 percent. 

This hearing provides stakeholders and members with a chance 

to discuss the pros and cons of the FEHB proposals, including in 

President Obama’s fiscal year 2014 budget that was just issued. 

While I share the Administration’s view that the 50-plus-year-old 

FEHB Program can be, as the Administration puts it, modernized, 

but certainly improved, I believe we should approach this cautiously and deliberately to ensure that any changes would improve 

the health of our Federal employees and retirees, and keep premiums and costs low and affordable. 

This is especially important at this juncture because Federal employees are already experiencing pay and benefit cuts, and cannot 

afford to take more hits. Federal employees are working under a 

three-year pay freeze. New employees are forced to pay more for 

their retirement contributions than existing employees, and more 

Federal workers face furloughs. On top of that, the President has 

recommended in his budget that Federal workers contribute an additional 1.2 percent more for their pensions and accept a reduced 

COLA for their annuities based on the changed CPI formula. 

I thank you, Mr. Chairman, and appreciate this opportunity to 

examine the merits of the Administration’s proposals, and look forward to hearing from our panel of witnesses and thank them for 

their testimony. 

Mr. FARENTHOLD. Thank you very much, Ms. Norton. 

We will now recognize the chairman of the full committee, the 

gentleman from California, Mr. Issa. 

Mr. ISSA. Thank you, Mr. Chairman. Thank you for holding this 

important hearing. And I want to thank Delegate Norton, our 

ranking member, because, in fact, this is the first and only federal 

exchange. Eight million Americans depend on this exchange, and 

4 

it is the model, at best, for what we intend to make available to 

those who do not otherwise have employer healthcare providers. 

Numerous times during the Affordable Health Care Act drafting 

and discussion I used the FEHB as the model for perhaps everyone 

who should have the same fine health care that members of Congress and every Federal employee has. Why not? Let us just simply 

duplicate this. So when I discover, as the President has discovered, 

that although a great and longstanding model, it is not a model 

with as open a process and as much competition as we could have. 

I look and say, my goodness, if we can’t get this 50-year-old system 

to be optimized, will we in fact deal as well with 50 State systems; 

some of them run by the States directly, some of them federalized. 

So today’s hearing is important on all those counts. 

I think to every member of Congress who is in that program. It 

is important. To every staff member now or retired, who depend on 

this system, getting it right, getting competition, opening it up in 

a way that is a plus, and not a minus, is important, but I think 

for all of us who are seeing the testimony today, let’s just assume 

that they are testifying about a national exchange that every 

American is going to be in. Do we currently have a system that 

would make the optimum national exchange or should we make it 

better? And can we do better for the 8 million and the other 316 

million Americans? 

With that, I thank the chairman and yield back. 

Mr. FARENTHOLD. Thank you, Mr. Chairman. 

At this point let’s introduce our members of the panel. 

Before I do that, I do want to say, without objection, all members 

will have seven days to submit opening statements for the record. 

Now we will go to our panel. First up will be Mr. Jonathan Foley. 

He is the Director of Planning and Policy Analysis at the U.S. Office of Personnel Management. 

Next up will be Mr. William A. Breskin. He is the Vice President 

of Government Affairs at Blue Cross and Blue Shield Association. 

Mr. Thomas C. Choate is the Chief Growth Officer at 

UnitedHealthCare. 

Mr. Mark Merritt is President and CEO of the Pharmaceutical 

Care Management Association. 

And Ms. Jacqueline Simon is Public Policy Director for the American Federation of Government Employees. 

Pursuant to the rules of the committee, all witnesses will be 

sworn before they testify. Would the witnesses please rise with me? 

If you will raise your right hand, please. Do you solemnly swear 

or affirm that the testimony you are about to give will be the truth, 

the whole truth, and nothing but the truth? 

[Witnesses respond in the affirmative.] 

Mr. FARENTHOLD. Let the record reflect that all witnesses have 

answered in the affirmative. 

You may be seated. 

We have a relatively large panel today. In order that everyone 

has sufficient amount of time to testify and the members of the 

subcommittee have sufficient amount of time to ask questions, we 

would ask that you limit your remarks to five minutes. There is a 

timer in front of you that will count down with a green light, then 

5 

a yellow light, and a red light. When the red light comes on, it will 

start up and we will know exactly how long you went over. 

So we have your entire testimony that you submitted in the 

record. Hopefully, the members of the committee have already reviewed it. So if you will summarize what you consider to be the salient points in the five minutes, it would be greatly appreciated. 

We will start with Mr. Foley. You are recognized for five minutes. 

WITNESS STATEMENTS 

STATEMENT OF JONATHAN FOLEY 

Mr. FOLEY. Thank you, Chairman Farenthold, Ranking Member 

Norton, and members of the subcommittee. Thank you for the opportunity to appear before you today to discuss the Federal Employees Health Benefits Program. 

Established in 1960, the FEHB Program is the largest employersponsored health insurance program in the Country, covering approximately 8.2 million Federal employees, retirees, and their dependents. The Office of Personnel Management administers this 

$45 billion program through contracts with private insurers. 

Currently, there are 95 health plan contracts, with 230 different 

Government options. 

The FEHB Program uses market competition and consumer 

choice to provide comprehensive benefits at an affordable cost. Average yearly premium increases have declined in each of the last 

four years, dropping from 7.4 percent in 2010 to 3.4 percent in 

2013. 

My written testimony addresses the subcommittee’s interest regarding the relationship between Medicare and the FEHB Program, and the impact of the Affordable Care Act on the program. 

I will spend the remainder of my remarks discussing the FEHB 

Program and its modernization. 

The FEHB Program was designed to offer a range of health insurance choices that are reflective of the most competitive options 

available in the commercial marketplace. As the health insurance 

market continues to change, OPM has done its best to keep pace. 

However, there are a number of areas where the original authorizing legislation passed in 1959 constrains OPM from responding to 

the changed marketplace. 

For example, the statute only allows OPM to contract with four 

plan types. Under the service benefit plan type, Blue Cross Blue 

Shield offers two government-wide benefit options. The second plan 

time, indemnity benefit plan was held by Aetna until the late 

1980s, but is now vacant. The third plan type consists of employee 

organization plans. The employee organization plans were grandfathered into the FEHB Program and no new employee organization plans are permitted to join. The final plan type is made up of 

comprehensive health plans, HMOs, offered at the State level, 

which have no restrictions in the number of plans participating as 

long as they meet FEHB qualifying criteria and State licensure 

laws. 

Missing from the current mix are regional plans that are widely 

available in the commercial market. If these regional plans were 

6 

available, FEHB enrollees would benefit from having greater 

choices that represent best practices in the private sector and more 

closely resemble product combinations available to private employers and State and local governments. 

It is important to emphasize that this proposal would not require 

that OPM contract with every health plan that applies to participate in the FEHB Program. This proposal would simply provide 

OPM with the ability to consider additional plan types and contract 

with plans only when it is in the best interest of the FEHB Program and its enrollees. 

Next, OPM proposes increasing its contracting discretion by allowing direct contracting with pharmacy benefit managers. Most 

FEHB carriers contract with pharmacy benefit managers to purchase prescription drugs and manage pharmacy benefits on behalf 

of their enrollees. However, current law precludes OPM from contracting directly with PBMs. With the ability to contract directly 

for PBM services, OPM would obtain better discounts by leveraging 

the 8.2 million covered lives, providing for more uniform performance across the FEHB, and allowing a more consistent formulary 

structure and patient care management. 

OPM also proposes authorizing the FEHB Program to offer a 

‘‘self plus one’’ enrollment option, aligning the program with other 

large and private employers, as well as State and local governments. Currently, the FEHB Program is only authorized to offer 

self only and self and family options. By adding the self plus one 

option, an employee or retiree who does not need a family plan, for 

example, because they need only to cover a spouse or a child, can 

choose the self plus one option, rather than the self and family option. 

OPM also proposes allowing FEHB enrollees to add a domestic 

partner to their FEHB enrollment. This proposal would align the 

FEHB Program with best practices in the private sector, as larger 

employers competing for talent are increasingly offering domestic 

partner benefits. 

Finally, OPM proposes allowing premium differentials tied to 

wellness. This proposal provides OPM with the authority to prove 

a limited adjustment to rates charged to enrollees based on their 

health status and participation in health and wellness programs. 

For instance, this proposal would allow OPM to increase the enrollee share of premiums for those who use tobacco products and 

do not participate in tobacco cessation programs. This proposal 

aligns the FEHB Program with current trends in the commercial 

market, increases the use of preventive services, and encourages 

enrollees to make improvements to their health status, resulting in 

a reduction or delay of the onset of chronic diseases and associated 

costs. 

Overall, these proposals would result in net mandatory savings 

of $8.4 billion over a 10-year period. In addition to cost savings, the 

proposals directly support OPM’s mission of recruiting, retaining, 

and honoring a world-class workforce to serve the American people. 

Thank you for the opportunity to testify, and I am happy to address any questions you have. 

[Prepared statement of Mr. Foley follows:] 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

STATEMENT OF 

JONATHAN FOLEY 

DIRECTOR, PLANNING AND POLICY ANALYSIS 

U.S. OFFICE OF PERSONNEL MANAGEMENT 

before the 

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL SERVICE, AND THE 

CENSUS 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

UNITED STATES HOUSE OF REPRESENTATIVES 

on 

"The Federal Employees Health Benefits Program" 

April 11, 2013 

Chainnan Farenthold, Ranking Member Lynch and Members of the Subcommittee: 

Thank you for allowing me the opportunity to appear before you today to discuss the Federal 

Employees Health Benefits (FEHB) Program. 

Background 

Established in 1960, the FEHB Program is the largest employer-sponsored health insurance 

program in the country, providing health insurance for approximately 8.2 million Federal 

employees, retirees, and their dependents. In 2012, approximately 90 percent of all Federal 

employees were enrolled and the FEHB Program provided $45 billion in health care benefits. 

The Office of Personnel Management (OPM) administers the FEHB Program through contracts 

with private insurers. On an annual basis, OPM issues a call letter to FEHB carriers soliciting 

benefit and rate proposals for the next contract tenn. In addition, new plan applications are 

Congressional and Legislative Affairs· 1900 E Street, N.\V.· Room 2309· Washington, DC 20415·202-606-1300 
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Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

submitted to OPM each year and plans that meet the requirements specified in the statute and 

regulations may be accepted for participation. Carrier negotiations are conducted from June 

through August and OPM provides for an Open Season each November allowing enrollees to 

change plans. 

Currently, there are 95 health plan contracts with 230 different plan choices government-wide. 

The FEHB Program statute specifies four types of plans: (I) the service benefit plan, which is 

one government-wide plan that is a fee-for-service plan and pays providers directly for services; 

(2) indemnity benefit plan; (3) employee organization fee-for-service plans; and (4) 

comprehensive medical plans. Currently, about 81 percent of total FEHB Program enrollment is 

concentrated in fee-for-service plans and 19 percent in HMO plans. 

Under the statute, all FEHB plans must cover basic hospital, surgical, maternity, physician and 

emergency care. In addition, plans are required to cover certain special benefits including: 

prescription drugs (which may have separate deductibles and coinsurance); mental health care 

with parity between mental health and medical care coverage; and child and adult screenings, 

preventive care and immunizations. To ensure the benefits provided under the FEHB Program 

are keeping pace with advances in medicine, OPM reviews treatments to determine if coverage 

or benefit changes should be implemented. For example, as a result of a recent review, in 2012, 

OPM concluded there is enough evidence to classify Applied Behavioral Analysis treatment for 

children with autism as a medical therapy. This reclassification allowed FEHB plans to offer 

such services where treatment is medically necessary and appropriate providers are available. 

For the 2013 plan year, 67 FEHB carriers in 22 states are now offering this coverage. 
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Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

The FEHB Program uses market competition and consumer choice to provide comprehensive 

benefits at an affordable cost to both the Federal government and enrollees. FEHB premiums 

cover enrollees' health care costs, plans' administrative expenses, reserve accounts, and OPM's 

administrative expenses, which are approximately 0.078 percent of premiums. As set by statute, 

the government's share of premiums for employees and annuitants is the lesser of 72 percent of 

the weighted average premium of all participating plans or no more than 75 percent of the total 

premium for anyone plan. However, enrollee premium contributions can be higher than 28 

percent if their individual plan's premiums are significantly higher than the average FEHB plan. 

Average yearly premium increases have declined in each of the last four years, dropping from 

7.4 percent in 2010 to 3.4 percent in 2013. In general, yearly changes in premiums reflect trends 

in the health care marketplace as well as specific policy initiatives negotiated with participating 

plans. 

The remainder of my testimony will address the Subcommittee's interest regarding the 

relationship between Medicare and the FEHB Program, the impact of the Affordable Care Act 

(ACA) on the Program, and FEHB modernization. 

Medicare and the FEHB Program 

Currently, Medicare eligible active or retired Federal employees are not required to enroll in 

Medicare Part B. If an active or retired Federal einployee enrolls in Medicare Part Band 

maintains coverage in an FEHB plan, Medicare law and regulations determine primary coverage. 

FEHB plans typically waive copayments, coinsurance, and deductibles for services covered by 

Medicare Part B. As a result, most annuitants have first dollar coverage. A growing proportion 

of FEHB enrollees eligible for Medicare Part B do not enroll in Part B. This means that FEHB 

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Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

plans are the primary payer for all services that Part B covers, which includes physician services 

and many outpatient procedures. OPM is encouraging proposals for pilot programs where 

participating carriers offer a sub-option for Medicare eligible annuitants as an alternate choice. 

The sub-option may include premium pass-through accounts for plans to use solely to pay some 

or all of Medicare Part B premiums. Carriers may propose cost sharing changes for enrollees 

with Medicare Part B that are sufficient to encourage them to participate in the pilot program and 

also encourage appropriate utilization. 

ACA and FEHB Program 

After enactment of the ACA, OPM reviewed its contracts and determined that FEHB plans were 

already in compliance with many of the ACA reforms to the health insurance marketplace. For 

example, denials of coverage to those with pre-existing conditions were already prohibited 

within the FEHB Program. However, there were some provisions in the ACA that expanded 

eligibility and benefits. For instance, effective plan year 2011, OPM extended dependent 

coverage by allowing adult children up to age 26 to be covered under their parent's FEHB plan. 

Almost 300,000 young adults between the ages of 22 and 26 now have FEHB coverage as a 

result of this provision. Another eligibility change included extending FEHB to employees of 

entitled Tribes, tribal organizations, and urban Indian organizations. Over the past three years, 

OPM has worked closely with Tribes, tribal organizations, urban Indian organizations, and 

national organizations to implement this provision of the ACA. As a result, approximately 

16,000 tribal employees and dependents in 15 States are now enrolled in the FEHB Program. 

Additionally, effective with the 2011 plan year, all FEHB plans now cover in-network 

recommended preventive care, immunizations, and screenings without cost sharing. 

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Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

Another provision in the ACA that impacted the FEHB Program was the medical loss ratio 

(MLR). Beginning in 20 II, the ACA required health insurers to use at least a certain percentage 

of health insurance premiums to pay for medical claims or activities that improve the quality of 

health care. The ACA set the minimum required MLR at 85% for the large group market and 

directed health insurers that did not meet the MLR to pay a rebate to their conswners. For FEHB 

enrollees, by law, rebates are sent to OPM, which serves as the policyholder, and the rebate is 

used to adjust future premium rates. This method ensures that rebates will be shared between 

health plan enrollees and the Federal agencies that pay for the FEHB. In 2012, OPM 

communicated with health insurers and determined that three insurers out of the 91 insurers in 

the program would provide a rebate to the FEHB Program. 

Modernization of the FEHB Program 

The FEHB program was designed to offer Federal employees, retirees, and their dependents a 

range of health insurance choices that are reflective of the most competitive choices available in 

the commercial marketplace. As the health insurance market continues to change, OPM has done 

its best to keep pace with change; however, there are a number of areas where the structure of the 

program as configured by the original authorizing legislation passed in 1959, constrains OPM 

from responding to the changed marketplace. There are a number of challenges facing the FEHB 

Program including the need for more competition with more diverse health plan choices; 

affordability for enrollees; and limited opportunity to use best practices from the private sector. 

Presently, however, the FEHB Program lacks the flexibility to address these challenges and 

respond to the continuously changing market. OPM proposes to modernize the FEHB Program 

in the following ways: allow additional health benefits plan types; increase contracting 
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U.S. Office of Personnel Management 

April 11, 2013 

discretion; expand coverage options to include a "self plus one" premium tier and coverage for 

domestic partners; and allow premium differentials tied to wellness. 

OPM proposes to expand its authority to contract with a greater variety of health plan types. The 

health insurance marketplace has changed significantly since FEHB began and the current 

contracting structure reflects largely outdated distinctions. As mentioned earlier, the statute only 

allows four plan types. Under the service benefit plan type, Blue Cross Blue Shield offers two 

govcrnment-wide benefit options (Standard and Basic), The indemnity benefit plan was held by 

Aetna until the late 1980s. Aetna's decision to leave as the indemnity benefit plan carrier was 

due primarily to adverse risk selection, which left Aetna in an uncompetitive situation. The third 

plan type consists of employee organization plans, which are sponsored by voluntary employee 

benefit associations or Federal employee unions. There are nine current sponsors and four of 

these plans are open to only certain Federal employees and retirees. The employee organization 

plans were grandfathered into the FEHB Program at inception or shortly thereafter and no new 

employee organization plans are permitted to join. The final plan type is made up of 

comprehensive health plans (HMOs) offered at the state level, which have no restrictions in the 

number of plans participating in the FEHB Program as long as they meet FElIB qualifying 

criteria and state licensure laws. 

The FEHB model is built on robust competition and consumer choice that keeps costs affordable 

for enrollees and offers diverse health plan choices. The ability to contract with strong regional 

plan types currently available in the private market would enable OPM to increase competition 

and respond to changes in the health insurance market. FEHB enrollees would benefit from 

having greater choices that represent best practices in the private sector and more closely 
13 


Insert offset folio 7 here 81665.007

Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

resemble product combinations available in private industry as well as in state and local 

government employee programs. 

It is important to emphasize that this proposal would not require that OPM contract with every 

health plan that applies to participate in the FEHB Program under this expanded authority. As 

with standard contracting procedures, each health plan would still need to meet the qualifying 

criteria like that currently in place for all plans in the FEHB Program. This proposal would 

simply provide OPM with the ability to consider additional plan types and contract with plans 

only when it is in the best interests of the FEHB Program and its enrollees. The introduction of a 

wider selection of market-driven plans would increase competition within FEHB Program, and 

thus lead to more choice for enrollees. OPM estimates the expansion ofFEHB plan types would 

result in estimated mandatory cost savings of $260 million in direct spending over ten years. 

Next, OPM proposes increasing its contracting discretion, which would allow us to more 

efficiently leverage the Federal government's purchasing power for its 8.2 million FEHB 

enrollees and allow greater flexibility in negotiating benefits by allowing for direct contracting 

with vendors for pharmacy and other benefits. Many FEHB Program carriers contract with 

Pharmacy Benefit Managers (PBM) to purchase prescription drugs and manage benefits on 

behalf of their enrollees. However, current law precludes OPM from directly negotiating with 

PBM contractors to purchase prescription drugs. With the ability to contract directly for PBM 

services, OPM would be in a position to obtain better discounts by leveraging the size of the 

population, providing for more consistent performance across the FEHB, and allowing a more 

consistent formulary structure and patient care management. Allowing OPM to pursue direct 

UNITED S r.\ rES OrFICE ()F PERS( )NNEL M/\NAGE~1[:Nr Page 7 of9 
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Insert offset folio 8 here 81665.008

Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

negotiations with PBM contractors would result in scored mandatory cost savings of 

approximately $1.6 billion over ten years. 

aPM also proposes authorizing the FEHB Program to offer a "self plus one" enrollment option. 

Allowing the FEHB program to offer a "self plus one" enrollment option, places the program in 

line with other large private employers as well as state and local governrnents. Currently, the 

FEHB Program is only authorized to offer self-only enrollment and self and family enrollment. 

By adding a third tier, the "self plus one" option, an employee or retiree who does not need a 

family plan - for example, because they need only to cover a spouse or one child - can choose the 

"self plus one" option rather than the self and family option. aPM also proposes allowing FEHB 

enrollees to add a domestic partner to their FEHB enrollment. This proposal would align the 

FEHB Program with best practices in the private sector as larger employers competing for talent 

are increasingly offering domestic partner benefits. Together, the proposals would result in a 

savings in mandatory spending of approximately $5.2 billion over ten years. 

Finally, aPM proposes allowing premium differentials tied to wellness. This proposal provides 

aPM with the authority to approve a limited differential adjustment to rates charged for enrollees 

based on their health status and participation in health and well ness programs. For instance, this 

proposal would allow aPM to increase the enrollee share of premiums for those who use tobacco 

products and do not participate in tobacco cessation programs (which FEHB plans offer tobacco 

cessation programs at no cost share to enrollees). This proposal aligns the FEHB Program with 

current trends in the commercial market, increases the use of preventive services, and encourages 

enrollees to make improvements to their health status resulting in a reduction oflong-terrn 

UNITED STATES OFHL l OF PERS( )NNEL ~l/\l\Al;EM[NT Page 8 of9 
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Insert offset folio 9 here 81665.009

Statement of Jonathan Foley 

U.S. Office of Personnel Management 

April 11, 2013 

chronic costs. OPM estimates that this this proposal would result in estimated mandatory cost 

savings of $1.3 billion over ten years. 

Overall, these proposals would result in net mandatory cost savings of $8.4 billion to the Federal 

government over a 10 year period. In addition to cost savings, the proposals would improve 

efficiency, and directly support OPM's mission of recruiting, retaining, and honoring a worldclass workforce to serve the American people. 

Conclusion 

I want to thank you for this opportunity to testify today and I am happy to address any questions 

you may have. 

UNlrf'D STXI l:S OFFICE OF PeRSONNEL tv'!;\NMifMENT Page 9 of') 
16 

Mr. FARENTHOLD. Thank you. I am sure we will be back to you 

with questions when we finish the panel. 

Mr. Breskin, you are now recognized for five minutes. 

STATEMENT OF WILLIAM A. BRESKIN 

Mr. BRESKIN. Thank you. Mr. Chairman and other members of 

the subcommittee, good morning. My name is Bill Breskin and I 

am the Vice President of Government Programs for the Blue Cross 

and Blue Shield Association. Thank you for this opportunity to discuss the value of the Federal Employee Health Benefits Program. 

We look forward, with members of the subcommittee, to ensure 

that Federal employees and retirees continue to have high quality, 

affordable health care coverage. 

The Blue Cross and Blue Shield Association and participating 

independent local Blue Cross and Blue Shield Plans have jointly 

administered the government-wide Service Benefit Plan from the 

very beginning of the program in 1960. Today we provide health insurance to more than 5.2 million active and retired Federal employees and their dependents. Last year, for the second consecutive 

year, premiums for the most popular option increased by only 2 

percent. We are proud of the millions of Federal employees that select Blue Cross Blue Shield for our affordable premiums, our high 

level of customer satisfaction, low administrative costs, and constant innovation. 

With 230 product offerings in the Federal workforce nationwide, 

and with very high levels of customer satisfaction, the FEHBP is 

often cited as a model for choice and competition. No matter where 

they live, Federal enrollees can choose from among a minimum of 

13 national products offered by six different carriers, each with a 

uniform premium nationwide. In fact, 80 percent of Federal employees select these nationwide options. 

Combined with local plan options such as HMOs, high deductible 

health plans, and consumer-directed health plans, Federal enrollees may have as many as 24 different plan choices in some States. 

No other employer-sponsored health program anywhere offers anything like this level of choice. Indeed, it would be hard to identify 

any government program having greater competition. 

Blue Cross Blue Shield has remained dedicated to FEHBP enrollees, having offered its products for 53 years, every year since the 

Program’s inception. We know that Federal employees and retirees 

have a broad choice of coverage every year. We also understand the 

need to reduce; Federal spending has never been greater, and we 

are leading in care delivery, innovation, and other key strategies 

that improve health and attack health cost drivers. 

We leverage the innovations and provide the relationships used 

by 85 of the Fortune 100 companies who turn to the Blues for their 

employee health benefits. Out standard in basic option plans offer 

more than 25 innovative features, including wellness programs and 

incentives, online transparency tools, and other management programs to improve the health of Federal employees and the value 

of their benefits. 

The service benefit plan will also offer patient-centered medical 

homes in every State, plus the District of Columbia, by the end of 

the year, having already offered PCMH in several States. No one 

17 

is more innovative and committed to bringing cutting-edge innovation to the FEHBP than the service benefit plan. 

Today I want to offer the Blues perspective on two proposed 

changes to the FEHBP: first, the addition of regional PPOs in the 

program and, second, the prescription drug carve-out. 

Introducing regional PPOs into the FEHBP will result in higher 

costs for both the Federal Government and Federal employees, and 

will jeopardize the most popular nationwide offerings. Instead of offering uniform premiums nationwide, regional PPOs will be allowed to cherry-pick low-cost regions and charge a premium that 

reflects the cost of that region only. This will lead to higher premiums in the nationwide plans or regions not picked up by the new 

PPOs, as more enrollees in the low-cost areas choose the regional 

PPOs. Within a few years, the nationwide plans will become noncompetitive and will likely stop offering nationwide coverage altogether. 

This would leave certain areas of the Country undeserved or potentially not served at all, and create gross disparities in health insurance coverage for enrollees in different areas. An analogy exists 

in the Medicare Advantage Program: a national PPO is allowed, 

but there has never been a nationwide option because nationally 

priced PPOs cannot coexist with locally rated PPOs, for the same 

reason that would occur in the FEHBP should regional PPOs be allowed. 

Assuming all PPOs were offered on a regional basis, 54 percent 

of Federal employees and retirees are likely to see their health premiums increase. An analysis of Avalere Health concludes that Federal spending would increase by $5.7 billion over 10 years if PPOs 

were offered on a regional basis. 

Rather than introducing regional products into the FEHBP and 

creating an unlevel playing field for competition, we believe a better approach would be to open up the program to any carrier willing to participate on a level playing field nationwide, and to give 

carriers additional flexibility to offer products and more aggressively incorporate their latest private sector innovations for controlling costs. 

Another change that is being proposed is consolidating contracting for prescription drug benefit management in the FEHBP. 

Proponents of the carve-out approach argue that streamlined purchasing of prescription drugs will save money and lower administrative costs. However, under the pharmacy benefit carve-out, 

health plans will have limited access to pharmacy claims that 

would otherwise help identify members who may benefit from case 

management and coordination of care. This leads to increased costs 

and poorer health outcomes. Furthermore, prescription drug carveout will reduce beneficiary choice by limiting prescription drug benefits, preventative effective integrated management of pharmacy 

and medical benefits, and compromised care management utilization management techniques that help ensure safety and adhere to 

best practices. 

In closing, let me say that the career staff at OPM have done a 

superb job in managing this program, which is the gold standard 

of competition and choice, and a model for health care reform. We 

have identified in our testimony additional innovations that OPM 

18 

should consider, including premium discounts, incentives for enrollees to choose high-quality providers, and coverage for new, cuttingedge access for points for health care. Blue Cross Blue Shield is 

committed to working with OPM and Congress to keep the FEP at 

the forefront of innovation and make the FEHBP even better, without disrupting the coverage millions of Federal employees have selected today. 

I appreciate the opportunity to discuss the value of the FEHBP 

and I look forward to your questions. 

[Prepared statement of Mr. Breskin follows:] 

19 


Insert offset folio 10 here 81665.010

Mr. Chairman, Ranking Member Lynch and Members of the Subcommittee: 

Good morning. My name is Bill Breskin, and I am Vice President for Government 

Programs at the Blue Cross and Blue Shield Association. Thank you for this opportunity to 

discuss the value of the Federal Employees Health Benefits Program (FEHBP) for federal 

employees. We look forward to working with members of the Subcommittee to ensure federal 

employees and retirees continue to have high quality, affordable health care coverage. 

The Blue Cross and Blue Shield Association and participating independent local Blue 

Cross and Blue Shield Plans jointly administer the government-wide Service Benefit Plan in the 

FEHBP. We have offered the Service Benefit Plan from the very beginning of the FEHBP in 

1960. Today, the Service Benefit Plan provides health insurance to more than 5.2 million active 

and retired federal employees and dependents. Last year-for the second consecutive yearpremiums for our most popular option increased by only two percent. We are proud that millions 

of federal employees select Blue Cross Blue Shield for our affordable premiums, high level of 

customer satisfaction, low administrative costs and constant innovation. 

My testimony covers two areas: (1) the value of the FEHBP and Blue Cross and Blue 

Shield's strong track record in serving federal employees; and (2) our perspective on proposed 

changes to the program, including the addition of regional PPOs and proposals to consolidate 

contracting for prescription drug benefit management. 

Value of the FEHBP 

With robust plan offerings and high customer satisfaction, the FEHBP is often cited as a 

model for choice and competition. The FEHBP offers more plan choices than any other 

employer in the country. While most employers offer two or three insurance products through 

one or two carriers, 230 plans participate in the FEHBP-at both the national and local levels. 

The FEHBP offers active and retired federal employees many plan choices from national 
20 


Insert offset folio 11 here 81665.011

preferred provider organizations (PPOs) to local health maintenance organizations (HMOs), 

high deductible health plans (HDHPs) and consumer-directed health plans (CDHPs). 

The Office of Personnel Management (OPM), which administers the FEHBP, has 

increased the number of carriers in the program by double digits in the last two years-and 

more carriers have entered in the last two years than in the last five years. The beauty of the 

FEHBP is that no matter where they live, federal enrollees can choose from among a minimum 

of 13 national products offered by six different carriers-each with a uniform premium 

nationwide. In fact, 80 percent of federal enrollees select these nationwide options. Combined 

with local plan options, federal enrollees may have as many as 42 plan choices in some states. 

The FEHBP has kept premiums affordable for federal employees and retirees while 

offering comprehensive, integrated benefits. In 2013, FEHBP premiums increased by 3.4 

percent, while according to industry surveys, commercial plans rose by an average of 6.3 

percent. (See Figure 1). 

Figure 1. Premium Growth in CalPERS, Commerical Market, FEHBP and Blue Cross Blue 

Shield Standard Option, 2013 Benefit Year and 2003-2013 

2013 10 year average (2003-2013) 

~ .. Blue CrO~$ Slue Shield Federaj Employee Pmgr<lm 

2 
21 


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Blue Cross Blue Shield: A Strong Track Record Serving Federal Employees 

The Blue Cross and Blue Shield Association and its member Plans are proud to have 

been dedicated, reliable and consistent participants in the FEHBP since the program's inception 

53 years ago. We are committed to the federal market and are focused on serving federal 

employees, retirees and their families. 

The nationwide Blue Cross Blue Shield FEHBP offerings include a Standard and Basic 

Option-both are popular with federal workers and retirees for their comprehensive benefits, 

competitive premiums and ongoing innovation. We are proud to have earned the loyalty of 

federal enrollees and retirees over our five decades in the program. 

BCBSA knows that federal employees and retirees have a broad choice in coverage 

each year. That is why we strive to be the best choice for our members and for the FEHBP. We 

also understand the need to reduce federal spending has never been greater, and we are 

leading in care delivery innovation and other key strategies that improve health and attack 

health cost drivers. Blue Cross Blue Shield plans in the FEHBP leverage the innovations and 

provider relationships used by 85 of the Fortune 100 companies who turn to Blue Cross Blue 

.Shield for their employee health benefits. Our Standard and Basic Option plans offer more than 

25 innovative features, including well ness programs and incentives, online transparency tools 

and other management programs to improve the health of federal enrollees and the value of 

their benefits. 

I want to highlight a few examples of specific Blue innovations that deliver quality, more 

affordable coverage options in FEHBP. 

Patient-centered medical homes in 17 states plus the District of Columbia covered 

more than 250,000 FEHBP members at the close of 2012. CareFirst BlueCross BlueShield 

(serving D.C., Maryland and Northern Virginia) operates one of the largest networks of patientcentered medical homes (PCMHs) in the country, which have been available to Blue FEHBP 

3 
22 


Insert offset folio 13 here 81665.013

members since 2011. In a medical home, the patient and primary care practice are at the center 

of care, and patients have a continuing relationship with a primary care physician and care team 

that assures care is comprehensive, proactive and coordinated. This reinforces primary care's 

critical role in helping patients get the care they need, when they need it, with greater efficiency, 

less redundancy and fewer return trips to the hospital or physician's office-and it encourages 

teamwork and coordination across all of the clinicians involved in caring for a patient. By the end 

of this year, Blue Cross Blue Shield FEHBP plans are expected to include PCMHs in all 50 

states plus D.C. These care delivery innovations are projected to serve almost 1.2 million 

federal members by the close of 2014. 

Patient safety initiatives, including locally-tailored efforts to prevent medical errors and 

reduce hospital readmissions, are critical to ensuring our members receive the best possible 

care. A 2012 pilot with local plans reduced readmissions rates for our federal members in a 

matter of months, yielding estimated savings of over $3.5 million. The pilot is now being scaled 

nationwide. 

Chronic disease management programs support BCBSA's FEHBP members with 

diabetes, congestive heart failure, chronic lung disease, coronary artery disease and/or asthma. 

In 2012, our 798,000 participating federal members had 11.9 percent fewer inpatient admissions 

and 8.29 percent fewer emergency room visits than those eligible but not enrolled. These 

reductions yield tangible savings for OPM and keep federal employees on the job and out of the 

hospital. 

Transparency tools, which include Fepblue.org, MyBlue, and other consumer tools 

serve our members by helping them save money, make the best health choices and take action 

on these choices. In 2012, nearly 700,000 federal members signed up for the MyBlue Portal, 

which helps them to be more active, informed health care consumers. The MyBlue Annual 

Statement offers a summary of the benefits paid for medical and pharmacy claims for the past 

year, illustrates annual savings earned for medical and pharmacy services, shows member 

4 
23 


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utilization of in-network versus out-of-network providers and generic versus brand name 

medications, and provides information on the incentives available to each member. The MyBlue 

Treatment Cost Estimator helps members avoid surprises by utilizing the national cost 

estimation tool prior to receiving services. The National Doctor and Hospital Finder has 

information to help members assess the quality of the hospitals and physicians. Members can 

write reviews, read patient satisfaction surveys, and view safety and efficacy ratings for 

providers. These are only a few of the many consumer tools we employ to make health care 

transparent for our members. 

In sum, no one is more innovative and committed to bringing cutting edge innovation into 

the FEHBP than Blue Cross Blue Shield. 

BCBSA Perspective on Proposed Changes toFEHBP 

1. Regional PPOs 

While the FEHBP has a long track record of success, some are calling for changes to 

the program, including the addition of regional PPOs into the FEHBP. We agree that there is 

always room for improvement, but believe a better approach would be to make statutory 

changes (if needed) to open up the FEHBP to any carrier willing to participate on a level playing 

field nationwide. 

Adding regional PPOs to the FEHBP is neither innovative nor will lower the overall cost 

of the FEHBP. In fact, it will result in higher costs for both the federal government and federal 

employees and will jeopardize popular nationwide offerings. Instead of offering a uniform 

premium nationwide, regional PPOs would be allowed to "cherry pick" low-cost regions and 

charge a premium that reflects the cost of that region only. Since health care costs vary 

considerably across the country, regional PPOs will have a strong incentive to select only lowcost areas to offer coverage. This will lead to higher premiums in the nationwide plans or 

regions not picked up by the new PPOs, as more enrollees in the low-cost areas choose the 

regional PPOs. Within a few years, the nationwide plans will become non-competitive and will 

5 
24 


Insert offset folio 15 here 81665.015

likely stop offering nationwide coverage all together. This would leave certain areas of the 

country under-served or potentially not served at all. 

Under the current FEHBP, a federal employee who works for a federal agency in 

California and is enrolled in a national PPO pays the same premium and has the same benefits 

as an employee working for that agency in New York or in any other state. This is especially 

important for federal employees and retirees who travel or are transferred to another area of the 

country. These nationwide plans provide access to in-network providers anywhere in the 

country, saving the member and the FEHBP money. However, if regional PPOs were allowed 

into the FEHBP, federal employees would pay different premiums based on the costs of each 

region. Assuming all PPOs were offered on a regional basis, 54 percent offederal employees 

and retirees are likely to see their premiums increase. An analysis by Avalere Health concludes 

that federal spending would increase by $5.7 billion over ten years if all PPOs were 

offered on a regional basis. 

Instead of adding regional PPOs to the program, BCBSA recommends a two-pronged 

approach for making the FEHBP even better without disrupting the coverage millions of federal 

enrollees have selected today: 

1. Open up FEHBP to any carrier willing to participate on a level playing field nationwide. The 

current statute allows for three categories of nationwide plans: (a) a Service Benefit Plan 

(BCBS); (b) employee organization or union plans; and (c) an indemnity insurance carrier 

slot (unfilled). To enhance competition without the negative impacts that regional PPOs 

would bring, Congress could authorize an unrestricted number of nationwide insurance 

carriers to offer products government-wide. This would encourage greater competition on a 

level playing field while preserving the nationwide coverage options overwhelmingly 

preferred by FEHBP participants. By maintaining the level playing field, the approach could 

also avoid cost increases expected under the regional PPO model. 

6 
25 


Insert offset folio 16 here 81665.016

2. Give carriers additional flexibility to offer new products that more aggressively incorporate 

the latest private sector innovations for controlling costs. Examples include ' : 

Premium discounts (currently not authorized by statute) that encourage tangible 

actions to improve health (e.g., smoking cessation or weight loss). 

Incentives for employees to choose high quality providers. 

Coverage of new, technology-supported access pOints for health care (e.g., e-visits, 

telemedicine, remote monitoring). 

2. Prescription Drug Carve-out 

Another change some are proposing is consolidating contracting for prescription drug 

benefit management in the FEHBP. Proponents of this "carve out" approach argue that 

streamlined purchasing of prescription drugs for FEHBP enrollees will save money by lowering 

administrative costs and using the government's purchasing power to secure better pricing than 

an individual insurance carrier could achieve. 

BCBSA opposes any carve out of prescription drug benefit management in the FEHBP. 

Such an approach would harm enrollees and would not lower costs because it: (1) reduces 

beneficiary choice by limiting prescription drug benefits; (2) prevents effective integrated 

management of pharmacy and medical benefits; and (3) compromises care management and 

utilization management techniques that help ensure safety and adherence to best practices. 

The pillars of the FEHBP have long been consumer choice and competition among 

carriers to offer affordable, high-quality health benefits that best meet the needs of their 

members. Carving out pharmacy benefit management from the current system would 

undermine these pillars and increase costs. 

1 Towers Watson and National Business Group on Health. (March 2013). Reshaping Health Care: Best 

Performers Leading the Way. Available at: 

http://www.towerswatson.com/DownloadMedia.aspx?media={BAD5FE64-62FD-492A-8F24-

A3C6E5B075B8j. 

7 
26 


Insert offset folio 17 here 81665.017

For the FEHBP to achieve significant savings, OPM would have to adopt a single, 

restrictive formulary, which would limit member and provider choice to potentially narrow 

selection of drugs (as in the Department of Defense [000] or Veterans Administration [VA] 

health programs that use a limited formulary/supply schedule'). The Congressional Budget 

Office (CBO) has stressed on numerous occasions that similar consolidation of "purchasing 

power" for Medicare Part 0 enrollees would not achieve significant savings unless an extremely 

restrictive formulary was adopted for all beneficiaries. 3 In addition, this single prescription drug 

benefit design is likely to shift costs from pharmacy to medical expenses by preventing the 

integrated management of medical and prescription drug benefits. Overall program costs would 

almost certainly increase as a result. 

Full integration of medical and pharmacy benefits allows carriers to design products that 

incentivize members to make safe, appropriate and cost-effective drug choices. Maintaining an 

integrated medical-pharmacy benefit provides members with better quality health care 

management as a result of total management and oversight of members across the continuum 

of care. Studies have found that annual medical expenses for plans with an integrated 

pharmacy-medical benefit design have been reduced by up to 6.2 percent as compared with 

plans without integrated designs' 

Under a pharmacy benefit carve-out, health plans have limited access to pharmacy 

claims that would otherwise help identify members who may benefit from case management 

and coordination of care. This leads to increased costs and poorer health outcomes. 

2 The VA uses both the FSS and national contracts to purchase drugs. DoD also allows beneficiaries to 

purchase drugs from retail pharmacies and then negotiates with the manufacturers for additional savings 

under the FSS. See Government Accountability Office. (June 1997). Drug Prices: Effects of Opening 

Federal Supply Schedule for Pharmaceuticals Are Uncertain, Available at: 

http://www.gao.gov/assets/230/224182.pdf. 

3 CSO estimates that striking the non-interference provision from the Medicare Modernization Act (i.e., 

permitting the federal government to negotiate drug prices) would have a negligible effect on federal 

spending. See Letter from Douglas Holtz-Eakin to Sen. Bill Frist. (January 23,2004). Available at: 

http://www.cbo.gov/sites/defaultlfiles/cbofiles/ftpdocs/49xx1doc4986/fristletter.pdf. 

4 Culley, E.H., Williams, L.C., & Thomas, L. (2010). Pharmacy Benefit Carve In: The Right Prescription for 

Cost Savings. Benefits and Compensation Digest, 47(2), 22. 

8 
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Insert offset folio 18 here 81665.018

In 2011, OPM issued a carrier letter that required FEHBP fee-for-service carriers to alter 

the way in which they contract with pharmacy benefit managers (PBMs), Specifically, the PBMs 

must now pass through all drug claims at their actual acquisition cost, and all rebates/discounts 

must be passed back at 100 percent to the carriers, This has the effect of making certain 

proposed legislation that would carve out pharmacy benefits unnecessary since carriers are 

already receiving all the discounts that this legislation hopes to achieve, I would also point out 

that any savings that have been attributed to a prescription drug carve-out in past budget 

proposals were predicated on numbers prior to OPM issuing its 2011 carrier letter and are 

inaccurate, 

Integrated medical-pharmacy models allow for more comprehensive and effective 

management of patients with complex pharmacy needs, The ability to access pharm~cy as well 

as medical claims information also helps decrease the risk of drug abuse and diversion, 

Prescription drug abuse and diversion is the fastest growing, most widespread substance abuse 

issue facing our society, Nearly half a million emergency department visits in 2009 were due to 

people misusing or abusing prescription painkillers, Drug abuse and diversion increases 

prescription drug costs as well as costs related to provider and emergency room visits, 

rehabilitation services and other health care needs. 

Conclusion 

Blue Cross Blue Shield has been in the FEHBP since its inception in 1960, and we are 

committed to working with OPM and Members of the Subcommittee to make the FEHBP even 

better without disrupting the coverage millions of federal enrollees have selected today, 

Blue Cross and Blue Shield has incorporated a diverse set of innovations in both of our 

FEHBP plans, Basic Option and Standard Option. Whether it is in care delivery and payment, 

i care management, or member engagement, these innovations leverage the Blues' local 

presence and nationwide strength to meet the needs of our federal members and our client, 

9 
28 


Insert offset folio 19 here 81665.019

OPM. As the choice of 85 of the Fortune 100 companies, the Blues are constantly innovating 

and are committed to delivering the best value to our members, whether in the FEHBP or in the 

commercial marketplace. We focus our services on each member, one at a time, to provide the 

best products to both the federal workforce and OPM. 

I appreciate the opportunity to discuss the value of the FEHBP, and I look forward to 

your questions. 

10 
29 


Insert offset folio 20 here 81665.020

Name: William A Breskin 

Committee on Ovenigh1 and Government Reform 

Witness Disclosure Requirement - <ITruth in Te.stimony" 

Required by House Rufe XI, Clause 2(g)(5) 

I. Please lis! any federal grants Orcontrac!s (including subgrants or subcontracts) you have received since October 1,2010. Include 

the source aad amounl of each grant 01 contfaCI. 

None. 

2. Please list any entiry you are testifying on behlllfof lind briefly describe your relatIonship with these entities. 

Blue Cross and Blue Shield Association 

Vice President, Government Programs 

3. P!e~e list any federal grants or contraclS (including subgrants or subcoOlracts) received since October 1,2010, by {he emity{ies) 

you listed above. Include the souree and amount of each grant or contract 

(1) The Blue Cross and Blue Shield Service Benefit Plan's contract CS 1039 with the U,S. Office of Personnel Management 

(OPM) for participation in the Federal Employees HeaHh Benefits Program: 

2011 - $26.7 Billion" 

2012 - $27.7 Billion" 

2013- TBD" 

~ These numbers represent the premiums attributed to the Service Benefit Plan. SeSSA does not receive the premium dollars; 

they are deposited in the U.S. TreasUlY and Blue Plans withdraw funds from a letter of credit account as needed to pay claims 

and other expenses. These total amounts do not include statutOrily required premium loads to defray OPM's administrative costs 

and to deposit in the Service Benefit Plan's contingency reserve, which is maintained in the U.S. Treasury. It is not possible to 

calculate the total receipts for 2013 at this time because the total amount attributed to the Service Benefit Plan depends on the. 

number of individuals who enroll in it and the mix of enrollment tiers they choose (self or self and family). 

(2) The Blue Cross and Blue Shield FEP BlueVision contracts with OPM for participation in the Federal Employees Dental and 

Vision Insurance Program: 

2011 - $76.5 Million" 

2012 - $82.9 million" 

2013- TBD" 

.'" These numbers include total premiums. It is not possible to calculate the total receipts for 2013 because the total amount 

received by FEP BlueVision depends on the number of individuals who enroll in it and the mix of enrollment tiers they choose 

(self or self and family). In addition to paying for vision and other expenses, a portion of the premiums is also used to defray 

OPM's,.expenses in adminis the program. (Continued on attached sheet) 
30 


Insert offset folio 21 here 81665.021

Committee on Oversight and Government Reform 

Witness Disclosure Requirement - "Truth in Testimony" Required by House Rule XI. Clause 2(g)(5) 

Page 2 of2 

(3) Health Insurance for the Aged and Disabled (Medicare Part A Prime contract) from the Centers for 

Medicare & Medicaid Services: 

FY 2011 - $4.533.100 (contract no, 87-001-1) 

FY 2012 - $4.533.100 (contract no, 87-001-1) 

FY 2013 - $4.533.100 (contract no, 87-001-1) 

(4) Resident FTE Assessment Program for the Children's Hospitals Graduate Medical Education 

(CHGME) Payment Program from the Health Resources and Services Administration: 

FY 2011- $1.262.753 (contract no, HHSH230200732003C) 

FY 2012 - $1.313.946 (contract no. HHSH230200732003C) 

FY 2013 - $1.141.113 (contract no. HHSH250201200006C) 

(5) Legal Representation in Arbitration Hearings for the Home Health Third Party Liability Demonstration 

from the Centers for Medicare & Medicaid Services 

FY 2011 and FY 2012 - $1.363.780 (contract no. HHSM-500-2010-00056C) 

FY 2013 Stop Work Order Issued (contract no, HHSM-500-2010-00056C) 

(6) Evidence-based Practice Centers (EPC III) (Contract no, HHSA 290 2007 100581) with the Agency 

for Healthcare Research and Quality'" 

2010 - $3.684.000 

2011 - $3.396.000 

2012 - $2.477.000 

.,. Under this contract. which extended from October 2007 to September 2012. receipts actually depend 

on the number and value of task orders issued to BCBSA, The amounts above represent revenues 

received from the Agency for Healthcare Research and Quality during that year and include some funds 

received under a previous contract EPC 11.) 

(7) Evidence-based Practice Centers (EPC IV) (Contract no, HHSA 290 2012 000101) with the Agency 

for Healthcare Research and Quality"" 

••• * Under this contract. receipts actually depend on the number and value of task orders on which 

BCBSA bids successfully, To date. BCBSA has received two task orders. totaling $245.000. 

(8) BCBSA subcontracts with Cahaba Government Benefit Administrators®. LLC. to provide the services 

of a Hearing Officer. on behalf of Cahaba. to conduct certain intermediary hearings: 

Start Date August 3. 2011 - $70.000 (contract no, CGBA-C-09-0020. Amendment 3) 

Start Date August 3.2012 - $70.000 (contract no, CGBA-C-09-0020. Amendment 4) 
31 

Mr. FARENTHOLD. Thank you very much. 

We will now go to Mr. Choate from United. Thank you. 

STATEMENT OF THOMAS C. CHOATE 

Mr. CHOATE. Thank you, Chairman Farenthold and Congresswoman Norton, for holding this important and timely hearing. I am 

honored to give UnitedHealth Group’s perspective on how increased 

competition will bring more choices, higher quality and better value 

to Federal employees in the health benefits program. Reform of the 

program will better serve the program’s sponsors, beneficiaries, 

and the American taxpayers. 

My name is Tom Choate and I am the Chief Growth Officer for 

UnitedHealthCare, a business segment of UnitedHealth Group. I 

have worked for many years on our FEHBP business and with the 

Office of Personnel Management. 

United Health Group is a diversified health benefits services 

company based in Minnetonka, Minnesota. We serve more than 80 

million people and have the unique ability to engage in all aspects 

of the health care delivery system and apply lessons learned at a 

full-scale in the marketplace. As a result, we view health care delivery and benefit design through multiple lenses. 

One thing we know for certain: it is essential for any employer 

who sponsors health plans to be able to offer choice of affordable, 

high-quality benefit options to its employees, while ensuring the 

employer gets the best value for its resources. 

Unlike virtually any other employer, the Federal Government 

can’t do this because it is hindered by the law governing the program. That law has not been updated in any meaningful way since 

President Eisenhower signed it in 1959. The law reflects the way 

health care was delivered and consumed five decades ago. As a result, competition in the program has eroded. 

Since 1995, one plan has more than doubled its market share, 

from 30 percent to 62 percent of Federal workers. The second largest plan has 7 percent market share. To be clear, that is a 55 point 

difference between number one and number two competitors. That 

is clearly not a market in which real competition exists. OPM itself 

acknowledged last year that ‘‘the competitive environment is not as 

robust as it should be.’’ 

The result of this virtual monopoly is exactly what you would expect, it is a system with no real incentives to increase quality, 

value, and choice for more than 8 million people. It also limits the 

Federal Government’s ability to confront the challenge of rising 

health care costs. 

Lack of competition inevitably leads to the following issues: first, 

as with any market that becomes more concentrated, consumers 

pay more. This is clearly an issue with FEHBP. 

Last year, a Health Affairs article found that in areas of strong 

program competitiveness, premiums were more than 10 percent 

lower than compared to areas of low competition. It also found that 

real competition in the program only exists in about 15 percent of 

the Country. That means that in 85 percent of the Country people 

in this program pay more than they should because competition 

does not exist in any meaningful way. 

32 

Second, with little competition, health plans have fewer incentives and little capacity to innovate and provide better quality. 

And, third, Government costs continue to rise. This year the program will cost taxpayers $34 billion. In this age of fiscal challenges, 

the Federal Government needs the same tools to manage costs that 

every other large employer has. 

The President’s 2014 budget, released yesterday, calls for Congress to make several reforms to the program. This includes a proposal that would give OPM the authority to offer new health plans 

with comprehensive medical benefits. This proposal provides no advantage to any one plan; it merely adjusts the program to reflect 

the realities of the modern health care system. Plans would still be 

required to meet all of OPM’s existing requirements for participation. OPM would still exercise its oversight authority. In fact, 

OPM’s role in premium design and benefit negotiations would be 

strengthened by increased competition. 

The premise underlying the FEHBP since its inception in 1959 

was that competition among health plans results in lower prices 

and better value. Much has changed since 1959. We have moved 

from rotary phones to smart phones and from 45s to iTunes. The 

driving force behind such innovation has been competition, which 

revolutionized the way we live, including the way many Americans 

consume health care. Now it is time to update the 1959 law. Federal employees and taxpayers should benefit from the innovation 

and competition in the market, just as they do in every other market. 

In closing, we all know one thing has not changed since 1959: the 

simple economic principle that consumers benefit from increased 

competition. 

Thank you for the opportunity to testify this morning and for 

your leadership on this committee. 

[Prepared statement of Mr. Choate follows:] 

33 


Insert offset folio 22 here 81665.022

UNITEDHEAlTH GROUP" 

United States House Committee on Oversight & Government Reform 

Subcommittee on Federal Workforce, U.S. Postal Service & the Census 

"The Federal Employees Health Benefit Program: Is It a Good Value for 

Federal Employees?" 

Testimony of Thomas Choate 

Untied Health Group Incorporated 

April 11, 2013 

Thank you, Chairman Farenthold and Ranking Member Lynch for holding this important and 

timely hearing. I appreciate the opportunity to share with you UnitedHealth Group's perspective 

on how increased competition can bring more health care choices, higher quality and better value 

to the Federal Employee Health Benefits Program (FEHBP). Reform of the FEHBP would 

better serve the program's sponsor, its beneficiaries and the American taxpayers. 

My name is Tom Choate and I am the Chief Growth Officer for UnitedHealthcare, a business 

segment of United Health Group Incorporated (hereinafter "UnitedHealth Group"), a diversified 

health and well-being company based in Minnetonka, Minnesota. I am here testifying on behalf 

of UnitedHealth Group. At UnitedHealth Group, I have been an integral part of our existing 

FEHBP business and have worked for many years with the Office of Personnel Management 

(OPM) and our dedicated FEHBP team. 

United Health Group serves more than 80 million people in all 50 states and worldwide through 

our health benefits and health services businesses. We have the unique ability to participate in 

all aspects of the health care delivery system and apply lessons learned at full-scale in the 

marketplace. As a result, we view health care delivery and benefit design through multiple 

lenses. Our findings are informed by our experience with: 

• Direct relationships with 770,000 health professionals, 5,000 hospitals, 154,000 dentists, 

67,000 pharmacies, 900 labs, 400 life science organizations, 300 commercial insurance 

companies and health plans, and 300 government agencies at the Federal, State and local 

levels; . 

• 27,000 physicians, nurses, and clinical practitioners in our workforce; 

• Managing more than $300 billion in health care spending annually; 

Processing 82 billion transactions a year, including 750 million transactions through our 

Web portals and mobility devices; and 

• Managing more than 24 million Personal Health Records. 

1 
34 


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We tailor health benefits, clinical programs and customer service for 3.8 million Medicaid 

beneficiaries, 9 million Medicare recipients, and more than 26 million Americans through their 

employer sponsored or individual plans. We have the privilege of managing the health care 

services for 2.7 million active duty and retired military service members and their families in the 

21-State TRICARE West Region. 

We strive to foster a health system that is more connected, better informed, and better aligned in 

its objectives and incentives to continuously improve the effectiveness, quality, and patient focus 

of the health system. Our approach leverages health data and analytics, technology, shared 

accountability, cost saving measures, and collaboration among providers, payers and patients 

across the health care delivery spectrum. 

One thing we know for certain: It is essential for any employer who sponsors health plans to be 

able to offer a choice of affordable, high-quality benefit options to its employees, while also 

ensuring the employer gets the best value for its resources. This is as true of the Federal 

Government's options for federal employees, their families and retirees as it is of any employer, 

including the private sector, and state and local governments. 

However, unlike other employers, including the private sector and state and local governments, 

the Office of Personnel Management needs Congress to act to update the existing statute that 

governs the Federal Employee Health Benefits Program to enable competition, modernize this 

outdated health benefits program, and provide its beneficiaries with more choice and coverage 

options comparable to today's broader marketplace offerings. This kind of reform, importantly, 

will also confront the ongoing challenges of rising health care costs. 

FEHBP beneficiaries deserve this same modernized health care experience, and the Federal 

Government, like any employer, should benefit from a healthier, more engaged population, better 

health care value, and lower costs. 

History and Background 

The Federal Employees Health Benefits Program (FEHBP) is the largest employer-sponsored 

health insurance program in the United States. The $47 billion Program protects the health of 

nearly 8 million Federal employees, retirees and their families, including the Congress, the 

Judiciary, and the US Postal Service. You, your staff, and your families may well be 

beneficiaries of the program; certainly, many of your constituents are. 

The 54-year-old statutory structure of the Program does not reflect the current health care 

marketplace of today and limits OPM's ability to introduce new health plan choices. 

As a result, a growing lack of competition and consumer choice threatens the sustainability of the 

Program, a problem that OPM has recognized. Without action, this erosion of competition and 

choice will continue. 

However, a simple statutory change authorizing greater health plan participation in the Program 

will help increase competition, choice and value in the Program. 

2 
35 


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Competition: A Founding Principle of the FEHBP, in Jeopardy 

The premise underlying the FEHBP from its inception in 1959 is that competition among health 

plans results in lower prices and better value for the Federal Government and Program 

beneficiaries. A June, 2012 Health Affairs article entitled "Federal Employees Health Program 

Experiences Lack O/Competition In Some Areas. Raising Cost Concerns For Exchange Plans. " 

demonstrated that in areas of strong FEHBP health plan competitiveness, premiums were more 

than 10 percent lower compared to areas of low competition. 

However, the statute establishing the FEHBP lacks the flexibility to maintain competitiveness 

and adjust to current and future changes in the employer-sponsored health insurance 

marketplace. Created during the early years of employer-sponsored health insurance, the law 

specifically authorized participation by two Government-wide plans, a small number of 

Employee Organization Plans (largely grandfathered into the Program), and a number of Health 

Maintenance Organizations serving limited geographic areas. 

For nearly three decades, that legislative specificity worked reasonably well. Two Governmentwide plans were available, and nearly 400 plans participated in the Program. Competition for 

participants among many choices was robust, benefits were comprehensive, and plans 

continually strengthened benefit packages, customer service and administration to attract new 

participants. 

But since the late 1980s, competition and choice in the Program have dramatically decreased. 

Aetna, one of the two Government-wide plans, left the Program in 1989. More than a dozen of 

the grandfathered Employee Organization Plans left the Program as well, and the number of 

participating Health Maintenance Organizations has dropped nearly 50 percent. Incrementally 

over succeeding years, choices have become fewer and participation in the one remaining 

Government-wide plan has grown substantially. 

In addition to substantially fewer health plans in the Program, these trends are dramatically 

illustrated by the distribution of individual participants in the program. 

Since 1995, the single government-wide plan has more than doubled its market share, from 30 

percent of federal workers to more than 60 percent. The next largest plan has 7 percent of the 

market. That is clearly not a market in which real competition exists, a fact which OPM itself 

acknowledged in a White Paper it released last year that concluded "the competitive environment 

is not as robust as it should be." 

Without Congress acting and granting OPM the authority to facilitate and enable the entry of 

new health plan types - which already exist in the broader health insurance marketplace across 

the United States - into the Program, these plan departures have created a situation where 

competition and choice in the Program today is largely an illusion. Without action to reinvigorate 

the competitive nature of the FEHBP, this situation will only worsen in the coming years. As the 

American health care marketplace continues to modernize, evolve and best serve the health care 

needs of employers and employees, we should ensure that the FEHBP is equally equipped with 

the tools and capabilities necessary to achieve these same modern, innovative and effective 

health care. approaches. 

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36 


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Declining Competition Affects Health Care Value, Outcomes, Choice and Cost 

Incremental in its effects, the current trend poses undesirable consequences, both now and for the 

future: 

• Affordability is at risk. Between 1995 and 20 I 0, 800,000 participants left the Program 

altogether. While a number of factors can influence enrollment, many can no longer 

afford health coverage. As participation becomes concentrated in a single insurer, 

affordability becomes an even more acute issue. 

• Innovation is at risk. With little competition to spur improvement, health plans have 

fewer incentives and little capacity to innovate and provide better quality. 

• Individuals face disruption at work and at home. When their plans leave the FEHBP, 

beneficiaries often have to choose new doctors and health care facilities, a problematic 

issue particularly in rural areas. Continuity of care issues present themselves, especially 

for individuals with chronic illnesses. In addition to its individual effects, disruption also 

means lower productivity and less commitment in the workplace. 

• Government costs increase. The Federal Government pays an average of 72% of the 

premium. This year, the Government's share of the cost for the Program is almost $34 

billion - an amount that in this age of budget restraint and fiscal challenges, the 

Government must find ways to manage. 

Why Competition in the FEHBP Continues to Erode 

As the administrator of the Program, OPM has recognized these trends and attempted to 

counteract them. OPM repeatedly invites new HMOs to submit applications for participation, 

with limited success. Several years ago, the agency unsuccessfully sought a new insurer to 

replace Aetna as the Government-wide Indemnity Benefit Plan. These and other initiatives by the 

agency to enhance competition have been helpful, but restrictions in current law limit their 

effecti veness. 

That's because the law governing the FEHBP is far too prescriptive in nature when it describes 

the types of health plans which may participate in the Program. Current law, as it was enacted in 

1959, 2.t!lx authorizes: 

• 2 Government-wide Health Plans - the Service Benefit Plan, which is administered by 

Blue CrosslBlue Shield, and the Indemnity Benefit Plan, which Aetna administered until 

its departure from the FEHBP in 1989. 

• Employee Organization Plans - Only nine of these plans exist today, four of which limit 

membership to certain classes of participants. This category includes a finite list of 

organizations. No new employee organization plans may be accepted into the FEHBP. 

• Comprehensive Health Plans - Now commonly referred to as Health Maintenance 

Organizations, these plans serve limited geographic areas, largely metropolitan areas in 

the United States. 

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37 


Insert offset folio 26 here 81665.026

For all practical purposes, the only way for an insurer to gain entry to the FEHBP today is in one 

of two ways. The first is to apply as the Government-wide Indemnity Benefit Plan. That course 

of action poses substantial insurer risk in today's market, effectively precluding insurer 

participation. Since one plan currently enjoys more than 60 percent of the market, the new plan 

would have to undertake an enormous educational and communications effort to move from zero 

membership to a subscriber base sufficient to recover its initial investment and ongoing 

operational costs. Furthermore, any new plan would be hampered by a crucial lack of 

transparency for all carriers except the plan with more than 60 percent market share. That 

dominant plan has a clear line of sight to its next year's enrollee premium rate contributions 

since the government contribution is based upon a weighted average of all carrier rates - and that 

plan accounts for more than 60% of that weight. That means the dominant plan can essentially 

set its competitive position using this knowledge and its reserve position. 

Creating a benefit package available in all 50 states with a competitive premium in the current 

FEHBP environment would impose a substantial risk for any new plans, with no assurance of a 

return on investment for a number of years. 

The second option is to apply as a Comprehensive Health Plan serving a limited geographic area. 

While that is possible for some insurers, it does not match up well with the business models of an 

increasingly large number of innovative insurers in the marketplace today, offering products 

which represent best practices among large employers, who could provide the Federal 

Government with the best combination of benefits and value. As OPM notes in its own analysis 

of the program, "the health insurance market includes other plan types that OPM is precluded 

from contracting with." 

Solution: Restoring Competition to the FEHBP 

The President's FY 2014 Budget Proposal recommends action by the Congress on a number of 

reforms in the FEHBP, including a proposal that would overcome restrictions on health plan 

participation in the Program, by adding a provision to the existing statute enabling OPM to 

receive and consider applications from new health plans that offer comprehensive medical 

benefits. 

Benefits of Increased Competition 

Enactment of this provision would be a significant step in enhancing the Program's 

competitiveness, both now and in the future. It would establish a level playing field, providing no 

advantage to any insurer or group of insurers. It would merely update and modernize the 

existing FEHBP statute to reflect the realities of the modern health care system, opening the door 

to choice, competition and value in the Program and removing artificial and outdated limitations 

on OPM's ability to accept new health care plans. Plans would still be required to meet all of 

OPM's existing requirements for participation, and OPM would retain the administrative and 

regulatory authority to deny or refuse entry to plans that do not meet acceptable standards. Here 

are some examples of the new types of plans which could apply for participation: 

5 
38 


Insert offset folio 27 here 81665.027

• A Preferred Provider Organization that operates in a single State, region, or nationally; 

• A health insurance plan whose territory is confined to a particular region of the United 

States; 

• An Exclusive Provider Organization that offers insurance in a single metropolitan area; 

and 

• A health insurance plan that specializes in the provision of healthcare outside of the 

United States. 

If Congress passes legislation consistent with this proposal, a broad range of potential benefits 

would accrue to everyone who has a stake in the success of the Federal Employees Health 

Benefits Program. For instance: 

• More than 8 million Federal employees, retirees and family members would benefit from 

increased plan participation. Health plan choices would likely increase, resulting in 

quality health care at a competitive price. As previously mentioned, a June, 2012 Health 

Affairs article demonstrated that in areas of strong FEHBP competitiveness, premiums 

were more than 10 percent lower compared to areas of low competition. Crucially, the 

article also concluded that real competition in the Program only exists in about 15 

percent of the country, meaning that in 85 percent of the country, Program 

beneficiaries - and the Federal Government - are paying more than they should 

because competition doesn't exist in any meaningful way; 

• Since a variety of new health insurers would be able to enter the Program, many with 

innovative health delivery mechanisms focused on the quality of individual care and 

health outcomes, the FEHBP would reap the benefits of innovation and modernization in 

the larger health care marketplace; and 

• OPM's role in benefit design and premium negotiations would be strengthened as a 

consequence of increased competition for participants among a larger group of health 

insurers. 

What a Modernized FEHBP Would Look Like 

A modem FEHBP root~d in competition and value would encourage participating insurers to 

provide beneficiaries the latest health care advancements and innovations, driving better health 

outcomes and increasing affordability. These would include: 

• Flexible, creative plan offerings that encourage consumer engagement and 

empowerment; 

• Transparency tools that give consumers the information and resources they need to make 

personally appropriate health care decisions, such as up-to-date, accurate cost estimates 

for specific services provided by doctors and hospitals; 

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39 


Insert offset folio 28 here 81665.028

• Powerful data analytics to help the Government evaluate plan performance, and identify 

specific opportunities for future cost savings through fully-integrated beneficiary data; 

• Tailored programs to improve the health of beneficiaries with chronic, rare, or complex 

diseases; and 

• Modern network-based offerings at a large scale that enhance care coordination, improve 

health outcomes, and reward providers for outcomes, not volume. 

Much has changed since 1959. We've moved from typewriters to lap tops; from rotary dial 

phones to smart phones; from 45s to iTunes. The driving force behind such innovation has been 

competition. Innovation and competition have revolutionized the way we live, including the way 

many Americans consume health care. It's time to update that 1959 law, so federal employees 

and the Federal Government can also benefit from innovation and competition in the health care 

marketplace. 

After aU, one thing hasn't changed since 1959: The simple economic principle that customers 

and consumers benefit from increased competition. 

Thank you for the opportunity to testify this morning, for your leadership on this Committee and 

for your ongoing commitment to and interest in federal workforce issues. 

7 
40 


Insert offset folio 29 here 81665.029

Committee on Oversighr and Government Reform 

Witness Disclosure Requirement - "Truth in Testfmonyt'> 

Required by Hous< Rule XI, Clause 2(g)(5) 

Name: Thomas C. Choate 

1. Please list any federal grants or contracts (inGiuding subgrants or subcontracts) you have received since October 1.2009. Include 

the source and amount of each granl or contract. 

None 

2. Please list any entity you are testifying on behalf of and briefly describe your relationship with these entities. 

United Health Group Incorporated 

I am Chief Growth Officer at United Health Group Incorporated. 

3. Please list any federal grants or contracts (including subgrants or subcontracts) received since October 1. 2009. by the entity(ies) 

you listed above. Indude the source and amount or each gram or contract 

None. (United Health Group Incorporated. on whose behalf I am testifying, receives no Federal grants 

and does not currently hold any Federal contracts. I am not representing, or responding on behalf of. 

any of United Health Group's operating subsidiaries. many of which do hold Federal contracts.) 

J cerlify thai the abc 

SignalUre: 

;on is true and correct. 

Date: 
41 

Mr. FARENTHOLD. Thank you, Mr. Choate. 

We will now recognize Mr. Mark Merritt, the President and CEO 

of Pharmaceutical Care Management Association. Mr. Merritt, you 

are recognized for five minutes. 

STATEMENT OF MARK MERRITT 

Mr. MERRITT. Good morning, Chairman Farenthold and members 

of the committee. I am Mark Merritt, President of the Pharmaceutical Care Management Association. PCMA is a national association representing America’s pharmacy benefit managers, or 

PBMs, who administer prescription drug benefits for more than 

216 million Americans through Fortune 500 companies, insurers, 

unions, FEHBP, Medicare Part D, and other State and Federal 

agencies. 

PBMs use a number of sophisticated tools and strategies to modernize pharmacy benefits, reduce cost, and expand access to medications. Specifically, we negotiate discounts from drugstores and 

drug manufacturers, design formularies that promote generics, create pharmacy networks that offer 90-day mail service, and use 

health IT like e-prescribing to improve patient safety. 

Although no employer or government program is required to use 

a PBM, almost all choose to do so because of the savings and improvement of benefits involved. Each PBM client has different 

needs and decides for itself how aggressive to be in terms of costcutting, formulary design, drugstore networks, and other areas of 

pharmacy coverage. In 2003, Congress modeled Medicare Part D on 

the successful examples of FEHBP and other employers which reduce costs by hiring PBMs to administer benefits and negotiate discounts. 

Fortunately, Part D has been a great success. It is not only extraordinarily popular with seniors, but it is the only major entitlement program to come in under budget each year of its operation. 

Likewise, in Medicaid, several governors, ranging from Andrew 

Cuomo of New York to Rick Perry of Texas, have begun to engage 

PBMs to reduce wasteful pharmacy spending. PBMs helped save 

New York Medicaid over $400 million in the first year alone, and 

this was done without cutting benefits or reducing the number of 

Medicaid enrollees. On a national scale, a recent report shows that 

overall U.S. prescription drug spending actually dropped last year. 

But there is more PBMs can do to reduce costs for payers across 

the Nation, including FEHBP. Long recognized as the gold standard for employer-sponsored health benefits, FEHBP, nonetheless, 

has unique and specific needs. First, unlike some Federal programs 

which simply deliver health benefits to a fixed set of enrollees, 

FEHBP uses benefits as part of a broader strategy to recruit and 

retain Federal workers. This requires generous benefits that offer 

broad choice, flexibility, and access. Accordingly, FEHBP offers a 

wide range of options for Federal workers, retirees, and their families. Apparently, the approach is working, because a recent OPM 

survey showed that enrollees are satisfied with their benefits by a 

7 to 1 margin. 

Second, many FEHBP retirees are enrolled in Medicare Part A 

and B, but not Part D. They choose, instead, to maintain their 

FEHBP drug coverage an allow Medicare to cover their other medVerDate Aug 31 2005 09:01 Jul 08, 2013 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\81665.TXT APRIL
42 

ical expenses. Lastly, FEHBP’s active population is older than that 

of the typical employer and likely to take more prescription drugs. 

PCMA believes OPM has significant running room to innovate 

and further reduce pharmacy benefit costs. To this end, OPM has 

suggested in its March Carrier letter the plan’s detail how to make 

better use of PBM tools like tiered cost sharing, prior authorization, and step therapy to promote generics and more affordable 

brands. OPM also encourages plans to explore mail service and 

specialty pharmacies, and specifically highlights the potential of 

preferred pharmacy networks, which can achieve even greater savings on prescription drugs with minimal member disruption. 

In closing, we understand and appreciate OPM for seeking new 

ways to leverage PBM tools to improve prescription drug benefits 

in FEHBP. We look forward to working with the members of the 

committee on this and other important issues. 

Thank you for having me today and I would be happy to take 

any questions you might have. 

[Prepared statement of Mr. Merritt follows:] 

43 


Insert offset folio 30 here 81665.030

FCmA 

PHARMACEUTICAL CARE 

MANAGEMENT ASSOCIATION 

Testimony of Mark Merritt 

President & Chief Executive Officer 

Pharmaceutical Care Management Association 

Before the 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

SUBCOMMITTEE ON THE FEDERAL WORKFORCE, U.S. POSTAL 

SERVICE, AND THE CENSUS 

"The Federal Employees Health Benefit Program: 

Is It a Good Valuefor Federal Employees?" 

April 11, 2013 
44 


Insert offset folio 31 here 81665.031

Introduction 

The Pharmaceutical Care Management Association (PCMA) appreciates this opportunity 

to submit our statcment for the record of the April 11,2013 Subcommittee Hearing. PCMA is 

the national association representing America's pharmacy benefit managers (PBMs), which 

administer prescription drug plans for more than 216 million Americans with health coverage 

provided through Fortune 500 employers, health insurers, labor unions, Medicare, Medicaid, and 

the Federal Employees Health Benefits Program (FEHBP). 

PBMs utilize a number of tools and strategies to manage prescription drug benefits that 

maximize value for health plan enrollees and PBM clients - employers, health plans, federal and 

state governments, and other payers. A common thread connecting all programs administered 

by PBMs is that success depends on offering the best overall value in terms of cost, quality, 

access, and convenience for health plan enrollees and saving PBM clients money. To stay in 

business, PBMs must deliver high-quality prescription drug benefits at highly competitive prices. 

The FEHBP has long been the gold standard for employer-sponsored health benefits and 

is a model for health insurance reform efforts at the state and national levels. The hallmark of 

the FEHBP is consumer choice and competition. FEHBP offers a wide range of health insurance 

options for federal workers, retirees and their families and is extremely popular, with a recent 

Office of Personnel Management (OPM) survey showing that enrollees are satisfied with their 

benefits by a 7 to 1 margin. Like any large employer, OPM structures benefits to attract and 

retain talented employees. Comprehensive prescription drug coverage, widely available at retail 

and mail-service pharmacies, is a key component of benefit design in the FEHBP. Most plans 

that participate in the FEHBP competitively bid their drug benefit administration to PBMs. 

OPM does not negotiate prescription drug prices or discounts directly with manufacturers 

or pharmacies, but instead uses its leverage with carriers to negotiate price concessions and 

reduce wasteful spending on prescription drugs for FEHBP enrollees. OPM's annual carrier 

letter establishes parameters within which the health plans - and by extension their 

subcontractors, such as PBMs, dental benefit managers, and mental health benefit managers -

must operatc. OPM provides additional guidance on specific issues and practices it deems 

necessary to address. Through this process OPM encourages carriers to innovate and implement 

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Insert offset folio 32 here 81665.032

new initiatives to address rising costs and stimulate appropriate use of health care goods and 

services. 

In its most recent carrier letter, OPM encourages plans to innovate by making pharmacy 

benefits management a "central theme" of their 2014 proposals. The agency suggests that plans 

detail how they will use PBM tools such as tiered cost sharing, prior authorization, and step 

therapy to encourage the use of generics and more affordable brands. Likewise, OPM encourages 

plans to explore how to use preferred pharmacy networks, mail-service pharmacies, and specialty 

pharmacies to reduce drug costs. OPM specifically highlights the promise of innovative 

pharmacy networks, saying "We understand that members can achieve even greater savings on 

prescription drugs with minimal member disruption, through either a narrower pharmacy 

network or a preferred pharmacy network." 

OPM's focus on pharmacy networks aligns with a recent PCMA study which found that 

greater use of preferred and limited pharmacy networks could save the U.S. health system $115 

billion over the next ten years with minimal disruption to beneficiaries. The savings results from 

competition among the abundance of pharmacies in the United States, including those in big-box 

stores like Target and Walmart, in grocery stores, independent and chain pharmacies, and mail 

service pharmacies. Since there are over 60,000 retail pharmacies nationwide -- more than 

McDonalds, Burger Kings, Pizza Huts, Dunkin Donuts, Wendy's, Taco Bells, Kentucky Fried 

Chickens, and Domino's Pizzas combined -- preferred pharmacies can save money without 

reducing access for patients. 

The OPM-established model for pharmacy benefits has allowed PBMs, working with 

FEHBP carrier clients, to create broad and convenient access to prescription drugs and generate 

significant savings for health plans and enrollees. Just as they do for private-sector health plans 

and large employers, PBMs participating in FEHBP plans playa key role in negotiating price 

discounts from manufacturers and pharmacies in order to lower unit drug prices. 

Negotiating price concessions on drugs is just one of the many ways PBMs reduce 

pharmacy benefits costs. PBMs encourage higher generic utilization, employ more affordable 

delivery options such as mail-service pharmacy, negotiate discounts from retail pharmacies, and 

help doctors and patients understand when safer, more affordable options are available. PBMs 

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understand that the "unit price" of a drug is only one of many different components of 

prescription drug spending. To ensure added value of these services to payers, PBMs also 

provide choice of formularies, broad access to medications, convenient pharmacy options, and 

other benefits for enrollees. 

These methods have proven to be successful in lowering the overall costs of drugs. 

According to the CMS National Health Expenditures Accounts, annual expenditures on 

outpatient prescription drugs have increased more slowly in the past four years than at any time 

in the previous four decades. In 2011, expenditures on prescriptions increased just 2.9 percent, 

well below the 3.9 percent rate of increase in health expenditures overall. 

This trend is due in large part to a continued increase in generic dispensing from 67 

percent in 2007 to 80 percent in 2011, which was encouraged by PBMs through lower or waived 

copayments and formulary compliance programs such as step therapy. Generic dispensing rates 

are generally higher in plans administered by PBMs than in other federal programs, especially 

Medicaid. This is significant, because every I percentage point increase in the generic fill rate 

can translate into a 1 percentage point reduction in drug costs. 

PBMs have been studied by several federal agencies and have received excellent ratings 

on their performance. In general, the deeper the Federal Trade Commission (FTC) probed into 

the operations of PBMs and related entities, the more reassuring were the results. This was 

largely attributed to complex, robust, far-reaching, negotiation-driven competition. Reports from 

other federal agencies, including three reports from the Congressional Budget Office (CBO 

2007a, 2007b, and 2008) and two from the Government Accountability Office (GAO 2003 and 

2009), confirm this. The 2003 GAO report, for example, found that FEHBP enrollees paid the 

lowest prices for 30 prescriptions when purchasing through PBM-owned mail-order pharmacies. 

Proposals to Change the Way FEHBP Purchases Pharmacy Benefits 

Over the years, alternatives to alter the way OPM purchases and administers pharmacy 

benefits have been proposed. At the outset, let us note that OPM, through its contracts, already 

has the capability to implement almost any idea it thinks would improve the quality and value of 

the program. One proposal included in the President's budget last year and, we assume, this year 

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Insert offset folio 34 here 81665.034

would carve-out pharmacy benefits from all OPM's 230 carriers and put the pharmacy benefit 

for the entire FEHBP program up for bid to the lowest bidder. PCMA takes a neutral position on 

this concept as our member companies differ in their views on it. 

Other proposals, including Ranking Minority Member Lynch's bill (H.R 1367), would 

impose drastic changes on the FEHBP program that would put at risk its ability to continue 

offering the savings, quality, and choice to which its enrollees have become accustomed. Some 

FEHBP "reform" proposals substitute federal price controls for market-based competition, while 

other proposals substitute congressional oversight for that of state boards of pharmacy. 

For example, H.R. 1367 would forbid PBMs from paying more than the average 

manufacturer price for drugs, substituting instead government price controls. This would make 

the program look more like parts of Medicaid-where price-controls have led states to pay 

pharmacy dispensing fees which are often double or triple those paid in Medicare Part D and the 

commercial market. Part D, which, like FEHBP, relies upon competition not price controls, has 

consistently performed better than CBO projections. Part D is currently more than 40 percent 

under initial budget projections, has achieved beneficiary satisfaction rates close to 95 percent, 

and, according to the recent MedPAC report, had a low 2.9 percent annual growth rate in per 

capita spending from 2006 to 2010. 

Such critical changes to FEHBP would normally follow a major report or significant 

findings that benefits are substandard or services are overpriced compared to other employer 

payers. But that is not the case. Beneficiaries are overwhelmingly satisfied with FEHBP, by a 

margin of 83 to 14. FEHBP benefit levels and premiums are comparable to or better than those 

received by employees in the private sector. 

Some have suggested that FEHBP's drug costs are significantly higher than those of 

private-sector employers, noting that drug benefits are a greater percentage ofFEHBP's total 

spending. But behind the figures are significant differences between FEHBP's insured 

population and that of most employers. First, the federal workforce is ten years older than that of 

the average private sector employer, which makes it a heavier user of health care services in 

general, and prescription drugs in particular, than the average employee population. Second, the 

FEHBP figures also include expenses for FEHBP's retiree population, including payments for 

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cost sharing for Medicare-eligibles. Again, retirees are higher users of prescription drugs than 

working populations. It is unclear whether these numbers also include the costs of the inpatient 

medications, which are different than outpatient costs. In combination, this largely explains the 

differences between FEHBP and the average employer expenditure on drug benefits. 

Various proposals, including both the carve-out proposal and H.R. 1367, would set in 

statute contract requirements for PBMs participating in FEHBP. In H.R. 1367, PBMs would be 

required by statute to disclose proprietary contract terms regarding drug acquisition costs and 

pharmacy dispensing fees to OPM, carriers, and enrollees, as well as similar information on 

private-sector contracts outside of FEHBP. The bill would establish drug price controls with 

reimbursement based on the average price a manufacturer receives from wholesalers for a given 

drug and require uniform maximum pharmacy dispensing fees determined by OPM. These are 

functions that are currently subject to negotiation, and indeed, OPM has required through its 

contracting process that FEHBP carriers require information on drug acquisition costs, obviating 

the legislation. Further, the bill preempts state laws governing generic drug substitution and 

therapeutic interchange. 

Impact on Patient Safety and Drug Costs of Proposals Limiting Generic Substitution 

Pharmacy benefits are carefully designed by FEHBP carriers and their PBMs to give 

enrollees incentives to use high-value, cost-effective products. Typically this involves 

promoting generic substitution for branded drugs, within the limits of state law. Pharmacy and 

physician prescription practices are generally regulated by the States and developed by 

professional boards with clinical expertise. Some proposals, including H.R. 1367, would place 

restrictions on drug substitution for FEHBP enrollees. For example, the bill would not allow a 

drug substitution based on safety if the replacement drug were "higher in cost." The drugsubstitution provisions of H.R.1367 represent a substantial shift in existing law and could 

significantly compromise patient safety. Any proposals including such a provision should be 

carefully weighed for these types of unintended consequences. 

H.R. 1367 would also prevent pharmacies from substituting generic drugs without the 

approval of the prescribing doctor, despite state pharmacy laws requiring such substitution. 

5 
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Generic drugs are widely accepted by patients - indeed, the reason drug costs are not increasing 

more rapidly is that many brands have lost patent exclusivity and are now competing against 

generics. The burden on physician offices to respond to pharmacy inquiries would be substantial 

and would add to physician workflow and overhead costs. In fact, physicians can already write 

"dispense as written" when they believe a patient would benefit from a specific drug in a 

therapeutic class. This bill could also cause longer lines at the pharmacy counter. Thus, the 

extensive patient and physician consultation and approval imposed by this kind of requirement 

would markedly restrict dispensing of FDA-approved generic versions of brand equivalents and 

drive drug costs up without improving quality. Generics have proven to be extremely effective 

at controlling costs and expanding access, which is why many states have implemented 

mandatory generic substitution laws. 

Impact on PBM Competition of Proposals to Debar or Limit Vertically Integrated PBMs 

Inexplicably, some proposals would limit the number of PBMs that could participate in 

the FEHB program. Competition keeps pressure on PBMs to negotiate well and keep costs 

down, and it makes little sense to limit the field of potential PBM participants, especially if OPM 

is considering awarding the entire benefit to a single PBM. By way of example, H.R. 1367 

would prohibit any drug manufacturer or retail pharmacy from having a controlling interest, 

defined as 20 percent, in a PBM serving the FEHBP and would prohibit a carrier-controlled 

PBM from earning a profit. which would appear to include making an operating margin. We do 

not sec how limiting competition would result in the best prices for the program. 

Turning to disclosure, PCMA notes that the FTC has said that public disclosure of 

proprietary pricing information, or "transparency," leads to higher - not lower - prices. 

Nonetheless, some proposals would require public release of negotiated rates, by requiring plans 

to send enrollees, for every prescription, the prices paid to manufacturers for drugs and to 

pharmacies for dispensing them. These prohibitions and disclosure requirements, combined with 

an additional requirement that PBMs serving FEHBP disclose specific acquisition costs and 

other pricing information on their entire book of business, would raise costs and severely limit 

the number of PBMs willing to participate in FEHBP while driving up drug costs. 

6 
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Insert offset folio 37 here 81665.037

PBMs may be unwilling to risk losing the pricing concessions negotiated with 

manufacturers and pharmacies for non-FEHBP accounts because of the disclosures to enrollees, 

carriers, and OPM required by the bill. In an ironic twist, reduced competition among PBMs, 

with the possibility of only a single PBM administering all FEHBP drug benefits, would leave 

remaining PBMs with little or no incentive to lower costs. 

Impact of Proposals for Cost-Plus Pricing Controls 

FEHBP relies upon consumer choice and competition rather than price controls to hold 

down costs and maintain flexible benefits. It is designed to take advantage of price competition 

among private sector competitors. H.R. 1367 would require carriers to limit payments for drug 

charges to Average Manufacturer Price (AMP) minus enrollee cost sharing. AMP is the price 

manufacturers charge wholesalers. The bill also requires PBMs to pay carriers 99 percent of all 

compensation received from manufacturers. Given that 90 percent of all pharmaceuticals are 

purchased through drug wholesalers - which to stay in business must charge pharmacies more 

than the price at which they acquire a drug - requiring reimbursement at AMP would result in 

PBM reimbursements that are lower than the pharmacy's acquisition cost. 

Without accounting for a wholesaler's markUp, pharmacies would carry a loss on every 

prescription, whether the pharmacy served as the PBM's mail-service pharmacy or was a retail 

pharmacy. Retail pharmacies contested a provision of the Deficit Reduction Act of 2005 (ORA) 

that imposed requirements regarding use and disclosure of drug acquisition costs based on 

wholesaler invoices (not manufacturer prices to wholesalers), and provisions in both the House 

and Senate health care reform bills redefined the AMP, based on manufacturer price to 

wholesalers, and set a new federal upper payment limit at 175 percent of AMP to address 

pharmacy concerns. 

Even assuming the AMP requirement is adjusted to a different benchmark rate, H.R. 

1367 would lead to a cost-plus only pricing policy in FEHBP. Polls show that employers don't 

want mandates that restrict their choice in this regard. Large employers such as OPM have the 

option to structure contracts using cost-plus pricing, and many choose not to do so. Although 

OPM currently encourages its FEHBP health plall to use cost-plus pricing, it could decide to 

7 
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follow the path taken by other large purchasers which encourage PBMs to negotiate bigger 

discounts by allowing them to retain a portion of any extra savings. 

OPM Already Has the Authority to Impose Standards and Requirements 

OPM already has the authority to impose all of H.R. 1367' s provisions without seeking 

any new authority from Congress. OPM routinely uses its existing authority to impose new 

PBM contract requirements when it deems them helpful to the program. Indeed, OPM has 

already required FEHBP carriers to insist that PBMs meet rigorous transparency and costsavings standards - some quite similar to those in' the bill. For example, in the 2012 standard 

contract for experience-rated HMOs, OPM requires contracting PBMs to meet an extensive set 

of standards, including disclosure, cont1ict-of-interest, and rebate pass-through requirements. 

These requirements are outlined in Attachment 1 to this testimony. 

Carrier letters, FEHBP guidelines, and the FEHB Carrier Handbook are the appropriate 

vehicles for OPM to guide and monitor the practices of participating carriers and plans as well as 

their subcontractors. 

Conclusion 

FEHBP is successful because it relies on market forces and competition to deliver high 

quality benefits and services to its enrollees. We urge the Subcommittee to pursue policies that 

foster and encourage competition to keep drug costs and pharmacy benefits affordable in the 

FEHBP. We especially urge the Subcommittee to consider carefully the likely harm of 

proposals, including most of the provisions in H.R. 1367, that would impose federal price 

controls on drug products and pharmacy services, preempt state laws that assure cost-savings 

from generic substitution, limit competition, and require sweeping disclosures of pricing and 

proprietary business practices that could have the unintended effect of driving prices higher and 

stit1ing competition. The significant adverse impact of such changes on federal workers, retirees, 

and dependents who rely on the FEHBP should not be taken lightly. 

8 
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Insert offset folio 39 here 81665.039

By using PBMs' management strategies proven in Medicare Part D and the commercial 

market, FEHBP carriers achieve significant savings for their enrollees in their drug benefits and 

provided wide access to medications and pharmacies at affordable prices. Additional savings 

for FEHBP could be obtained if OPM encouraged carriers to adopt even greater use of preferred 

pharmacy networks, home delivery, formulary tiering, step therapy, prior authorization, and 

other utilization management tools that facilitate cost-effective medication use. 

PCMA looks forward to working with the Subcommittee and Congress to find additional 

ways to promote savings while continuing to deliver the highest quality, highest value 

prescription drug benefits for all federal employees. 

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Insert offset folio 40 here 81665.040

Attachment 1 

FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAMSTANDARD CONTRACT FOR EXPERIENCE·RATED HEALTH MAINTENANCE 

ORGANIZATION CARRIERS 

2012 

SECTION 1.28 

STANDARDS FOR PHARMACY BENEFIT MANAGEMENT COMPANY (PBM) 

ARRANGEMENTS (JAN 2011) 

The Carrier will ensure and report that the following standards are included in new, renewing or 

amended contracts with vendors providing a retail pharmacy network and/or a mail order 

pharmacy and/or a specialty pharmacy to enrollees and dependents (hereafter "PEM") effective 

on or after January 1,2011. Notwithstanding the foregoing, the revisions to Section 1.28(a) in 

the January 2011 clause shall not take effect before the expiration of the Carrier's current 

contract (including the exercise of an existing option to extend the term by not more than one 

year at a time) but not later than January 2013. The PBM includes all entities that have a 

majority ownership interest in or majority control over the PBM. The PEM also includes any 

other subsidiary of the entity that has majority ownership or control over the PEM. 

This section does not apply to carrier-owned PBMs, which are already expected to adhere to the 

FAR and FEHBAR standards and requirements, and the remaining provisions of this contract. 

(a) Transparency Standards 

(1) The PBM is not m~ority-owned or majority-controlled by a pharmaceutical 

manufacturing company. The PEM must disclose to the Carrier and OPM the name of any entity 

that has a majority ownership interest in or majority control over the PBM. 

(2) The PBM agrees to provide pass-through transparent pricing based on the PEM's cost 

for drugs (as described below) in which the Carrier receives the value of the PBM's negotiated 

discounts, rebates, credits or other financial benefits. 

(i) The PEM shall charge the Canier no more than the amount it pays the 

pharmacies in its retail network for brand and generic drugs plus a dispensing fee. 

(ii) The PEM shall charge the Carrier the cost of drugs at mail order pharmacies 

based on the actual cost, plus a dispensing fee. Costs shall not be based on industry 

benchmarks; for example, Average Acquisition Cost (AAC) or Wholesale 

Acquisition Cost (WAC). 

(iii) The PEM, or any other entity that negotiates and collects Manufacturer Payments 

allocable to the Carrier agrees to credit to the Carrier either as a price reduction or by 

cash refund the value all Manufacturer Payments properly allocated to the Carrier. 

Manufacturer Payments are any and all compensation, financial benefits, or 

remuneration the PEM receives from a pharmaceutical manufacturer, including but 

not limited to, discounts; credits; rebates, regardless of how categorized; market share 

incentives, chargebacks, commissions, and administrative or management fees. 

Manufacturer payments also include any fees received for sales of utilization data to a 

pharmaceutical manufacturer. 

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Insert offset folio 41 here 81665.041

(3) The PBM must identify sources of profit to the Carrier and OPM as it relates to 

the FEHB contract. 

(4) The PBM's administrative fees, such as dispensing fees, must be clearly identified 

to retail claims, mail claims and clinical programs, if applicable. The PBM must agree to 

disclose sources of each administrative fee to the Carrier and OPM. 

(5) The PBM, or any other entity that negotiates and collects Manufacturer Payments 

allocable to the Plan, will provide the Carrier with quarterly and annual Manufacturer Payment 

Reports identifying the following information. This information shall be presented for both the 

total of all prescription drugs dispensed through the PBM, acting as a mail order pharmacy, and 

its retail network and in the aggregate for the 25 brand name drugs that represent the greatest 

cost to the Carrier or such number of brand name drugs that together represent 75% of the total 

cost to the Carrier, whichever is the greater number: 

0) the dollar amount of Total Product Revenue for the reporting period, with 

respect to the PBM's entire client base. Total Product Revenue is the PBM's 

net revenue which consists of sales of prescription drugs to clients, either 

through retail networks or PBM-owned or controlled mail order pharmacies. 

Net revenue is recognized at the prescription price negotiated with clients and 

associated administrative fees; 

(ii) the dollar amount of total drug expenditures for the Plan; 

(iii) the dollar amount of all Manufacturer Payments earned by the PBM for the 

reporting period; 

(iv) the Manufacturer Payments that have been (1) earned but not billed (2) billed and 

(3) paid to the PBM based on the drugs dispensed to the Plan members during the 

past year. 

(v) the percentage of all Manufacturer Payments earned by the PBM for the 

reporting period that were Manufacturer Formulary Payments, which are 

payments the PBM receives from a manufacturer in return for formulary 

placement andlor access, or payments that are characterized as "formulary" or 

"base" rebates or payments pursuant to the PBM's agreements with 

pharmaceutical manufacturers; 

(vi)the percentage of all Manufacturer Payments received by the PBM during the 

reporting period that were Manufacturer Additional Payments, which are all 

Manufacturer Payments other than Manufacturer Formulary Payments. 

(6) The PBM agrees to provide the Carrier, at least annually, with all financial and utilization 

information requested by the Carrier relating to the provision of benefits to eligible enrollees 

through the PBM and all financial and utilization information relating to services provided to the 

Carrier. 

(7) The Carrier shall provide any information it receives from the PBM, including a copy of 

its contract with the PBM to OPM. A PBM providing information to a Carrier under this 

subsection may designate that information as confidential commercial information. The Carrier, 

in its contract with the PBM shall effectuate the PBM's consent to the disclosure of this 

information to OPM. OPM shall treat such designated information as confidential under 5 

C.F.R. § 294.112. 

(8) If the Carrier's PBM arrangement is with an Underwriter rather than with the Carrier, 

then all references to the Carrier and Plan appearing in this Section 1.28 shall be deemed to be 

references to the Underwriter. 

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Insert offset folio 42 here 81665.042

(9) The Carrier will require that its PBM contractors: 

(i) Provide information to physicians, pharmacists, other health care professionals, 

consumers, and payers about the factors that affect formulary system decisions, 

including: cost containment measures; the procedures for obtaining non-formulary 

drugs; and the importance of formulary compliance to improving quality of care 

and restraining health care costs; 

(ii) Provide consumer education that explains how formulary decisions are made and 

the roles and responsibilities of the consumer; and 

(iii) Disclose the existence of formularies and have copies of the current formulary 

readily available and publicly accessible. 

(10) In accordance with FEHBAR 1652.204-74, FAR 52.215-2 and FEHBAR 1652.246-70, 

all contracts and other documentation that support amounts charged to the Carrier contract are 

fully disclosed to and auditable by the OPM Office of Inspector General (OPM DIG). The PBM 

must provide the OPM OIG upon request all PBM records including, but not limited to: 

(i) All PBM contracts with Participating Pharmacies; 

(ii) All PBM contracts with Pharmaceutical Manufacturers; 

(iii)AIl PBM contracts with third parties purchasing or using claims data; 

(iv) All PBM transmittals in connection with sales of claims data to third parties; and 

(v) All PBM Maximum Allowable Cost (MAC) price lists. 

(b) Integrity Standard 

The Carrier will require that its PBM contractors agree to adopt and adhere to a code of ethics 

promulgated by a national professional association, such as the Code of Ethics of the American 

Pharmacists Association (dated October 27, 1994), for their employed pharmacists. 

(c) Performance Standards 

The Carrier will require that its PBM contractors develop and apply a quality assurance program 

specifying procedures for ensuring contract quality on the following standards at a minimum and 

submit reports to the Carrier on their performance. PBMs must meet, at minimum, the member 

inquiry, telephone customer service, paper claims processing, and other applicable standards set 

for Carriers at Section 1.9(g)(1), (3), (5) and (6). All other standards discussed below will have 

specific target goals the PBM is expected to achieve. Carriers may permit PBMs to measure 

compliance using statistically valid samples for the PBMs book of business. Agreed to standards 

shall be provided to OPM for its review and comment. If OPM has concerns about a particular 

standard, the Carrier agrees to present OPM's concerns to the PBM and either revise the standard 

as requested by OPM or revise the standard to the extent feasible and present to OPM 

information demonstrating the problems associated with making the requested revisions in full. 

(1) Retail Pharmacy Standards 

(i) Point of Service (POS) system response time. The PBM's network electronic 

transaction system provides rapid response to network pharmacies. 

(ii) POS system availability. The PBM's network electronic transaction system 

generally is available to, and accessible by, network pharmacies. 

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Insert offset folio 43 here 81665.043

(iii) Licensing - The PBM verifies the appropriate licensing of its 

network pharmacies. 

(2) Mail Service Pharmacy Standards 

(i) Dispensing accuracy - The PBM dispenses its prescriptions to the correct patient 

and for the correct drug, drug strength and dosage in accordance with the 

physician's prescription not less than 99.9% of the time. 

(ii) Turnaround time - The PBM promptly dispenses and ships at least 98% on 

average of all prescriptions not requiring intervention or clarification within 3 

business days or meets an equivalent measure approved by OPM. 

(3) Prior Approval- if applicable - The PBM promptly reviews and responds to requests for 

prior approval for specific drugs following receipt of all required information. 

(4) Quality of Drug Therapy - The quality assurance program implemented by a Carrier's 

PBM contractor must include a process to measure the quality of its drug therapy provided to 

enrollees. Specific areas to be addressed include achievement of quality targets measured by 

both internal and external metrics; identification and appropriate use of best practices; and 

application of evidence-based medicine, as appropriate. 

(d) Alternative Drug Options 

The Carrier will require that its PBM contractors, at a minimum, utilize the following 

protocols for PBM initiated drug interchanges (any change from the original prescription) 

other than generic substitution: 

(i) The PBM must treat the prescribing physician, and not itself, as the ultimate 

decision-maker. Furthermore, to the extent appropriate under the circumstances, 

the PBM must allow the patient input into that decision-making process. At a 

minimum, the PBM must provide the patient with a written notice in the package 

sent to the patient that the drug interchange has occurred with the approval of the 

Prescriber. 

(ii) The PBM will obtain authorization for a drug interchange only with the 

express, verifiable authorization from the Prescriber as communicated 

directly by the Prescriber, in writing or verbally, or by a licensed medical 

professional or other physician's office staff member as authorized by the 

Prescriber. 

(iii) The PBM must memorialize in appropriate detail all conversations with 

patients and physicians in connection with drug interchanging requests, 

including the identity of the contact person at the physician's office and 

the basis for his or her authority. 

(iv) The PBM will only interchange a patient's drug from a lower priced drug 

to a higher priced drug to patient or Plan when authorized by the Carrier or 

the Plan. 

(v) The PBM will permit pharmacists to express their professional judgment to both 

the PBM and physicians on the impact of drug interchanges and to answer 

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Insert offset folio 44 here 81665.044

physicians' questions about dosing. PBMs will not require pharmacists to, and 

will not penalize pharmacists for refusing to, initiate calls to physicians for drug 

interchanges that in their professional judgment should not be made. 

(vi) The PBM will offer to disclose, and if requested, will disclose to 

physicians, the Carrier, and patients (i) the reason(s) why it is suggesting a 

drug interchange and (ii) how the interchange will affect the PBM, the 

Plan, and the patients financially. 

(e) Patient Safety Standard - The Carrier will require that its PBM contractors establish drug 

utilization management, formulary process and procedures that have distinct systems for 

identifying and rectifying consumer safety issues including: 

(i) A system for identifying and communicating drug and consumer safety issues at 

point-of-service; and 

(ii) A system of drug utilization management tools, such as prospective and 

concurrent drug utilization management that identifies situations which may 

compromise the safety of the consumer. 

(f) Safety and Accessibility for Consumers - The Carrier will require that its PBM contractors 

meet the following standards related to pharmacy network management and consumer access to 

medications. 

(1) The Carrier will require that its PBM contractor define the scope of its services with 

respect to: 

(i) 

(ii) 

(iii) 

The distribution channels offered (e.g. pharmacy network, mail order pharmacies, 

or specialty pharmacies); 

The types of pharmacy services offered within each distribution channel; and 

The geographic area served by each distribution channel. 

(2) The Carrier will require that for each distribution channel provided by its PBM 

contractor, the PBM contractor: 

(i) Establishes criteria and measures actual performance in comparison to those 

criteria: and 

(ii) Makes improvements where necessary to maintain the pharmacy network and 

meet contractual requirements. 

(3) The Carrier will require that its PBM contractor establish a quality and safety mechanism 

for each distribution channel in order to identify and address concerns related to: 

(i) Quality and safety of drug distribution; and 

(ii) Quality of service 

(g) Contract Terms - The contract between the PBM and the Carrier must not exceed 3 years 

without re-competition unless the Contracting Officer approves an exception. The Carrier's 

PBM contract must allow for termination based on a material breach of any terms and conditions 

stated in the Carrier's PBM contract. The Carrier must provide sufficient written notice of the 

material breach to the PBM and the PBM must be given adequate time to respond and cure the 

material breach. 

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Insert offset folio 45 here 81665.045

Committee on Oversight and Government Reform 

Witness Disclosure Requirement - "Truth in Testimony" 

Required by House Rul~ XI, Clause 2(g)(S) 

Name- MAf,J: fJ.- f: (L«. l"l1 

L Please list any federal grants or contracts (including subgrants or subcontracts) you have received since October 1, 2010, Include 

the source and amount of each grant or contract. 

2, Please list any entity you are testifying on behalf of and briefly describe your relationship with these entities, 

3, Please list any federal grants or contracts (including subgrants or subcontracts) received since October 1,2010, by the entity(ies) 

you listed above. Include the source and amount of each grant or contract. 

Date: 

( 7 
59 

Mr. FARENTHOLD. Thank you, Mr. Merritt. 

We will now recognize Ms. Jacqueline Simon, Public Policy Director for the AFGE. 

STATEMENT OF JACQUELINE SIMON 

Ms. SIMON. Chairman Farenthold, Ranking Member Norton, and 

members of the subcommittee, thank you for the opportunity to testify today on behalf of the more than 650,000 Federal workers in 

65 agencies that AFGE represents. 

Health insurance benefits are extremely important to AFGE’s 

members. We have been very frustrated by our inability to have 

much of a voice when it comes to FEHBP. Because the program is 

statutory, we are unable to use the collective bargaining process to 

make our priorities and preferences known, and OPM has, in the 

past four years, adopted a culture of extreme secrecy regarding 

FEHBP, leaving us almost completely in the dark about the program and the changes they have contemplated. 

In particular, our request for information about the likely impact 

on enrollees of changes being considered today were refused until 

the last minute, when OPM realized we intended to complain about 

the withholding of information at today’s hearing. In fact, all we 

had received prior to preparation of our testimony was a large font 

10 screen PowerPoint presentation from last December that raised 

many questions, but answered none. 

We ultimately received another document last week that revealed what was in the Administration’s budget release yesterday; 

that the proposals amount to a multi-billion dollar cost-shifting 

that will ultimately cause great financial harm to many of our 

members. 

Federal employees currently pay an average of 30 percent of 

FEHBP premiums, in addition to sometimes substantial out-ofpocket deductibles and co-payments. In some plans, the employees’ 

share of premiums is 64 percent. Yet, we get almost no information 

or any input in decisions about changes in benefits, administration, 

or structure. We are apparently supposed to just keep quiet and 

keep paying. 

After a three-year pay freeze, massive increases in employee 

costs for FERS and furloughs of up to 14 days, Federal employees 

can hardly afford to keep quiet. And like every other middle-class 

American, no Federal employee can afford to pay any more than 

absolutely necessary for health insurance. 

We believe the changes in FEHBP that OPM is proposing will 

have some winners and losers, but that overall they will shift costs 

for the program away from the Government and onto the backs of 

Federal workers. 

The proposal described as giving discounts for wellness would 

charge more to those with the misfortune of being ill or aged or 

overweight. The proposal to expand plan types is a proposal that 

will bring in plans with inferior benefit packages and will worsen 

the program’s already risk segmentation. It will also mean charging employees in high health care cost cities more for their health 

care. These are not necessarily cities where salaries are higher. 

The proposal to carve out prescription drugs may become a proposal to transform the prescription drug coverage into either a 

60 

voucher or, worse, an employee pay all pseudo benefit. The proposal to add ‘‘self plus one’’ is a proposal to charge families with 

more than two persons more for their benefits. 

Interestingly, when the PowerPoint was shown to AFGE last December, there was a slide with an OPM proposal to eliminate the 

statutory provision that prevents the Government from paying 

more than 75 percent of any FEHBP premium. It was presumably 

the spoonful of sugar to help the medicine go down. All the other 

proposals take benefits away. This one would have helped many 

low paid and uninsured Federal workers gain some coverage. But 

this proposal has been eliminated from the PowerPoint document 

that now circulates. Word is that OPM approved the cuts and nixed 

the one thing that would have provided a benefit. 

So AFGE is in a difficult position. We believe strongly that 

FEHBP is in need of reform, but all the rhetoric about the benefits 

of competition, how it will lower costs, ring hollow when there is 

no standard benefits package and the program is structured to 

maximize risk segmentation. Without a standard benefits package, 

competition doesn’t lower prices, it just divides up the market. 

OPM’s proposals divide up the market further, geographically in 

terms of risk and in terms of health status. 

As for regional PPOs, we know the most expensive and least accountable plans in the program are the regional HMOs. They are 

in and out of the program, merge with one another, drop providers, 

add providers. They are generally unstable. We often hear from our 

members that these regional plans charge the Government far 

more than they charge local employers. But again OPM has not 

made the case on the merits of this proposal; we are just told that 

it is a best practice in the private sector, a sector not known for 

best practices in the area of health insurance. 

We believe strongly that in light of the extremely large share of 

FEHBP costs that Federal employees shoulder, we deserve an opportunity to have input on the benefit structure and administration 

of this program; not a PowerPoint once in a blue moon, but a regular exchange of information and concerns, and opportunity to have 

questions answered and employees’ perspectives given serious consideration. We have such opportunities in the thrift savings plan, 

we have it with the Federal Salary Council for workers on the general schedule, and in the Federal Prevailing Rate Advisory Council 

for blue collar Federal workers. All these advisory councils are statutory and all work extremely well. 

We urge the subcommittee to consider establishing an FEHBP 

advisory committee so that Federal employees have a regular opportunity to learn more about their health insurance program and 

know that their interests, views, and concerns are receiving the attention they deserve. Thank you. 

[Prepared statement of Ms. Simon follows:] 

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Introduction 

My name is Jacqueline Simon, and I am the Public Policy Director of the American Federation of 

Government Employees, AFL-CiO (AFGE). On behalf of the 650,000 federal employees AFGE 

represents, I thank you for the opportunity to testify today. The Federal Employees Health 

Benefits Program (FEHBP), which covers more than eight million federal employees, retirees, 

and their dependents, is the nation's largest employer-sponsored health insurance program. 

FEHBP is affected by the Patient Protection and Affordable Care Act, and FEHBP is also a target 

of those who would force federal employees to forfeit their earned benefits to finance deficit 

reduction. The President's failed deficit commission, led by Morgan Stanley Director Erskine 

Bowles and former Republican Senator Alan Simpson recommended dismantling FEHBP and 

turning it into a voucher program. Within the next few years, when the tax provisions of 

Obamacare take effect, some FEHBP plans will be passing to enrollees the full amount of their 

new excise tax liabilities (40% of the premium that exceeds the law's threshold amounts), 

causing premiums to increase substantially. And now the Office of Personnel Management 

(OPM) is floating several highly controversial initiatives that would have a harmful effect on 

many of the most vulnerable enrollees. 

OPM has provided stakeholders next to nothing in terms of analysis or justification for these 

proposed changes. That is one reason why we are asking lawmakers to withhold approval for 

any of the OPM initiatives. It is massively unwise. to give OPM the authority it seeks to make 

enormous and consequential changes to FEHBP without requiring them to demonstrate the 

impacts of these changes on enrollees. In that context, we are also asking Congress to establish 

a statutory advisory council for FEHBP, modeled on the Employee Thrift Advisory Council and 

the Federal Salary Council, so that organizations representing federal employees and retirees 

will have a formal opportunity to gain access to information about FEHBP policies and 

administration. 

With federal pay frozen for three straight years, a massive tax increase on FERS employees via 

increased retirement contributions, and furloughs of up to 14 days that may be repeated each 

year for the next decade, federal employees cannot withstand any more reductions in their 

compensation. Meanwhile, in spite of the freeze and the shift of retirement system costs that 

lower new employees' take home pay by an additional 2.3 percent in perpetuity; federal 

employees have had to pay more each year for health insurance. No federal employee can 

afford to pay any more than is absolutely necessary for health insurance, and there is certainly 

no justification for any more cost-shifting to federal employees. Unfortunately, all of OPM's 

proposals, except perhaps for one, would shift costs to enrollees without improving the 

program or lowering its overall costs at all. 

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We understand that the changes in FEHBP that OPM is proposing will produce both winners 

and losers, but that overall, they will shift costs for the program away from the government and 

onto the backs of federal workers. There are obviously numerous ways for the government to 

reduce deficits, but the worst possible way is to impose further cuts in benefits on its own 

workforce. As with the pay freeze and the retirement system cost shifting, the administration 

couches its proposals in the notion that it is following private sector practice, or "modernizing." 

But the end result is the same: lower compensation for federal employees through costshifting. Thus, AFGE urges lawmakers to reject all proposals from OPM that would lead to 

higher costs or lower benefits for federal workers. 

Our members currently pay an average of 30% of FEHBP premiums, in addition to sometimes 

substantial out-of-pocket deductibles and copayments. In some plans (New Jersey's and 

Delaware's Aetna Open Access Plans), the employee's share of the premium is 64%. Yet 

despite shouldering this tremendous financial burden, we have neither access to information 

nor input into any decisions about expansions or contractions of benefits, changes in 

administration, or changes in program structure. We're in the unenviable position of being 

expected to keep quiet and keep paying. That is another reason why we are so grateful for this 

opportunity to testify today. Hearings like this have become our sole opportunity to voice 

concerns about FEHBP and the direction OPM would like to take it. 

OPM's FEHBP Proposals 

Discounts for WeI/ness 

We first consider the proposal described as giving "discounts for wellness." This Orwellian label 

barely masks its true purpose -- to impose surcharges on those deemed "unwell." The unwell 

have relatively higher health insurance claims than those identified as "well." Would OPM also 

propose lower salaries for those deemed "unwell"? Would OPM propose to charge those in 

"wellness programs" more for their retirement benefits on the belief that those with good 

health are likely to live longer, and therefore cost the retirement system more? Would it all 

come out even in the end? Lower pay and benefits now for the obese, but since they die earlier, 

they will be charged less for retirement? 

The latest medical research strongly suggests that obesity is as much a function of genetics as is 

height. But illness is a misfortune, not a moral defect. Genetic traits do not respond to financial 

incentives. According to the latest data from the Centers for Disease Control, obesity rates 

vary tremendously by race and ethnicity, with 58.5% of non-Hispanic black women and 41.4% 

of Hispanic women classified as obese, while just 32.2% of non-Hispanic white women were 

labeled as such. The legal definition of discrimination involves disparate treatment on the basis 

of immutable characteristics, and one protected class has to do with physical disability. There 

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are numerous conditions that are physical disabilities that might make a federal employee 

ineligible for the "wellness discounts" related to obesity, rendering the initiative discriminatory. 

We understand that this form of discrimination is legal under ERISA and other laws, but it 

remains offensive to our sense of fairness. As such, AFGE urges members of the subcommittee 

to reject the so-called "premium differentials tied to "well ness"" initiative. 

As an alternative, we propose requiring all FEHBP plans to cover up to $750 per year for gym 

memberships, fitness classes, or fitness devices. This would provide a positive incentive to 

pursue fitness, and it is a practice that is far superior to penalizing those with obesity or other 

conditions that render them ineligible for preferred rates. This is the practice that AFGE uses 

for its employee health insurance program. For many of AFGE's employees, this subsidy has 

been instrumental in the decision to pursue fitness classes that would otherwise have been 

unaffordable. 

Adding a new Premium Tier: Self plus one 

OPM has also proposed a "self plus one" category of premiums. This change would increase 

costs for families, and perhaps, contrary to the plan, might also increase costs for those who 

choose the "self plus one." Self plus one would include many retirees or older couples, but it 

would also include some single parents of just on.e child. Those who currently choose family 

coverage include hundreds of thousands of parents and children under 26. Children under age 

26 are the least expensive group to insure: the bulk of their health care costs come from 

primary care office visits, immunizations, and preventive care, which adds up to about $900 per 

child per year. Other than that, their costs generally come from emergency room visits, and 

prescription drugs. Thus, families that include one or more children generally cost less to insure 

than two adults. That is why, currently, in FEHBP, among those with family coverage, those 

with more than one child subsidize the two-adult family. But all that could change with self 

plus one, to the detriment of both kinds of families. 

FEHBP's most serious structural problem is risk segmentation. FEHBP encourages those with 

similar risk to congregate in the same plans. Risk segmentation can occur when a program lets 

participants choose from plans that vary widely in terms of benefits, and when the program lets 

partiCipants choose the number and age of individuals covered. Risk segmentation robs a large 

group of the benefits of minimizing average risk, and since premiums are based on average risk, 

risk segmentation produces higher aggregate health care costs for FEHBP than would occur if 

everyone were in the same pool. The "self plus one" proposal would exacerbate FEHBP's risk 

segmentation problem, creating new disadvantaged groups of self-plus ones with similar risk 

profiles. Older or sicker couples would pay more, but so would those with larger families. 

Overall, the plan would have even more risk segmentation, which in turn raises aggregate costs 

and costs for some enrollees. 

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Interestingly, President Obama's Affordable Care Act went to great lengths to avoid the adverse 

consequences of risk segmentation. The rules for exchanges attempt to standardize benefits by 

allowing them to include no more than four benefits packages (60,70,80, and 90 percent of 

projected cost of "essential health benefits"), limiting the differentials plans can charge by age, 

and prohibiting differentials by gender altogether. Initially, Obamacare would have prohibited 

self plus one, but bowing to pressure from the states and insurance industry, state exchanges 

will have the option of charging by the number of individuals (up to a maximum individualized 

charge per family for three children). 

The sole rationale offered by OPM for the self plus one premium tier is that they consider it a 

"best practice" in the private sector. Although business buzzwords like "best practices" should 

always be approached cautiously, there is a clear· sense of what one means by the term, and it 

is important to note that what private firms consider "best practice" is not necessarily desirable 

public policy. A private sector "best practice" is one that maximizes profits, and in the context 

of compensating employees, that increasingly means minimizing employer costs for health 

insurance by shifting costs on to employees, eliminating defined benefit pensions altogether 

and providing only nominal employer funding of defined contribution plans. Further, empirical 

evidence shows that the private sector does not have the "best" practices when it comes to 

health insurance; the public sector's practices are far superior. A 2011 Congressional Budget 

Office (CBO) analysis of Representative Paul Ryan's budget found that "average spending in 

traditional Medicare will be 89 percent of (that is 11 percent less than) the spending that would 

occur if that same package of benefits was purchased from a private insurer." 

(http://cbo.gov/sites/default/files/cbofiles/ftpdocs/121xx/doc12128/04-05-ryan_letter.pdf) 

An OPM document estimated that establishing self plus one in FEHBP would save the 

government $6 billion over ten years. The proposal would shift some or all of this $6 billion on 

to federal employees and retirees. Again, it is incumbent upon OPM to evaluate the impact 

that this change would have on plans and enrollees. aPM simply says premiums would not 

change ("there would be no overall impact on premiums"), but $6 billion would be saved. 

What kind of assumptions did OPM use to produce that statement and the savings estimate? 

For many years, OPM's actuaries have told us that self plus one premiums would likely exceed 

family premiums in FEHBP, and that allowing this category would send family coverage 

premiums much higher. If past OPM actuarial estimates were so wrong, can OPM explain why 

they were wrong? Does OPM expect that all plans would offer this option, or would offering it 

be voluntary? The $6 billion would be a massive compensation cut on top of the pay freezes, 

retirement cuts, and furloughs if it derives from cost shifting, as we suspect. Thus, AFGE urges 

the committee to reject this proposal as well. 

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Regional PPOs 

The next idea from OPM for FEHBP is one its proponents call "expansion of FEHBP plan types." 

in practice, this means allowing regional Preferred Provider Organizations (PPOs) to compete 

against the national PPOs such as Blue Cross/Blue Shield (BCBS) standard and basic options. 

The "Blues" are FEHBP's most popular plans, and currently cover more than 60 percent of 

enrollees. like other proposals that claim to lower costs by increasing competition, this one will 

deliver much less than promised by OPM. First, OPM has a miserable track record when it 

comes to "arms-length" negotiations with health insurance carriers. Indeed, the carriers are 

regularly referred to as OPM's "partners" while we, the enrollees on whom OPM wants to shift 

more and more costs, are more like lepers. What OPM never seems to understand is that as a 

purchaser, they have a different set of interests from the carriers and it is not their role to 

follow and accommodate and approve any and all demands by the carriers. Thus their 

assurance that they would pursue a "negotiations" strategy "not only advantageous to the 

FEHBP Program but to carriers as well" does not bode well for enrollees, and neither does the 

$600 million they think they will save from this initiative. Health care costs (prices and 

utilization) are not going down; if the government is saving $600 million here and $6 billion 

there in FEHBP, it can only mean that enrollees are paying the difference. 

Like all of OPM's proposals, this one would have both winners and losers. One question is who 

the winners would be and who would be the losers. Another is whether there are more losers 

than winners; the $600 million savings estimate begins to answer that question in the 

affirmative. There is also the question of whether the amount of savings for the winners 

exceeds th.e losses of the losers. In short, what will be the impact on FEHBP? How many will 

migrate out of other plans into these regional PPO's? How many will shift out of other plans 

that are affected by the migration to regional PPO's? What will be the impact on premiums and 

benefits? OPM has not answered any of these questions. 

OPM suggests that BCBS plans have too much market power, and that a dose of competition 

from regional PPOs will lower costs for both. But we know from experience that is not how 

things go in FEHBP. What will likely happen is that BCBS will end its national plan and the 

various state BCBS organizations will compete against the regional PPO's, depriving federal 

employees of the most popular national plan. More risk segmentation will plague FEHBP. 

There may be less competition, not more, as a result of this change. 

if there is one thing FEHBP carriers oppose more than anything, it is the reform long 

championed by AFGE: one standard benefits package that would require plans to compete on 

the basis of cost and quality, rather than compete by segmenting the market. Without the 

national BCBS plans, the regional plans will construct dissimilar benefits packages designed to 

cherry pick, and the ensuing increase in risk segmentation will worsen FEHBP's existing flaws. 

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We have surveyed our members who choose a BCBS plan and they report that they like the 

stability of BCBS, they like the large provider network, and they like the benefits package 

relative to other plans. In short, they like the fact that the Blues offer comprehensive benefits. 

They do not like the premiums, of course, or the fact that their rise seems inexorable. But they 

do like the idea and the reality of one national plan. They understand that purchasing power is 

maximized in a large group, and that average costs and therefore premiums are lowest in a 

diverse risk pool. The Blues are as close as FEHBP gets to having one big, diverse federal 

government plan with a standard benefits package. They know that the other regional plans try 

to lure away those with a particular need or preference, and are thus a worse deal. That is how 

BCBS became the biggest FEHBP plan, and that is why there is no appetite for yet additional 

breakaway plans that will further segment the market, and further dilute the purchasing power 

of the federal employee and retiree group. 

Direct Contracting with one Pharmacy Benefit Manager 

Another OPM initiative, put forth under the heading of "increasing contracting discretion" 

would involve carving out prescription drug benefits and allowing OPM to negotiate directly 

with one Pharmacy Benefit Manager {PBM}. The logic behind this is identical to AFGE's 

arguments in favor of reducing the number of carriers in order to consolidate buying power and 

encourage the kind of competition that drives down costs, rather than that which merely 

segments the market and shifts costs. AFGE would be supportive of this proposal if OPM had 

not let slip that it contemplated this in the context of full "voucherization" of FEHBP, as 

recommended by Messrs. Simpson and Bowles, but not endorsed by the commission they led. 

The notion that the carve out would mean a voucher to purchase prescription drugs, and 

would, eventually, be part of a fully-voucherized cafeteria-type structure for all of FEHBP makes 

AFGE extremely wary of OPM's initiative. 

In addition, since it seeks to save $1.8 billion over ten years, it is not clear whether OPM's 

strategy would lead to the adoption of a formulary (i.e. a list of covered drugs) that would leave 

out a particular drug or brand of drug that a patient needs. It is also far from clear that OPM 

would be successful in choosing a PBM that would provide the best prices. There is an almost 

inevitable trade-off between the restrictiveness of the formulary and the overall cost of the 

prescription drug benefit. Further, plans such as Blue Cross/Blue Shield may have more buying 

power than OPM, as they cover more than eight million when their non-federal customers are 

counted. It remains for OPM to demonstrate how it intends to lower its costs without a costshifting voucher or problematic restrictions on the formulary. 

Alternatively, AFGE strongly supports H.R. 1367, introduced by Representative Stephen Lynch 

(D-MA), the FEHBP Prescription Drug Integrity, Transparency, and Cost Savings Act. The bill is 

meant to lower FEHBP's prescription drug costs by putting restrictions on the activities of 

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PBMs, the entities that negotiate with drug manufacturers and supply prescription drug 

benefits to health insurance plans of all types. The legislation prohibited PBMs from switching 

a person's prescription without prior approval from the prescribing doctor (currently PBMs do 

so if switching to a different drug is more profitable for them). It also required a PBM to return 

to insurance plans almost all rebates and incentive payments they receive from manufacturers, 

and creates disclosure requirements for information about such rebates and incentive 

payments. 

Domestic Partner Bene/its 

Finally, OPM has indicated a willingness to allow domestic partners to be added to a federal 

employee's FEHBP enrollment. However, tax laws will require the government to include in the 

employee's taxable income the value of FEHBP benefits provided to a domestic partner and/or 

the child of a domestic partner unless they qualify as the employee's "dependents" for federal 

income tax purposes. In cases where the domestic partner and/or his or her children do qualify 

as dependents for federal income tax purposes, the value of the insurance under FEHBP will not 

be taxable to the employee. AFGE strongly supports the full coverage for domestic partners of 

both same- and opposite-sex couples and their children under FEHBP, as well as other law 

changes that would not impose a tax penalty on same-sex families. 

Federal Employees Need an Advisory Council for the FEHBP Program 

Federal employees and retirees pay at least 25% and as much as 64% of the premiums for 

health insurance under FEHBP. Yet in spite of this heavy financial obligation and the fact that 

FEHBP is the sole source of health insurance for many of its eight million participants, there is 

no formal mechanism for enrollees to have any input into any aspect of the program. We must 

rely upon OPM to negotiate contracts, set policy, and to decide what, if any, benefits beyond 

those specified in statute will be included or excluded. And we are forced to rely upon OPM to 

provide information, almost always after the fact, of what it has decided to do with this 

program. there is no formal mechanism for sharing of information prior to decision making. 

There is no formal mechanism for having federal employees' questions about FEHBP answered 

by OPM staff. In short, after paying, in the aggregate, 30% of the program's cost, there is no 

formal mechanism or opportunity for federal employees to have any involvement in its 

administration. 

Federal employees have opportunity for input into administrative decisions involving the 

General Schedule pay system with the Federal Salary Council (FSC), a PreSidentially-appointed 

advisory council required by law. The FSC includes outside experts in pay as well as 

representatives of the largest federal unions. Federal employees have an opportunity for input 

into administrative decisions involving the Federal Wage System with the Federal Prevailing 

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Rate Advisory Committee (FPRAC), an advisory council whose director is appointed by the 

Director of OPM and whose members include both management and labor representatives. 

And federal employees have the Employee Thrift Advisory Council (ETAC) which gives federal 

and postal employees and retirees and members of the uniformed services, all of whom 

participate in the Thrift Savings Plan (TSP), a chance to have input into administrative decisions 

involving the program. All of these bodies are established in statute, and all function well as 

avenues for dialogue and exchange of information, concerns, and advice. FEHBP would benefit 

greatly from the establishment of a similar statutorily required employee advisory council. 

AFGE will be seeking a sponsor for legislation to establish such an advisory committee. 

Coverage of Applied Behavioral Therapy for Autism in FEHBP 

After years of pressure from AFGE and organizations representing the families of those with 

autism spectrum disorders, OPM finally agreed to allow FEHBP plans to cover the most widely 

used and most effective treatment for autism, Applied Behavior Analysis (ABA). Thirty-seven 

states require health insurance plans operating in their state to cover autism treatments and 

interventions. OPM's action still falls far short of this standard, because it only permits and 

does not require FEHBP plans to cover treatments such as ABA. Nevertheless, starting in 

January 2013, 67 of FEHBP's 230 participating plans offered ABA. In 19 states, coverage will be 

offered in some regions. All state-specific plans in Arkansas, Minnesota, and New Mexico will 

provide the coverage. 

Neither of the largest FEHBP plans, Blue Cross/Blue Shield Standard Option or Basic Option, will 

cover ABA in 2013. These nationwide plans cover 62% of all FEHBP participants, and the 

regional plans that cover ABA do not begin to include the remaining 37%. Thus, if OPM is at all 

serious about providing coverage for the most effective and widely used intervention for 

autism, it must require plans to cover ABA. AFGE will continue to press OPM to require this 

coverage in every FEHBP plan. 

Obamacare and FEHBP 

The enactment of the Affordable Care Act in 2010 has not yet solved ilil of our nation's 

problems associated with health care cost and insurance coverage, as 50 million Americans 

remain uninsured and we still spend almost twice as much per capita as other advanced 

industrializ.ed countries with nationalized health care. This is true despite the fact that almost 

half of all American health care spending is funded by the US government through Medicare 

and Medicaid which are not drivers of cost. (Indeed, OPM should look to these government 

programs and the Veterans Health Care system for best practices). The country's problems with 

prices and coverage derive from the other "half" of health care spending, the portion controlled 

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by private insurers and pharmaceutical companies and where policies and rates are set by the 

private sector rather than government regulation. 

The phase-in of benefits from Obamacare began in 2011 with extension of coverage to 

dependents up to age 26, no copayments for preventive care, and smoking cessation benefits, 

again without charging any copayments. Several other provisions of Obamacare affect federal 

employees and retirees who participate in FEHBP. Three will have a direct cost impact. The 

most prornising is the rule on medical loss ratio limitations. Insurers will have to spend at least 

80 percent of premiums on medical care or functions that improve the quality of care. For 

those covered by large group policies, insurers must spend an even higher amount -- 85 

percent. Insurers who fail to meet this standard must provide policyholders with a rebate 

instead of pocketing the extra premiums as profit. 

Those covered by Medicare and an FEHBP plan pay nothing for one annual well patient visit to a 

doctor, and can request a personalized illness prevention plan at no cost. Medicare 

beneficiaries are also able to get immunizations and screenings for cancer and diabetes without 

any copayments. Those who participate in Medicare Part 0 are eligible for a 50 percent 

discount on brand-name drugs and a seven percent discount on generic drugs if the plan has a 

coverage gap (also known as a "donut hole"). These discounts will increase each year until the 

donut hole is completely eliminated by 2020. 

Beginning in 2018, the income-based governmen't subsidies for individuals to purchase health 

insurance from state-run "exchanges" will become available. Unfortunately, because the 

incomes of hundreds of thousands of federal employees are so low, and FEHBP premiums are 

so high, the number of federal employees eligible for subsidized purchase through the 

exchange will be large. The numbers will be larger than originally anticipated because while 

FEHBP premiums continue to climb, the three- year pay freeze has impoverished growing 

numbers. The subsidies will be calculated partially to limit the share of family income paid out 

in premiums, and partially on the basis of family size. 

2014 will also see the introduction of rules to prevent insurance companies from discriminating 

against those with a pre-existing or existing health problem. In addition, insurance companies 

will be prohibited from placing lifetime limits on the amount they will pay for benefits for a 

patient (the law raises the limit and eventually eliminates it). Restrictions on insurance 

companies' ability to cancel coverage when an enrollee falls ill also come into effect in 2014. 

However, Obamacare also includes a time bomb prOVision, set to go off in 2018, that is likely to 

be very damaging to federal employees. The most punitive will be the 40 percent excise tax on 

"high cost" or "Cadillac" plans that will make FEHBP far less affordable for many federal 

employees and retirees than it already is. Most disturbing is the fact that this tax will fall on 

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many FEHBP plans whose high costs are not at all a reflection of a rich benefit package. In fact, 

the highest cost plans in FEHBP are not those with the most comprehensive benefits. The 

highest cost plans are those that exploit FEHBP's structural weaknesses by encouraging those 

with the highest health risks to congregate, and thus their costs reflect the risk group rather 

than the actuarial value of the benefits offered. Additionally, some FEHBP plans become high 

cost because of their political power and the Office of Personnel Management's long history of 

exempting. them from cost accounting standards, and acceding to their demands for large 

annual premium increases. 

FEHBP contracts are fixed price re-determinable type contracts with retrospective price 

redetermination. This means that even as the insurance companies receive only a fixed amount 

per contract year per "covered life", they are allowed to track their costs internally until the 

end of the year. The following year, they can claim these costs and recoup any amount they 

say exceeded their projections from the previous year. They are guaranteed a minimum, fixed 

profit each year regardless of their performance or the amount of claims they pay. The cost 

"estimates" on which they base their premium demands are a combination of what they report 

as the prior year experience plus projections for the coming year plus their minimum 

guaranteed profit. Clearly, there is no ability for federal employees to alter the "high cost" of 

these plans. It is in the FEHBP's insurance companies' interests to keep costs and profits high, 

and benefits low. And to subject the result of this inefficient system, one that propels FEHBP 

premiums ever-upward without regard to affordability or without any meaningful expansion of 

benefits to a "Cadillac" tax just adds insult to injury. 

The excise tax is a heavily regressive tax on federal workers, especially those whose incomes 

are too high to be eligible for the exchange subsidies but are too low to afford employee 

premiums in excess of $3,000 per year. While the 40 percent tax is levied on the insurance 

company a.nd is paid on incremental costs over $10,200 for individuals and $27,500 for families, 

there are FEHBP HMOs whose rates already meet the 2018 thresholds. 

The 2011 Deficit Commission's Proposal to Dismantle FEHBP 

The recommendations of the co-chairs of the President's National Commission on Fiscal 

Responsibility called for "transforming the Federal Employees Health Benefits Program (FEHBP) 

into a defined contribution premium support plan that offers federal employees a fixed subsidy 

that grows by no more than GOP plus 1 percent each year." Although the commission failed to 

achieve the supermajority vote necessary to send its recommendations to Congress for fast 

track consideration, the recommendations remain alive in current attempts to reduce the 

deficit on the backs of federal employees. 

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The voucher plan would change FEHBP by having the government provide a fixed amount of 

cash each year that employees could use to buy insurance on their own, instead of paying a 

percentage of average premiums charged by the insurance companies, as is currently the case. 

Under the existing statutory system, if premiums go up by 10 percent, the government's 

contribution goes up by around 10 percent. The FEHBP financing formula requires the 

government to pay 72 percent of the weighted average premium, but no more than 75 percent 

of any given plan's premium. Under the Commission proposal, the government's "defined 

contribution" or voucher would go up by an amount totally unrelated to the rise in premiums. 

For example, between 2011 and 2013, FEHBP premiums went up by an average of 3.5 percent 

(3.4% for 2013), and so did the government's contribution. If the voucher proposal would have 

been in effect, the government's "contribution" or voucher would have gone up by GDP + 1%. 

The annual growth rate of GDP in 2011 is estimated to have been 2% (through the third 

quarter, the most recently available data). Adding an additional percentage point to that and 

the voucher would have risen by 3%, not enough to cover the average rise in premiums. 

This proposal originated in a Heritage Foundation "backgrounder," published in 2001 which 

criticizes FEHBP's "artificial restrictions on plan options, including less expensive plans" and 

recommends getting rid of all legally "mandated benefits," removing the 75 percent cap on the 

government's contribution to a plan, and allowing rollovers of any unspent funds. To make 

matters worse, Heritage recommended allowing plans selling to federal employees to charge 

different premiums to different individuals, based upon age or health risk. Differential 

premiums combined with the voucher approach would spell disaster for federal employees, no 

matter what their age or health status. 

Why did co-chairmen Bowles and Simpson propose this drastic change? The proposal was 

presented as a "pilot program" in health care vouchering. The co-chairs planned to use federal 

employees as guinea pigs to see what happens if you de-link the government's financing of 

health care from actual health care costs. If they liked what happened to federal employees 

under the voucher plan, they said they would advocate extending the same approach for 

Medicare. Following the description of turning FEHBP into a voucher, they say many on the 

commission wanted to "offer seniors a fixed subsidy, adjusted by geographic area and by 

individual health risk to purchase health coverage from competing insurers." They went on to 

say that "if this type of premium support model successfully holds down costs without 

hindering quality of care in FEHBP," they would apply it to Medicare. 

House Budget Committee Chairman Paul Ryan (R-WI) and the House Republicans who voted for 

his budget did not wait for the FEHBP pilot, and voted to voucherize Medicare. Of course, the 

voucher plan only holds down costs for the government, shifting the burden to federal workers 

12 
72 


Insert offset folio 57 here 81665.057

or the elderly. Clearly the objective is to reduce government spending and impoverish workers 

and retirees. 

Conclusion 

During the three year pay freeze, federal employees' health insurance contributions have 

grown by more than thirteen percent. The cost to employees of participating in FEHBP 

continues to rise by more than either the general rate of inflation or the rate of growth of their 

ability to pay (i.e. cola growth for retirees or pay adjustment rates). While the consumer 

protections included in Obamacare have allowed all Americans to enjoy some of the positive 

elements of the FEHBP, federal employees' main benefit has been the extension of coverage to 

dependents up to age 26. AFGE supports efforts to lower FEHBP's prescription drug prices, but 

will closely monitor any sense that efforts to do so are part of a voucherization project or would 

negatively affect the formulary. Finally, AFGE will seek to protect federal employees from the 

new taxes Obamacare will impose starting in 2018, because they punish enrollees for the 

failure of OPM to negotiate premiums that are a fair reflection of the benefits contained in 

FEHBP's plans. 

The establishment of an FEHBP Advisory Council, similar to the FSC, FPRAC, or ETAC, would 

allow representatives of federal employees the opportunity to voice their many concerns about 

the adequacy of the program to OPM, the federal agency with the responsibility of 

administering the program fairly. 

(318847.00CX -) 

13 
73 


Insert offset folio 58 here 81665.058

Name: Jacqueline Simon 

Committee on Oversight and Government Reform 

Witness Disclosure Requirement ~ "Truth in Testimony" 

Required by House Rule XI, Clause 2(g)(5) 

I. Please list any federal grants or contracts (including subgrants or subcontracts) you have received since Octoher 1, 

20 I O. Include the source and amount of each grant or contract. 

None. 

2. Please list any entity you are testifying on behalf of and briefly describe your relationship with these entities. 

I am the Public Policy Director of the American Federation of Government Employees, AFL-CIO. 

3. Please list any federal grants or contracts (including subgrants or subcontracts) received since October 1,2010, by 

the entlty(ies) you listed above. Include the source and amount of each grant or contract. 

None. 

f certifY that the above information is true and correct 

Signature: Date: 

14 
74 

Mr. FARENTHOLD. Thank you, Ms. Simon. We appreciate your 

testimony and I certainly do have some questions for you when the 

time comes. 

Pursuant to an agreement with the minority, Mr. Walberg, who 

has another hearing or something to attend, we are going to go out 

of the normal order of questioning. Mr. Walberg has quite a few 

questions, so we have agreed to allow Mr. Walberg 10 minutes for 

questioning, and then Ms. Norton 10 minutes of questioning, then 

we will come back to myself and Mr. Gowdy for the usual five minutes of questioning, and any other members who may show up in 

the meantime. 

So at this point I will recognize Mr. Walberg for 10 minutes. 

Mr. WALBERG. Well, I thank the chairman. Being subcommittee 

chairman and my subcommittee going on right now, you understand why I would like to get back as soon as possible, so that they 

don’t realize they can do it better without me. 

First, I would like to thank you and I would like to thank Chairman Issa for holding this important hearing. I certainly, had I been 

here when the witnesses were welcomed, would want to welcome 

them as well and thank them for appearing across the board. 

Today we take a look at the Federal Employee Health Benefits 

Program and consider changes that can strengthen the program 

going forward. I have reviewed each of the witnesses’ testimony 

and concluded that the FEHBP has been a valuable and well-administered program, but also one that is seriously hampered in responding to the present challenges and opportunities in the health 

care marketplace. 

Unfortunately, the FEHBP and its administrator, the U.S. Office 

of Personnel Management, OPM, are hamstrung by a 50-plus-yearold statute which locks OPM into a delivery structure that reflected 

the health care industry in 1959, but not now. Most reforms, such 

as those outlined in the President’s budget, which was released 

yesterday, can provide the statutory changes necessary to allow the 

FEHBP to access the myriad products and services that comprise 

today’s health care marketplace. 

The hallmarks of a model health care program are healthy competition, consumer choice, and high-quality care at a reasonable 

cost. The FEHBP, through most of its existence, has included these 

vital components. However, due to the lack of authority for OPM 

to entertain scores of new and different insurance products, the 

program has stagnated. There are roughly 50 percent fewer carriers participating in the program today than in 1990. Many Federal employees and retirees, depending on where they live, have 

limited options to choose from. Many of the latest plan designs and 

innovations in health care management are not available to either 

OPM, as the administrator of the plan, or Federal employees and 

retirees as participants in the plan. 

For all these reasons, opening up the FEHBP to greater competition and, therefore, greater choice will serve the Federal Government, Federal employees, and retirees and taxpayers well. OPM 

will retain all of its regulatory and negotiating authority to ensure 

the prospective new plan entrants will strengthen the overall program and provide greater value to the participants. 

75 

I am particularly pleased that there is interest in addressing this 

issue by both the legislature and the executive branch. As such, 

Mr. Chairman, I would like to submit for the record OPM’s white 

paper on the subject, as well as a letter from three providers, 

Aetna, Humana, and UnitedHealthcare. 

Mr. FARENTHOLD. Without objection, so ordered. 

Mr. WALBERG. Let me ask my first question, Mr. Breskin. Thank 

you for being here. The assumptions that your commissioned 

Avalere report made about the introduction of new plans appears, 

at least to me, wholly speculative. Wouldn’t you agree it more likely that new plans would enter in a gradual manner, reflect a variety of health plan types, and that OPM would exercise its authority 

to ensure that the program operates in the best interests of the 

Government and its participants? 

Mr. BRESKIN. Thank you for the question. My reaction is I don’t 

know how it would play out. I certainly know this: there is quite 

a bit of interest, at least in one carrier, in getting into the program 

on a regional basis, and there have been no assurances whatsoever 

that when they get in on a regional basis that they are planning 

to serve the interests of all employees, all of the Federal workforce 

throughout the Country. The point we have raised and the point 

that the Avalere study is focused on is the concern about cherrypicking, the idea that if there are regional PPOs, that regional 

PPOs can choose low-cost areas, come in, offer their products at a 

much lower rate than the national carriers have to because the national carriers are offering a single rate across the Country, and it 

will cause actually a noncompetitive situation. 

It is important, when we talk about competition, not just to talk 

about the idea of more people starting into the program, but also 

the effect on competition between having an unlevel playing field 

between national PPOs and regional PPOs. And the effect that will 

have is the national PPOs will not be able to offer, because they 

have a single national rate, a competitive product in those lower 

cost areas and will eventually be forced to go regional as well. So 

what you will end up with, actually, is fewer choices for Federal 

employees, particularly in higher cost areas, and possibly no 

choices for Federal employees in those high cost areas. 

So Avalere’s premise, I think it is a valid one, I do not think it 

is speculative at all; I think it reflects the concerns we have and 

the concerns about the cherry-picking that would likely occur if 

someone was able to come in regionally. 

Mr. WALBERG. Well, I appreciate that and I think that really establishes and sets the framework of understanding here, and I 

would continue to say there are a lot of assumptions, especially 

with OPM and the responsibility that they have shown and how 

they are undertaken. 

I guess I would turn to you, Mr. Foley. Do you agree with both 

its assumptions, the Avalere report commissioned by Blue Cross 

Blue Shield, and the conclusions in that report? If not, could you 

tell us why not? 

Mr. FOLEY. No, I don’t agree with the assumptions and with the 

conclusions. To start off, in terms of the cherry-picking concern, 

OPM has that concern now with the current marketplace, and we 

manage that issue by negotiating with our local health plans and 

76 

with our national health plans to make sure that the local plans 

are not just choosing areas that are advantageous to them and undercut other health plans. So we do that now in our current market, and we would do that when we have regional PPOs. We would 

look to make sure that a regional PPO is in the best interest of the 

enrollees and of the program overall, and does not undercut markets. We would make sure that they are responsible programs in 

that regard. 

The Avalere study assumes a very high rate of switching of enrollees based, apparently, on price. So they have elasticity assumptions that don’t jive with our current experience or experience over 

the past 50 years in terms of how employees and retirees respond 

to price signals when the FEHB Program. 

Choosing a health plan is a complex decision. Often it is about 

the providers that you have or the brand name of the insurer, and 

a lot of other factors. So price is only one factor. So the elasticity 

assumptions I just couldn’t agree with. 

Mr. WALBERG. Well, if you could go into a little more detail in 

explaining how the agency would evaluate and accept new plan 

types in the program. 

Mr. FOLEY. Sure. We would look to, first of all, our normal process, where a health plan submits an application, and often it is the 

case that a new health plan requires two or three tries before they 

actually are accepted in the program because we have concerns 

about customer service or the benefits that are offered, or some of 

the competitive concerns that have been raised earlier. So all of 

those things would enter into play, so it might take a period of 

time before a new entrant would actually come into the market. 

When they do come into the market, we would look to make sure 

that the region that is described is several contiguous States, that 

does’nt pick any one market, does’nt undercut in any one market, 

but is a blend of markets so that it does’nt have the effect of some 

of the concerns that have been raised to date. We would go through 

our normal process in terms of making sure that the plan is financially sound, that it has good customer service, and all the other 

criteria that we apply normally to health plans would be applied 

to those plans. 

So we view this as an extension and an expansion of how we look 

at new entrants into the FEHB Program now. 

Mr. WALBERG. Okay, thank you. 

Mr. Breskin, just to be clear, are you telling the committee today 

that Blue Cross Blue Shield would withdraw its participation as a 

service benefit plan if Congress gave OPM the authority to accept 

a broad range of new health plan types? 

Mr. BRESKIN. No, I am not. 

Mr. WALBERG. Well, the report seems to indicate that. 

Mr. BRESKIN. Well, let me make things clear. First of all, our 53 

year association in the FEHBP, I think, speaks for itself. It certainly speaks to our commitment to this program. We have been 

in it through thick and thin. We got down to a single day of reserve 

and we figured out a way to stay in the program back in 1982. So 

we are certainly not suggesting exiting. What we are suggesting, 

however, is that if we are put in a position where we cannot compete on a national basis with a national PPO in a competitive way, 

77 

we would have no other choice but to continue our participation in 

the FEHBP in a way that would allow us to be competitive, which 

would have to be regional. 

A perfect analogy is on the Medicare Advantage Program, where 

regional PPOs were originally started in the Medicare Advantage 

Program and, in fact, back in 2003 there was an attempt to try to 

put in a national PPO product or national PPO products in the 

Medicare Advantage Program and, in fact, an incentive of 3 percent 

was given to any carrier that was willing to offer a national PPO 

product; and nobody did it. Nobody is doing it at this point, and 

the reason is you can’t have two different sets of rules. 

So to answer your question, no, we are committed to this program for the long haul. But we obviously can’t be put in a position 

where we can’t compete in a position where we can’t compete on 

a level playing field, and we would have to find that level playing 

field and compete in that way. 

Mr. WALBERG. If I could ask one more question. 

Mr. FARENTHOLD. Without objection. 

Mr. WALBERG. Mr. Foley, if no changes are made to the structure 

of the program, where do you see the FEHBP in 5 years, 10 years, 

20 years? 

Mr. FOLEY. Sure. As we look at it right now, the FEHB, if you 

look at it as a marketplace, is more concentrated than the commercial marketplace overall, so without changes, without additional 

authorities, we see a continuation of that concentration. And our 

concern is that that undercuts some of the competition that exists 

in the program and the choice of health plans. So it is difficult to 

say exactly where it will be 5, 10 years from now, but we have seen 

a continuing trend from the mid-1980s to a very high concentrated 

market, more highly concentrated than insurance markets commercially, and we see a continuation of that trend and the problems 

that are associated with it. 

Mr. WALBERG. Less effective, less of an ability to provide comprehensive coverage, new plans, new programs, new ideas? 

Mr. FOLEY. Yes. 

Mr. WALBERG. Thank you. 

Mr. Chairman, thank you for your efforts. 

Mr. FARENTHOLD. Thank you, Mr. Walberg. We will let you get 

back to your subcommittee as well. 

We will now recognize the gentlelady from the District of Columbia for 12 minutes. 

Ms. NORTON. Thank you, Mr. Chairman. 

Mr. Foley, my great problem with government has generally been 

that it doesn’t innovate, so I am always open to innovation in government. I find I can’t bear how hard it is to change one little thing 

in government. But I have to tell you the burden is really on you, 

especially when you use the word modernize when it comes to 

FEHB fix. Essentially what you are proposing to do is to fix what 

everybody believes, I think even you at this table do not believe, 

is broken. The chairman, the big chairman here, indicated, I think, 

quite factually that FEHBP has been a model for what this Administration is trying to do with their Affordable Health Care Act. 

You have a lot of chutzpah because you have in place the model 

and all we understand about what is happening with this AdminisVerDate Aug 31 2005 09:01 Jul 08, 2013 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 C:\DOCS\81665.TXT APRIL
78 

tration with the Affordable Health Care Act comes close to chaos. 

So at least you have one model that you can look to. Of course, it 

should be looked to as a model for what to do and what not to do. 

And as you do the Affordable Health Act, you could learn from that 

experience, because that is a true nationwide pool. 

So, in looking at your proposal, my concern would be capsulized 

in one word: price. You know, the word competition means nothing 

unless you are going to reduce the price for the average person on 

FEHBP. Remember, in most parts of the world there is only one 

payor; and I guess you figured out why. And that is what I want 

to first get back to. The reason that even Singapore has one payor 

is that the first rule of insurance is get the biggest pool you can. 

That is what you have managed to do. Moreover, you have the Post 

Office, you have members of Congress and all this great, big pool, 

the biggest pool in the Country. Do you think that pool, the size 

of that pool tells us anything about OPM’s success in keeping premium costs lower than the private sector? 

Mr. FOLEY. First of all, thank you for your description of the program; it is a model program and it is one that we are proposing 

to modernize, but really these are changes that will occur over periods of years and really are in the spirit of the basic model, which 

is a competitive model and one that is based on choice. The large 

pool that we have, the 8.2 million covered lives, is an advantage 

to the program. 

Ms. NORTON. If you had a smaller pool, the way the average employer apparently has, wouldn’t that mean that the price for the 

average Federal worker would go up? 

Mr. FOLEY. It would decrease our negotiating power, and I think, 

with reference to the proposal about contracting authority, we are 

proposing to use that size, that large pool to negotiate lower prices 

in the pharmacy area. 

Ms. NORTON. On the one hand you are trying to use that large 

pool, in the pharmacy area; in the other hand, with respect to the 

rest of health care, you are breaking up the pool. 

Mr. FOLEY. Well, the reason is different, and there are two different markets. So you have a pharmacy benefit manager share 

market, which has a few large players that are capable of handling 

the business that we would bring to them. You do not have that 

same situation in the health insurance base; you have many local 

plans, you have many national plans. And our strategy to increase 

competition in that space makes a lot of sense to us, given the market that is there. 

Ms. NORTON. So you think the regional pools, for example, which 

are a smaller number of employees? 

Mr. FOLEY. We are not proposing regional pools. The regional 

plans would participate in the overall FEHB; they would be part 

of the same pool. So we are not carving up the pool in any way. 

And, in and of itself, that should decrease price, it shouldn’t increase price. 

Ms. NORTON. Well, wait a minute. The point is price. What is the 

point, then? If these pools do not lower the price, then why not 

stick with the pool that you have, since you already have the price 

coming down? 

79 

Mr. FOLEY. Regional plans, not pools, regional plans will increase 

competition in the regions that they are serving, and we believe 

that that will lower price because it will lead to more competition; 

and that is what we are seeing in the commercial market, so we 

would like to bring that benefit to the FEHB market. 

Ms. NORTON. So you are telling me that the pool would not be 

as Mr. Breskin says when he keeps his OPM cherry-picking; you 

are saying do not bother, we can manage anything, where they 

would cherry-pick the low-cost regions and charge a premium that 

reflects that region, shifting some costs to the larger FEHBP pool? 

I do not see how that can fail to happen. 

Mr. FOLEY. Again, our actuaries have looked at this in the way 

that the Avalere people looked at the circumstances, and they estimate modest savings for this over a 10-year window, so there are 

obviously different assumptions being used about the efficiency of 

the regional plan, about the propensity for Federal employees and 

retirees to switch plans. 

Ms. NORTON. Well, let’s get to switching plans. First of all, I 

think you have an obligation, as you come before us, to tell the 

members of Congress and their staffs who are sitting here is our 

Federal employees going to be on the exchange, so that all of this 

is essentially moot? I mean, we were told, when we passed the Affordable Health Care Act, that everyone would ‘‘go on the exchange.’’ What does that mean in terms of this? First of all, what 

does that mean? Are Federal employees no longer going to be a 

part of their own plan, as, I might add, other employers would continue to have, but are all a part of the exchange and therefore 

would go on the exchange to find the best deal, rather than be part 

of something called the FEHBP? I mean, I am confused as to where 

all of this starts in the first place, and here you are talking about 

changing it. No one has told members of Congress whether they 

are going to be part of the FEHBP or whether they should all be 

prepared to go into the exchange. 

Mr. FOLEY. Federal employees and retirees have employer-sponsored coverage, it is credible coverage, and they will not be going 

on exchanges. There is a provision, as you have referenced, that affects members of Congress and their staff. That is something that 

we are writing regulation on. 

Ms. NORTON. Well, let’s straighten that out. Are you saying to 

me that members of Congress and their staff will no longer be a 

part of the FEHBP? 

Mr. FOLEY. That is, right now, a subject of regulation. It would 

be inappropriate for me to comment. 

Ms. NORTON. So we are certainly losing part of that pool. 

Let me go on. How would you manage what would otherwise is 

seen to be to the advantage of a regional plan to go to regions, 

lower cost regions, rather than have what every other employer 

has? Every other employer in the United States will have one or 

two, of course. We have this wonderful galaxy. How would you 

manage to keep the cherry-picking from transferring costs to the 

larger pool that is not in these regional pools? 

Mr. FOLEY. We would do it similar to the way we do it with local 

plans who come in and propose areas, and if we feel that the local 

plan is just picking the good risk or picking an area to undercut 

80 

a competitor, and not in the best interest of enrollees and of the 

program overall, we negotiate a larger region or a different region. 

An analogy might be in the Pacific Northwest. If a regional plan 

came in and said that they wanted to offer products in Washington 

and Oregon, and we needed another plan in Alaska, we would negotiate that they take Alaska as well. And that is the power that 

we have as a negotiator and that is, I think, one of the strengths 

of this model, is our ability to act on behalf of enrollees, and I think 

that is why we have experienced the success we have over the 50 

years we have had the program. 

Ms. NORTON. I will leave that on the table and ask Mr. Breskin, 

in fact, I will ask Mr. Foley, perhaps both of you can explain this. 

This rendition that Mr. Choate’s testimony gives of how the 

FEHBP started with many more plans and over the decades these 

plans dropped out; some were grandfathered in, most of them 

dropped out. Even the health maintenance organization dropped 

out. So part of the reason why one or two plans, and the first plan 

that has 60 percent, which on its face doesn’t look very competitive, 

part of the reason may be that these others dropped out. Well, if 

you have been managing so well, how come all of these plans 

dropped out? Why didn’t you keep a competitive FEHBP? 

Mr. FOLEY. We have over 230 plan options available. 

Ms. NORTON. No, my question is not how many do you have now. 

My question is you grandfathered in plans, more than 400 participated in the program. It looks like, by attrition, some plans have 

gotten dominance, rather than by competition. Why didn’t FEHBP 

manage to have more national plans in the program so that it 

would not be caught with a model that now gives one carrier 60 

percent of the pool? 

Mr. FOLEY. Ms. Norton, our statute limits the number of plan 

types that we can have. 

Ms. NORTON. So when did the others drop out? 

Mr. FOLEY. The dropping out has occurred mainly among local 

HMOs. If you recall, in the 1990s there was a large and robust 

HMO market. 

Ms. NORTON. Did 400 plans initially participate in governmentwide and nationwide plans? 

Mr. FOLEY. No. That 400 figure is probably sort of a high point, 

again, when there was a lot of HMO presence in the 1990s; and 

the FEHBP reflects a commercial market, to a large degree, so if 

there are a lot of HMOs locally, they tend to join the FEHB program. So we have 230 plan options and we have increased each of 

the last two years the number of plan options, and we work very 

hard to increase those options to increase competition. So we are 

doing what we can administratively, but the law restricts us in 

terms of adding national plans or adding regional plans, for that 

matter. 

Ms. NORTON. Thank you, Mr. Chairman. I see my time is up. 

Mr. FARENTHOLD. Thank you very much, Ms. Holmes. I was 

going to go next, but I do see the chairman of the full committee 

is here, and out of deference to the value of his time, I will go 

ahead and recognize him as our next majority member for five minutes. 

81 

Mr. ISSA. I will gladly pay you Tuesday for a hamburger today. 

I owe you, chairman. 

Mr. Foley, I want to be for the President’s budget in this area, 

but let us go through a few things. First of all, standing behind an 

obsolete law is a bad excuse for why you can or can’t do anything. 

Wouldn’t you agree that you are in the business of saying to Congress, change the law? I have the opportunity to be in the business 

of changing laws. So, first of all, would you say that it is time to 

lift the cap on this four different—in other words, eliminate many 

of the brush that have become obsolete in the 1960 law? 

Mr. FOLEY. We think it is appropriate to add additional plan 

types and to allow the FEHBP to—— 

Mr. ISSA. No, no, I understand what you are proposing doing, but 

I just want to get to the core of it. Let’s scrap some of the limitations of the original law as a premise going forward. Aetna dropped 

out I think before I got in Congress, okay? It is time to say that 

is over with. 

Now, wouldn’t you agree that the legacy of my own postal carrier 

and other organizational ones does, to a certain extent, already divide up the whole process, doesn’t it? In other words, the postmaster has proposed leaving your system because he says he can 

save money. I know your organization doesn’t agree, but you have 

two very large groups. As a matter of fact, he represents your largest single element, current and retired postal workers, and he says 

scrap it, I am leaving you and I am going to go bid for one big entity. Isn’t that true? 

Mr. FOLEY. Yes, he has proposed—— 

Mr. ISSA. Okay, so one of the processes should be for us to create 

a situation in which numbers-based, numbers-and service-based 

competitive responses should be able to be the primary determinant of changes in this program, isn’t that true? 

Mr. FOLEY. Yes, we believe that that increases choice. 

Mr. ISSA. Because Delegate Norton I think did a good job of questioning whether cherry-picking regions would make you save 

money in one region for which you would like to score, but then the 

national programs would have a tendency to say, in the next rebid, 

you have cherry-picked a lot of things, it is going to change how 

we work nationally, isn’t that true? Inevitably that you can’t score 

as you typically do, you score that there will be no change at the 

two dominant carriers in front of you, and then you take the savings. That is just the way savings tends to get scored, isn’t it? 

Mr. FOLEY. No, we don’t agree. 

Mr. ISSA. But do you score an increase from Blue Cross as a result of going to regional cherry-picking? Because you have asked 

for the ability not to regionally bid come one, come all. You have 

asked for the ability to cherry-pick when it works to your benefit, 

isn’t that true? 

Mr. FOLEY. No. Our actuaries, as I said, have modeled this and 

they come up with a modest savings. This is an incremental change 

to the program. 

Mr. ISSA. I appreciate it is an incremental change, but I do believe that Delegate Norton is right that we have to be very cautious 

about—I have no problem with the regions, I really don’t, but I 

think it has to be numbers-based. 

82 

Another area is although you call for domestic partner benefits, 

and I share with you that the Government has to be competitive 

with the private sector, and if that includes those benefits, so be 

it. Now, you are limiting it to gay couples only, same sex couples; 

you are not allowing domestic partner benefits for heterosexual 

couples, which makes the score smaller, but it doesn’t make you 

equal to the private sector, does it? In other words, the private sector is recognizing a domestic benefit of either gender, very often. 

So you are only doing part of it there, is that correct? 

Mr. FOLEY. No, that is not correct. The President’s budget reflects the inclusion of opposite sex and same sex couples. 

Mr. ISSA. Okay. Then the $240 million previous CBO would be 

dwarfed; you would probably in the multi-billion dollars per year, 

isn’t that true? 

Mr. FOLEY. It is approximately $600 million over 10 years to add 

that benefit. 

Mr. ISSA. I hear you. I find that is believable as the estimates 

what Obama Care was going to cost. So it is now doubled what was 

estimated. 

You also want to give these benefits to retirees, isn’t that true, 

in other words, add it to their entitlement? 

Mr. FOLEY. To new retirees, yes. 

Mr. ISSA. To new retirees. Not to anyone retired as of today? 

Mr. FOLEY. That is the way we have modeled the benefit. 

Mr. ISSA. Okay. I want to make sure that was scored that way, 

because we all understand that the incentive to recruit and retain 

a workforce has nothing to do with those already retired. 

I would quickly like to go a couple more items. Obama Care included a rather esoteric provision, which is the men and women on 

this dais, the men and women behind there are currently going to 

lose their participation in the Federal Employee Health Care Benefit as of the end of this year, right? 

Mr. FOLEY. We are in the process of writing regulations in response to the law. I can’t comment, or it would be inappropriate 

for me to comment. 

Mr. ISSA. Oh, no, it is very appropriate and you will comment, 

if you don’t mind. It is important not that you issue an opinion on 

the law at this point, although we have had discussions between 

OPM on what it might mean or not mean. Is there any economic 

benefit to pulling us out and putting us into exchanges not yet 

formed from an administrative overhead? In other words, somebody 

still has to administer these people going into Maryland, D.C., and 

Virginia plans, and some Pennsylvania; us going into plans in all 

50 States in the Union, and our district offices going into plans in 

all 50 States in the Union, which would be regional exchanges. Is 

there any benefit to that administratively, or is that a burdenous 

cost, by definition, to have a few thousand people pulled out of the 

plan and then administered all over the Country, to the Federal 

Government, who has to absorb this overhead? 

Mr. FOLEY. I am not prepared to comment on that. 

Mr. ISSA. I would request that you go back and have OPM comment on it, because the Speaker just went through sequestration; 

everyone went through an 8 to 10 percent cut, depending upon 

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83 

istrative costs would have to be borne within legislative or executive costs. 

Mr. Chairman, I would ask to have just an additional one 

minute. 

Mr. FARENTHOLD. Without objection. 

Mr. ISSA. Thank you. 

Again, I said I want to be with you, and I really do. The proposal 

itself inherently is good. Let’s open up the process. Let’s recognize 

that artificial historic definitions need to be gone. I do believe that 

although I am willing to support a law change that would create 

a regional opportunity, and certainly a law change that would create a greater opportunity for nationals to come in, I believe that, 

as you go back today with the proposals from us, that you need to 

answer the question of are you willing to go through a process that 

says you can only do any of these if there is a finding scored by 

CBO or found by GAO to be an actual savings. In other words, let’s 

not agree to a change that you then go through and based on a prediction that may not be true. Are you willing to take that back 

today to the Administration? Because I want to work with you. I 

want to open up and change very aggressively the law, but only to 

the extent that Ms. Norton and I can come to an agreement that 

we have been prudent in making sure that the proof is in the pudding before we begin significant changes with incumbent carriers. 

Mr. FOLEY. We are asking for the authority to contract with regional plan types. We wouldn’t do that if it weren’t in the best interest of the program. So we are approaching this in a very deliberate and incremental way. And as I described earlier, we would 

go through all the normal processes in terms of vetting the proposal and the insurers. 

Mr. ISSA. Mr. Foley, I am exceeding even my borrowed time. History has been please trust us, we will be prudent. The history in 

this committee is that ain’t so. So in rewriting the law to give that 

kind of authority, I must admit if the Administration, Vice President and the President, want to have, and obviously OPM, want to 

have our buy-in, and you will have it, it is going to have to be 

based not on we give you the authority, trust us, but based on a 

much more limited, perhaps a pilot program, certainly a bidding 

process that is open to review and independent third party. 

I must admit that today, discovering that Obama Care is going 

to cost us double, discovering that most States don’t want to form 

exchanges, and that, contrary to the law as passed, we are going 

to be subsidizing non-State exchanges, which was clearly prohibited in the law, that puts us in a situation in which we cannot deal 

with 8 million Americans, current and retired, in a way that would 

endanger the cost and benefit to those individuals. 

So I opened with I want to be with you. I strongly want to be 

with you. I believe in competition. I share with Delegate Norton 

and Mr. Walberg and others, the chairman, that we want to be 

with you, but we want to work on this not from a budget proposal, 

but from a change in law proposal, and I look forward to doing 

that. 

Mr. Chairman, ranking member, I appreciate the excessive indulgence. I yield back. 

Mr. FARENTHOLD. Thank you very much. 

84 

We now have the member of the full committee, Mr. Connolly, 

who is requesting to participate. Without objection, I will allow Mr. 

Connolly to participate and recognize him for five minutes. 

Mr. CONNOLLY. Thank you, Mr. Chairman. And, before my five 

minutes, I just want to thank you for your graciousness. Because 

of the limitation of the space on the subcommittee, I could not join 

the subcommittee. I was on it last year. But I do represent the 

third largest number of Federal employees, so I have a direct and 

vital interest in the subject, and I thank you so much. 

Mr. FARENTHOLD. You are welcome. Any time. 

Mr. CONNOLLY. As well as the chairman of the full committee 

and, of course, my friend and ranking member, Eleanor Holmes 

Norton. And I would ask my five minutes start over. That was all 

gracious, thank you. 

[Laughter.] 

Mr. ISSA. Mr. Chairman, could you give him an extra minute or 

two to say thank you, but we will start over? 

Mr. CONNOLLY. I thank my colleague. 

I wanted, Mr. Foley, to focus on a proposal that came out of the 

postmaster general, which was to pull the Postal Service employees 

out of FEHBP. 

In fact, Mr. Chairman, I would ask unanimous consent to insert 

in the record the testimony of Walt Francis before this committee 

last year to refresh our memories as to his analysis of the consequences of such an action. 

Mr. FARENTHOLD. Without objection. 

Mr. CONNOLLY. Without objection. I thank the chair. 

Mr. Foley, have you all looked at the possible ramifications of 

such a move? 

Mr. FOLEY. Yes, we have, and we have discussed with the Postal 

Service their proposals. Essentially, the proposal to pull out postal 

employees and retirees would amount to about a quarter of the 

population that is in the program right now. We believe, in aggregate, for the program as a whole, it doesn’t have a very significant 

price impact in the sense of disrupting the market; however, on an 

individual plan basis it has a very significant impact, looking at 

the 23 plans that have 50 percent or more of their enrollees that 

are postal employees, retirees. That would have a significant impact on several of those plans. So overall, as I said, the impact is 

not great, but there are also unintended consequences. 

Mr. CONNOLLY. Well, you say it is not great. We had testimony 

when we had that hearing that, in aggregate, to maintain current 

benefits with the diminished pool, short pool of remaining Federal 

employees could cost $1 billion more annually. Does that ring a bell 

with you? 

Mr. FOLEY. I don’t recall a specific figure. 

Mr. CONNOLLY. I would ask, then, that you get back to us for the 

record as to whether your analysis concurs with that. It also said 

cost for retirees could rise rather substantially for a retired couple. 

Mr. FOLEY. Right. And that really is dependent on the plan that 

they are in, as I mentioned. 

Mr. CONNOLLY. On the plan. 

Mr. FOLEY. Certain plans are very affected by this change and 

some, quite frankly, wouldn’t stay in business, I don’t think, and 

85 

some would experience increases; and it really depends on the mix 

of enrollees. 

Mr. CONNOLLY. In fact, we also had some testimony that some 

widows, for example, might not be covered by Medicare, given the 

employment of their spouse, and they would have to find a way to 

try to compensate for that if the Postal Service were to pull out of 

FEHBP. 

There is also, is there not, a question of viability of some of the 

existing postal plans? For example, the mail handlers standard 

plan has 150,000 participants, only 10,000 of whom are postal employees. So if you were to separate the two, in theory, that plan 

could go away because it is not viable with a risk pool of 10,000 

remaining. Would that be a fair statement? 

Mr. FOLEY. Well, if those employees were pulled out and part of 

a postal plan of whatever formation that would be, the remainder 

in the FEHB may or may no be a viable plan option. I guess our 

concern is much greater about the plans that have a much higher 

concentration of postal employees and retirees. 

Mr. CONNOLLY. I just think we have to pay attention to this proposal and we have to, without emotion, without bias, hopefully, we 

need honest analytical work. What are the consequences both for 

the postal employees who are being pulled out and for the remaining FEHB programs? Ms. Norton was correctly citing some concerns she has about competitiveness and entry and the number of 

options available. I want to know, and I am sure my colleagues do, 

could this precipitative move in fact have an unintended consequence of actually killing some options for all employees, maybe 

with the best of intentions? 

And the other thing I am really interested in is, at the end of 

the day, net, does it in fact save money. 

My final point, Mr. Chairman, I was so glad to hear of the concern of the chairman of the full committee about members of Congress and their staff being pulled out of the FEHBP, and the fact 

that that actually could have attendant unforeseen administrative 

costs, and I certainly agree with him and would remind him that 

that was a Republican amendment to Obama Care in the Senate 

led by Senator Chuck Grassley of Iowa. I just want to get that in 

the record. 

Thank you, Mr. Chairman. 

Mr. FARENTHOLD. Thank you. 

At long last it is my turn to ask some questions. I will probably 

go down in history as one of the most generous chairman with 

time. 

Mr. CONNOLLY. You have my vote. 

Mr. FARENTHOLD. So I am going to start out with Mr. Foley. Mr. 

Foley, I think we can kind of summarize your proposals in three 

big areas that we are talking about right now: that is, opening up 

the program to more regionalized care to increase competition; you 

guys taking over and doing prescription drugs in-house; and then, 

finally, adding in some alternative coverages, be it the ‘‘plus one’’ 

coverage, as well as some incentives for wellness. We are going to 

kind of focus on those issues broadly. 

My first question, let’s talk a little bit about the regions. It has 

been mentioned that cherry-picking, I understand in the much less 

86 

stressful environment of South Texas than Washington, D.C., we 

would probably get some lower rates. The chairman pointed out we 

really don’t have a firm score on doing that yet, is that correct? 

Mr. FOLEY. We have estimated that the expanding the plan types would save approximately $240 million over 10 years. 

Mr. FARENTHOLD. I am going to go to Mr. Breskin, who has the 

vast majority. You think that number is reasonable and will hold? 

Mr. BRESKIN. I don’t, and I think it doesn’t take into account 

what we have described as the phenomena that will likely occur. 

Of course, the Avalere study indicated it would be more like $6 billion increase over the 10-year period. 

Mr. FARENTHOLD. All right. I would imagine Mr. Choate is going 

to have a different opinion of that as well. 

Mr. CHOATE. Historically, obviously, as we have seen competition 

increase, we are not endorsing one specific type of plan designed 

to be added; we are simply asking for OPM to have the capability 

of being able to offer local, national, regional, any type of plan that 

any commercial market would be able to offer today, and at their 

discretion be able to offer those. 

Mr. FARENTHOLD. Okay. Let’s get back to Mr. Foley here. So you 

guys want the power to do your own prescription drug program. 

Would you cover all prescription drugs, are you guys going to cherry-pick, or how are you going to choose which ones you do or don’t 

cover yourself, and then do you dump the dogs to Mr. Merritt? 

Mr. FOLEY. The way we would approach the pharmacy benefit 

manager option would be that we would first look at it and look 

at the market and the kinds of bids we get in. We are not entering 

into this if it is not good value for enrollees and for the program 

as a whole. We think it is good value; otherwise, we wouldn’t propose that we go down this path. 

Mr. FARENTHOLD. So you are asking us to trust you with no 

numbers. 

Mr. FOLEY. No. We estimate that it would save $1.6 billion in 

mandatory savings over a 10-year period. 

Mr. FARENTHOLD. But just to get back to my original question, 

you all aren’t talking about taking over all of them, just the more 

common drugs that you see the highest use of? 

Mr. FOLEY. We would see that we would, pharmacy is a complex 

market and we would see that we would want to look at specialty 

drugs, for example, separately and consider whether that makes 

sense to have as part of a single PBM purchase; and we would 

want to make sure that the benefit design is consistent with the 

plans that we have, being able to transmit information in real-time 

to have as good or better coordination with the medical benefit. 

Mr. FARENTHOLD. Now, having dealt with Mr. Merritt’s group in 

trying to get some specialty drugs that my doctor wants my wife 

and myself to be on, I can guarantee you are doing a good job trying to save the Government money. There are an awful lot of hoops 

that we have to jump through to do that. Would cherry-picking off 

some of the prescriptions from your program run up your costs significantly? How would it affect your members? 

Mr. MERRITT. Well, it depends. I mean, we don’t believe that 

price controls generally save money, they more shift cost to other 

programs. And one challenge would be if there is direct negotiation 

87 

in the form of price controls, that most likely that would probably 

shift higher costs into the exchange and other programs. When you 

add 8 million lives into that program, probably the response a manufacturer is going to have are to raise prices across the board. So 

we see a number of ways you can save money without that, and, 

as with most employers, there is a lot more you can do to save 

money as people get more comfortable, in terms of preferred pharmacy networks, more generic utilization, and things like that. 

Mr. FARENTHOLD. A little bit off the subject, but just something 

of personal interest to me, having grown up at the soda fountain 

of my pharmacy, I am really kind of seeing a shift pushing to the 

big Walgreens, CVSes, and a lot of pressure on those small familyowned pharmacies. What can we do about that, or is that just an 

inevitable force of the marketplace? 

Mr. MERRITT. Well, some of that is a little bit of an urban myth 

in the sense that small pharmacies continue to grow; they are very 

profitable. As you were saying, let’s see the score on how much is 

really going on. The reality is that PBMs are there in the marketplace to save money for consumers and employers and government 

programs, and some folks would rather we just go away, like it was 

20 years ago, but people can’t afford to do that. They want better 

benefits and, frankly, we move a lot of business to the most efficient drugstores, those who offer the best prices, and certainly 

those in rural areas where there aren’t many options have a lot of 

negotiating power and do very well. 

Mr. FARENTHOLD. All right. 

Ms. Norton, I gave everybody else a little bit of time. Would you 

object to me taking another minute and a half? 

Ms. NORTON. Unanimously. 

Mr. FARENTHOLD. All right, thank you. 

I wanted to get to Ms. Simon for a minute. Now, you haven’t gotten a lot of questions, but you raised some real concerns on the 

part of the Government workforce. You pointed out that there 

might be a problem with bringing in a wellness program, and to 

me that just seems counterintuitive. Why would you not want to 

have incentives for the workers that you represent to, for instance, 

quit smoking? 

Ms. SIMON. Well, part of the Affordable Care Act already provides coverage for smoking cessation; it was a requirement. But we, 

of course, want every incentive for Federal employees to be able to 

pursue wellness. What we don’t want is price discrimination 

against those who have the misfortune of being ill or obese. 

Mr. FARENTHOLD. Well, isn’t there a difference between the misfortune of being ill and choosing to smoke? I have the misfortune 

of being overweight. I might be subject to one of those. 

Ms. SIMON. Well, in my written testimony I suggest an alternative, which is what AFGE does as an employer. 

Mr. FARENTHOLD. Incentive? 

Ms. SIMON. It doesn’t penalize those who have an illness or who 

are older but provides money for fitness classes and gym membership, and that sort of thing. 

Mr. FARENTHOLD. And you also expressed a little bit of concern 

about a ‘‘plus one’’ program. To me, this seems like since the employees pick up a share of their health care, giving those married 

88 

couples, or in this case we are even talking about expanding it into 

same sex couples of opposite sex domestic partners. To me, this 

seems like a cost savings for some of your members that mirrors 

what is almost universally done in the private sector. 

Ms. SIMON. Well, thank you for bringing that up, Chairman 

Farenthold. Here is the awkward thing, and this hearing has felt 

rather gratifying to me because I am listening to the members of 

the subcommittee ask all the same questions we have been trying 

to ask of OPM, and we haven’t been able to get any answers beyond trust us, either. For many, many years, as long as I have 

been involved with advocating for Federal employees regarding 

FEHBP, OPM’s actuaries have told us that ‘‘self plus one’’ would 

be actually more expensive than a family, families of more than 

two persons. 

And now, suddenly, we are getting different numbers, but we are 

only getting the bottom line, and we have not been able to see what 

kinds of assumptions OPM has used in its calculations for saying 

this will cost this or this will cost that; this will save this amount 

of money. We really do want to know exactly how they arrived at 

their estimates for changes in premiums to family coverage, what 

the premiums would be for ‘‘self plus one,’’ and we have been denied that information. 

We can’t really say, one way or another, whether this would be 

good, who would be the winners and who would be the losers, until 

we see how those numbers were constructed. 

Mr. FARENTHOLD. All right. Well, thank you very much. 

Did anybody on this side have any additional questions? 

Ms. NORTON. Just for the record, Mr. Chairman, first, there are 

a couple questions from Representative Danny Davis that he would 

like answered for the record. That is number one. 

Mr. FARENTHOLD. And he will get this into the record. We will 

send this to you guys, and if you would respond in writing, it would 

be greatly appreciated. 

Ms. NORTON. And I wonder if Mr. Foley would respond in writing 

as well to the suggestion of Ms. Simon for the AFGE based on what 

the Federal Government does in other areas. Apparently in the 

thrift savings bond area we have a thrift advisory council. Even 

with salaries we have a federal salary council. 

Mr. Foley, what bothers me most about your proposal is that 

there is no constituent. Those who use the plan apparently have 

not had an opportunity to look at it and to advise you on it. Now, 

their views are not determinative, but they are part of the market. 

I would like to have Mr. Foley respond to the chairman on whether 

he believes that the model from these other areas would also perhaps advise an employee advisory council for this area as well. 

Mr. FARENTHOLD. And I will just speak from personal experience 

in listening to folks, in our case it is constituents, but in your case 

it would be customers, is always a valuable experience. I would join 

with Ms. Norton in encouraging you to take a look at that. 

Ms. NORTON. And one more thing for the record. Mr. Foley indicated what the savings would be for the negotiations for pharmaceuticals. I think he said $1.6 billion over a 10-year period. But he 

never gave us what the savings would be if we went to the larger 

plan with regional plans he is proposing. So I would ask that you 

89 

provide for the chairman what the marginal savings, I believe that 

is your word, would be if we switched to the plan that OPM is recommending today. 

Mr. FARENTHOLD. All right, with that, I would like to thank the 

witnesses and the members of the panel for participating today. 

The subcommittee will stand adjourned. 

[Whereupon, at 11:35 a.m., the subcommittee was adjourned.] 

(91) 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

92 


Insert offset folio 59 here 81665.059

Committee on Oversight and Government Reform 

Subcommittee on Federal Workforce, U.S. Postal Service, and the Census 

Opening Statement of Chairman Blake Farenthold 

"The Federal Employees Health Benefits Program: 

Is it a Good Value for Federal Employees?" 

April 11, 2013 

The federal government provides health insurance coverage for more than 8 million 

tederal workers, retirees, and their family members through health plans participating in the 

Federal Employees Health Benefits Program (FEHBP), the largest employer-based health 

insurance program in the country. Since 1960, the FEHBP has offered federal participants a 

choice of multiple health plans through private health insurers - a hallmark of the program. 

Examining the value of the FEHBP is a balance of many factors, including provider 

choice, coverage, and cost. In these tough times, we must ensure OPM is providing affordable 

benefits to FEHBP participants in a cost-effective manner. Effective competition is critical, with 

OPM leveraging enrollees' purchasing power to reduce costs and obtain greater value for federal 

workers and their families, as well as for the federal government as the employer. OPM must 

manage today for future projected increases in the cost and utilization of health care services. 

A recent study by the Congressional Budget Office found that on average, the cost of 

benefits, including health insurance, was 48 percent higher for federal civilian workers than for 

their private sector peers. Put another way, the federal government pays on average $6 more per 

hour per employee for fringe benefits. The value of the FEHBP increases as federal workers 

near retirement, since they retain coverage in retirement with no change in premium. 

Average health insurance premiums continue to rise, 5.78 percent within the FEHBP over 

the last five years. Growing premiums result in higher costs to the federal worker as well as the 

taxpayer, who funds approximately 70 percent of the insurance premium on behalf of the federal 

government. 

The President's budget proposes several initiatives intended to improve the value of the 

FEHBP. This hearing provides Committee members the opportunity to determine the impact 

these and other proposals would have on provider choice, coverage, and cost. I remain open to 

proposals that will lower cost and improve the value of the FEHBP without unnecessarily 

restricting consumer choice, and thank our witnesses for their willingness to testifY. 
93 


Insert offset folio 60 here 81665.060

ONE HUNDRED THIRTEENTH CONGRESS 

(!Congress of tbe ~niteh ~tates 

t..~ous£ of i,cprcsCl1tatibcs 

COMMITIEE ON OVERSIGHT AND GOVERNMENT REFORM 

2157 RAYSURN HOUSE OFFICE BUILDING 

W,.\SHiNGTON, DC 20515-6143 

Opening Statement 

Rep. Eleanor Holmes -;orton 

Subcommittee on Federal Workforce, U.S. Postal Service and the Census 

Hearing on "The Federal Employees Health Benefits Program: Is It a Good Value for 

Federal Employees" 

April 11, 2013 

Thank you. Chainnan Farenthold, for bringing together these witnesses to discuss 

the Federal Employees Health Benefits Program (FEHBP), including the Administration's 

proposals for modernizing the program. 

FEHBP is the largest employer-sponsored health insurance program in the country, 

covering 8 million individuals. Last year, it provided close to $45 billion in benefits to federal 

employees, retirees and their families. Since its creation in 1959, FEHBP has been regarded as a 

model for health insurance reform and private and public health insurance programs, such as 

Medicare. It has also been looked at as a way to expand insurance coverage to the non-federal 

community, such as small business employees or the uninsured. 

FEHBP has generally perfonned as well or better than large private employers. Industry 

experts have rated the benefits offered to emollees as competitive with other employers. 

Premium increases are consistently below those of other large employers. For example, 

according to Barclay's U.S. Healthcare, over the last decade, FEHBP premiums have increased 

7.7% annually compared to 9.3% in the commercial market. In 2012, FEHBP premiums 

increased by 3.8%, while industry surveys show that private sector plans rose by an average of 

8.1%. 

However, this does not mean that FEHBP is a perfect program or that it does not 

need improvement. For, example, coverage for same-sex domestic partners while prevalent in 

the private sector is currently not included in FEHBP. Prescription drug costs also are a concern. 

One-third or S 15 billion of the total FEHBP annual costs were for prescription drugs. And, OPM 

estimates that for 2013, 25% of that or about $4 billion will be spent on specialty drugs. That is 

a significant increase over 2009, when specialty drugs accounted for only 10% of total drug 

spending. 
94 


Insert offset folio 61 here 81665.061

This hearing provides stakeholders and members with the chance to discuss the pros and 

cons of the FEHBP proposals included in President Obama's tiscal year 2014 budget that was 

just issued. 

\\11ile I share the Administration's view that the 50 plus year old FEHBP can be 

modernized and improved, I believe that we should approach this eautiously and deliberately to 

ensure that any changes would improve the health of our federal employees and retirees and keep 

premiums and costs low and affordable. 

This is especially important at this juncture because federal employees are already 

experiencing pay and benefit cuts and cannot afford to take more hits. Federal employees are 

working under a 3 year pay freeze, new employees are forced to pay more for their retirement 

contributions than existing employees, and some federal workers face furloughs. On top oftha!, 

the President has recommended in his budget that federal workers contribute an additional 1.2% 

more for their pensions and accept a reduced COLA for their annuities based on the chained CPI 

fonnula. 

Thank you, Chairman. I appreciate this opportunity to examine the merits of the 

Administration's proposals and look forward to hearing from our panel members. 

Contact: Jennifer Hoffinan, Press Secretary, (202) 226-5181. 

2 
95 


Insert offset folio 62 here 81665.062

Health Plan Competition in the FEHB Program 

The purpose of this paper is to describe the current competitive environment among health plans 

in the Federal Employees Health Benefits (FEHB) program and the impact of expanding the 

types of plans that are eligible to participate in the program. 

Background 

The FEHB program provides health insurance coverage for approximately 8 million people 

(federal employees, annuitants, and their families) through private health insurance plans. FEHB 

operates as a type of health insurance exchange where health plans propose a set of benefits and 

premiums, which are negotiated with the Office of Personnel Management. The total cost of the 

program in 2011 was $43 billion, of which approximately 70 percent was paid by the 

government and 30 percent by enrollees. 

The premise underlying the FEHB program since its inception in 1959 is that competition among 

health plans will result in lower prices and better value for the government and enrollees. 

Generally, the model has performed well: the benefits offered to enrollees have been rated as 

competitive with other employers by external analysts 1 and annual premium increases are at or 

below those of other large employers (though considerably above CPI). 

While the FEHB model has withstood the test of time and influenced the direction of health 

reform, the competitive environment is not as robust as it could be. The health insurance market 

has changed dramatically over the last fifty years, but, due to the way that Title V is constructed, 

the FEHB program lacks the flexibility to adjust in response to the changing market. The 

following sections provide evidence of problems, specifically the growing concentration of the 

FEHB market in a dominant insurer (Blue Cross Blue Shield) and the departure or diminished 

role of certain health plans in the FEHB market. 

Growing Concentration in the FEHB Market 

Blue Cross Blue Shield (BCBS) has been a major player in the FEHB program since it began. 

BCBS fills the role of "service benefit plan" (as defined in Title 5, Section 8903(1», one of four 

plan types described in the original legislation. As the service benefit plan, BCBS offers two 

government-wide benefit options (Standard and Basic). There are currently 2,521,816 contract 

holders with BCBS; 1,810,849 with BCBS Standard and 710,967 with BCBS Basic. Combined, 

these two benefit options cover 61.6% of the FEHB market. 

The chart below shows the evolution ofBCBS's market dominance. In 1987, BCBS covered 

approximately 37% ofFEHB enrollees, whereas the next five largest health plans covered about 

the same percentage of enrollees. In 2011, the next five largest health plans covered 22.1 % of 

the FEHB market. 

1 Deloitte compared the most popular FEHB plans with other private health plans and other public sec lor plans in 

20lO. They determined that the FEHB plans were 'markel competitive' with plans offered by large private 

employers. 
96 


Insert offset folio 63 here 81665.063

Relative FEHBP Market Shares 1985 to 2011 70.0% -. ______________ 0 ___ ""_"" _________________________ •• _ •• _------

60.0% I 

, 

I 

50,0% r 

40.0% + 

30.0% L .. --------- 20.0%L------------------------

10.0% i 

i 

0.0% e.-' ---~--~---~--~---~---

1985 1990 1995 2000 2005 2010 2011 

What has occurred to enable BCBS to occupy such a dominant position in the FEHB market? 

One contributor to BCBS's growth is the exit of Aetna from FEHB in the late 1980s. Aetna filled 

the second plan type, government-wide indemnity insurer2

(as defined in Title 5, Section 

8903(2)). Aetna's demise was due primarily to adverse risk selection: too many high risk/high 

cost enrollees were in Aetna, driving up the cost of Aetna premiums relative to other health plan 

premiums. Low risk/low cost enrollees selected other health plans, leaving Aetna in an 

uncompetitive situation. 

The third plan type defined in Title 5, Section 8903 (3) and 8903a is employee organization (EO) 

plans. Employee organization plans are either sponsored by voluntary employee benefit 

associations (VEBAs) or federal employee unions. The nine current sponsors of EO plans 

include the Government Employees Health Association, American Postal Workers Union, 

National Rural Letter Carriers' Association, National Association of Letter Carriers, and Special 

Agent Mutual Benefit Association. Four of these EOs are open to only certain federal employees 

and retirees. These plans were grandfathered into FEHB at its inception or shortly thereafter but 

no new EO plans are permitted to join the program. Since 1959, more than a dozen (e.g., 

Postmasters Benefit Plan and Benefit Association of Congressional Employees) have dropped 

from the program and the collective market share of EOs in 2011 is 17%. 

Another contributor to BCBS's market dominance is the introduction of BCBS Basic in 2002. 

BCBS Basic is an Exclusive Provider Organization (EPO), meaning that enrollees are restricted 

2 Indcmnity Bcnefit Plan - One Government-wide plan. offering two levels of benefits, under which a carrier 

agrees to pay certain sums of money, not iu excess of the actual expenses iucurred, for benefits of the types 

described by section 8904 (2) of this title. 

2 
97 


Insert offset folio 64 here 81665.064

to a defined provider network and out of network care is covered in very limited circumstances. 

The EPO model operates much like an HMO by controlling the range of providers available to 

enrollees. HMOs (comprehensive health plans in FEHB parlance) are the fourth plan type 

defined in Title 5, Section 8903 (4). There is no restriction in the number of HMOs participating 

in the FEHB program as long as they meet FEHB qualifying criteria and state licensure laws. 

Premiums for BCBS Basic are considerably lower than BCBS Standard and competitive with 

other lower cost programs. BCBS Basic has grown to 17% FEHB Market share in only 10 years. 

BCBS Basic has attracted many of its enrollees from BCBS Standard, but also has drawn from 

other plans. Over time, the profile ofBCBS Basic enrollees is becoming somewhat higher 

risklhigher cost and premiums have risen accordingly. 

Exiting of other large insnrers 

Over the last 25 years, the role of other large insurance companies in FEHB has diminished. As 

the charts below display, United Healthcare operated in 21 states in 1999,16 states in 2007, and 

only 7 states in 2010. Similar enrollment patterns could be shown for Aetna, Humana, Cigna, 

and Coventry. 

United Health.are participation in FEHB, 1999 United Healthcare participation in FEHB, 2011 

It is well documented that health insurance markets are becoming increasingly concentrated3 and 

that this concentration is contributing to premiums rising faster than inflation. 

Is the FEHB more or less concentrated than the overall commercial market? As the table in 

Attachment 1 shows, BCBS market share in FEHB is greater than its market share among all 

products in 46 of the 51 markets shown. In contrast, Aetna has less of a market presence in 

FEHB than overall in 29 of the 32 markets where a comparison was possible. Similarly, Humana 

had greater market share in the overall commercial market than the FEHB market in 20 of the 21 

states where a comparison could be made. In all 45 states where United Healthcare operates, its 

FEHB market share is less than its overall market share. 

Proposed change 

3 J.e. Robinson. "Consolidation and the Tnmsformation of Competition in Health Iusnrdl1ce." Health Affairs, Vol 

23. Number 6, NovlDec. 2004. 

3 
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Insert offset folio 65 here 81665.065

As described above, OPM is allowed to contract for health insurance services from four health 

plan types: 1) service benefit plan; 2) indemnity insurance plan; 3) employee association plans; 

and 4) comprehensive health plans. However, the health insurance market includes other plan 

types that OPM is precluded from contracting with. The largest examples are regional preferred 

provider organizations such as those operated by Humana, Aetna, Cigna, and United Healthcare. 

These health insurers participate in the FEHB program through HMOs in limited service areas; 

however, they do not participate nearly to the extent that they could, given their presence in the 

overall market in these states. Allowing OPM to negotiate with these organizations as regional 

entities will enable them to participate in the most efficient and effective way while at the same 

time providing FEHB enrollees with greater choice. 

The addition of other plan types would enable the FEHB to respond to future changes in the 

dynamic health insurance market. With the implementation of health reform, there is the 

possibility that new health plan types may emerge; for example, accountable care organizations 

may become health insurers in their own right. OPM cannot be responsive to enrollee needs if it 

must seek a law change every time a new opportunity emerges. 

It is important to emphasize that OPM is not obligated to contract with every health plan that 

applies to participate in the program; each health plan must meet qualifying criteria and OPM 

must determine if the introduction of the plan is in the best interests of the program. Examples 

of qualifying criteria include the availability of financial reserves sufficient to withstand 

significant changes in enrollment or the marketplace, having marketing materials that are clear 

and transparent, compliance with prompt payment rules, and having adequate provider networks 

to ensure enrollee access. 

OPM exercises discretion in approving plans to ensure that they do not unnecessarily disrupt the 

FEHB market and disadvantage enrollees. For example, when high deductible options were 

introduced, OPM required that the plans establish and contribute to individual health savings 

accounts to protect enrollees in case of unforeseen illness and to retain the actuarial value of the 

benefit. High deductible plans remain an option in the program but their collective enrollment is 

less than 2%. We do not expect that expanding the number of plan types will result in more high 

deductible options. 

The following language had been proposed by OPM in 2007 to enable more plan types to 

participate in the program: 

Section 8903 o.ftitle 5, United States Code, is amended, by adding thefbllowing after 

8903(4){C) "(5) ADDITIONAL HEALTH PLAN TYPES.- Plans that o.ffer health 

benefits o.fthe types named under section 8904(a)(J) or (2), or both, through physicians, 

hospitals, and other health care providers. " 

This language would enable the FEHB to contract with contemporary health plan types that are 

currently major players in the private sector market, such as regional PPOs, and allow OPM to 

add plans in the future that would advantage plan participants. Nothing in the proposed language 

would restrict current insurance carriers from also offering additional plans under the new 

4 
99 


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paragraph (5), and it is reasonable to expect that new carriers would participate once invited into 

the program. 

Moreover, to be clear, we do not interpret the language of the proposed section 8903(5) as 

allowing OPM to contract with entities that only provide one service, such as pharmacy benefits. 

The proposed language is modeled after existing FEHB language, specifically appearing in 

section 8903(1), (2), and (3). As with those other sections, each additional health plan added 

through the new section 8903(5) would be required to offer "benefits of the type" described in 

Section 8904 (a)(1) or (2). Thus, consistent with our long-standing interpretation of this 

language, the proposed section 8903(5) would not authorize OPM to contract with an entity, 

unless that entity provides the array of health services listed in 8904(a)(1) or (2), as is required of 

other health plan types listed in section 8903. For example, Pharmacy Benefit Managers (PBM) 

do not provide the array of services identified in sections 8904(a)(l) or (2), but instead act as 

agents for health plans in the purchasing of drugs from manufacturers and the supply of drugs to 

retail pharmacies and by mail order. Section 8903(5), therefore, would not authorize OPM to 

"carve out" pharmacy benefits by contracting directly with PBMs for this purpose. As stated in 

the President's budget proposal, we remain very interested in obtaining legal authority that 

would allow us to contract directly for pharmacy benefits. 

Impact of Expanding Plan Types 

Insurance markets are difficult to enter, in part, because enrollees tend to stay with health plans. 

On average, between 3 and 5 percent ofFEHB enrollees change health plans each year. 

Additionally, the resources and effort required to develop a health insurance product and bring it 

to market are significant and cannot be mustered quickly. For these reasons, we do not expect 

many new health plans to enter or expand their presence in the FEHB market, nor do we expect a 

sudden growth in plans. The most likely occurrence would be those regional insurers already in 

the FEHB would to seek to expand their presence in the program. We expect that this will evolve 

over a number of years. 

Another possibility is that plans that participate in the BCBS Federal Employees Plan (FEP), the 

national aggregation ofBCBS local plans with whom OPM contracts, will opt to contract 

separately with FEHB while maintaining their existing relationship through BCBS FEP. 

Well point and Anthem, for example, are large regional PPOs within FEP that could seek this 

option. 

Concerns have been raised about the impact of this change on BCBS Standard, which includes 

44% ofFEHB enrollees. We do not believe that this change in and of itself will have a 

destabilizing impact on BCBS Standard. BCBS Standard has attracted and retained an older 

population on average. As the chart below indicates, Standard option already has a greater 

proportion of age 55 and over relative to other plans in the FEHB. 

5 
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Insert offset folio 67 here 81665.067

:30.0% 

~ 20.0% 

E 

.3 

'15 

~ 1i £ l().O% 

Age Distribution in BCBS Standard VS. All Other FEHBP Plans 

Data is as of March 31> 2011. 

35-44 45-54 55-64 65-74 75-99 

Age Band 

Bess std 

-' All Other Plclns 

In addition, BCBS Standard has been losing enrollment (mainly to BCBS Basic) in recent years 

and has experienced a greater concentration of higher cost enrollees. As a consequence, the 

enrollee share of premium has grown steadily (see chart below). 

BCBS Standard, Enrollee Share, 1991-2012 

6 
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Hence, BCBS Standard will need to adjust to the market regardless of the addition of plan types. 

In fact, having viable regional health plans available to take higher risk enrollees should make 

this transition easier. 

There are other changes that FEHB has made or could make to increase competition. FEHB is in 

the process of changing the way community rating is done such that value of premiums for 

community-rated plans (locally-based HMOs) will be assessed based on the plan's ability to 

achieve a medical loss ratio (MLR) threshold instead of the similarly sized subscriber group 

methodology currently in place. The MLR-based rating methodology provides a more 

predictable and more transparent way of rating I-lMOs; this change should lead to more plans 

staying with the program and some new plans entering the program. 

Another change would be to price all plans on a state basis. Currently, the ten national plan 

options (BCBS and EOs) have national premiums for self and self plus family, whereas, the 

remaining plans have premiums based on local market conditions. The effect of the national 

premiums is to distort local markets: undercutting community-rated prices in high cost markets, 

but disadvantaging national plans in low cost markets. In Massachusetts, a high cost state that 

includes several strong managed care organizations, BCBS enjoys 88% market share in FEHB, 

but only 48% market share in the overall commercial market. 

7 
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Attachment 1 

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CAN A USPS-RUN HEALTH PLAN HELP SOLVE ITS "FINANCIAL 

CRISIS? 

Testimony of Walton Francis 

Independent Consultant and Principal Author of 

CHECKBOOK's Guide To Health Plans For Federal Employees 

Before the Subcommittee on Federal Workforce, Postal Service, and Labor Policy 

Committee on Oversight and Government Reform 

US. House of Representatives 

March 27, 2012 
104 


Insert offset folio 71 here 81665.071

Mr. Chairman, and members of the Subcommittee: 

I am pleased to testify before you today concerning the current status and performance of the 

Federal Employees Health Benefits Program (FEHBP) as it relates to the United States Postal 

Service (USPS) and USPS solvency problems. I am testifying in my personal capacity, not as the 

principal author of CHECKBOOK's Guide to Health Plans for Federal Employees, and not as a 

consultant to the Centers for Medicare and Medicaid Services. All views expressed are my own. 

Let me start by saying that I have a great deal of sympathy for the USPS, which finds itself in a 

predicament that is primarily the result of a (1) flawed S(,ltute that enables the Congress of the 

United States to micromanage what should be business decisions, of (2) bizarre accounting and 

budget scoling rules that fail to recognize fiscal realties, (3) of an Internet business threat whose 

severity few if any could have fully foreseen as recently as a decade ago, and of (4) essential 

refol1ns to the Medicare/FEHBP interface that are long overdue and that were never seriously 

considered by the Congress over the last decade, under the stewardship of either party or either 

branch of government. For these reasons alone, the Congress should give the USPS fiscal relief 

to the tune of billions of dollars a year. 

But the problem is also one of fiscal and bargaining mistakes by the USPS, and nowhere have 

these mistakes been as important as in its (5) decisions on health insurance subsidies for its 

employees. The USPS has for decades provided unnecessary subsidies to its employees' health 

insurance costs and, despite some recent reductions, still pays a higher share of premiums by far 

than is standard among American corporations or consistent with its fiscal condition. 

I will address each of these issues in turn, and then address (6) the health insurance reforms that I 

think the USPS and the Congress should make. In fact, I regard the current postal fiscal crisis as 

a wonderfnl opportunity to make changes that would protect and preserve the FEHBP for 

decades to come, to the benefit of all employees and retirees, both postal and non-postal. 

Dismantling the FEHBP 

The USPS proposals would massively dismpt or destroy the FEHBP, the single most successful 

health insurance program evcr operated by the United States govemment. In destroying the 

FEHBP, the USPS would disrupt the health insurance of 8 million Americans, and breach 

statutory entitlemcnt promises made to millions of Federal retirees. In a world where the House 

of Representatives' own Budget Resolution, voted just it few days ago, is routinely dismissed as 

"radical" or "ideological," these proposals certainly exceed in immediate harm anything the 

Congress has previously endorsed or voted for other Medicare recipients or retirees. No one, for 

example, has previously proposed radical reductions in the statutory retirement benefits o[ 

existing Medicare retirees. Y ct the USPS proposal docs just that. 

It would pull out almost one fourth of current Federal employee enrollees, and a like percentage 

of Federal annuitant enrollees. Plans that currently enroll half or more postal employees, such as 

the National Association of Letter Carriers (NALC) plan, and the Rural Postmaster plan, would 

be decimated. It is hard to see how the FEHBP could survive with any similarity to its current 

design. For example, there are 18 plan options available nationally to Federal employees and 

retirees. Of these plans, 15 are open to all employees. If all of the postal union plans (all but one 

of which arc open to all Federal employees) went under, the total number of national plans 

would drop to 11, and those open to all would drop to 8. HMOs aside, plan choices would be cut 

2 
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in half for almost all employees and retirees. And many HMOs wonld leave the program as well, 

as their enrollment dropped in cities and towns all over AmeJlca. 

The numbers of employees and retirees affected would be staggering. For example, the Mail 

Handlers Standard option plan enrolls about 150,000 employees and retirees. Only about 10,000 

of these are postal employees. If this plan went under, all 150,000 Federal employees and retirees 

would be forced to change plans. Likewise, the NALC plan enrolls about 120,000 employees and 

retirees. About 30,000 of these arc postal employees. If this plan went under about 120,000 

employees and retirees would be forced to change plans. In both cases all postal annuitants over 

the age of 65 would be forced not only to change plans but also to leave the FEHBP. 

President Obama has been criticized for promising that under Health Reform all Americans 

would be able to stay in their existing health plans. To whatever degree this promise was 

exaggerated, the USPS plan, if adopted by the Congress, would make it look like solid gold. 

The FEHBP as a Model for Insurance Reform 

In my scholarly book, Putting Medicare Consumers in Charge: Lessons.trom the FEHBP, I 

concluded that over the last 50 years the FEHBP has outperformed Medicare in cost control, in 

service, in benefit generosity, in fraud prevention, and in protecting enrollees from 

catastrophically high health care expenses. 

I was not the first to reach these conclusions. Every major Medicare reform proposal of the last 

decade, enacted or not, has been based on the FEHBP model. In 1995 the Heritage Foundation 

published "The FEHBP as a Modcl for Medieare Refonn." During the Clinton Administration 

the National Bipartisan Commission on the Future of Medicare, otherwise known as the 

"Breaux/Thomas Commission," in 1999 endorsed the FEHBP model of consumer choice among 

competing plans by a majOllty vote, just short of a super-majority vote. During the recent Bush 

Administration the Republican-controlled Congress enacted the Medicare Modernization Act in 

2003, explicitly modeling both the Medicare Advantage program and the Medicare Prescription 

Drug Program (Part D) on the FEHBP. In fact, the MMA requires that in administering these 

programs the Centers for Medicare and Medicaid Services (CMS) use the policies and methods 

of the FEHBP. 

All of the recent reform proposals for Medicare, including the first Ryan plan, the Ryan/Rivlin 

plan, the RivlinlDomeneci plan, the Burr/Coburn plan, the Lieberman/Coburn plan, and the 

Ryan/Wyden plan (among others), have attempted to follow even more closely the FEHBP 

model under which all plans (including original Medicare plans) compete on an equal footing to 

attract enrollees, holding down costs through competition among plans. 

The Rand/Graham/Lee/Demint plan introduced last week, which would enroll all Medicare 

beneficiaries in the FEHBP, would not only follow the FEHBP model, but would explicitly rely 

on the FEHBP plans to enroll 50 million Medicare beneficiaries in the same risk pool as Federal 

employees and retirees. Whatever one's view of this scheme, the USPS proposal would destroy it 

as an option. 

In the present charged political environment, with arguments before the Supreme Court on the 

individual mandate even today, I hesitate to mention this, but the Obama Administration's health 

reform law follows the model of the FEHBP in promoting competition among health plans in a 

3 
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health insurance exchange. And what, one might ask, are the major differences between the 

FEHBP statute and the legal challenge before the Supreme Court? One answer is that unlike 

health reform, the FEHBP does not impose an individual mandate. 

It hardly seems inappropriate to ask how, of all those insurance experts of both parties and both 

houses of Congress who have looked to the FEHBP as a model, only the USPS sees it as an 

albatross to be abolished. 

Follow the Money 

The USPS has no professional or historical competence in insurance design or in analysis of 

health insurance reform models, and probably no real desire to gain these. The USPS is clearly 

looking for a solution that would allow it to obtain a taxpayer subsidy in the billions of dollars. It 

would do so by claiming that its new plan would enable it to eliminate or vastly reduce the 

contributions to FEHBP reserves for retirees that it is forced to make under present law. The 

motives for this are perfectly clear and transparent. Indeed, in some sense the logic of the USPS 

proposal is impeccable. If a debt is onerous, make whatever changes are needed to write it off. 

It is not my intention to analyze the actuarial or legal rationale through which the USPS seeks to 

reduce, most notably, the $5 billion a year it is currently required to pay to "pre-fund" its retiree 

health benefits. But I will make the following observations, ,vhich can readily be confirmed by 

the Congressional Budget Office or any fiscal cxpert. 

Under current law, the Federal government maintains a number of trust funds, including the 

Federal retiree health benefits trust fund, the Medicare Part A trust fund, and the Social Security 

trust fund, that are intended to somehow segregate and preserve funds to meet future obligations. 

Under the fiction that the USPS is a true business (a principal supposedly established in the 1970 

Postal Reorganization Act, and reaffinned in the 2006 Postal Accountability and Enhancement 

Act), the USPS is supposed to prefund its retiree obligations on the same basis as private 

corporations. But the 2006 Act in particular was an exercise in science fiction. It gave the 

Federal government a budget windfall in the arcane "scoring" rules that govern Congressional 

score keeping on budget matters. 

But all these trust funds arc "let's pretend." You may recall the debates late in the Clinton 

Administration over placing the Social Security trust fund in a "lock box." The only thing more 

surreal than those debates was the underlying reality: all of these trust funds arc EMPTY in fact 

if not in accounting. The money has been spent. The only things remaining arc accounting 

pretenses. Put another way, every dollar that the USPS does not contribute to deficit reduction 

through charges to its patrons or reductions in employee benefits is a dollar that the taxpayers 

will have to bonmv now and repay in the future. The issue before the Congress is not whether or 

how to fund real obligations with monies placed in real trust funds, but how to apportion USPS 

insolvency among future taxpayers, postal patrons, and postal employees. 

In February, the HayGroup consulting firm presented a purportedly sound analysis of the USPS 

proposals whose "starting point" was the measurement of trust fund obligations prepared by the 

OPM Office of the Actuary. But all estimates by that Office are based on the accounting fiction 

that the trust funds actually exist as dedicated funds unavailable to fund the government's current 

account deficit. The HayGroup report on "United States Postal Service Retiree Health Benefits" 

made clear in its key assumption on "Funding Method" that "the funding forecast assumes the 

4 
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USPS retains the PSRHBF assets" (page 2). These assets do not exist except as a legal and 

accounting fiction. The money has been spent. 

(As an aside, the HayGroup report was dated February 10,2012, and assumes that all annuitants 

over age 65 "enroll in Medicare Parts A and B with no penalty" (page 4). Meanwhile, a USPS 

PowerPoint presentation entitle "USPS Health Care Program," apparently also prepared in 

February of 2012, says that "growing nonparticipation in Medicare increases costs for USPS and 

for participants" (page 3). Apparently the USPS and its consulting firm arc not on the same 

page.) 

This fiscal legerdemain then raises the obvious question: why dismantle the FEHBP to preserve 

accounting fictions that no responsible and informed adult believes to be true? Why not just 

eliminate the prepayment obligations by the stroke of a pen, and leave this valuable program to 

continue to provide high value for money? Is the Federal government really so incompetent that 

it would abolish one of its most cost-effective programs to maintain the pretense that it is fiscally 

responsible? 

The USPS Substantive Proposals on the Merits 

The USPS has changed its proposals in recent months. Originally, for example, it claimed that a 

major part of its savings would arise from paying new Postal employees a lower health insurance 

subsidy. This claim suffered from the obvious problem that the USPS won't be hiring any 

consequential number of new employees for decades as it downsizes-savings zero. 

Then and now the USPS claims that FEHBP plan designs are somehow obsolete and do not 

match "best practices" in the private sector or align "cost to value." This naturally raises the 

question as to how all those Congressional leaders and experts of both parties could have been so 

badly fooled all these years. How is it that only the USPS has been able to detect that the FEHBP 

plans fail to provide health promotion and well ness benefits, and chronic condition and disease 

management programs? And of course the truth is that the FEHBP provides all these things and 

many more. It is more than passingly ironic that a USPS system facing ever more devastating 

competition, include parcel carriers and the Intemet, fails to understand that competition among 

competing health plans drives down costs while improving service. 

Nonetheless, the FEHBP is no longer the best model of effective competition among health 

plans. Medicare Advantage and Medicare Part D share that blue ribbon prize. After all, Part D 

has held its costs to a levcl ronghly forty percent below that predicted by both CMS and CBO 

actuaries and experts, a record the FEHBP cannot match. But the FEHBP is no slouch, and has 

outperformed the "one size fits all" traditional Medicare for almost the entire history of both 

programs in controlling costs. As a point of comparison, the mis-designed TRICARE system 

makes even traditional Medicare look like a miracle of modem management. 

The current "discussion draft" USPS proposal proudly proclaims that it will provide a reform 

that will "especially benefit annuit,mts who cover only self and spouse" (as opposed to larger 

families). The truth of this claim is easily tested. According to the U.S. government's Medical 

Expenditure Panel Survey (MEPS), the annual cost of health care at age 55 to 65 is about $8,000 

per person. So the cost of health care for a retired couple is approximately $16,000. The annual 

cost for an adult under age 35 is about $2,000, and for a child is about $1,500, according to 

MEPS. So the annual cost of a premium for a retired eonple would be abont $16,000 (less eost5 
108 


Insert offset folio 75 here 81665.075

sharing) and for a young family of four about $7,000 (less cost sharing). In other words, this 

wonderful reform would, other things equal, charge retired couples more than double the 

premium amount charged young families. 

The falsity of this pipe dream about the alleged benefits of a "couples" premium has been 

desClibed for decades by the OPM actuaries and by advice given through CHECKBOOK's Guide 

to Health Plans/or Federal Employees. But the postal bureaucrats who designed these "reforms" 

are not health insurance experts and would not be expected to know such things. 

Interestingly, the February 2012 USPS discussion draft, in describing the "key features" of the 

"proposed USPS plan" demonstrates an either unintended or deliberate decision to drastically 

reduce insurance benefits. This contradicts previous USPS promises that it would maintain or 

improve those benefits. 

Under the discussion draft proposal, Blue Cross Standard option is described as charging 15 

percent in network coinsurance for most services. This is false. This plan charges no coinsurance 

for inpatient hospital services and $20 or $30 eopays for most outpatient services. The document 

then goes on say that the Blue Cross plan has a $5,000 out of pocket limit and no limit for 

prescription drugs, even though drugs are included in the plan's $5,000 OOP limit. These 

features are proudly contrasted with a USPS "High Option" that charges 10 percent coinsurance 

for all hospital stays and all physician visits, and that has an OOP limit of $7,500 for medical and 

drug expenses combined. If the best USPS plan is so inferior to Blue Cross Standm'd option, one 

hesitates to describe the "Middle" and "Value" USPS options. Suffice it to say that not one 

single FEHBP plan has benefits as poor as the "Value Option," and only one has benefits as poor 

as the "middle" USPS option. So the truth is revealed: in sharp contrast to earlier promises, the 

USPS now proposes a massive reduction in health insurance benefits to current employees in the 

name of modernization and value purchasing. 

To its seeming credit, the USPS plan includes a consumer-driven high deductible option in its socalled "Value Option." This plan would have a $4,000 deductible. But there is something 

missing. Unlike all the consumer-driven plans in the FEHBP, there is no Health Savings Account 

or comparable reimbursable arrangement. In the FEHBP plans, this account is typically about 

$1,500 to $2,000 for a family. In the USPS scheme, it got left on the cutting table. 

I t is not an easy task to design a sensible health insurance reform, and there is an important and 

essentially insurmountable problem facing the USPS proposal. The FEHBP operates as a single 

risk pool. An agency with a disproportionate number of older and more costly enrollees has its 

premium eosts subsidized by agencies with a disproportionate number of younger and less costly 

enrollees. Younger and older enrollees pay the same premiums. Experts and ethicists differ on 

the merits of such a system. But whatever its overall merits, it is the reality of the FEHBP and of 

the system the USPS proposes to leave. What do current data tell us about the problems created 

by a pullout? Quite a lot! The following table shows the consequences to the USPS of a pullout 

from the FEHBP, using 2009 data: 

6 
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Ave Costal 

that age 

(MEPS) 

Number of 

postal selfonly 

$2,000 

enrollments 15,000 

TqtalCost 

{M} 

Average 

cost per 

postal 

employee 

Numbeto[ 

non-postal 

self-only 

enrollments 161,000 

TdtaiC~st 

($M) 

Average 

cost per 

non-postal 

employee 

$4,000 

25,000 

109,000 

$6,000 $8,000 $11,000 

69,000 62,000 7,000 178,000 

$6,275 

191,000 179,000 25,000 665,000 

$5,430 

As these numbers show, the USPS has an employee pool that is substantially more costly than 

that of non-postal employees, simply because it is older, To provide the identical benefits and 

premium levels to USPS employees that nonpostal employees receive will cost about one sixth 

more per employee, or about one tenth of the all-employee avcrage, Put another way, just to 

break even the USPS will have to reduce benefits or increase premiums by about one tenth, 

Considering that USPS employees number about 500,000, and that average premium costs per 

enrollee in the program (self-only averaged with self and family) arc about $11,000, the costs of 

a pullout to the USPS will exceed one billion dollars annually just to maintain current levels of 

benefits and premiums, And over time, as the postal work forced ages further, the costs will rise 

sharply, 

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Put another way, the FEHBP is a giant insurance pool. All workers and retirees pay either a selfonly or self and family premium, regardless of their age. Younger workers subsidize older 

workers. Retirees with Medicare subsidize all the rest, because Medicare is "primary" and pays 

about three fourths of health care costs (more, for the fcw Federal retirees who get prescription 

drug coverage from Medicare). Within this pool, postal employees benefit because they are older 

and more costly than average. Were the USPS to pull out, its premiums would increase to 

maintain equivalent benefits, while those of other OS and other non-postal workers would 

decrease. 

The USPS Record in Health Insurance Cost Control 

Unlike almost all other agencies, the USPS has substantial discretion over insumnce benefits. 

While the USPS was not given the authority to override OPM in plan participation and benefit 

design decisions, it was given the authority to decide on premium subsidy levels. 

That authority, exercised through collective bargaining, has led to multi-billion dollar spending 

decisions. This year the USPS pays up to 83.5 percent of plan premiums, whereas for OS and 

other non-postal employees the maximum payment is 75 percent of plan premiums. And the 

USPS pays this rate up to 80 percent of the costs of the average plan, compared to a ceiling of 72 

percent for nonpostal employees and all retirees. The result of this generous contribution formula 

is that on average the USPS pays about $1,000 more for family premiums, and about $500 more 

for self-only premiums, than the rest of the governmcnt. This is a mtc ncgotiatcd through 

collective bargaining, and in prior years the difference was even larger, but for an organization 

that is essentially insolvent, and has known for years that insolvency loomed, that seems rather 

oddly generous. Considering that about two thirds of postal workers have family policies, the net 

cost of this differential in 2012 exceeds $400 million. Ovcr the last five years, the cost of this 

differential has been elose to $3 billion. 

Incidentally, according to the Kaiser Family Foundation data on employer insurance, the average 

percentage of premium paid by large employers is around 70 percent. So it is the USPS, not the 

nonpostal work force, which is out of line with modern employer practice. 

What is worse, the USPS initiated what is arguably the single worst mistake in the history of the 

FEHBP. "Premium conversion" is a system in which the employee share of premiums is taxsheltered (this is on top of the tax-free status of the employer share). It is routinely used by 

corporate America because it shifts costs to Federal taxpayers. However, it makes no sense for 

the Federal government itself, because it takes from one pocket to put into the other. From an 

insurance design standpoint, in a competitive system like the FEHBP premium conversion is a 

disaster, because it attenuates the already weak incentivcs for enrollees to choose more frugal 

plans. Assuming that the marginal tax rate of a postal worker is about one third on average (this 

includes OASDI taxes and State income tax), the 16.5 percent employee share of premium 

becomes more like 10 percent. 

Unfortunately, the Office of Personnel Management copied this mistake several years after the 

USPS led the way. It is hard to estimate with any precision the effects of this policy over the 

years, but it is likely that it has led to avemge premium increases, compared to what they would 

otherwise have been, of close to half a percent a year, or even more. Total FEHBP costs are 

likely several billion dollars a year higher than they would have bcen without premium 

conversion. There is dramatic confirmation of the relativcly weak CUlTent incentives in today's 

8 
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FEHBP in the failure of the several consumer-driven and high deductible plans-almost all of 

which arc excellent buys-to attract more than about one percent of total FEHBP enrollment. 

What the USPS Could Do Under Current Law 

As the discussion ab(we suggest.s, the FEHBP could generate much larger savings than it does 

now. Several years ago I developed a table to show Federal agencies how much they could save 

if they make CHECKBOOK's Guide to Health Plalls for Federal Emplovees available online to 

their employees, and effectively encouraged its use during Open Season. The key point is that as 

much as 75 percent of each enrollee's premium is paid by the employing agency, through its 

Salmies and Expenses account. While the table is slightly dated, and understates potential USPS 

savings (where the contribution rate is now as high as 83.5 percent), the potential savings are 

rather substantial, to say the least. As the table ShOll'S, for every employee who switches from 

one of the dozen highest cost pl,ms to one of the dozen lowest cost plans, the average saving is 

roughly $2,000. Assuming enrollment choices arc stable, which they are in the FEHBP, this is 

not a one time saving to the agency, but one that continues year after year. 

Agency Savings Potential 2010 

Biweekly Saving from Annual Saving from 

Biweekly Govt Contribution Switch Switch 

I Family Self I Family Self I Family Self Premium Premium Saving Saving Saving Saving 

Govt Contribution for 12 

Highest Cost Plans in DC 

Area (Maximum Govt 

Contr) $167.61 $376.04 

Government Contribution & Savinos Under 12 Lowest Cost Plans in the DC Area: 

Mail Handlers Value 

Option $82.68 $197.12 $84.93 $178.92 $2,210 $4,650 

Kaiser Standard $100.49 $231.13 $67.12 $144.91 $1,750 $3,770 

Aetna Healthfund HDHP $103.51 $226.68 $64.10 $149.36 $1,670 $3,880 

Mail Handlers HDHP $107.60 $243.81 $60.01 $132.23 $1,560 $3,440 

GEHASt $111.08 $252.41 $56.53 $123.63 $1,470 $3,210 

United Healthcare HDHP $113.38 $253.29 $54.23 $122.75 $1,410 $3,190 

APWUCDHP $116.55 $262.20 $51.06 $113.84 $1,330 $2,960 

GEHA HDHP $131.82 $301.08 $35.79 $74.96 $930 $1,950 

United Healthcare CDHP $135.45 $299.84 $32.16 $76.20 $840 $1,980 

Blue Cross Basic $139.52 $326.75 $28.09 $49.29 $730 $1,280 

Aetna Open Access Basic $145.62 $340.79 $21.99 $35.25 $570 $920 

Aetna Healthfund CDHP $145.73 $347.75 $21.88 $28.29 $570 $740 

Average government savings under these 12 plans: I $1,250 I $2,660 

Average for Self and Family Combined: I $1,960 I 

1 havcn't had time to make these calculations more precise for the USPS, or to reneet current 

postal employce plan enrollments, but a ballpark estimate would be that if one half of postal 

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employees could be persuaded to switch from one of the higher cost plans (over one third are in 

Blue Cross Standard option, for example) to one of the lower cost plans, 250,000 employees 

times a USPS saving in excess of $2,000 each would bring in $500 million in savings in the first 

year alone. And this saving would put employees in good plans, not the stripped down versions 

the USPS is now proposing. 

Here is a simple suggestion: The USPS could offer a two hundred dollar year-end bonus, perhaps 

as a Health Savings Account, to every employee who made such a switch in the next Open 

Season. 

This is but one option under current law. There are others. For example, the USPS and the postal 

unions could collaborate on a premium contribution ref 01111 similar to the one I recommended in 

Putting Medicare Consumers in Charge: Lessons from the FEHBP. Thc basic idea is that the 

government contribution could be 100 of the cost of a lower benchmark, such as 70 percent of 

the avcrage of all plans' total premium cost. This would actually reduce the employee share of 

premium for the most frugal plan choices. But it would raise premiums for those in the higher 

cost plans. Postal workers themselves would decide which plan to choose, from among the wide 

set of choices offcrcd today (almost two dozen plan options throughout America, not just in the 

DC area). Over time, workers would gravitate to lower cost plans and the USPS would save a 

great deal of money. 

The Good News About the USPS Retirement Proposal 

The one good thing that I see emerging from the USPS proposal is its focus on the growing 

problem of Medicare/FEHBP premium and benefit coordination. 

Medicare was created over 40 years ago, and the FEHBP over 50 years ago. The design of each 

has not significantly changed since its inception, with the major exception that Medicare has 

added plivate plan alternatives and a system of choice based on the FEHBP model in Medicare 

Advantage, as well as a prescription drug benefit. Original Medicare remains frozen in the time 

warp of vintage 1960 insurance patterns (e.g., the nonsensical bifurcation between hospital and 

physician costs, and the failure to use networks to control costs). The FEHBP has aged far more 

gracefully, with a market driven structurc that readily adopts the latest and best insurance 

practices. But neither program has made any sensible accommodation to the existence of the 

other. 

Absent legislative rcfol111, OPM and the plans have stmggled to create some kind of 

coordination. Unfortunately, the one they chose creates a major problem. All but one of the 

national fce-for-service plans in the FEHBP offer age-65 enrollees a seemingly wonderful 

benefit enhancement. The plans promise that if the enrollee has both Medicare Parts A (hospital) 

and B (physician), all hospital and physician care will be free-no deduetibles, no coinsurance, 

and no copayments. Not only that, all this medical care will be free whether or not the enrollee 

uses preferred providers- network constraints go away. What could be wrong with this 

wonderful benefit enhancement? Indeed, the great majority of retirees elect to pay the Medicare 

Part B premium at age 65, and enroll in one of the national fee for service plans. 

This wonderful coverage comes, however, at a high price. In 2012, the total premium cost for 

the most popular choice in combination with Medicare, Blue Cross Standard Option, will cost a 

retired couple over $7,500 in premium. This is a "for sure" expense, whether or not they ever see 

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a doctor (of course, total cost is far higher, with most hidden in the government premium 

subsidies). 

This same couple was most likely enrolled in Blue Cross until age 65, and was satisfied with its 

good benefits and reasonable premium. What changed upon turning age 65 that impelled them 

to pay an extra $2,400 a year for two Part B premiums? They do get that reduced cost sharing, 

and the ability to leave the network without penalty. However, CHECKBOOK's Guide estimates 

that in 2012 the net effect of joining Part B is to cost the average retired couple in Blue Cross 

Standard option more than $1,000, on average. The answer is that this decision is rational for that 

couple only because existing law is ilTational. 

Of greater importance to the program and to the United States Treasury, this decision is 

expensive. That retired couple has no incentive to be frugal in any way in making decisions 

about any kind of health care other than prescription drugs and dental care. Unlimited provider 

visits arc free. The most expensive provider in the nation is free. The most discretionary 

surgical procedure is free. Durable medical equipment is free. Every conceivable medical test is 

free. Thousand dollar MRI and CAT scans arc free. If an additional scan \vould show progress, 

the price is right for the second. 

Based on robust research findings on the effects of cost sharing incentives, each person enrolled 

in a wraparound FEHBP plan and Medicare Parts A and B costs the Federal government 

somewhere on the order of 15 percent or more, or $1,500 or more, in unnecessary medical care 

utilization (for the source of this conservative estimate, see Jeff Lemieux et ai, "Medigap 

Coverage and Medicare Spending: A Second Look," in Health Affairs Volume 27, Number 2, 

March/ApriI2008). With approximately 1.5 million Medicare enrollees (both single and 

couples), the Federal government loses more than $2 billion a year in increased utilization under 

the cunent system. Most of this cost falls on Mcdicare (which pays first) but as much as a half 

billion dollars a year falls on the FEHBP. And it falls disproportionately on plans like Blue Cross 

Standard Option, because they attract a disproportionate number of Medicare enrollees. 

Meanwhile, it appears that increasing numbers of age-65 retirees are deciding not to sign up for 

Medicare Part B. They calculate, eoneetJy, that they will save substantially in most years by not 

having to pay two sets of premiums. There are alternatives, such as suspending FEHBP 

enrollment, paying only one set of premiums, and enrolling in a Medicare Advantage plan. 

Today, all Medicare Advantage plans offer very good value (for example, they all have good 

catastrophic protection), and paying one premium is far better than paying two premiums. But 

very few even know this option exists, and even fewer choose it. 

The trend of few retirees signing up for Part B will accelerate as more and more higher income 

retirees face the Medicare income-tested Part B premium penalty (almost all GS-15 or highergraded retirees who arc single will pay the higher income-tested premium if they enroll in Part 

B). Every such decision actually saves the Federal government money by reducing incentives for 

wasteful overutilization, but those savings accrue primmily to Medicare, not the FEHBP. The 

effect on the FEHBP is to raise premiums overall, and especially in those plans that 

disproportionately aUract retirees (e.g., Bille Cross Standard Option and NALC). 

FEHBP plans individually and the program as a whole would benefit if many more Medicareeligible enrollees sign up for Part B. Most of this saving would, however, be offset by wasteful 

overutilization if current benefit design remains nnchanged. 

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There is a major alternative. Instead of enriching benefits so far as to eliminate all hospital and 

physician cost sharing, in a decrcasingly successful effort to induce Medicare participation, plans 

could instead directly subsidize Medicare Part B premiums. Ideally (from a government-wide 

and taxpayer perspective) plans would be strongly discouraged or even prohibited from 

improving physician and other ambulatory cost sharing, but instead encouraged to add benefits 

that are not covered by Medicare Parts A and B, such as better prescription drug coverage, vision 

care, dental care, and improved hearing aid coverage. (That the government's no-cost standalone 

dental plans would lose business, and that OPM's longstanding policy of discouraging dental 

benefits would be reversed, should be of no concern whatsoever since hundreds of millions of 

dollars in actual real savings to both enrollees and the taxpayer would be involved. Alternatively, 

the dental subsidy could be directed towards "free" enrollment in those plans.) 

Viewed from a benefieiary perspective, the ideal result would be no-cost Part B coverage, no 

change in cost shating for hospital, medieal, and drug benefits based on Medieare coverage (that 

is, most benefits would be identical pre- and post-65, at1d modest additional benefits (such as a 

dental fund or premium subsidy of several hundred dollars) not available pre-Medicare. Take-up 

would be near 100 percent (why would anyone decline a free benefit?), and all enrollees would 

directly gain more than they do under the eUlTent wrap-around scheme, as well as retaining the 

ability to go out of network should they so choose, using the Medicare Part B benefit. 

Under such a reform, there would have to be a one-time amnesty from the Medicare penalty for 

delayed enrollment or, better yet, Medicare would adopt the Part D innovation of allowing 

penalty-free late enrollment for anyone who had been enrolled in comparable or better 

"creditable coverage." (This last innovation would benefit Medicare in all situations where 

employers such as State or local governments had lieh benefits post-65, as many do.) 

Among the other benefits of such a reform, it would encourage retirees to remain in HMO plans, 

since there would no longer be an advantage for enrolling in national fee-for-service plans. As a 

result, thc FEHBP would benefit from the supcrior cost control exercised by HMO plans. (At 

present, about one third of employees enroll in HMOs, but most older retirees migrate to the 

"free" care of the national plans and less than one tenth of annuitants are enrolled in HMOs.) 

Such a program could and should be voluntary. Compulsion is not needed if incentives are 

properly aligned. Almost any version would be easy for plans to administer, as they currently 

serve large numbers of retirees both under and over age 65, with every conceivable combination 

of Medicare coverage, including even a few retirees and survivors in their 80s and 90s who have 

no Medicare coverage at all. 

And if this change were made for the FEHBP program as a whole, the cun'ently required USPS 

contribution for unfunded retiree hcalth care costs would decrease substantially, thereby directly 

benefiting the solvency of the USPS without massivcly disrupting either the FEHBP and its 8 

million enrollees and dependents, or reneging on retirement promises made in law to current 

postal retirees. 

Conclusion 

If Medicare/FEHBP benefit and premium coordination are not reformed, the FEHBP is likely to 

see costs surge over time. I urge the Congress to think "out of the box" in assessing the current 

state of the FEHBP and possible refoon options like these. There is plenty of practical and 

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analytic help to be found in the CBO, OMB, GAO, and OPM itself. I wish you success in 

making needed reforms to this vital program. It is not aging well, and the USPS proposal, while 

badly Hawed, demonstrates the importance of refonn for the program as a whole. 

It is clear that the main goal of the USPS is to reduce its costs of financing retiree health costs, 

and the USPS is apparently even willing to take on the substantial financial burden of an aging 

and increasingly expensive work force to get that relief. But it is neither necessary nor sensible to 

do anything remotely so drastic as dismantling the FEHBP to achieve the savings it needs, and 

possibly even higher savings. 

Thank you for the opportunity to testify today. 

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Questions for 

Mr. Jonathan Foley 

Director. Planning and Policy Analysis 

U.S. Office of Persomlel Management 

Chairman Blake Farenthold 

Subcommittee on Federal Workforce, U.S. Postal Service and the Census 

Committee on Oversight and Govemment Refonn 

Hearing: "TIle Federal Employees Health Benefits Program: 

Is it a Good Value for Federal Emplovees"" 

1. Is the FEHBP is of sufficient quality to recruit and retain the best and brightest civilian workforce? 

The FEHB Program is the largest employer-sponsored health insurance program in the country. 

With low administrative casts and over 230 different plans. the FEHB Program is an efficient~y 

administered program which offers many choices to Federal employees. However, aver the years, 

the health insurance marketplace has changed and the law, (LS cUiTently lw'itten, prevents the FEHB 

Programfi'om implementing many of the changes that have occurred in the commercial 

marketplace. OPM's legislative proposals would align the FEHB Program with best practices 

a.ffered in the private sector; thus ensuring that the Federal govemment can continue to compete 

'with the private sector in order to recruit and retain the best and brightest civilian workforce. 

2. AFGE's testimony suggests that the President's proposals would "have a hannful effect on 

many of the most vulnerable enrollees" and would "shift costs to enrollees without improving the 

program or lowering its overall costs at all." What is OPM's response to this criticism'? 

OPM respectfilily disagrees with that assessment. We believe the changes we are proposing, if 

enacted, will keep the program on a path to lang-term financial viability while offering a choice 

of health care coverage that will meet the needs of Federal employees, retirees, and their 

dependents. We believe we can keep health care cost growth as low as possible through good 

stewardship qfthe program with prudent legislative changes when necessary. 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

3. What are OPM's short- and long-tenn projected changes in the factors affecting premium gro\\1h? 

Absent legislative change, how is OPM preparing to mitigate these factors? 

For both short and long term, the factor affecting premium growth is health care cost trend. 

which OPM projects to be between 5 and 6percent. Absent legislative changes. OPM will 

continue to: 

• work with carriers to effectively manage costs by, for example, encouraging contracting 

with effective delivery system models such as Patient Centered Medical Homes; 

• set goals for carriers to achieve drug trends low by encouraging the use of generic drugs 

and by managing specialty drug trend; 

• work with carriers to increase participation in wellness programs and other programs to 

help individuals better manage chronic conditions; and. 

• incentil'ize calTiers to improve the quality of care prOVided to Federal employees, 

retirees. and their dependents by taking steps such as reducing preventable 

complications, reducing the use of commonly overused tests and procedures, and by 

encouraging the Meaningful Use of health information technology. 

4. The President's Budget includes a proposal allowing OPM to contract for additional health plan 

types, producing mandatory cost savings of $260 million in direct spending over ten years, 

a) If the proposal were enacted, how many enrollees will migrate from existing plans to additional 

health plan types? 

Until benefits and premiums are negotiated, the migrationJrom existing plans is difficult to project. 

We anticipate that the migration will be gradual because enrollees do not shift from their current 

plans readily and the development of new health plans will occur over time depending on local or 

regional market conditions. 

b) How will OPM guard against risk segmentation with respect to additional health plan types? 

OPM manages risk segmentation through the negotiation of benefits and rates with carriers. As 

discussed below, OPM currently negotiates with health plans to ensure that the benefit design and 

areas served are balanced and in the best interests of the FEHB program. 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

c) What impact would a new plan's selection of certain geographic markets have on national plan 

premiums? 

T1lere has always been a risk of cheny picking geographic areas within the relIE program given 

that there are more than 200 local health plan options competing with national carriers each of 

whom has a single national price. OPM has addressed this risk through negotiating balanced 

service areas with local plans. Plans may propose to serve the most prqfilable area, but, through 

negotiation, OP M expands the plan's service area to serpe enrollees in less profitable areas. OPJvf 

would employ a similar negotiation strategy with nevI' regional plans. 

Overall, OPM believes that the impact q{the expansion of FEHB plan types will occur over a 

number q{vears and will not have a dramatic impact on markets. Establishing a new health plan 

takes time in part because enrollees do not change plans frequently and because del'eloping the 

infrastructure to support a plan takes time and money. Expansion of FEHB plan types is a modest 

reform that should improve competition amongst plans without radically altering the number or 

quality of health plan choices. 

5. What percentage ofpJans are meeting OPM's goal of issuing 80 percent of drugs in generic form? 

What contingencies has OPM considered if earners' existing efforts do not achieve this goal? 

Based on data supplied by the carriers, in 2012,65 percent (,(health plans with 26 percent of the 

FEHBP population are achieving this target. OPM will work with plans that do not expect to meet 

the generic dispensing goal to make changes to their benefits or administrative programs to help 

them achieve the 80 percent goal in 2014. The OPM goalf()r 2013 was 75 percent generic 

dispensing rate. Based on data supplied by the carriers, we expect that 94 percent qf plans will 

achieve that goal this year. Plans will continue to increase their generic dispensing rate as more 

drugs come qf/patent. 

6. How is OPM meeting its goal of maintaining the specialty drug trend at 22 percent of less? What is 

the cost trend for the last three years? How will OPM contain future growth in spending on specialty 

drugs? 

Recent cost trendfor specialty drugs in the FEHBP is displayed below: 

2013 (projected) - 16% 

2012 (estimated) 17% 

2011-19% 

2010-22% 

OPM will work with carriers to administer benefit changes or program changes that will encourage 

the better management q{specia/ty drug trend. S011le of the programs that carriers are using 

include: the use q{specialty drug pharmaCies; step therapy, to assure that first-line therapies are 

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Questions for 

'\1r. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

tried file,'!, before newer and more expensive therapies, wilel1 appropriate: and prior authorization, to 

assure that specialty drugs are used onlyfor conditions in which their safety and efficacy has been 

demonstrated. Specialty pharmacies achieve savings by negotiating deeper .';al'ings with the 

mamifacturers as well as prol'iding an increased lerel of customer service to members using these 

drugs, 

7. In its 2013 Call Letter, OPM notes that enrollees can achieve even greater savings on prescription 

drugs with minimal disruption through either a narrower pharmacy network or preferred pharmacy 

network. Is this proposa1likely to produce savings for the enrollee? How does this proposal compare 

with private sector practice? 

Based on information ji-om Pharmacy Ben",[its Managers (PBMs), OPM believes savings will accrue 

to the program through narrower or pr.eferred pharmacy networks. If enrollees' cost sharing is 

calculated through coinsurance, enrollees will directly experience savings in their retail prescription 

dmg purchases. Enrollees may also experience savings through their premiums because the cost of 

prescription drugs is a significant portion (approximate~y 30 percent) of the total premium. Large 

employers are reducing their networks in order to help them control their health care costs. fIa 

carrier proposes to contract with a PEMfor a narrower network, OPM requires thaI the can'ier 

demonstrate how reasonable access to pharmacy services will be maintained for enrollees. 

8. Given that many FEHBP participants purchase prescription drugs through a Pharmacy Benefits 

Manager in their existing plans, how would simply changing the PBM relationship produce savings? 

How much of the prqjected savings corne from a more restrictive formulary? 

Each carrier in the F'EHBP negotiates their PBM contractfor their population only. OPM can 

achieve savings by contracting with a single PBM through: 

• economies of scale by negotiating on behalf of all Federal employees, retirees and 

dependents; 

• administrative savings resultingji-om one contractual relationship (OPM/PBM) versus many 

(100 carriers/numerous PBAls);and, 

• consistent strategies across the program to reduce costs and improve quality. 

The projected savings were not based on adding a more restrictive/ormulaty. 

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Questions for 

Mr. Jonathan J<'oley 

Director. Planning and Policy Analysis 

U.S. Office of Personnel Management 

9. In the last decade, the average annual growth in FEHBP premiums has been generally lower than 

the gro'N1h for other health care purchasers. Please explain the extent to which OPM used the FEHBP 

reserve accounts to offset premium increases for the last ten years, by year. 

All plans in the FEHB use reserves to mitigatefi;ture premium increases. Historical{l' resen'es hare 

held level in relative terms though there are fluctuations both up and down as the result o.r program 

experience (e.g.. lower/higher utilization than anticipated). When rese",es rise. we can anticipate 

lower future premium increases. while low reserve levels indicate higher future premium 

increases. In general. OPM actuaries negotiate rates to hold three to four months reserve. 

The following table shows the historical unobligated reselTe levels jar all plans in the program as o.r 

the end of the calendar year. 

Months of Unobligated 

Year Reserves 

2011 4.97 

2010 4.36 

2009 4.06 

2008 4.10 

2007 4.54 

2006 4.92 

2005 4.36 

2004 3.78 

2003 3.42 

2002 2.85 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

10. The FEHEP has two premium tiers, individnal and family. OPM is proposing a third premium tier 

of "self plus one." OPM estimates this proposal, combined with coverage for domestic partners, would 

result in mandatory savings of $5.2 billion over ten years. Please provide the assumptions used as the 

basis for this estimate. 

Key Assumptionsfor Self Plus One coverage: 

• Self plus one coverage is estimated to dra;v 1.159.000 enrollments Fom existing self and famiZv 

coverage program wide 

337KJi"om NOli-Postal Actives 

III Kfrom Postal Actives 

7llKJi"om Annuitants 

II. What, if any, impact would the addition of Self Plus One as an enrollment category have on the 

Self and Family premium? 

As a result of the introduction of the self plus one option, we expect each carrier to make adjustments 

to their self on(v and self andfamily enrollment options. Adjustments will vary by carrier depending 

on their mix of enrollees. but we expect the overall adjustment to selland family options to be about 7-

8%. 

12. The FEHBP requires agencies to report to carriers on a quarterly basis the names of enrollees, and 

carriers to resolve any enrollment discrepancies. OPM's 2013 call1ctter states that carriers "must 

ensure they have programs in place for prevention and prompt collection of improper payments. 

a) How does OPM ensure enrollees and their dependents are eligible for health benefits? 

The Federal agencies, not OPM. are responsible jar making decisiolls about whether an 

employee's fami~v member is eligible for coverage. Each agency has the authority to request 

whatever documentation it believes is necessary to determine afomily member's eligibility. OPM 

expects the agencies to take reasonable actions. 

The Standard Form (SF) 2809 (Health Benefits Election Form) warns employees that any 

intenlionafZvfalse statement or willful misrepresentation (such as listing ineligible individuals as 

family members) is a violation oftlie law punishable by afine of not more than $10..000 or 

imprisonment of not more than 10 years. Electronic enrollment systems contain similar warnings. 

flan agency suspects that a persolliisted is not an eligiblefamily member. the agency may 

request documentation such as a marriage license or birth certificate. ff the employee refilses to 

provide documentation, the agency may refer the case to their Inspector General jar 

investigation. 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

Foster children are covered if the employee certifies that certain requirements arc met. If an 

agency has concerns over whether the requirements hare been met. it may request documentation 

ji-om the employee. 

OPM alloYl:~ the FEHB plans to add newfami(v members to existing self andfami~v enrollments. 

The plans are allowed to request documentation proving the person is an eligible fami(r member. 

OPl,,! eneourages plans to request the documentation. 

b) How much is lost each year to these improper payments? 

There is no evidence to support a substantial rate of improper payments due to ineligible 

dependent coverage. However, OPM is worl..ing to reduce the number (if ineligible employees, 

annuitants andfamity members in the FEHB Program. 

c) What steps is OPM taking to reduce improper payments through eligibility verification? 

OPM has made an extensive effort to ensure that on~v eligible employees, annuitants andfami(v 

members are covered under the FEHB Program. 

The FEHB Centralized Electronic Enrollment Reconciliation Clearinghouse (CLER) went 

operational on June 1, 2002. CLER is a computer match program that compares the FEHB 

enrollment records of federal agencies against enrollment records ofFEHB Program carriers. 

CLER identifies discrepancies in the records and posts discrepancies on a web site for the 

agencies and carriers to use in resolving enrollment discrepancies. 

• In June 2002 the error rate (calculated by dividing the number of records where a 

discrepancy has been identified by the number of records submitted) for the carriers was 

15%. Currently the error rate for the carriers is 2%. 

• In June 2002 the carriers had approximately 140,000 more enrollment records than did 

the payroll offices. Current~)l that number is down to approximately 25,000. 

We continue to work with both the agencies and the can'iers to lower the error rate and the 

number of excess enrollment records. 

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Questions for 

"ir. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

13. The OPM Inspector General has long recommended ending the exemption of the FEHBP from the 

Anti-Kickback Statute. characterizing it as "the single most valuable meaSUte that can be taken to 

combat frand and abuse against the FEHBP by health care providers." 

a) Did OPM consider the Inspector General's recommendation in developing its legislative proposal 

to modernize the FEHBP? 

The Administration's proposal 10 modernize the FEHEP is focused on providing OPM the 

flexibility 10 keep pace wilh the changing health insurance marketplace through more competition 

with more diverse health plan choices. affordabilityfor enrollees, and opportunity 10 use best 

practices ji-om the private sector. Changing the lau' to app~v the Anti-Kickback Statute to the 

FEHBP is not included in this proposal. 

b) How would implementation of this recommendation improve the integrity of the FEHBP? 

In the October 1.2011, - March 31, 2012, Semi-annual report to Congress, the Inspector General 

addressed this issue. The Inspector General's message noted that the FEHEP was specifically 

excludedji-om the Anti-Kickback Statute and that activities that constitute criminal behavior 'when 

committed under other Federal health care programs are not punishable if they accur in the 

FEHEP. The impact on the integrity of the FEHEP L~ that prosecutors pursuing cases under the 

Anti-Kickback Statute are often reluctant to expand their cases to include similar False Claims 

Act violations against the FEHEP by the same providers. Thus, we are rendered less able to 

protect the FEHBP against violations by providers. 

14. AFGE's testimony discusses the 40 percent excise tax the Affordable Care Act imposes on certain 

high cost health plans, describing it as a "regressive tax on federal workers." 

a) How will OPM manage this tax within the FEHBP? 

This tax is not expected to take ",{{ecluntil the 2018 plan year. OP1"fwill work with FEHE 

participating plans to ensure that they meet the requirements of the Affordable Care Act. The 

Internal Revenue Sen'ice has /lot issued guidance 0/1 the tax and plans will need to review such 

gUidance to ensure compliance. 

b) Will this tax be passed along to employees in the form of higher premiums? 

Once the Internal Revenue Sen'ice issuesfinal guidance on the tax, we will work with the plans to 

determine the impact on the FEHE Program. 

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()uestiollS for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

15. What percentage of federal workers and retirees decline FEHBP coverage because of affordabililY 

concems? Would raising the premium cap help address this concern? How would such a proposal 

potentially increase more competition among low cost plans? 

For 2008, 6.6 percent of Federal employees were uninsured des pile being eligiblefor FEHB 

coverage. While we can 'f determine the various reasons for this choice. }Fe know that this 

population of uninsured Federal employees has a higher concentration of lower income employees 

than those employees in higher income brackets. Raising the cap on the government contribwion 

(currently 75% of premium) should benefit those who choose low cost plans and potential~y attract 

more IOH' cost plans to participate in the FEHB. 

16. OPM has stated that it wonld use data to recognize plans that are quality leaders on its website. 

Medicare uses similar data in several ways, inclnding letting consumers compare hospital quality and 

developing 5-star rankings for Medicare Advantage plans. Does OPM intend to use this quality data to 

develop similar comparison or ranking tools? 

OPAl's programfor quality measurement is described in Carrier Letter 2012-25 (available at 

htlp://ll'ww. opm.gov/healrhcare-insumncel'i/Calthcare!carriers/20 1212012-2 5.pdf). All Federal 

Employees Health Benefits Program Carriers collect and report a set of quality measures which 

assess health plan peiformance in key areas such as cancer screening, diabetes care, cardiovascular 

risk management, prenatal care, alld prompt follow up afier mental health hospitalization. Results 

are scored in comparison to national benchmarks for commercial PPO and Hlt.10 plans. OP.~1 has 

included plan HEDIS scores on our website since 2006 for HMOs and since 2009 for fee-for-service 

plans. Beginning in the fall of 20 13, carriers attaining top scores will be recognized by OPAl as 

"Exemplmy" and those improving by 20% or more be/ween years will be designated "most 

improved. " 

Federal employees can consider plall peliormance in their choice of plans at Open Season. 

Healthcare Effixtiveness Data and it!formation Set (HEDIS) metrics by plan are displayed at 

http://>;'''%'. opm.govlhealthcCl/·e-insurance/heal thearel quality-healthcarelhedisl2 012lindex.aspx 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

17. aPM wants insurance carriers 10 reduce hospital readmissions by 20 percent and cut preventable 

"hospital acquired conditions," such as falls, by 40 percent. Medicare has developed value-based 

pay1nent systems that penalize providers for failing to meet similar goals. Does aPM intend to develop 

a similar program? 

Beginning in 2009. OPAl encouraged proven strategies to reduce preventable medical errors and 

allowed FEHB carriers to deny paymentfor provider claims{or the preventable Ho;pital-Acquired 

Conditions as long as members were held harmless. OPM does not impose any other penalties for 

this pwpose. 

OPM's current approach to reducing readmissions. prevel1lahle harms, and prematurity is detailed 

in Carrier Letter 2012-17 (available at http://w\1w.opm.f;ov/heaithcareinslirance/heaithcare/ca17'iers/2012/2012-17.pdf). In 2012. plans provided data on readmission 

rates, Neonatal Intensive Care Unit days, and preventable harm rates and, in 2013. plans will add 

Plan All-Cause Readmission rates to the required quality metrics. Plan performance will be 

benchmarked and recognized as described in the response to questioll 16~ This year, we also asked 

carriers to consider hospital peljormance on measures used by CMS of hospital aequired conditions 

and early elective delivelJi as important/actors in the choice o/network/acilities. 

18. AFGE's testimony recommends Congress establish a statutory advisory council for the FEHBP, 

modeled on existing advisory councils for the Thrift Savings Plan and the Federal Salary Council. 

Would an advisory council impose additional costs on the FEHBP? How would a statutory advisory 

council improve the value of the FEHBP? 

During meetings held at the end 0/2012 and beginning of 20 13 to discuss the FEHB modernization 

proposals, OPM and employee organization and union representatives discussed the creation of an 

FEHBP advisOlJi committee. In particular, OPM personnel inquired about the Ileed for such a 

committee. the composition of the committee, andji'equency of meetings. Both the employee 

organizations and unions expressed an interest in the creation of such a committee. As a result, 

OPM has created an F£"HB Program Advisory Group and the jlrst meeting is scheduled in May 

2013. 

The Fl.7lB Program Advisory Group will meet on a semi-annual basis to share information and 

ideas about the FEHB Program. Although not a decision-making body. the establishment of this 

Group will improve the flow 0/ iliformalion between OPM and FEHB enrollees. Representatives 

from unions/employee organizations will provide feedback on OPM's FEHB initiatives based on the 

pri!{erel1ces of their respective members. Membership in this group will be open to any 

representative of a union/employee organization whose members are Federal employees or 

annuitants. OPM does not believe that an advisory group of the type described above will impose 

additional cost on the ageney. 

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Questions for 

Mr. Jonathan Foley 

Direetor, Planning and Policy lillalysis 

U.S. Office of Personnel Management 

Delegate Eleanor Holmes Norton 

Subcommittee on Federal Workforce, U.S. Postal Service and the Census 

Committee on Oversight and Government Reform 

Hearing: "The Federal Employees Health Benefits Program: 

Is it a Good Value for FederaIEmployees?" 

The American Federation of Government Employees (AFGE) has suggested allowing federal 

employees the opportunity to provide input on the policies of the Federal Employees Health Benefits 

Program (FEHBP). AFGE suggested a statutory advisory council tor FEHBP, based on the model of 

the Employee Thrift Advisory Council that advises the Federal Retirement Thrift Investment Board on 

the Thrift Savings Plan and the Federal Salary Council that advises the Administration on federal pay 

issues. 

I, In light of these preeedents in comparable federal programs, would OPM object to such an entity or 

would it recommend such an entity? Please also state the reasons for your position. 

During meetings held at the end af20l2 and beginning of2013 to discuss the FEHB modernization 

proposals, OPM and employee organizations and unions representatives di~cussed the creation of an 

FEHBP advisOly committee. In particular, OPM personnel inquired about the need for such a 

committee, the composition of the committee, andfrequency of meetings. Both the employee 

organizations and unions expressed an interest in the creation of such a committee. As a result, 

OPM has created an FEHB Program Advisory Group and the first meeting is scheduled in May 

2013. 

The FEHB Program Advisory Group will meet On a semi-annual basis 10 share il'{formation and 

ideas about the FEHB Program. Although not a decision-making body, the establishment of this 

Group will improve the flow of information bem'een OPM and FEHB enrollees. Representatives 

from unions/employee organizations will provide feedback On FEHB initiatives based on the 

pr4erences of their respective members. ~Membership in this group will be open to any 

representative ofa union/employee organization whose members are Federal employees or 

annuitants. 

OPM does not believe that an advisory group of the type described above will impose additional cost 

on the agency. 

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Questions f1:)r 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

Representative Danny K. Davis 

Member of the Committee on Oversight and Govemment Reform 

Hearing: "The Federal Employees Health Bencfits Program: 

... __ 18 it a GoodVaJuc for Federal Emplovees?" 

The Federal Employees Health Benefits Program (FEHBP), administered by the Office of Personnel 

Management (OPM), is the largest employer-sponsored health insurance program in the country and 

insures approximately eight million people. Since the federal government and FEHBP enrollees share 

the cost of the program's premiums -with the government and emollees generally paying about 70% 

and 30% of premiums, respectively- it is critical to safeguard the program from frand, waste. and 

abuse. 

1. Does OPM have estimates for the past 3 years of the amount and percentage (compared to total 

premiums paid or benefits provided) of money that is lost each year due to fraud, waste and abuse in 

the FEHBP? If so, please provide. 

OPM does not have comprehensive estimates of Fraud. Waste and Abuse in the FEHBP: however. 

the agency's Improper Payments Reportingfor FEHBP includes amounts identified and recovered 

as a result of Investigative settlements and litigation. which are the combined efforts of the OIG. 

Department of Justice. other law enforcement, FEHB Can'iers, and OPM Contracting Officers. 

Investigative recoveries are often the result of research. negotiation and/or negotiations that have 

taken place over several years. but are reported in the year the recoveries were made. 

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Questions for 

Mr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

The below table reflects Investigative recoveries for the last 5 years as a percentage of FEHB 

Premiums during the same period. 

Improper Health Care Overpayments i 

. 

I Year 

Premiums Invest. %of 

(M) Recovered (M) Premium 

2012 $42.558.5 $]67.0 0.39% 

2011 $40.493.0 $46.8 0.12% 

2010 I $38,778.8 $23.1 0.06% 

2009 $37,093.9 $38.7 I 0.10% 

2008 $35,323.5 i 

$19.9 0.06% 

2. Please describe the typical or common situations in which fraud, waste, and abuse may occur in the 

program. 

Health care fi'aud cases are often time-consuming and complex, and may involve several health care 

providers, members or plans. Occasionally, multiple health insurance plans are being dejj'auded 

and, where appropriate, OPM's Inspector general coordinates investigations with other Federal 

agencies. OIG criminal investigations are critical to protecting Federal employees, annuitants, and 

members oftheirfamities who are eligible to participate in the FEHBP. instances offt-aud can vary 

widely to include such activities as the submission o.f false claims, double-billing, pharmaceutical 

marketing/irregularities, prescription fraud and more. 0/ concern are the growth of medical identity 

theji and organized crime in health care fraud, which has qtrected the FEHBP. 

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Questions for 

'lr. Jonathan Foley 

Director, Planning and Policy i\nalysis 

U.S. Office of Personnel Management 

3. What efforts have been taken by OPM to reduce the fraud, waste, and abuse in the FEHBl'? 

OYM exercises continuous oversight of can'iers in the FEHBP. Carriers are required to develop 

programs to assess their vulnerability to ji'aud and abuse and must have systems designed to detect 

and eliminate fi'aud and abuse if/ternan)' by carrier employees and subcontractors. by providers 

prl)1'iding goods or sen'ices to FEHB Membel:~. and by individual FEHB Members. The program 

must spec!!'/ provisions in place for cost avoidance as 'well asfi'aud detection, along with aiteriafor 

follow-up actions. Carriers must submit an annual analysis of the costs and benefits of itsfiYlud and 

abuse program to OPM. Carriers report on such items as: cases opened, dollars identified as lost 

and recovered, savings and prevented ross. referrals to law enforcement, cases referred to the Qflice 

of the Inspector General, and number of arrests and criminal convictions. OPly!'s OIG supports our 

endeavors to ensure compliance through its audit program in support of the notification, reporting, 

and other requirements outlined in the contract and other guidance to FEHBP carriers. 

OPM's administration of the FEHBP includes substantial controls, providing the fi'ameworkfor 

~ffective development, implementation, audit, reporting and oversight of Plans' Fraud and Abuse 

Programs. OPMI Healthcare & Insurance exercises continuous oversight of carriers in the FEHBP 

and, as an employer-purchaser on behaifofthe entire Federal community, OPM encourages carriers 

to adopt and aggressively follow. at minimum, the follo.,,!ing industry standards in their fi'aud and 

abuse programs: 

I. Anti-Fraud Policy Statement 

2. IYritten Plan and Procedures 

3. Formal Employee Training 

4. Fraud Hotlines 

5. Enrollee Education 

6. Fraud Protection Software 

7. Security to Protect Claims, A1ember, and Provider Information 

8. Patient Sa/ety 

Currently. the OPM Office of Inspector General (OIG) SU5pensioll and Debarment Team disciplines 

FEHB participating health care providers who have lost professional licenses. been convicted of a 

crime related to delivery of or payment for health care services, violated provisions of a Federal 

program, or are debarred by another Federal agency. These sanctions help assure that FEHB fonds 

will not be paid, either directly or indirectly, to such providers. 

14 
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Questions for 

;Vlr. Jonathan Foley 

Director, Planning and Policy Analysis 

U.S. Office of Personnel Management 

4. Does OPM have estimates for the past 3 years of the amount and percentage (compared to tOlal 

premiums paid or benefits provided) of money that is recovered each year from OPM's efforts to 

reduce fraud, waste, and abnse? If so, please provide. 

As noted earlier, thefi'aud and abuse program is based on efJective oversight qf OP] .. ! / Healthcare 

and Insurance's Contracting Officers. Thefocus is on plan administration of a program that is 

comprehensive. effective. and leverages proven components of both the public and private sectors. 

The presence qf strong controls to prevent fi'aud before it occurs to save funds before they are paid 

are alleast as valuable asfimds recovered, 'which may not indicate the existence of a comprehensive. 

effective program. That said. in our efforts to evaluate and upgrade FEHEP carrier oversight, 

includingfi'aud and abuse, we have identified opportunities to enhance the reporting requirements 

that plans use as the basis to provide Faud and abuse peljormance metrics to OPM and are working 

to update plan guidance in this regard. 

r support OPM's efforts to expand eligibility for FEHBP coverage to employee's adult children up to 

the age of26 and to employees of Tribes, tribal organizations, and urban Indian organizations and their 

dependents. However, in order to ensure that taxpayer dollars are wisely spent, I believe that OPM's 

efforts to reduce fraud, waste, and abuse in the FEHBP should include verifying the eligibility of 

dependents to receive FEHEP coverage. 

1. Please explain how OPM verifies the eligibility of dependents to receive FEHEP coverage. 

The Federal agencies, not OPM, are responsible for ma!cing decisions about whether an 

employee 'sfami(v member is eligible for coverage. Each agency has the authority to request 

whatever documentation it believes is necessary to determine a fami{v member's eligibility. OPM 

expects the agencies to take reasonable actions. 

The Standard Form (SF) 2809 (Health Benefits Election Form) warns employees that any 

intentionally false statement or wil(fu/misrepresentation (such as lLvting ineligible individuals as 

family members) is a violation q{the law punishable by afine of not more than $10,000 or 

imprisonment of not more than 10 years. Electronic enrollment systems contain similar warnings. 

If an agency suspects that a person listed is not an eligible Iami~v member, the agency may 

request documentation such as a marriage license or birth certificate. If the employee refoses to 

provide documentation, the agency may refer the case to their Inspector General for 

investigation. 

Foster children are covered if the employee certifies that certain requirements are met. If an 

agency has concerns over 'whether the requirements have been met. it may request documentation 

from the employee. 

OPM allows the FEHB plans to add new fami{v members to existing self and fami~v enrollments. 

15 
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Insert offset folio 98 here 81665.098

Questions for 

Mr. Jonathan Foley 

Director. Planning and Policy Analysis 

U.S. Office of Personnel Management 

TIle plans are allowed to request documentation proving the person is an eligible family member. 

OPM encourages plans to request the documentation. 

2. How does OPM prevent waste, fraud, and abuse with respect to dependent eligibility for FEHBP 

coverage? 

OPM has made an extensive effort to ensure that only eligible employees. annuitants andfamily 

members are covered under the FEHB Program. 

TIle FEHB Centralized Electronic Enrollment Reconciliation Clearinghouse (CLER) went 

operational on June 1, 2002. CLER is a computer match program that compares the FEHB 

enrollment records of federal agencies against enrollment records of FEHB Program carriers. 

CLER identifies discrepancies in the records and posts discrepancies on a web site for the 

agencies and carriers to use in resolving enrollment discrepancies. 

In June 2002 the el7'or rate (calculated by diViding the number of records where a 

discrepancy has been identified by the number of records submitted) for the cal?'iers was 

15%. Currently the error rate for the carriers is 2%. 

In June 2002 the carriers had approximately 140,000 more enrollment records than did 

the payroll offices. Currently that number is down to approximately 25,000. 

We continue to work with both the agencies and the carriers to lower the error rate and the 

number of excess enrollment records. 

16