U.S. POSTAL 

SERVICE

Proposed Health Plan 

Could Improve 

Financial Condition, 

but Impact on 

Medicare and Other 

Issues Should Be 

Weighed before 

Approval

Report to Congressional Requesters

July 2013

GAO-13-658

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-658, a report to 

congressional requesters

July 2013

U.S. POSTAL SERVICE

Proposed Health Plan Could Improve Financial 

Condition, but Impact on Medicare and Other Issues 

Should Be Weighed before Approval

Why GAO Did This Study

USPS has asked Congress to help 

restore its financial viability in part by 

enacting its proposal to create a USPS 

health care plan outside of FEHBP. 

This would result in the withdrawal of 

all postal employees and retirees 

(about 1 million people) from FEHBP. 

Under its proposal, USPS’s and postal 

employees’ and retirees’ share of 

premiums would first be established by 

USPS and then, for union-covered 

employees, in collective bargaining. 

USPS employee groups oppose or

have concerns about USPS’s proposal.

GAO was asked to review USPS’s 

proposed health care plan. This report 

discusses how the plan could affect 1) 

USPS’s financial condition, 2) postal 

employees’ and retirees’ benefits and 

costs, and 3) FEHBP and non-postal 

enrollees. GAO analyzed USPS and 

FEHBP data and interviewed officials 

from USPS, Office of Personnel 

Management (OPM), OMB, Treasury, 

CMS, employee groups, and FEHBP 

plans. See the following page for more 

discussion of the scope and 

methodology.

What GAO Recommends

As Congress considers USPS’s health 

care plan, it should weigh the plan’s

impact on Medicare and other issues, 

including establishing safeguards for 

USPS health plan assets and ensuring

FEHBP-comparable protections for 

USPS health plan participants. In a 

letter commenting on this report, USPS 

took no position on GAO’s 

recommendations. OPM and Treasury 

had no formal comments. USPS and 

Treasury provided technical comments 

that were incorporated where 

appropriate.

What GAO Found

The U.S. Postal Service (USPS) would likely realize large financial gains from its 

proposed health care plan, primarily by increasing retirees’ use of Medicare. 

Specifically, USPS estimates that its plan would reduce its retiree health benefit 

liability by $54.6 billion, thereby eliminating its unfunded retiree health benefit 

liability. The plan would also reduce USPS’s required total annual health care 

payments by an estimated $7.8 billion in the first year of implementation and by 

$33.2 billion over the first 5 years of implementation. USPS also projects that 

relative to the total annual health care payments it would expect to make

(reflecting its stated inability to make prefunding payments to fund retiree health 

benefits), its new plan would reduce its payments by $2.1 billion in the first year 

of implementation and $12.4 billion over 5 years. USPS also projects that its 

plan would increase the more than $550 billion that the federal government 

spends annually for Medicare by $1.0 billion in the first year and an average of 

about $1.3 billion annually in the first 5 years of its health plan—about 0.2 

percent of Medicare’s annual costs. GAO has previously reported that Medicare 

is on a fiscally unsustainable path over the long term. Additional costs resulting 

from USPS’s proposed plan would also have to be weighed alongside the fiscal 

pressure already faced by Medicare, but these costs have not been evaluated by 

the Office of Management and Budget (OMB) or the Centers for Medicare and 

Medicaid Services (CMS).

Some elements of USPS’s proposal would add uncertainties that could reduce

funds available for its employees’ and retirees’ future health care. 

• Investment of Health Plan Assets: One of USPS’s proposed options for 

investing health plan assets would increase the risk exposure of these assets 

by allowing investments in assets other than Treasury securities, such as 

stocks, as well as commodities, foreign currency, and other investments. If 

fund assets were invested in non-Treasury securities (including $46 billion 

that would be transferred under this option from the current Postal Service 

Retiree Health Benefits Fund), the fund may experience losses in a market 

downturn and would thus have reduced assets available for health care. The 

presence of non-Treasury securities in the portfolio would also raise issues 

as to the appropriate discount rate for determining prefunding targets for 

retiree health benefits.

• Transfer of Surplus Funds: USPS’s proposed option to transfer health fund 

assets to use for purposes other than health benefits, when assets 

supporting the USPS health plan exceed liabilities, is not fiscally prudent. If 

USPS were to consistently exercise this option to help maintain its financial 

solvency, it could result in an unfunded liability for retiree health benefits.

• Selection of Assumptions: Liability measurements are very sensitive to 

assumptions, and there can be professional disagreements over 

assumptions. USPS’s proposal could potentially allow for the use of overly 

optimistic assumptions, which could lead to inadequate funding for the health 

plan over time. This potential could be reduced by having assumptions 

selected by an independent third party.

View GAO-13-658. For more information, 

contact John E. Dicken at (202) 512-7114 or 

dickenj@gao.gov, Lorelei St. James at (202)-

512-2834 or stjamesl@gao.gov, and Frank 

Todisco at todiscof@gao.gov.
United States Government Accountability Office

Scope and Methodology

To describe the potential financial 

effects of USPS’s proposed plan, GAO 

reviewed USPS documents detailing 

key elements of the plan and estimated 

cost savings. GAO obtained 

documentation regarding USPS’s 

assumptions, methodology, 

calculations, underlying data, and 

projections and reviewed these for 

internal consistency and consistency 

with GAO’s prior work and for overall 

reasonableness, and discussed them 

with officials of USPS and 

representatives of the Hay Group, 

which USPS hired to prepare its 

projections. GAO used its actuarial, 

economic, and health care expertise 

and judgment to determine the 

assumptions and projections were 

sufficiently reliable for purposes of this 

review but did not independently 

validate them. GAO also met with 

officials from OMB and CMS to discuss 

the effect of USPS’s proposal on 

Medicare.

To determine the effect that USPS’s 

proposal could have on postal 

employees’ and retirees’ benefits, GAO

compared the package of services that 

USPS proposed to cover in the first 

year of implementation with the 

services covered in 2013 by seven 

selected FEHBP plans that had more 

than 75 percent of the total postal 

enrollment in FEHBP. To determine 

the extent to which employees and 

retirees would have the same legal 

protections related to employees’ and 

retirees’ benefits and costs under 

USPS’s proposed plan as they have 

within FEHBP, GAO reviewed draft 

legislation proposed by USPS and 

federal laws, regulations, and OPM 

guidance that apply to FEHBP plans.

To describe the effects of a USPS 

withdrawal on FEHBP and on 

nonpostal FEHBP enrollees, GAO 

used OPM data on postal and 

nonpostal enrollment in FEHBP in 

2011 to estimate the change in total 

program enrollment. GAO also used 

the data to estimate the effect on 

enrollment in each of the more than 

140 FEHBP plans.

GAO met with officials from USPS 

management and employee groups

and others to obtain their perspectives 

on USPS’s proposed health care plan.

What GAO Found (continued)

Under USPS’s health care plan as designed for year one, USPS employees and 

retirees would have coverage for a similar set of inpatient, outpatient, and 

prescription drug services as under selected Federal Employees Health Benefits 

Program (FEHBP) plans, which account for over 75 percent of postal enrollment 

in FEHBP. USPS’s proposed plan would also offer similar levels of coverage for 

many services, with some exceptions (e.g., services received outside of USPS’s 

approved network). GAO estimated that at least 63 percent of postal enrollees in 

the selected FEHBP plans would pay similar or lower premiums under the USPS 

plan, but some employees and retirees could have higher total costs—premiums 

and out-of-pocket costs for the use of care—due in part to differences in 

deductibles and maximum spending limits. Also, employees and retirees may 

need to change providers and would have many but not all the same protections 

around benefits and costs under the USPS plan as in FEHBP. For example, 

postal retirees would no longer have the assurance that USPS’s contribution to 

the cost of health benefits would be fixed by law as it is within FEHBP.

A USPS withdrawal from FEHBP would reduce the program’s enrollment by an 

estimated 25 percent. Despite the significant change in enrollment, most 

nonpostal enrollees would likely not be affected by a USPS withdrawal beyond 

what selected FEHBP plan representatives expect to be small increases or 

decreases in premiums. However, USPS’s withdrawal could lead the small 

number of FEHBP plans with primarily postal enrollment to withdraw from the 

program, which would result in an estimated 29,000 (of over 3 million) nonpostal 

enrollees having to select a new health plan. 

Key Policy Issues

The primary policy decision for Congress to make with respect to USPS’s 

proposed health care plan is whether to increase postal retirees’ use of 

Medicare, which is already facing funding challenges. This is because USPS’s 

proposal would essentially decrease USPS costs but increase Medicare costs. 

If Congress does not act on USPS’s proposal for a new USPS health care plan, 

GAO continues to believe that Congress and USPS need to reach agreement on 

a comprehensive package of actions to improve USPS’s financial viability. In 

previous reports, GAO has provided strategies and options that Congress could 

consider to address constraints and legal restrictions that limit USPS’s ability to 

reduce costs and improve efficiency. GAO also continues to believe that 

Congress would need to modify the current statutory schedule for prefunding 

USPS’s retiree health benefits payments in a fiscally responsible manner. In this 

regard, USPS should continue to prefund any unfunded retiree health benefits 

liabilities to the maximum extent that its finances permit.

If Congress decides to move forward with USPS’s proposed health plan as part 

of a broader reform package, other important policy issues remain to be 

addressed. Specifically, Congress should consider:

• safeguards for all USPS health plan fund assets by placing appropriate 

constraints on their asset allocations; such as limiting all investments to 

Treasury securities, including inflation-indexed Treasury securities; 

• standards for the disposition of any surplus health plan assets that reduce 

the risk of a new unfunded liability emerging in the future; such as standards 

for amortizing any surplus to mirror the amortization of any unfunded liability; 

• designation of an independent entity responsible for selecting actuarial 

assumptions used to determine the health plan’s funded status; and

• protections for postal employees and retirees that are comparable to those 

under FEHBP, including a formula for retirees’ contribution to health costs.
Page i GAO-13-658 U.S. Postal Service

Letter 1

Background 7

USPS Would Likely Realize Large Financial Benefits from Its 

Health Plan, Mainly by Increasing Retirees’ Use of Medicare, but 

Some Plan Elements Could Decrease Funds Available for 

Retiree Health Benefits in the Future 15

Compared to FEHBP, Postal Employees and Retirees Would Have 

Coverage for Similar Services, but Elements of the Proposed 

Plan’s Design Could Lead to Higher Costs for Some Enrollees 30

A USPS Withdrawal from FEHBP Would Significantly Reduce 

Program Enrollment but Is Not Expected to Adversely Affect 

Most Nonpostal Enrollees 41

Conclusions 45

Matters for Congressional Consideration 47

Agency Comments and Our Evaluation 48

Appendix I The Proposed Health Care Plan of the U.S. Postal Service 51

Appendix II U.S. Postal Service Proposals for Health Plan Financing 53

Appendix III Comments from the U.S. Postal Service 58

Appendix IV GAO Contacts and Staff Acknowledgments 65

Tables

Table 1: USPS Health Benefits Payments, Fiscal Years 2007 through 

2012 10

Table 2: Key Elements of the Proposed USPS Health Care Plan 12

Table 3: USPS-Projected Liabilities and Assets for Retiree Health 

Care under FEHBP and the USPS Proposed Health Plan, 

Projected to September 30, 2014 17

Table 4: USPS-Projected Reduction in Its Liability for Retiree 

Health Benefits, Projected to September 30, 2014 18

Contents
Page ii GAO-13-658 U.S. Postal Service

Table 5: Projected USPS Payments from the Postal Service Fund 

for Health Benefits under FEHBP and USPS’s Proposed 

Health Plan 19

Table 6: Examples of Services for Which the USPS Proposed Plan 

Offers Levels of Coverage for In-Network Care within the 

Range of Coverage Offered by Selected FEHBP Plans 32

Table 7: Comparison of Proposed USPS Annual Plan Deductibles 

and Out-of-Pocket Maximums to Those of Selected FEHBP 

Plans 37

Table 8: Illustrations of Estimated Differences in Employees’ 

Annual Costs under the Proposed USPS Plan and the 

FEHBP Plan with the Largest Number of Postal Enrollees 39

Table 9: Comparison of FEHBP Enrollment in 2011 and under a 

USPS Withdrawal from FEHBP 41

Table 10: Comparison of Age Distribution of FEHBP Enrollment in 

2011 and Estimated Distribution under a USPS Withdrawal 

from FEHBP 42

Table 11: Number of FEHBP Plans at Various Levels of Postal 

Enrollment and the Number of Postal and Nonpostal 

Enrollees in Those Plans as of 2011 43

Figure

Figure 1: Percentage of Postal Employees and Retirees from

Selected FEHBP Plans Who Could Obtain Similar or 

Lower Premiums under the Proposed USPS Health Plan, 

2013 35
Page iii GAO-13-658 U.S. Postal Service

Abbreviations

CMS Centers for Medicare & Medicaid Services

EGWP Employer Group Waiver Plan

ERISA Employee Retirement Income Security Act of 1974

FEHBP Federal Employees Health Benefits Program

HBF Health Benefits Fund

HMO health maintenance organization

OMB Office of Management and Budget

OPM Office of Personnel Management

PAEA Postal Accountability and Enhancement Act

PHSA Public Health Service Act

PSRHBF Postal Service Retiree Health Benefits Fund

TIPS Treasury Inflation-Protected Securities

USPS U.S. Postal Service

USPS OIG U.S. Postal Service Office of the Inspector General

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Page 1 GAO-13-658 U.S. Postal Service

441 G St. N.W.

Washington, DC 20548

July 18, 2013

The Honorable Thomas R. Carper

Chairman

The Honorable Tom Coburn, M.D.

Ranking Member

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Susan M. Collins

United States Senate

The U.S. Postal Service (USPS) has insufficient revenues to cover its 

expenses, has reached its statutory borrowing limit of $15 billion, lacks 

liquidity to maintain its financial solvency, and has projected 

unsustainable losses. We and the Postmaster General have called on 

Congress to enact legislation for comprehensive postal reform to address 

these issues.1 We have recently testified that USPS needs to reduce its 

expenses while continuing to fund its retirement obligations.2

Compensation and benefits continue to comprise roughly 80 percent of 

postal costs, with benefit costs comprising close to half of this. Employee 

and retiree health care benefits are USPS’s single most costly benefit. In 

fiscal year 2012, USPS reported that health benefit payments were $7.8 

billion for current postal employees and retirees,3

 1

GAO, U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial 

Viability, 

not including $11.1 

billion in statutorily required payments—that USPS did not make—to 

GAO-10-455 (Washington, D.C.: Apr. 12, 2010); Patrick R. Donahoe, Postmaster 

General and Chief Executive Officer, USPS, Solutions to the Crisis Facing the Postal 

Service, testimony before a hearing of the Committee on Homeland Security and 

Governmental Affairs, United States Senate, 113th Cong., 1st Sess., Feb. 13, 2013.

2

GAO, U.S. Postal Service: Urgent Action Needed to Achieve Financial Sustainability, 

GAO-13-562T (Washington, D.C.: Apr. 17, 2013); U.S. Postal Service: Urgent Action 

Needed to Achieve Financial Sustainability, GAO-13-347T (Washington, D.C.: Feb. 13, 

2013).

3

In this report, we use the term “retirees” to refer to postal annuitants or any survivors of 

postal retirees who receive health benefits.
Page 2 GAO-13-658 U.S. Postal Service

prefund retiree health benefits.4

To improve its finances, USPS has proposed establishing its own health 

care plan that would provide coverage for the approximately 1 million 

postal employees and retirees who are currently enrolled in the Federal 

Employees Health Benefits Program (FEHBP). USPS’s plan is designed 

to increase postal retirees’ enrollment in Medicare and take advantage of 

Medicare subsidies for employer-based prescription drug plans.

USPS’s reported unfunded liabilities for 

retiree health benefits combined with its other liabilities totaled $96 billion 

at the end of fiscal year 2012.

5

 4

The Postal Accountability and Enhancement Act (PAEA) established the Postal Service 

Retiree Health Benefits Fund (PSRHBF) and required USPS to begin prefunding the 

health benefits for its current and future postal retirees. Under the prefunding mechanism 

established by PAEA, as implemented by the Office of Personnel Management (OPM), 

USPS payments to OPM would be projected to fund the liability over a period in excess of 

50 years, from fiscal years 2007 through 2056 and beyond (with rolling 15-year 

amortization periods after 2041). PAEA established “fixed” prepayment amounts—

meaning that the amounts were set by statute and did not vary with actuarial 

measurements of the cost of the benefits—in the first 10 years, from fiscal years 2007 

through 2016, with actuarially determined payments thereafter. However, the payments 

required by PAEA were significantly “frontloaded,” with the fixed payment amounts in the 

first 10 years exceeding what actuarially determined amounts would have been using a 

50-year amortization schedule. USPS has made a total of $17.9 billion in prefunding 

payments, and a total of $33.9 billion in required prefunding payments remain from the 10 

years of fixed payments. Originally due at the end of fiscal year 2011, USPS’s $5.5 billion 

retiree health benefit payment requirement was delayed until August 1, 2012. Pub. L. No. 

112-74, § 632, 125 Stat. 786, 928 (Dec. 23, 2011). USPS missed that payment, as well as 

the $5.6 billion that was due by September 30, 2012.

To help 

finance its plan, USPS has proposed as one option a new fund that would 

inherit all assets (reported at approximately $46 billion at the end of fiscal 

year 2012) of the Postal Service Retiree Health Benefits Fund (PSRHBF). 

The postal unions and management associations and an organization 

representing federal employees and retirees have raised concerns about 

5

Medicare is the federally financed health insurance program for persons age 65 or over, 

certain individuals with disabilities, and individuals with end-stage renal disease. Medicare 

Parts A and B are known as Medicare fee-for-service. Medicare Part A covers hospital 

and other inpatient stays. Medicare Part B covers hospital outpatient, physician, and other 

services. Medicare beneficiaries have the option of obtaining coverage for Medicare 

services from private health plans that participate in Medicare Advantage—Medicare’s 

managed care program—also known as Part C. All Medicare beneficiaries may purchase 

coverage for outpatient prescription drugs under Part D, either as a stand-alone benefit or 

as part of a Medicare Advantage plan.
Page 3 GAO-13-658 U.S. Postal Service

or are opposed to USPS’s proposed health care plan.6

With these issues in mind, you asked us to examine USPS’s proposed 

health care plan. This report addresses (1) the potential effects of the 

proposed plan on USPS’s financial condition; (2) the potential effects of 

the proposed plan on postal employees’ and retirees’ benefits and costs; 

and (3) the potential effects of a USPS withdrawal on FEHBP and on 

nonpostal FEHBP enrollees.

Some of these 

groups have suggested that USPS should explore options for reducing 

costs within FEHBP. However, USPS has stated that it cannot sustain the 

current approach to providing health benefits and, unless its proposed 

health plan is implemented, will be unable to pay FEHBP premiums for 

current postal employees and retirees in future years.

To describe the potential financial effects of USPS’s proposed plan, we 

reviewed USPS documents detailing key elements of the plan and 

estimated cost savings. We obtained USPS’s projections of its cash 

expenses, liability, and unfunded liability for health benefits, both under 

current law and its proposed health plan, as well as USPS’s projections of 

the effect of its proposal on Medicare’s total cash expenses. We obtained 

documentation regarding USPS’s assumptions, methodology, 

calculations, underlying data, and projections. This documentation 

included reports and memorandums authored by the Hay Group (the 

actuarial contractor that USPS hired to prepare its projections), as well as 

responses to our questions on data reliability, including the systems used 

to compile the data, audits of those systems, and system controls to 

ensure data accuracy. According to USPS, the Hay Group’s updated 

projections were prepared using valuation software that has been audited 

by other actuarial firms, and there were no material findings from such 

audits. USPS also stated that input data and actuarial assumptions used 

by the Hay Group came from the Office of Personnel Management’s 

(OPM) Office of the Actuary. In addition, the USPS Office of Inspector 

General (USPS OIG) reported last year that previous USPS projections of 

the effect of its proposed health plan on its liability for retiree health care 

 6

Joseph A. Beaudoin, President, National Active and Retired Federal Employees 

Association, Solutions to the Crisis Facing the U.S. Postal Service, a hearing of the

Committee on Homeland Security and Governmental Affairs, United States Senate, 113th 

Cong., 1st Sess., Feb. 13, 2013.
Page 4 GAO-13-658 U.S. Postal Service

were reasonable.7

To determine the effect that USPS’s proposal could have on postal 

employees’ and retirees’ benefits, we compared the package of services 

that USPS proposed to cover in the first year of implementation with the 

services covered in 2013 by seven selected FEHBP plans that collectively 

had more than 75 percent of the total postal enrollment in FEHBP.

As part of this review, the USPS OIG hired the Nyhart 

Company to review USPS’s actuarial assumptions and projections; this 

company also performed independent actuarial valuations to compare to 

the Hay Group results. The Nyhart Company also concluded that the Hay 

Group’s estimate of reduction in USPS’s liability from USPS’s proposed 

health plan was reasonable. While we did not independently validate the 

cost estimates, we reviewed these sources for internal consistency and 

consistency with our prior work and for overall reasonableness, and 

discussed them with officials of USPS and the Hay Group. Based on 

these procedures, and using our actuarial, economic, and health care 

expertise and judgment, we determined that the assumptions and 

projections were sufficiently reliable for purposes of our review. In 

addition, we reviewed relevant statutes, proposed legislation, and 

sections of the President’s budget request for fiscal year 2014 pertaining 

to USPS’s health care costs and the requirement for USPS to prefund its 

retiree health benefits. We interviewed officials from USPS, USPS OIG, 

the U.S. Treasury Department, OPM, postal unions, postal management 

associations, and an organization representing federal employees and 

retirees about USPS’s proposal. We also interviewed the Centers for 

Medicare & Medicaid Services (CMS), and the Office of Management and 

Budget (OMB) to discuss the effect of USPS’s proposal on Medicare, 

among other topics.

8

 7

USPS OIG, U.S. Postal Service Alternative Health Care Plan Proposal: Management 

Advisory Report, FI-MA-12-014 (Arlington, VA: Aug. 22, 2012).

We 

also compared the coverage levels—the proportion of the cost for the 

8

The seven FEHBP plans we selected had the highest numbers of postal enrollees of all 

FEHBP plans and together represented over 75 percent of postal enrollment in FEHBP in 

2011, the most recent year of enrollment data available. All seven of the FEHBP plans 

that we selected were offered nationally. The selected plans included: the standard and 

basic options of the Blue Cross and Blue Shield Service Benefit Plan (which count as two 

plans using OPM’s definition of plan), the NALC Health Benefit Plan (sponsored by the 

National Association of Letter Carriers), the American Postal Workers Union Health Plan, 

the Government Employees Health Association, Inc. Benefit Plan (which included both the 

high and standard options), the Mail Handlers Benefit Plan, and the Rural Carrier Benefit 

Plan. 
Page 5 GAO-13-658 U.S. Postal Service

service that the plan will pay—under the USPS plan and the selected 

FEHBP plans for 29 services, including a range of inpatient, outpatient, 

and prescription drug services.9 To determine the effect of the proposal 

on postal employees’ and retirees’ costs, we performed a number of 

analyses. First, we compared USPS’s projected 2013 premiums for the 

three options under its proposed plan—the high, middle, and value 

options—with the 2013 premiums for the selected FEHBP plans and 

estimated the percentage of enrollees in the selected plans who would 

pay similar or lower premiums under USPS’s proposed plan.10 Second, 

we assessed the effect on employees’ and retirees’ total costs—

premiums plus any out-of-pocket costs for the use of care—of moving 

from FEHBP to the proposed postal plan. To do so, we compared other 

elements of USPS’s proposed plan that could influence out-of-pocket 

costs, including deductibles and out-of-pocket maximums, with the 

selected FEHBP plans.11

 9

We selected services for which the USPS plan and all selected FEHBP plans provided 

some level of coverage. We compared coverage levels for services received in the plans’

approved network of providers, i.e., “in-network services,” and services received outside of 

the approved provider network, i.e., “out-of-network services.” Our comparison of 

coverage levels accounted for the interaction of the different plans with Medicare. We 

excluded one of the selected FEHBP plans from this comparison because the structure of 

benefits for the plan was not comparable to that under the proposed USPS plan.

We also estimated what employees and retirees 

would pay at different levels of total annual cost, that is, the total cost 

claimed by providers, under USPS’s proposed high and middle options 

10For 2013 FEHBP premiums, we used publicly available data from OPM. We defined 

“similar” premiums as those within 10 percent of the premium the employee or retiree 

would have paid in 2013 for their FEHBP plan and “lower” premiums as those more than 

10 percent less than the FEHBP premium. Our analysis accounted for the Medicare Part 

B premiums for those Medicare-eligible retirees who were in selected FEHBP plans who 

were not enrolled in Medicare Part B, since all Medicare-eligible retirees would be 

assumed to enroll in Medicare Part B under the proposed USPS plan.

11We excluded one of the selected FEHBP plans from this comparison because the 

structure of the deductibles and out-of-pocket maximums was not comparable to those 

under the proposed USPS plan.
Page 6 GAO-13-658 U.S. Postal Service

and under the FEHBP plan with the largest number of postal enrollees.12

To describe the effects of a USPS withdrawal on FEHBP and on 

nonpostal FEHBP enrollees, we used OPM data on postal and nonpostal 

enrollment in FEHBP in 2011 to estimate the change in total program 

enrollment and the age distribution of enrollees. We also used the data to 

estimate the effect on enrollment in each of the more than 140 FEHBP 

plans. Using OPM data on the plans offered in each state and the 

premiums charged for those plans in 2013, we determined choices that

nonpostal enrollees would have in the event that a USPS withdrawal led a 

health plan to leave FEHBP. To supplement this analysis, we interviewed 

OPM officials and representatives from 10 selected FEHBP plans to 

discuss how a USPS withdrawal would affect nonpostal enrollees, plan 

participation in FEHBP, and premium rates.

To determine the extent to which employees and retirees would have the 

same legal protections related to employees’ and retirees’ benefits and 

costs under USPS’s proposed plan as they have within FEHBP, we 

reviewed draft legislation proposed by USPS, federal laws, regulations, 

and OPM guidance that apply to FEHBP plans. We supplemented our 

review by interviewing officials from USPS and OPM, as well as 

representatives from postal unions and management associations about 

the potential effects of the USPS proposal on employees and retirees.

13

 12We estimated enrollee costs if total annual costs of health care were $2,500, $10,000, 

$17,000, and $50,000. For each cost scenario, we assumed a distribution of costs across 

inpatient and outpatient services and prescription drugs. For example, at $2,500 in total 

annual costs, we assumed that about 47 percent of costs were for outpatient services and 

the rest of costs were for prescription drugs; and, at $50,000 in total annual costs, we 

assumed 67 percent was for inpatient care, 32 percent for outpatient care, and 1 percent 

for prescription drugs. We based our assumptions on those used by USPS’s contracted 

actuaries in estimates that they performed, because we did not have data on the 

distribution of costs in FEHBP across these categories; and we conducted a sensitivity 

analysis to ensure that our results were not overly sensitive to the assumptions. We 

applied the cost-sharing requirements of each plan to the costs in each service category 

and then added premium costs to estimate total enrollee costs.

We took a number of steps 

to assess the reliability of the OPM data including interviewing OPM 

officials on the limitations of the data and checking the data for 

inconsistencies and anomalies. We determined the data to be sufficiently 

reliable for the purposes of estimating changes in enrollment and 

13The selected plans together comprised over 70 percent of FEHBP enrollment and 

ranged in the percentage of enrollment that postal employees and retirees represented 

from over 90 percent to less than 10 percent. Several of the selected plans were offered 

by the same carrier. In total, we spoke to officials from six carriers. 
Page 7 GAO-13-658 U.S. Postal Service

illustrating the choice in plans that nonpostal enrollees would have if their 

plan withdrew from FEHBP; where relevant we stated the limitations of 

the data in the findings.

We conducted this performance audit from September 2012 to July 2013 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

USPS currently participates in FEHBP, a program administered by OPM 

that offers a choice of health plan options to all postal and nonpostal 

federal employees and retirees.14 More than 140 health plans participate 

in FEHBP; these include fee-for-service plans and health maintenance 

organizations (HMO). The specific options available to enrollees depend 

on where one lives since fee-for-service plans are generally offered 

nationally while HMOs offer coverage in selected areas.15

 14Additionally, OPM oversees FEHBP, including contracting with participating plans, 

reviewing proposed benefits and premiums, issuing guidance, and responding to 

enrollees’ appeals of benefit denials. FEHBP is unique in that OPM plays the role of 

employer sponsor as well as having responsibility for oversight.

FEHBP plans 

generally cover a comprehensive array of medical services, including 

inpatient and outpatient services and prescription drugs. However, plans 

offer different levels of benefits, with many plans offering a choice 

between a more expensive option, which offers a higher level of coverage 

and a less expensive option, which offers a lower level of coverage. 

Premium prices also vary across plans and within plans and depend on 

whether one is enrolled in self-only coverage or family coverage. FEHBP 

enrollees can change health care plans during an annual open enrollment 

period or when they experience a qualifying life event, such as a change 

15In 2011, the most recent year of data available, 80 percent of FEHBP participants were 

enrolled in fee-for-service plans and 20 percent in HMOs, and the distribution among 

postal enrollees was about the same. 

Background

Current USPS Health 

Benefits Provided Through 

FEHBP
Page 8 GAO-13-658 U.S. Postal Service

in family status. According to OPM officials, an average of 5 percent of 

enrollees changed plans annually from 2003 through 2010.

Postal employees also pay Medicare taxes and therefore may become 

eligible for Medicare coverage generally at age 65. For retirees enrolled in 

Medicare and FEHBP, including postal retirees, Medicare is the primary 

insurer, and the FEHBP plans generally cover any expenses that 

Medicare does not cover. Eligible retirees are not required to enroll in 

Medicare. According to FEHBP data, in 2011, about 22 percent of eligible 

postal retirees in FEHBP were not enrolled in Medicare coverage of 

outpatient services, known as Part B, and 8 percent were not enrolled in 

Medicare coverage for hospital services (Part A).16 According to an OPM 

actuary, most eligible FEHBP retirees do not enroll in prescription drug 

coverage under Medicare (Part D). FEHBP plans provide prescription 

drug coverage that is as good or better than Medicare.17 There is no 

penalty for choosing not to enroll in Medicare; however, retirees who later 

decide to enroll in Part B must pay a penalty.18

USPS and its employees and retirees share the cost of health care 

benefit premiums.

For retirees in FEHBP 

who choose not to enroll in Medicare, their FEHBP plan remains the 

primary payer and they would continue to receive the same level of 

coverage through that plan as they did prior to becoming eligible for 

Medicare.

19

 16For most people, Medicare Part A is premium-free unless the beneficiary or spouse has 

worked fewer than 40 quarters in his or her lifetime, but the beneficiary is responsible for 

required deductibles, coinsurance, and copayment amounts. Beneficiaries must pay a 

premium for Part B coverage, which generally was $99.90 per month in 2012. 

Beneficiaries are also responsible for Part B deductibles, coinsurance, and copayments. 

For fiscal year 2012, USPS reported paying $5.2 

17When private coverage for prescription drugs is at least as good as the coverage under 

Part D, then retirees do not need to enroll in Part D. If retirees later chose to cancel their 

private health insurance, Medicare would permit them to enroll in Part D without penalty, 

subject to some restrictions. For example, there are limitations on how much time can 

elapse between canceling private insurance coverage and enrolling in Part D.

18Medicare beneficiaries generally would be billed an extra 10 percent of their monthly 

premium for each full 12-month period that they were eligible for Part B coverage but did 

not sign up for it.

19The federal government also absorbs some costs for those employees whom also had 

service with the United States Post Office Department (predecessor to USPS) which is 

prorated to reflect the number of years of such service by postal retirees. 5 U.S.C. § 

8906(g).
Page 9 GAO-13-658 U.S. Postal Service

billion toward employee premiums, an amount that represented 78 

percent of the premium cost (see table 1). USPS’s share of the premium 

cost for employees is established through collective bargaining with its 

four major postal unions and in consultation with its three management 

associations. If USPS and its unions cannot agree on the share of 

premium costs, the share is determined in binding arbitration. The law 

requires USPS’s employee benefits to be at least as favorable as those in 

effect when the Postal Reorganization Act of 1970 was enacted.20

USPS’s contribution rates for employees have historically been higher 

compared to the rates paid by other federal agencies for federal 

employees,21 but USPS’s contribution rates will be decreasing in the 

coming years under current agreements with its unions and management 

associations.22 USPS’s share of premium costs for postal retirees is set 

according to a statutory formula and is not subject to negotiation with its 

unions. In fiscal year 2012, USPS reported it paid $2.6 billion toward the 

costs of current retirees’ health benefit premiums. In addition to paying a 

portion of retiree premiums, USPS has been required since 2007 to make 

annual payments to prefund retiree health benefits.23 However, USPS 

failed to make those payments in fiscal years 2011 and 2012.24 USPS’s 

failure to make its prefunding payments notwithstanding, health care 

expenses represent a significant portion of total USPS expenses.

 2039 U.S.C. § 1005(f).

21As set by statute, for current nonpostal employees as well as both postal and nonpostal 

retirees and survivors, the government pays 72 percent of the average premium across all 

FEHBP plans but no more than 75 percent of any particular plan’s premium. 5 U.S.C. § 

8906(b).

22More than 85 percent of USPS career employees are covered by collective bargaining. 

Under the current collective bargaining agreements and arbitration awards, USPS’s 

contribution for health care premiums for these employees will decrease to approximately 

76 percent in 2016. Managers are not covered by collective bargaining agreements and 

are compensated under a pay-for-performance program. Under the current pay packages, 

USPS’s contributions for these employees will decrease to approximately 72 percent in 

2015.

235 U.S.C. § 8909a(d)(3)(A). 

24Originally due at the end of fiscal year 2011, USPS’s $5.5 billion retiree health benefit 

payment was delayed until August 1, 2012. Pub. L. No. 112-74, § 632. USPS missed that 

payment as well as the $5.6 billion payment that was due by September 30, 2012, 

resulting in $11.1 billion of missed payments in 2012. 
Page 10 GAO-13-658 U.S. Postal Service

Table 1: USPS Health Benefits Payments, Fiscal Years 2007 through 2012 

Source: USPS.

Note: Numbers may not add to total due to rounding. Health benefit premium payments were made 

by USPS to the OPM-managed Employee Health Benefits Fund that finances the FEHBP. Retiree 

premium payments were for postal retirees and survivors participating in FEHBP. Prefunding 

payments were statutorily required payments from USPS to the OPM-managed PSRHBF. 5 U.S.C. § 

8909a. A looming USPS cash shortfall necessitated last-minute congressional action to defer costs 

by reducing the 2009 prefunding payment from $5.4 billion to $1.4 billion. Pub. L. No. 111-68, div. B, 

§ 164(a), 123 Stat. 2023 (Oct. 1, 2009). Due to subsequent cash shortfalls, USPS did not make its 

$5.5 billion and $5.6 billion retiree health benefit prefunding payments that were due in fiscal year 

2012 ($5.5 billion of which had been statutorily delayed from fiscal year 2011 to fiscal year 2012). 

Under accounting standards, these required prefunding contributions are included in USPS’s 

expenses for financial reporting purposes, regardless of whether the payments are actually made; 

missed payments are reported as a liability on USPS’s balance sheet. Thus, USPS’s expenses 

exceeded its payments for health benefits in fiscal year 2012 by the $11.1 billion required prefunding 

contributions that were due but not paid—so that USPS’s reported expenses for health care in fiscal 

year 2012 were $18.9 billion, whereas its actual health care payments were only $7.8 billion.

In December 2012, we reported that USPS’s deteriorating financial 

outlook will make it difficult to continue the current schedule for 

prefunding postal retiree health benefits in the short term, and possibly to 

fully fund the remaining $48 billion unfunded liability over the remaining 

decades of the statutorily required actuarial funding schedule.25

 25GAO, U.S. Postal Service: Status, Financial Outlook, and Alternative Approaches to 

Fund Retiree Health Benefits, 

However, 

we also reported that deferring funding could increase costs for future 

ratepayers and increase the possibility that USPS may not be able to pay 

for some or all of its liability. Our 2012 report discussed various funding 

approaches, the related short- and long-term effects, and key factors for 

Congress to consider in restructuring USPS’s current retiree health

benefit prefunding requirements. We continue to believe that it is 

GAO-13-112 (Washington, D.C.: Dec. 4, 2012).

Dollars in billions

Fiscal year

Premium payments for 

employee health benefits 

Premium payments 

for retiree 

health benefits 

Prefunding payments 

made for retiree 

health benefits 

Total USPS payments 

for health benefits 

2007 $5.4 $1.7 $5.4 $12.5

2008 5.4 1.8 5.6 12.8

2009 5.3 2.0 1.4 8.7

2010 5.1 2.2 5.5 12.9

2011 5.2 2.4 0.0 7.7

2012 5.2 2.6 0.0 7.8
Page 11 GAO-13-658 U.S. Postal Service

important for USPS to prefund these benefits to the maximum extent that 

its finances permit, recognizing that multiple options exist to prefund 

benefits and amortize unfunded liability.

USPS’s health care proposal to withdraw from FEHBP and administer its 

own health plan includes a number of key elements that are designed to 

reduce USPS’s cost of providing health care benefits (see table 2). The 

USPS plan would be available to about 498,000 current employees and 

about 477,000 retirees and would have benefits of comparable aggregate 

“actuarial value” to the largest FEHBP plan in the first year of 

implementation.26 After the first year, benefits for current retirees must 

continue to meet that standard, and while the standard will no longer 

apply for employees, any changes to employee benefits would be subject 

to collective bargaining.27

The USPS plan would include high, middle, and value options that would 

range in price. USPS would self-insure the benefits—that is, USPS would 

set aside funds to pay for benefits rather than purchasing insurance from 

an insurance company. USPS plans to hire a health insurance company 

to administer its proposed plan, a plan that would include processing 

claims, negotiating payment rates with health care providers, and

providing wellness and disease management programs.28

 26The USPS legislative proposal specifically indicates that the type and the average level 

and value of a plan’s benefits will be benchmarked against the type and level of benefits 

provided under FEHBP and that the “aggregate actuarial value of benefits shall be at least 

equivalent to that of the FEHBP plan with the highest enrollment.” For those eligible for 

Medicare, the aggregate actuarial value will include the value of Medicare benefits. The 

actuarial value of the benchmarked coverage would be documented in an actuarial 

opinion that meets actuarial standards of practice. Note that “actuarial value,” as used in 

this context, is a limited concept that measures the estimated value of benefit coverage, 

but does not take into account premium costs, and so does not capture estimated total 

out-of-pocket costs for a typical participant. Two different health insurance plans could 

have the same actuarial value but very different participant premiums.

(See appendix 

I for more information on the USPS proposed health plan.)

27Under USPS’s plan, benefits for employees who retire after the USPS plan is 

implemented, i.e., “future retirees,” do not have to meet the comparability standard 

described in the preceding footnote.

28USPS officials also anticipate contracting to administer pharmacy benefits. In addition, 

USPS officials said they also may contract with HMO plans in certain geographic 

locations.

USPS’s Proposed Health 

Care Plan Elements and 

Legislative Changes
Page 12 GAO-13-658 U.S. Postal Service

Under one financing option (which USPS refers to as “Scenario 2”), 

USPS would pay for health benefits out of a newly created Postal Service 

Health Benefits Fund (HBF), which would include some portion of reserve 

funds currently set aside for FEHBP and all funds from the PSRHBF, 

which would be abolished upon its transfer to the HBF. Under Scenario 2, 

USPS proposes that it be allowed to invest the HBF in non-Treasury 

securities, such as investments in stocks and private sector bonds, under 

the oversight of a USPS-appointed committee. According to USPS, 

assets of this fund would not be federally guaranteed, except for those 

invested in federally guaranteed securities. USPS has also proposed 

another option for financing its health plan (which USPS refers to as 

“Scenario 1”) under which the Congress could leave the funds in the 

PSRHBF, so that retiree health benefits under the proposed USPS plan 

would continue to be financed out of the PSRHBF. See appendix II for 

more detail on these aspects of the USPS proposal, which are discussed 

further in the next section of this report.

Table 2: Key Elements of the Proposed USPS Health Care Plan

Element Description 

100% participation of eligible retirees in 

Medicare Parts A and B

USPS’s plan is designed so that all Medicare-eligible retirees would enroll in Medicare 

Parts A and B. Those who do not enroll would have their benefits reduced by the 

amount Medicare would have paid had the individual enrolled. As is the case under 

FEHBP, Medicare would serve as the primary payer of health care costs, and for 

existing retirees, the USPS plan would cover 100 percent of any costs above the 

amounts covered by Medicare Parts A and B.

Prescription drug benefits that qualify the 

plan for federal subsidies and drug 

discounts

USPS would design the prescription drug benefits under its plan to qualify as an 

Employer Group Waiver Plan (EGWP) under Medicare Part D. This would qualify USPS 

to receive—for those eligible for Medicare—a federal subsidy from the Medicare 

program for drug costs, a discount from pharmaceutical companies for brand name 

drugs, and federal coverage for drug costs above a catastrophic limit.

Introduction of two new tiers of coverage The proposed plan would include four coverage tiers: self only, self and spouse, self 

and children, and self and family. Premiums for each tier would be set according to the 

claims experience of the group. USPS’s proposed addition of two tiers (self and spouse 

and self and children) to the options available under FEHBP would be to reflect the 

various stages of family status that participants may experience over the course of their 

career and retirement. 

Purchasing plan administration services 

from a single vendor through a competitive

bidding process

USPS would contract with a single vendor to administer its plan; that vendor would 

negotiate with providers for payment rates, process claims, and provide wellness and 

disease management programs. 

Requirement that future retirees be subject 

to plan deductibles and cost-sharing upon 

enrolling in Medicare

For employees retiring a year or more after the USPS plan becomes effective (i.e., 

“future retirees”), Medicare would be the primary insurer once the enrollee becomes 

eligible, and the USPS plan would cover costs above what Medicare pays. However, 

future retirees would be required to meet the USPS plan deductible and pay 

coinsurance. 
Page 13 GAO-13-658 U.S. Postal Service

Element Description 

USPS Health Benefits Fund Under one option of USPS’s proposal (which USPS refers to as “Scenario 2”),

a

Under its proposal, USPS would be authorized to invest HBF assets without the 

approval of the Secretary of the Treasury in non-Treasury securities, such as stocks 

and bonds, as well as commodities, foreign currency, and real property. Also, USPS 

indicates that HBF assets could not be used for (1) loans to USPS, such as to enable it 

to remain solvent; (2) USPS payments to the federal government, such as for pensions 

and workers’ compensation; or (3) to finance USPS investments or USPS nonpostal 

initiatives to generate revenue.

its 

health plan would be financed by a newly created fund called the HBF that would 

include: (1) the entire Postal Service Retiree Health Benefits Fund that would be 

abolished upon its transfer to the HBF; (2) the balance of the fund that finances FEHBP 

allocable to contributions by USPS, postal employees and retirees, including any 

reserve fund amounts; (3) USPS contributions under its health plan; (4) contributions of 

postal employees and retirees under the USPS health plan; (5) any interest on HBF 

investments; (6) any other USPS receipts allocable to the USPS health benefits plan; 

and (7) appropriations based on the service of officers and employees of the former 

U.S. Post Office Department.

In any year when the amount of HBF assets exceeds USPS’s estimated actuarial 

liability for retiree health benefits, USPS could authorize the surplus amount to be 

transferred to the Postal Service Fund that finances most USPS expenses, provided 

that such authorization is made pursuant to a recommendation by a majority of the 

Committee overseeing the HBF.

USPS funding of retiree health benefits USPS would continue to prefund retiree health benefits, but under a purely actuarial 

approach, without the fixed (non-actuarial) payments required under current law through 

2016. Payments to the HBF would be based on the “normal cost” and amortization of 

any unfunded liability or surplus of its retiree health care liabilities over an amortization 

period ending at the later of 40 years after implementation or 15 years from the thencurrent year.

Source: GAO analysis of USPS information.

a

USPS has also proposed another option for financing its health plan (which USPS refers to as 

“Scenario 1”) under which retiree health benefits would continue to be financed from the PSRHBF.

According to USPS officials:29

• USPS cannot implement its proposed health plan without changes to 

federal law. Although USPS already has limited authority to move 

current employees from FEHBP into a USPS-run plan, it would need 

 29GAO did not independently verify USPS’s statements regarding its current authority or 

the need for additional authority as provided herein. 
Page 14 GAO-13-658 U.S. Postal Service

additional statutory authority to allow the USPS Board of Governors to 

establish initial health benefits and premiums for this plan.30

• Legislation would be needed to move postal retirees out of FEHBP 

and into a USPS plan. With regard to the portions of its plan that 

interact with Medicare, if given the authority to move retirees into a 

USPS plan, USPS already has the authority to design the program in 

such a way to reach 100 percent participation in Medicare and to 

allow USPS to participate in an Employer Group Waiver Plan 

(EGWP).31

• USPS would need legislation to create a special enrollment period for 

those Medicare-eligible retirees who previously chose not to enroll in 

Parts A and B—similar to the special enrollment periods currently

available—and to exempt these enrollees from the financial penalty 

for late enrollment in Medicare Part B.

• Finally, USPS would need legislation to access assets in the 

PSRHBF, eliminate statutorily fixed prefunding payments for retiree 

health benefits, and restructure statutory requirements for amortizing 

any unfunded liabilities for retiree health benefits.

Some elements of USPS’s proposed health care plan are being explored 

on a smaller scale within FEHBP. For example, OPM currently has a pilot 

under way to try to increase enrollment in Medicare by providing the 

incentive that the FEHBP plan would pay the Part B premium on behalf of 

the enrollee. In 2013, the second year of implementation, only one 

FEHBP plan and 2,400 enrollees were participating in the pilot, and there 

were no measurable effects on cost. In addition, as of March 2013, OPM 

officials said that the agency was in discussions with several plans about 

restructuring plans’ drug benefits to receive federal subsidies under 

Medicare Part D, as USPS is planning to do under its proposal. However, 

OPM officials said that the agency does not have the authority to 

introduce some of the measures that USPS is proposing. For example, 

FEHBP plans cannot achieve 100 percent participation in Medicare using 

 30According to USPS officials, USPS has the authority under current law to move 

employees from FEHBP to a USPS plan, subject to reaching a collective bargaining 

agreement for those employees represented by collective bargaining. However, 

negotiating for this change through the collective bargaining process also would subject 

the initial benefit package and contribution rates to collective bargaining. Thus, a statutory 

change is needed to allow the initial benefit package and premium amounts to be set by 

the Board of Governors.

31According to USPS officials, USPS would contract with a prescription drug plan sponsor 

to implement the EGWP.
Page 15 GAO-13-658 U.S. Postal Service

the approach that USPS has proposed. According to officials, the agency 

also does not have the authority to introduce additional tiers of coverage, 

such as the self-and-spouse and self-and-children tiers included in the 

proposed USPS plan. In April 2013 testimony, OPM proposed that it be 

provided with more flexibility to take additional measures to contain drug 

costs, increase competition, and introduce a new tier of coverage in 

FEHBP.32

USPS would likely realize large financial benefits from its proposed health 

plan, with USPS estimating that it would: (1) reduce its retiree health 

benefit liability by $54.6 billion, thereby eliminating its unfunded retiree 

health benefit liability; (2) reduce its required payments by $7.8 billion in 

the first year of implementation; and (3) reduce its required payments by 

$33.2 billion over the first 5 years of implementation. Most of the financial 

benefits from the proposed plan would result from increasing postal 

retirees’ use of Medicare, thereby increasing Medicare costs. In addition, 

some elements of USPS’s proposal could lead to decreased funds 

available for retiree health care in the future. First, one proposed option 

for investing health plan assets could leave plan assets exposed to risk of 

loss. Second, the ability to transfer surplus funds to use for purposes 

other than health benefits could result in unfunded liabilities. Third, the 

process for selecting economic and demographic assumptions could 

create risks of excessive surplus transfers or inadequately funded retiree 

benefits. Lastly, the collective bargaining process could result in binding 

arbitration that is not required to consider USPS’s financial condition—

which could result in higher costs and thus unfunded liabilities.

 32Jonathan Foley, Director, Planning and Policy Analysis, OPM, The Federal Employees 

Health Benefits Program, testimony before the Subcommittee on Federal Workforce, U.S. 

Postal Service, and the Census, Committee on Oversight and Government Reform, 

United States House of Representatives, 113th Cong., 1st Sess. (Apr. 11, 2013). 

USPS Would Likely 

Realize Large 

Financial Benefits 

from Its Health Plan, 

Mainly by Increasing 

Retirees’ Use of 

Medicare, but Some 

Plan Elements Could 

Decrease Funds 

Available for Retiree 

Health Benefits in the 

Future
Page 16 GAO-13-658 U.S. Postal Service

USPS would likely realize large financial gains from reducing its liabilities 

for retiree health care through implementation of its proposed health plan. 

USPS projects its health plan assets would slightly exceed its liability for 

retiree health care. It estimates a liability reduction of $54.6 billion—

resulting in a $3.7 billion surplus instead of a $50.9 billion unfunded 

liability if the plan were implemented on January 1, 2014 (see table 3).33

USPS projects that its plan would immediately eliminate its existing 

unfunded liability for retiree health care, which was $47.8 billion at the 

end of fiscal year 2012.34 Consistent with this projection, USPS has 

proposed that Congress eliminate its statutorily fixed prefunding 

payments. However, it is important to recognize that elimination of an 

existing unfunded liability does not necessarily eliminate the need for 

continued prefunding payments. The existing workforce would continue to 

earn future retirement benefits that must be funded, as USPS proposes to 

do. In addition, liability measures of this type are subject to significant 

revision or fluctuation, and are likely to change, as underlying economic 

and demographic experience and estimates change. USPS’s proposal 

calls for additional payments, on an actuarial basis, as needed, to pay for 

ongoing benefit accruals for its workforce35

 33The estimates in this section address the implications of USPS’s proposal for prefunding 

and for USPS’s cash flow and liquidity. USPS’s proposal would have different implications 

for its financial reporting (its accounting costs). USPS currently accounts for the costs of 

its participation in FEHBP using a “multiemployer” plan basis under the accounting 

standards, under which accounting costs are set to match USPS’s required payments.

Under USPS’s proposed plan, its accounting would switch to a “single employer” plan 

basis under the accounting standards. On a single employer plan basis, USPS would 

recognize any unfunded liability (or overfunded asset) for retiree health care benefits on its 

balance sheet based on the accounting standards (which measure the unfunded liability 

differently than the measure used for funding purposes discussed in the report), would 

accrue expense on an actuarial basis rather than a current-required-payments basis, and 

would use a different basis for setting assumptions for estimating the cost of future retiree 

benefits.

and to amortize any unfunded 

liability for retiree health benefits.

34USPS has no unfunded liability for health benefits provided to current employees, which 

are financed by USPS on a pay-as-you-go basis.

35The cost of these future retirement benefits attributable to a year of employees’ service 

is called the “normal cost.”

USPS Projects Large 

Financial Gains from Its 

Health Plan and Improved 

Liquidity, Largely by 

Increasing Medicare Use
Page 17 GAO-13-658 U.S. Postal Service

Table 3: USPS-Projected Liabilities and Assets for Retiree Health Care under 

FEHBP and the USPS Proposed Health Plan, Projected to September 30, 2014 

Dollars in billions

Liability for retiree health care under FEHBP 100.0 

Assets for retiree health care under FEHBP 49.1 a

Unfunded liability under FEHBP 50.9 

Change in liability from FEHBP to USPS’s health plan (54.6)

Remaining liability under USPS’s health plan 45.4 

Assets for retiree health care under USPS health plan 49.1 

Unfunded liability (surplus) under USPS health plan (3.7)

Source: USPS.

Note: For purposes of these projections, USPS’s health plan would begin on Jan. 1, 2014.

a

For purposes of these projections, assets supporting the USPS health plan were assumed to 

continue to be invested in special-issue Treasury securities. These assets were assumed to initially 

consist of the assets of the PSRHBF that would be transferred into a newly-created HBF supporting 

the USPS health plan. The assets of this new fund did not include a portion of the FEHBP reserve 

fund that USPS is proposing to be transferred into the new fund.

Increased use of Medicare under USPS’s proposed plan would account 

for most of the projected reduction in USPS’s liability for retiree health 

costs (i.e., reduction in future USPS health costs) and increase the 

federal government’s future Medicare net spending. First, USPS’s 

proposal would lead to greater enrollment of eligible postal retirees in 

Medicare Parts A and B,36 with Medicare acting as the primary insurer for 

those enrollees and the USPS plan paying costs above what Medicare 

would cover for current retirees.37

 36As of the end of 2011, about 8 percent of Medicare-eligible postal retirees were not 

enrolled in Medicare Part A and 22 percent were not enrolled in Medicare Part B—slightly 

lower than the nonpostal FEHBP population, of which 11 percent and 25 percent did not 

enroll in Parts A and B, respectively.

Second, USPS would receive a 

Medicare subsidy from participating in a Medicare Part D Employer Group 

Waiver Plan (EGWP), as well as benefits from discounts from drug 

suppliers on brand-name drugs. According to USPS, these two elements 

of the plan are responsible for $48.8 billion, or 89 percent, of the $54.6 

37Future retirees would not receive 100 percent coverage from the combination of 

Medicare and the proposed USPS plan, since the USPS plan proposes requiring that 

future retirees pay all costs up to the plan deductible and a portion of additional costs for 

care.
Page 18 GAO-13-658 U.S. Postal Service

billion projected reduction in USPS’s liability for retiree health benefits, 

assuming the plan is implemented on January 1, 2014 (see table 4). 

Table 4: USPS-Projected Reduction in Its Liability for Retiree Health Benefits, 

Projected to September 30, 2014 

Dollars in billions

Aspect of proposed plan

All eligible postal retirees enroll in Medicare Parts A & B (23.1)

USPS participates in Medicare Part D EGWP (25.7)

Subtotal: Medicare-related elements (48.8)

Other elements of USPS health plan (1.8) a

Use different assumptions to estimate USPS liability (4.1) b 

Total (54.6)

Source: USPS.

Note: Numbers may not add to total due to rounding. For purposes of these projections, USPS’s 

health plan would begin on Jan. 1, 2014.

a

USPS projected a $3.6 billion liability reduction from adding cost exposure for future retirees and a 

$1.6 billion liability reduction that USPS projects it would achieve from contracting with a single 

vendor to administer its health plan, including processing claims, negotiating payment rates with 

health care providers, and providing wellness and disease management programs; these projected 

reductions were partially offset by a $3.4 billion projected liability increase from the four-tier structure 

of the proposed USPS health plan.

b

USPS estimated its liability for retiree health benefits using assumptions consistent with those that 

OPM uses to determine USPS’s funding requirements for federal pension programs. These 

assumptions are not the same as those used by OPM to estimate USPS’s liability for retiree health 

benefits. Current law requires OPM to determine the value of USPS’s retiree health benefit liability 

based on actuarial assumptions that are consistent with those used by OPM for its financial reporting 

of liabilities for federal employee benefits.

Turning to the projected impact of USPS’s proposed health plan on 

USPS’s liquidity, the implementation of USPS’s proposed health plan for 

current postal employees as well as retirees is projected by USPS to 

result in lower costs and thus greater liquidity for the Postal Service Fund, 

which is used to finance most USPS expenses.38

 38The Postal Service Fund is a revolving fund established in the U.S. Treasury for the 

deposit of all revenues, interest, appropriations, proceeds from borrowing, or any other 

receipts from USPS’s operations. The fund is available to USPS to carry out the purposes, 

functions, and powers of USPS. 39 U.S.C. § 2003. 

Under current law, 

USPS projects that its required payments for health care will total $61.8 

billion for the 5-year period of 2014 through 2018. Whereas under its 

proposed plan, it projects those payments would be reduced by $33.2 
Page 19 GAO-13-658 U.S. Postal Service

billion over this period, with the first-year reduction being $7.8 billion (see 

table 5).39

Table 5: Projected USPS Payments from the Postal Service Fund for Health Benefits 

under FEHBP and USPS’s Proposed Health Plan 

About half of this $33.2 billion difference ($17.2 billion) would 

result from eliminating required fixed payments to prefund retiree health 

benefits from 2014 to 2016.

Dollars in billions

2014 2015 2016 2017 2018 Total

USPS payment requirements from the 

Postal Service Fund under FEHBP under 

current law

13.6 13.7 14.0 10.2 10.3 61.8

USPS payments from the Postal Service 

Fund under proposed USPS health care 

plan

5.8 5.8 5.7 5.7 5.6 28.6

Difference 7.8 7.9 8.3 4.5 4.7 33.2

Source: USPS.

Note: Years are calendar years. 

USPS made a separate calculation of the expected effect of its proposed 

plan on its short-term liquidity. Under this calculation, USPS assumed that 

it would continue to not make prefunding payments required by current 

law, but that it would pay for its share of premium payments for workers 

and retirees. It compared these expected payments to its expected 

payments under its proposed new health care plan. Under this 

calculation, USPS would reduce its payments by $2.1 billion in 2014 and 

by $12.4 billion over the 2014 to 2018 period. Close to half of the 

estimated first-year savings of $2.1 billion would result from reducing

USPS’s premium costs for retirees, largely due to the Medicare-related 

elements of the USPS health plan. In addition, USPS projects that about 

 39While USPS projects that its required payments for health care will total $61.8 billion 

over 2014 through 2018 under current law, USPS officials also have stated that USPS 

would not be able to make this level of required payments. The required payments for 

health care under current law consist of USPS’s share of premium payments for its 

workers, plus retiree health prefunding payments, plus, through fiscal year 2016 only, 

USPS’s share of premium payments for retirees. In addition, USPS’s proposal would 

eliminate the existing $11.1 billion owed for missed prefunding payments in 2012, plus 

another $5.6 billion assuming the 2013 required prefunding payment is missed as well. 

Adding in the elimination of this $16.7 billion would increase the 5-year savings from $33.2 

billion to $49.9 billion.
Page 20 GAO-13-658 U.S. Postal Service

$0.5 billion of the $2.1 billion would result from lower costs for 

employees.40

The estimated liquidity improvement reflects the lower costs expected 

from moving out of FEHBP, where enrollee premiums reflect a large 

minority of Medicare-eligible retirees who do not enroll, to a USPS plan 

where all Medicare-eligible retirees are presumed to enroll. USPS also 

estimates that some of the liquidity improvement would result from 

efficiencies gained in contracting with a single vendor to administer its 

health plan. Some postal employee organizations have objected to having 

postal employees and retirees withdrawn from FEHBP, with one union 

official testifying that there is potential for some cost savings for USPS 

within FEHBP.41

Neither CMS nor OMB has estimated the potential short- or long-term 

effects of the USPS proposal on Medicare costs or the net effects on the 

federal budget. However, as to the short-term effect, USPS projected that 

its plan would increase the more than $550 billion spent annually for 

Medicare by $1.0 billion in the first year of its proposed health plan and an 

average of roughly $1.3 billion annually in the first 5 years of its health 

plan—about 0.2 percent of Medicare’s annual costs.42

 40The remaining portion of the reduction in payments under this alternative calculation by 

USPS would result from making actuarial prepayments instead of pay-as-you-go premium 

payments for retiree benefits.

We have 

previously reported that Medicare is on a path that is fiscally 

41Fredric V. Rolando, President, National Association of Letter Carriers, Solutions to the 

Crisis Facing the U.S. Postal Service, testimony before a hearing of the Committee on 

Homeland Security and Governmental Affairs, United States Senate, 113th Cong., 1st

Sess. (Feb. 13, 2013).

42These projections factor in additional Medicare spending for Parts A and B and drug 

subsidies under the EGWP, offsetting Part B contributions from additional postal retirees 

enrolling in Part B, and offsetting drug discounts under the EGWP. USPS projected that 

the total cost to the federal government would be less than the $1 billion increase in 

Medicare spending in the first year of implementation, because USPS’s plan would reduce 

health care premiums for postal retirees some of which is financed by the federal 

government. USPS estimates that the proposal would reduce the federal share of postal 

retiree premiums by about $300 million annually. As previously noted, the federal 

government also absorbs some costs for those employees who also had service with the 

United States Post Office Department, which is prorated to reflect the number of years of 

such service by postal retirees. 5 U.S.C. § 8906(g).
Page 21 GAO-13-658 U.S. Postal Service

unsustainable over the long term.43 Spending for Medicare Part A already 

exceeds dedicated revenue, and the Part A trust fund is currently 

expected to be exhausted by 2026. Total Medicare spending is expected 

to increase as a share of GDP in coming decades, putting greater 

pressure on the rest of the federal budget. While there are significant 

uncertainties about the future growth of health care spending, particularly 

related to the sustainability of cost containment mechanisms over the 

long term, additional costs from USPS’s proposed plan would also have 

to be weighed alongside the fiscal pressure already faced by Medicare.

Some elements of USPS’s proposal could reduce funds available for 

health care in the future, including one proposed option for managing 

health plan assets; the disposition of health plan assets deemed 

“surplus;” and the assumptions used to calculate liabilities.

Under one option of USPS’s legislative proposal (which USPS refers to 

as “Scenario 2”), assets supporting its health plan could be invested in 

stocks, private sector bonds, and other non-Treasury securities exposed

to risk of loss.44

 43See GAO, High-Risk Series: An Update, 

Currently, as with the Postal Service Fund that USPS 

uses to pay most of its expenses, all assets of the PSRHBF are invested 

solely in special-issue Treasury securities backed by the full faith and 

credit of the federal government. In contrast, USPS has stated that it 

would seek increased investment returns on assets of a newly created 

HBF. Under Scenario 2, the HBF would inherit all of the assets of the 

existing PSRHBF (reported at $45.7 billion at the end of fiscal year 

GAO-13-283 (Washington, D.C.: February, 

2013); Medicare: Program Remains High Risk Because of Continuing Management 

Challenges, GAO-11-430T (Washington, D.C.: Mar. 2, 2011); and The Federal 

Government’s Long-Term Fiscal Outlook: Spring 2013 Update, GAO-13-481SP

(Washington, D.C.: Apr. 11, 2013). 

44For example, plan assets could be invested in commodities, foreign currency, and real 

property. The plan also could acquire a controlling interest in stock of a private company,

subject to certain limitations. USPS investment of plan assets would not require approval 

of the Secretary of the Treasury. See app. II for more detail.

Some Elements of 

Proposed Plan Could 

Reduce Funds Available 

for Retiree Health Care in 

the Future

Potential Decrease in Future 

USPS Health Plan Assets
Page 22 GAO-13-658 U.S. Postal Service

2012).45 Other assets of the HBF would include a portion of the current 

OPM-managed Employee Health Benefits Fund that supports FEHBP46

Under Scenario 2, USPS’s investment policy for the HBF would be 

managed by a Committee subject to specified provisions of the Employee 

Retirement Income Security Act of 1974 (ERISA)

that would be transferred to USPS, as well as ongoing contributions from 

USPS and from employees and retirees participating in the plan.

47

Large private sector pension plans typically invest substantial portions of 

plan assets in asset classes such as stocks, often including some 

allocation to “alternative” asset classes such as private equity or hedge 

funds.

pertaining to certain 

fiduciary duties and responsibilities. ERISA requires that plan assets be 

managed solely in the interest of plan participants and their beneficiaries 

for the exclusive purpose of providing benefits and defraying plan 

expense; with the care, skill, prudence and diligence of a prudent man 

acting in a like capacity; and to generally diversify the assets so as to 

minimize the risk of large losses.

48

 45Under Scenario 2, the PSRHBF would be abolished upon transfer of its assets to the 

new HBF. Under a separate option (which USPS refers to as “Scenario 1”) the PSRHBF 

would be continued and used to finance retiree health benefits under USPS’s health plan.

See app. II for more detail.

While such types of investments can offer the potential for 

46See app. II for more detail.

47ERISA governs most private sector benefit plans. The USPS proposal would provide 

that Committee members are subject to the provisions applicable to fiduciaries under 

sections 1104 – 1106, 1108, and 1110 of title 29, U.S. Code, and, to sections 1131 and 

1132 of title 29, U.S. Code, only to the extent they concern the performance of fiduciary 

responsibilities. Since the USPS proposal provides that the plan established by the USPS 

is a “governmental plan” under ERISA, the provisions of Title I of ERISA generally would 

not apply to the plan. See 29 U.S.C. § 1003(b)(1). Therefore, oversight and enforcement 

provisions of Title I of ERISA not specifically made applicable in the proposal would not 

apply to the plan and the extent of the Department of Labor’s role in ensuring compliance 

remains unclear.

48See GAO, Defined Benefit Pension Plans: Recent Developments Highlight Challenges 

of Hedge Fund and Private Equity Investing, GAO-12-324 (Washington, D.C.: Feb. 16, 

2012); Randy Diamond, “Volatility plays starring role in allocation shifts,” Pensions & 

Investments, vol. 38, no. 3 (2010); Arleen Jacobius, “Funds still carrying torch for 

alternatives: Private equity, real estate asset classes show double-digit increases in 

2011,” Pensions & Investments, vol. 40 no. 3 (2012); Christine Williamson, “Top pension 

funds put 20.3% more into hedge fund strategies,” Pensions & Investments, vol. 41 no. 3 

(2013); and S&P Dow Jones Indices LLC, S&P 500® 2011: Pensions and Other PostEmployment Benefits (OPEB) (New York, NY: July 2012).
Page 23 GAO-13-658 U.S. Postal Service

returns significantly in excess of those on Treasury securities, and thus 

the potential for significantly lower long-term funding costs, they also have 

a significant risk of loss relative to investments in Treasury securities. 

Private sector companies and state and local governments that prefund 

retiree health benefits are permitted to, and do, invest plan assets in nonTreasury securities, typically in a mix that includes significant allocations 

to stocks and private sector bonds, among other asset classes. The 

National Association of Letter Carriers, noting the low interest rates on 

Treasury securities, has suggested that USPS remain in FEHBP, but with 

the PSRHBF invested in index funds of the federal Thrift Savings Plan. 

These proposals would allow USPS to seek higher investment returns, 

but there would be additional risk.

The U.S. Treasury Department’s standard position and policy is that 

federal investment funds should be invested only in Treasury securities to 

minimize risk of loss.49 According to Treasury officials, the position of the 

U.S. Treasury Department is that no USPS funds—including any funds of 

a USPS health plan—should be invested outside of the Treasury and 

should instead remain invested in special-issue Treasury securities to 

ensure their safety.50

If USPS health plan fund assets were invested in non-Treasury securities 

that have more risk than Treasury securities and a market downturn 

caused severe losses in asset value, health benefits to postal employees 

and retirees could potentially decline or be jeopardized, such as through 

changes in plan provisions in reaction to unfunded liabilities or eventual 

inability to pay some benefits because of lack of funds. According to 

USPS, under its proposed health plan, there would be no explicit federal 

guarantee of USPS health benefits for postal employees, annuitants, or 

survivors, including any participants in the USPS health plan. If a market 

downturn caused losses in the value of fund assets, this would reduce 

funds available for postal health care. The impact of such losses could be 

magnified because a market downturn that negatively affected the value 

of plan assets could be associated with a more general economic 

downturn that negatively affected USPS mail volume and revenues. A 

 49According to Treasury officials, there would be no protection of the value of the assets of 

the HBF, with the exception of any investments in special-issue Treasury securities.

50Treasury officials also cited other advantages of Treasury securities, such as minimizing 

investment and administrative costs.
Page 24 GAO-13-658 U.S. Postal Service

simultaneous decline in plan assets and USPS revenue could be a 

potential threat to USPS’s financial viability or to workers’ and retirees’ 

benefit security should plan assets be invested in risky non-Treasury 

securities.

USPS is currently not well positioned to face a potentially significant 

decline in the value of plan assets, as it continues to incur significant 

operating losses and experience a continuing decline in mail volume, 

particularly in First-Class Mail. USPS could have great difficulty earning 

profits on its postal business to eventually make up investment losses it 

might incur on its over $45 billion of health plan assets. Due to its 

financial difficulties, USPS has missed $11.1 billion in prefunding 

payments for retiree health benefits and has recently reported that, given 

its low levels of liquidity, it will likely be forced to miss future prefunding 

payments.51

One other asset class that could be an option as part of a portfolio for 

prefunding USPS’s retiree health care benefits would be inflation-indexed 

Treasury securities (known as TIPS). Since the amount of future retiree 

health care expenditures can be expected to vary with levels of future 

medical inflation, which in turn can be expected to vary somewhat with 

general inflation, inflation-indexed securities would provide a partial 

hedge against the risk of future medical inflation and retiree health 

expenditures. According to the U.S. Treasury Department, both TIPS and 

nominal (non-inflation-indexed) Treasury securities are safe and secure, 

backed by the full faith and credit of the United States government.52

In response to concerns that have been expressed about the investment 

of assets for retiree health care in other than Treasury securities, USPS 

developed an alternative option for financing its health plan (which it 

refers to as “Scenario 1”). As previously discussed, under Scenario 1, the 

 51USPS, Quarter II, 2013 Report on Form 10-Q, p. 16.

52Treasury officials told us that while the U.S. Treasury Department has issued both 

marketable Treasury securities to the public and special-issue Treasury securities for 

various federal programs, it has not to date issued any special-issue TIPS. Special-issue 

Treasury securities are protected by the U.S. Treasury Department against fluctuations in 

market value. While payments of interest and principal on Treasury securities are backed 

by the full faith and credit of the United States government, if marketable Treasury 

securities are sold prior to maturity, the market value could be less than the principal 

amount, depending upon prevailing interest rates, so such securities could be sold at a 

loss.
Page 25 GAO-13-658 U.S. Postal Service

PSRHBF would be continued and used to finance retiree health benefits 

under USPS’s health plan, though without continued OPM management 

since the plan would be administered by USPS. All future funding of 

USPS’s retiree health benefits liability would be deposited into the 

PSRHBF. According to USPS, the current and future assets of the 

PSRHBF would continue to be invested as now, in special-issue Treasury 

securities or otherwise as might be directed by Congress. USPS would 

prefer to have some input on the structure of the asset holdings so that 

the PSHRBF’s investments would be matched by duration to the 

expected benefit payments. According to USPS, this could be 

accommodated with the use of Treasury securities and is a sounder way 

of matching assets and liabilities than is currently in place. USPS officials 

stated that Congress’s adoption of either scenario would be acceptable to 

USPS.

If USPS is permitted to, and does, invest plan assets in non-Treasury 

securities such as stocks, an important issue that would have to be 

resolved would be the appropriate method for determining the “discount 

rate” used in calculating USPS’s liability for prefunding purposes. The 

discount rate is a key assumption in estimating the value of retirement 

liabilities, and there is significant disagreement among actuaries, 

economists, and other professionals regarding the appropriate approach 

to determining it.53 One school of thought calls for basing the discount 

rate on an expected long-term rate of return based on the allocation of 

plan assets. This is the model generally used, for example, for 

determining funding targets for state and local government pension 

plans.54

 53The “discount rate” is used to convert projected payments in the future into present 

values. We have a separate ongoing review examining the discount rate controversies for 

pension plans. See 

Since stocks have a higher expected return, on average, than 

bonds, a greater allocation of plan assets to stocks increases the discount 

rate, which in turn lowers the estimated liability and the needed amount of 

prefunding payments. This can also create an incentive to invest a 

GAO-13-112 for additional discussion of the discount rate used for 

USPS’s current participation in FEHBP. There are different types of liabilities calculated 

for different purposes, including liabilities for financial reporting purposes and liabilities for 

determining prefunding targets and payments. The discount rate for financial reporting 

purposes is governed by relevant accounting standards. The discussion here is about the 

discount rate for prefunding purposes. 

54This model is also used for multiemployer pension plans and for prefunding retiree 

medical benefits in the private and state and local government sectors, when these are 

funded.
Page 26 GAO-13-658 U.S. Postal Service

greater proportion of plan assets in investments such as stocks. A 

different school of thought calls for basing the discount rate on bond 

yields, which produces a discount rate that is independent of the 

allocation of plan assets. A variation of this approach is used for private 

sector single-employer pension plans under the Pension Protection Act of 

2006.55

We are concerned with USPS’s proposal to allow the transfer of surplus 

assets because if surpluses are consistently transferred, then an 

unfunded liability—the difference between the liability and plan assets—

for retiree health benefits could result. Under Scenario 2 of USPS’s 

proposal, in any year that assets supporting the USPS health plan 

exceeded USPS’s liability for retiree health benefits, the Committee 

appointed by USPS to oversee its health plan could transfer the 

estimated surplus to the Postal Service Fund that USPS uses to pay most 

of its expenses, including its general operating expenses. According to 

USPS, a transfer could not occur unless the Committee concluded, after 

receiving an actuarial report, that the transfer would not violate the 

requirement that the assets in the HBF supporting the USPS health plan 

exceed its estimated actuarial liability. USPS officials told us that their 

principal concern is that they would prefer to have the question of the 

potential disposition of excess assets set aside for retirees addressed in 

legislation, to avoid uncertainties they told us have arisen with respect to 

this issue in funding the Civil Service Retirement System and the Federal 

Employees Retirement System. They noted that it is possible to envision 

some circumstances in which a surplus could be quite large, and as a 

result, some guidance from Congress as to the potential disposition of a 

surplus, under whatever strictures Congress would see fit to impose, 

would be appropriate. They told us that while they made an initial 

There are many possible variations on the bond-yield approach, 

but these types of approaches generally produce a more conservative 

discount rate than the expected-return-on-plan-assets approach. Hybrid 

approaches are also feasible. Factors to consider in establishing the 

discount rate model that would be used for a USPS-sponsored plan 

include the fragile state of USPS’s finances, the mature age profile of 

USPS’s workforce, and the large number of USPS retirees. These 

circumstances would point to a more conservative approach to setting 

USPS’s prefunding discount rate.

 55Pub. L. No. 109-280, § 112(a), 120 Stat. 780, 798 (Aug. 17, 2006), codified at 26 U.S.C. 

§ 430(h)(2).

USPS’s Proposal for 

Transferring Surplus Assets 

Could Create Future Unfunded 

Liability
Page 27 GAO-13-658 U.S. Postal Service

proposal in their August 2011 legislative language, they are open to any 

reasonable resolution of this issue.

In our view, except in special circumstances, transferring surpluses 

creates risk because liability measurements for retirement benefits are 

inherently uncertain and subject to significant revision and fluctuation as 

more information becomes available and as economic and demographic 

conditions change.56

In 2011, we reported on considerations and options regarding the 

disposition of any surplus assets in USPS’s Federal Employees 

Retirement System subaccount.

In addition, under Scenario 2, the more than $45 

billion saved to prefund retiree health benefits would no longer be 

restricted to that purpose but could be used to pay for employee health 

benefit costs and plan administration. OPM officials noted that USPS 

could face health claims costs that exceed what it is expecting, and as a 

self-insured plan, USPS would be fully responsible for financing those 

costs. Given USPS’s financial condition, using the funds previously set 

aside to finance retiree health benefits may be necessary for financing 

unexpected increases in health plan costs. In this regard, USPS officials 

told us that at least in Scenario 1 and possibly in either scenario, USPS 

would expect to segregate and not commingle assets designated for 

retiree health benefits from those that might be maintained in the 

management of the health benefits funds required for active employees.

57

 56In addition, if the plan assets were also subject to significant risk and fluctuation in value, 

such as through investments in the stock market, it could make the unfunded liability even 

more unstable, so that transferring surplus for other uses would be even riskier.

Similar considerations are relevant to 

any surplus assets relative to USPS’s liability for retiree health benefits. A 

transfer of surplus assets would raise the risk of a future unfunded 

liability—a risk that would increase significantly if there were automatic, 

recurring transfers. A one-time transfer can sometimes be justified by 

special circumstances. A significantly safer and more prudent approach is 

to amortize any surplus over an extended period—for example, to match 

the amortization period to that required to address any unfunded liability, 

which has an element of fairness in that it would treat surpluses and 

unfunded liabilities symmetrically. The amortization amount would be an 

offset to the normal cost (the annual prefunding cost for the future 

57GAO, U.S. Postal Service: Allocation of Responsibility for Pension Benefits between the 

Postal Service and the Federal Government, GAO-12-146, Appendix II (Washington, D.C.: 

Oct. 13, 2011).
Page 28 GAO-13-658 U.S. Postal Service

benefits being earned by current workers), reducing USPS’s prefunding 

payment somewhat. Another approach would be to use the surplus to 

offset the entire normal cost, thereby reducing the prefunding payments 

to zero (for as many years until the surplus is used up). This approach 

would be more risky than the amortization approach in that it would 

essentially return the surplus more quickly, but significantly less risky than 

transferring the entire surplus all at once. This approach would be similar 

to that allowed for private sector pension plans.

Under USPS’s proposal, there can be some risk of overly optimistic 

assumptions in valuing the funded status of USPS’s health plan—

resulting, for example, in actual investment returns that are less than the 

assumptions, or liabilities that are larger than anticipated by the 

assumptions—potentially leading to inadequate funding of benefits. 

Although USPS has proposed some safeguards over the selection of 

assumptions, an additional safeguard would be to have assumptions 

selected by an independent third party.

Selecting long-term assumptions for asset returns, medical inflation, and 

other economic and demographic variables involves judgment, with room 

for professional disagreement and differing estimates, which can have a 

very large impact on the estimated size of the retiree health liability and 

on the amount of prefunding payments. For example, in recent years the 

USPS OIG has had disagreements over certain assumptions selected by 

OPM’s actuaries.58

Under USPS’s proposal, the current oversight function provided by OPM, 

including its staff of actuaries, would no longer apply. USPS has stated 

that it is important to establish a solid structure for governance and 

oversight of its proposed plan. USPS has also said it would adopt a best 

practices approach for governance and oversight based on models in the 

private sector. Oversight of the plan would include the formation of a 

Health Benefits Plan Management Committee, which would include 

members selected by USPS, including members recommended by the 

unions, management associations, and the U.S. Treasury Department. 

Specifically, USPS would retain the services of an independent actuary 

qualified under the U.S. Qualifications Standard and subject to the U.S. 

 58USPS OIG, Estimates of Postal Service Liability for Retiree Health Care Benefits, ESSMA-09-001(R) (Arlington, VA: July 22, 2009). 

Use of Overly Optimistic 

Assumptions Could Decrease 

Funds
Page 29 GAO-13-658 U.S. Postal Service

Code of Professional Conduct and Actuarial Standards of Practice to 

perform an annual actuarial valuation of the USPS health benefit plan and 

fund.

While these safeguards are important, they do not provide for selection or 

oversight of assumptions that would be independent of USPS or its 

chosen contractors. Given the tens of billions of dollars involved, the 

sensitivity of results to assumptions, USPS’s financial condition, and 

potential pressures from different constituencies, assumptions could be 

selected by an independent actuarial body. Potential models could 

include the Board of Actuaries for the federal civilian pension program 

and the Boards of Actuaries for the military retirement programs.

USPS health benefit costs and liabilities could increase over time 

because, under USPS’s proposal, the scope of the collective bargaining 

process would be expanded to cover health benefits and premiums. In 

this regard, the collective bargaining process, which could result in 

binding arbitration, does not require the consideration of USPS’s financial 

condition. Although the collective bargaining process could potentially 

result in appropriate modifications to the USPS health plan over time, it 

also could result in changes that increase USPS’s health benefits costs, 

such as expanded benefits, an increase in the percentage of claims costs 

that the USPS health plan covers, or decreases in employee and retiree 

premiums. It is important to note that even if USPS does not agree to 

such changes in collective bargaining, the changes could result from 

binding arbitration. In this regard, arbitrators also are not required to 

consider USPS’s financial condition during binding arbitration. In 2010, 

when we found USPS’s business model was not viable, we 

recommended Congress consider multiple actions, including changing the 

statutory framework for collective bargaining to ensure that binding 

arbitration takes USPS’s financial condition into account.59 We recently 

reaffirmed this recommendation in testimony in early 2013 before the 

Senate and House postal oversight committees.60

 59

USPS supports this 

recommendation, but according to USPS officials, even without such a 

requirement for arbitrators, any future arbitration would be exceedingly 

GAO-10-455. 

60GAO-13-562T and GAO-13-347T.

Expanded Collective 

Bargaining over Health 

Benefits and Premiums 

Could Increase Costs 

without Regard to USPS’s 

Financial Condition
Page 30 GAO-13-658 U.S. Postal Service

unlikely to dramatically escalate the cost of health benefits beyond those

contemplated by its health plan.

Under the proposed USPS plan, as designed for the first year, postal 

employees and retirees would have coverage for a similar package of 

services as those covered by selected FEHBP plans that we reviewed, 

and the level of coverage would be similar for many services, with some 

exceptions.61 We estimate that, had the proposed USPS plan been 

implemented in 2013, most employees and retirees would have had 

similar or lower premiums compared to the selected FEHBP plans; but 

total costs—premiums and costs for the use of care—could be higher for 

some, due in part to higher deductibles and out-of-pocket maximums 

under the USPS plan. In addition, employees and retirees would have 

many but not all of the same protections relating to coverage and costs 

under the USPS plan that they have in FEHBP.

 61Services cannot be compared beyond the first year, because USPS’s benefits could 

change. Under USPS’s proposal, the requirement that benefits be similar in type and 

value to that of the most popular FEHBP plan is limited to the first year for employees. For 

current retirees, the standard extends beyond the first year. For those who retire after the 

first year, the USPS proposal offers no benchmark for comparability with FEHBP plan 

benefits. 

Compared to FEHBP, 

Postal Employees and

Retirees Would Have

Coverage for Similar

Services, but

Elements of the

Proposed Plan’s

Design Could Lead to

Higher Costs for

Some Enrollees
Page 31 GAO-13-658 U.S. Postal Service

Under the USPS plan as designed for the first year of implementation, 

employees and retirees would generally have a similar set of services 

covered, including inpatient and outpatient services and prescription 

drugs, as they have under selected FEHBP plans.62 For example, like the 

selected seven FEHBP plans that we reviewed, the proposed USPS plan 

would cover inpatient hospital room and board, surgery, visits to primary 

care and specialist physicians, chemotherapy, laboratory tests, and 

prescription drugs. The proposed USPS plan also would cover some 

services that were not covered by all selected FEHBP plans, such as 

routine hearing tests. However, USPS had not determined as of February 

2013 whether the USPS plan would provide coverage for three services—

acupuncture, family planning and contraceptive care, and infertility 

diagnostic services—covered by all selected FEHBP plans.63

When comparing coverage levels—the portion of service costs paid by 

the insurer for covered services—we found employees and retirees in the 

selected FEHBP plans that we reviewed would have similar or higher 

levels of coverage for many services under the USPS plan.64

 62Our review includes the seven plans with the highest enrollment of postal employees 

and retirees, which comprised about 78 percent of total FEHBP enrollment from postal 

employees and retirees. The remaining 22 percent of postal employee and retiree 

enrollment was spread across 140 other FEHBP plans, which we did not review.

Compared 

to the selected FEHBP plans we reviewed, the USPS high and middle 

options would provide employees and current retirees not eligible for 

Medicare with levels of coverage within or above the range of coverage 

offered by selected FEHBP plans for more than half the in-network 

services we reviewed (23 of 29 for the proposed USPS high option and 

21 of 29 for the middle option). For example, the proposed USPS middle 

option would cover 85 percent of in-network surgery costs and the high 

option would cover 90 percent; the selected FEHBP plans we reviewed 

63USPS officials said they would determine coverage when procuring a contract with a 

vendor to administer the health plan. Family planning/contraceptive care can include 

coverage for contraceptive counseling and medical goods such as implantable 

contraceptives. Not all plans cover all of the same procedures or items within a category 

of goods or services.

64We excluded one of the seven selected FEHBP plans that we reviewed from this 

comparison of coverage levels because the structure of benefits for the plan was not 

comparable to that under the proposed USPS plan.

Under the Proposal, Postal 

Employees and Retirees 

Would Have Coverage for 

Similar Services at Similar 

Coverage Levels when 

Compared with FEHBP, 

with Some Exceptions
Page 32 GAO-13-658 U.S. Postal Service

would cover from 85 percent to 90 percent (see table 6).

65 For current 

USPS retirees who are eligible for Medicare, coverage for inpatient and 

outpatient services would generally be the same under the proposed 

USPS plan as under the selected FEHBP plans, with the USPS plan 

covering 100 percent of the cost beyond what Medicare covers.

Table 6: Examples of Services for Which the USPS Proposed Plan Offers Levels of 

Coverage for In-Network Care within the Range of Coverage Offered by Selected 

FEHBP Plans

In-network coverage 

levels for USPS plan

Service

Middle 

option

High 

option

Range of in-network coverage 

levels for selected FEHBP plans

Chemotherapy and 

radiation therapy 

85% 90% 85% to 90%

Outpatient diagnostic 

laboratory services

85% 90% 85% to 100%

Inpatient hospital 

admission

85% a 90% 85% after $200 copayment to 

100% after $100 copayment

Routine physical exam 

(adults and children)

100% 100% 100%

Surgery (outpatient and 

inpatient)

85% 90% 85% to 90%

Source: GAO analysis of USPS proposal and 2013 FEHBP plan brochures.

Note: The selected FEHBP plans included: the standard option of the Blue Cross and Blue Shield 

Service Benefit Plan, the NALC Health Benefit Plan (sponsored by the National Association of Letter 

Carriers), the American Postal Workers Union Health Plan, the Government Employees Health 

Association, Inc. Benefit Plan (which included both the high and standard options), the Mail Handlers 

Benefit Plan, and the Rural Carrier Benefit Plan. These plans are all national, fee-for-service plans, as 

the proposed USPS plan would be, and do not include high-deductible or consumer-driven plans.

a

This includes room and board and other hospital services and supplies related to inpatient 

admission.

 65An example of a service for which coverage under the USPS plan is above the range of 

the selected FEHBP plans is brand-name prescription drugs listed on a plan formulary and 

purchased through a retail pharmacy. However, levels of prescription drug coverage are 

also affected by which specific drugs are included on the plan formulary, and the 

composition of formularies is at the discretion of individual plans or their pharmacybenefits vendors.
Page 33 GAO-13-658 U.S. Postal Service

While the proposed USPS plan would provide similar levels of coverage 

for many services, we found some exceptions where employees and 

retirees would have lower levels of coverage or where it was unclear how 

the level of coverage would compare for a service. For example, 

employees and non-Medicare-eligible retirees would have lower coverage 

under USPS’s high option for 2 of the 29 in-network services (primary 

care office visits due to illness and outpatient mental health or substance 

abuse treatment).66 In addition, USPS’s middle option would provide 

lower levels of coverage than the selected FEHBP plans we reviewed for 

those and 2 other services (visits to specialist physicians and maternity 

care services).67 For several other in-network services, whether the USPS 

plan would provide higher, comparable, or lower levels of coverage would

depend on the cost of the service.68

We found a few other instances where employees and retirees would 

have lower levels of coverage under the USPS plan. Specifically, levels of 

coverage would generally be lower for out-of-network services, for those 

insured under USPS’s value option, and for future retirees when they 

become eligible for Medicare.

Finally, we could not compare the 

coverage levels for one service (ambulance ground transport) because 

USPS had not determined at what level the plan would cover the 

services.

• Services received out-of-network. Employees and non-Medicareeligible retirees generally would have lower coverage levels for out-ofnetwork services under the proposed USPS plan than under the 

selected FEHBP plans we reviewed. For example, for surgical 

 66For visits to in-network primary care doctors due to illness, the proposed USPS high 

option would cover $5 to $15 less per visit than the selected FEHBP plans we reviewed, 

and the proposed middle option would cover $15 to $25 less per visit. For outpatient

mental health or substance abuse services from in-network providers, the proposed high 

option would cover $20 to $30 less per visit, and the proposed middle option would cover 

$30 to $40 less per visit. 

67Under the proposed USPS middle option, coverage for visits to in-network specialists 

would be between $10 and $32 less than selected FEBHP plans. Coverage for maternity 

care from in-network providers would be between 5 percent and 15 percent less than 

selected FEHBP plans. 

68For example, the proposed USPS plan would provide lower coverage than the selected 

FEHBP plans for generic drugs from a mail-order pharmacy that cost more than $150. 

USPS’s plan would provide coverage within the range of selected FEHBP plans for drugs 

costing between $50 and $150 and greater coverage for drugs costing less than $50. 
Page 34 GAO-13-658 U.S. Postal Service

services from out-of-network providers, the selected FEHBP plans 

would cover from 65 to 75 percent of allowable charges; the proposed 

USPS high option would cover 60 percent, and the proposed USPS 

middle option would cover 50 percent.69

• USPS’s value option. USPS’s value option would generally have 

lower levels of in-network and out-of-network coverage than the 

selected FEHBP plans we reviewed for employees and non-Medicareeligible retirees. However, USPS officials expected a smaller 

proportion of employees and retirees to select this option as 

compared to the high and middle options.

Representatives from one 

selected FEHBP plan noted that generally 10 percent to 20 percent of 

enrollee charges are for services received out of network. USPS 

officials reported that their discussions with health insurance carriers 

indicated that out-of-network claims represented 2.5 percent to 10 

percent of total claim costs.

• Future retirees when they become eligible for Medicare. Those who 

retire after the first year of implementation would be subject to the 

USPS plan’s annual plan deductibles and cost-sharing for covered 

services even after enrolling in Medicare. The selected FEHBP plans 

we reviewed waive the annual plan deductible and do not require 

copayments for inpatient and outpatient services for retirees who 

enroll in Medicare.

In addition, while covered services and coverage levels may be similar 

under the USPS plan and the selected FEHBP plans, some postal 

employees and retirees may have to find new providers in order to avoid 

paying the higher out-of-network charges. Further, the more than 20 

percent of Medicare-eligible postal retirees who are not enrolled in 

Medicare Part B, but are assumed to do so under the postal plan, will 

need to select Medicare participating providers in order to receive full 

coverage of care.

 69“Allowable charges” are set by each plan and reflect the amount that a plan considers 

reasonable or customary for a specific service. A plan’s allowable charges sometimes can 

vary based on geographic area. In general, in network providers negotiate with health 

plans to determine the allowable charge for various services. 
Page 35 GAO-13-658 U.S. Postal Service

Our estimates indicate that under USPS’s proposed plan most postal 

employees and retirees would have had similar or lower premiums than 

under the seven selected FEHBP plans in 2013. Depending on which 

USPS option was chosen, we estimated that from 63 percent to 97 

percent of employees and retirees would have premiums that are similar 

(within 10 percent) or lower (more than 10 percent less) than the 

premiums they would have paid under FEHBP.70 For example, if all postal 

employees and retirees in the selected FEHBP plans chose USPS’s 

middle option, 94 percent of them would pay similar or lower premiums, 

which for employees with self-only coverage, would mean paying 

anywhere from about $100 more to $1,000 less in premiums annually 

under the USPS middle option than under their current FEHBP plan (see 

figure 1).

71

Figure 1: Percentage of Postal Employees and Retirees from Selected FEHBP Plans 

Who Could Obtain Similar or Lower Premiums under the Proposed USPS Health 

Plan, 2013

 70As previously noted, we defined “similar” premiums as those within 10 percent of the 

projected premium for the proposed USPS plan and “lower” as those more than 10 

percent less. Those that would not pay similar or lower premiums would pay premiums 

more than 10 percent higher under the USPS proposed plan than under their FEHBP 

plan. 

71Those with self-only coverage would be more likely than those needing family coverage 

to have similar or lower premiums under the proposed USPS plan. For example, we 

estimated that 70 percent of employees and retirees with self-only coverage would have 

similar or lower premiums under the proposed USPS high option than under their FEHBP 

plan. By comparison, we estimated that 58 percent of those with self-and-family coverage 

would have similar or lower premiums under the USPS high option. Medicare-eligible 

retirees who were not enrolled in Part B in FEHBP but would be enrolling under the USPS 

plan would be more likely than other enrollees to have higher premium costs under the 

USPS proposal because of the addition of the Part B premium.

At Least 63 Percent of 

Employees and Retirees in 

Selected FEHBP Plans 

Would Pay Similar or 

Lower Premiums, but 

Elements of the Proposed 

USPS Plan Could Lead to 

Higher Total Costs for 

Some
Page 36 GAO-13-658 U.S. Postal Service

Note: For these estimates, we defined “similar” premiums as those within 10 percent of the premium 

the employee or retiree would have paid in 2013 for their FEHBP plan and “lower” premiums as those 

more than 10 percent less than the FEHBP premium. The estimates assume that enrollment in the 

selected FEHBP plans did not change from 2011 to 2013. Estimates also use USPS’s assumptions of 

the distribution of those with family coverage under FEHBP across the three levels of family coverage 

offered under the USPS proposed plan. The estimates account for Medicare Part B premiums that 

Medicare-eligible retirees are assumed to pay under USPS’s proposed plan.

The selected FEHBP plans included: the standard and basic options of the Blue Cross and Blue 

Shield Service Benefit Plan, the NALC Health Benefit Plan (sponsored by the National Association of 

Letter Carriers), the American Postal Workers Union Health Plan, the Government Employees Health 

Association, Inc. Benefit Plan (which included both the high and standard options), the Mail Handlers 

Benefit Plan, and the Rural Carrier Benefit Plan. These plans are all national, fee-for-service plans, as 

the proposed USPS plan would be, and do not include high-deductible or consumer-driven plans.

However, certain elements of the proposed USPS plan in combination 

with lower levels of coverage for some services could lead to higher total 

costs—premiums and out-of-pocket costs—for some employees and 

retirees than under the selected FEHBP plans we reviewed. Specifically, 

though deductibles and out-of-pocket maximums for in-network care 

under the USPS proposed high option would be similar to or lower than 

the selected FEHBP plans we reviewed, total deductibles and maximums 

for in-network and out-of-network care would generally be higher.72 For 

example, total out-of-pocket maximum amounts for family coverage for innetwork and out-of-network services would be at least $8,000 more under 

the proposed high option and at least $14,000 more under the proposed 

middle option than under any selected FEHBP plan (see table 7). The 

proposed USPS plan also includes a separate $1,500 out-of-pocket 

maximum for prescription drugs, which would provide more cost 

protection for prescription drug spending than most of the selected plans 

but less than the FEHBP plan with the greatest number of postal 

enrollees. The differences in deductibles and out-of-pocket maximums 

under the USPS plan—on their own, or in combination with lower 

coverage levels for some services—could lead to higher total costs for 

some postal employees and non-Medicare-eligible retirees, including 

those who would have lower premiums under the USPS plan.

 72For our analysis of annual plan deductibles and out-of-pocket maximums, we excluded 

one of the seven selected FEHB plans because the structure of the deductibles and outof-pocket maximums was not comparable to that under the proposed plan.
Page 37 GAO-13-658 U.S. Postal Service

Table 7: Comparison of Proposed USPS Annual Plan Deductibles and Out-ofPocket Maximums to Those of Selected FEHBP Plans

USPS plan

Range for selected 

FEHBP plans

High 

option

Middle 

option

Annual deductible for in-network 

services

Self-only $275 to $400 $250 $500

Self and family $550 to $800 $500 $1,000

Total annual deductible for innetwork and out-of-network 

servicesa

Self-only $300 to $660 $750 $1,500

Self and family $600 to $1,500 $1,500 $3,000

Annual out-of-pocket maximum for 

in-network services

Self-only $4,000 to $6,000 $3,000 $4,000

Self and family $4,000 to $6,000 $6,000 $8,000

Total annual out-of-pocket 

maximum for in-network and out-ofnetwork servicesb

Self-only $4,500 to $10,000 $9,000 $12,000

Self and family $5,000 to $10,000 $18,000 $24,000

Source: GAO analysis of USPS proposal and 2013 FEHBP plan brochures.

Note: Separate deductibles and out-of-pocket maximums for prescription drug services are not 

included. The selected FEHBP plans included: the standard option of the Blue Cross and Blue Shield 

Service Benefit Plan, the NALC Health Benefit Plan (sponsored by the National Association of Letter 

Carriers), the American Postal Workers Union Health Plan, the Government Employees Health 

Association, Inc. Benefit Plan (which included both the high and standard options), the Mail Handlers 

Benefit Plan, and the Rural Carrier Benefit Plan. These plans are all national, fee-for-service plans, as 

the proposed USPS plan would be, and do not include high-deductible or consumer-driven plans.

a

Unlike the selected FEHBP plans, the proposed USPS plan would have a separate annual 

deductible for out-of-network services. The total in-network and out-of-network annual deductible 

reflects the sum of the separate in-network and out-of-network deductibles.

b

Unlike the selected FEHBP plans, the proposed USPS plan would have a separate out-of-pocket 

maximum for out-of-network services. The total in-network and out-of-network out-of-pocket 

maximum reflects the sum of the separate maximum limits for in-network and out-of-network care.

Employees and non-Medicare-eligible retirees could be at greater risk for 

higher costs due to these plan elements depending on: the amount and 

the cost of care they use, their use of out-of-network providers, and 

whether they have family coverage.

• Employees and non-Medicare eligible retirees who use relatively 

high amounts of care and have family coverage risk having higher 
Page 38 GAO-13-658 U.S. Postal Service

costs under USPS’s plan. For example, employees with family 

coverage who used $50,000 worth of in-network health care would 

have spent an estimated $2,116 more with the proposed USPS 

high option and about $3,474 more with the proposed middle 

option than with the FEHBP plan with the largest number of postal 

enrollees.73 By comparison, an employee with family coverage 

who used $2,500 worth of health care costs from in-network 

providers would have faced lower out-of-pocket costs under either 

the proposed USPS high option or middle option than under the 

FEHBP plan (see table 8). We found that employees and nonMedicare-eligible retirees who choose the new self-and-spouse 

and self-and-children coverage tiers offered in the USPS proposal 

could face higher costs than under the FEHBP plan’s self-andfamily option if their total health care costs are $50,000.74

• Employees and non-Medicare eligible retirees who use out-ofnetwork care also could face higher total costs under the 

proposed USPS plan. For example, compared to the FEHBP plan 

with the largest number of postal enrollees, we estimated that 

employees with self-only and family coverage would have higher 

out-of-pocket costs under many scenarios. An employee with 

family coverage using $50,000 worth of health care with 30 

percent of outpatient care received out of network would have 

spent an estimated $3,195 more under the proposed USPS high 

option and about $5,193 more under the proposed USPS middle 

option than under the FEHBP plan with the largest number of 

postal enrollees (see table 8).

75

 73These higher costs would be attributable almost entirely to the plan elements since the 

2013 premiums for family coverage under the largest FEHBP plan were higher than 

USPS’s middle option and almost the same as the high option.

When we assumed a lower 

74For example, at $50,000 of total health care costs using all network providers, we 

estimated that employees enrolling in self-and-children coverage would pay about $900 

more under the USPS high option and $2,700 more under the middle option than under 

the FEHBP plan. The estimated total cost difference under the $50,000 scenario for nonMedicare-eligible retirees enrolling in self-and-spouse would be similar.

75In this example, out-of-network outpatient care ranged from 8.8 percent of total health 

care costs under the $50,000 scenario to 14.2 percent in the $2,500 scenario. We 

assumed all costs for inpatient care and prescription drugs came from in-network sources.
Page 39 GAO-13-658 U.S. Postal Service

proportion of outpatient care from out-of-network providers, we 

found similar results.76

Table 8: Illustrations of Estimated Differences in Employees’ Annual Costs under the Proposed USPS Plan and the FEHBP 

Plan with the Largest Number of Postal Enrollees

Difference in employees’ annual costs compared to the FEHBP plan with the 

largest number of postal enrollees under different scenarios of total health 

care costs

$2,500 in total 

health care costs

$10,000 in total 

health care costs

$17,000 in total 

health care costs

$50,000 in total 

health care costs

All care received from network providers

Self-and-family coverage

USPS high option -$300 -$35 $191 $2,116

USPS middle option -$1,350 -$704 -$169 $3,474

Self-only coverage

USPS high option -$479 -$215 $12 $26

USPS middle option -$772 -$125 $410 $724

Combination of care from network and nonnetwork providersa

Self-and-family coverage

USPS high option -$51 $582 $941 $3,195

USPS middle option -$1,119 -$130 $806 $5,193

Self-only coverage

USPS high option -$231 -$121 $462 $1,284

USPS middle option -$541 $154 $1,135 $2,662

Source: GAO.

Notes: Estimates of the difference in employees’ annual costs account for both health insurance 

premiums and out-of-pocket costs for the use of health care services. The estimates assume different 

distributions of costs across three categories of services—inpatient and outpatient services and 

prescription drugs—at the four different total health cost amounts. The estimates reflect cost sharing 

for each category of service and apply the plan’s deductibles and out-of-pocket maximums.

 76For example, when we assumed 10 percent of outpatient care was received from nonnetwork providers, we estimated that employees in self-only or family coverage would face 

higher total costs under the USPS high and middle options than under the FEHBP plan if 

their total annual health care costs were $17,000 or $50,000. Estimated employee costs 

under the $17,000 scenario ranged from $150 to $980 higher under the USPS plan and 

under the $50,000 scenario from $650 to $4,700 higher. (Out-of-network care made up 

2.9 percent of total health care costs under the $17,000 scenario and 3.2 percent of total 

health care costs under the $50,000 scenario, since we assumed all inpatient care and 

prescription drug costs were from in-network providers.)
Page 40 GAO-13-658 U.S. Postal Service

a

Estimates assume that 30 percent of outpatient care is from out-of-network providers, but all 

inpatient care and prescription drug purchases are from in-network providers. Out-of-network 

outpatient care ranged from 8.8 percent of total health care costs under the $50,000 scenario to 14.2 

percent in the $2,500 scenario. Outpatient care includes such items as diagnostic imaging tests and 

surgeries for those who have not been admitted to a hospital.

USPS included provisions in its legislative proposal to ensure that its 

proposed plan would be required to meet many of the standards 

protecting FEHBP enrollees. USPS’s legislative proposal requires that 

the health plan provide continuation of coverage benefits consistent with, 

and other benefits that comply with, specified standards for employersponsored group health plans.77 These include limits on excluding 

coverage for preexisting conditions and standards for benefits for mothers 

and newborns.78 There are other standards that the USPS proposal 

applies to the USPS plan by incorporating a general reference to the 

Public Health Service Act (PHSA) in one of the proposal’s provisions.79 

USPS officials stated that inclusion of this provision ensures that the 

USPS plan would be required to meet the referenced group health plan 

standards in the PHSA and noted that it is ambiguous whether the PHSA 

standards would apply to the proposed plan without such a provision.80

However, the USPS contribution to the cost of retirees’ health benefits 

would no longer be tied to the statutory formula for federal contribution 

 77According to USPS’s legislative proposal, benefits provided by the USPS health plan 

shall be consistent with provisions of ERISA relating to continuation of coverage 

requirements (29 U.S.C. §§ 1161-1169) and shall comply with other provisions relating to 

additional standards (29 U.S.C. §§ 1181-1191c).

78See 29 U.S.C. § 1181 (increased portability through limitations on preexisting condition 

exclusions) and 29 U.S.C. § 1185 (standards relating to benefits for mothers and 

newborns).

7929 U.S.C. § 1185d, which is among the provisions applied to the USPS plan by the 

proposal, applies the provisions of PHSA, title XXVII, part A (42 U.S.C. §§ 300gg et seq.) 

to group health plans and health insurance issuers providing health insurance coverage in 

connection with group health plans. PHSA standards that may be applied through this 

reference include a prohibition on setting life time limits on the value of coverage and 

standards for appeals of benefit denials to the health plan and an independent, external 

reviewer. 42 U.S.C. §§ 300gg-11 (no lifetime or annual limits) and 300gg-19 (appeals 

process) (PHSA §§ 2711 and 2714, as added by Pub. L. No. 111-148, §§ 1001, 10101, 

124 Stat. 130, 884) (Mar. 23, 2010)). 

80Officials stated that it is ambiguous whether the group health plan provisions of the 

PHSA would apply by their own force to a self-insured federal governmental plan, which is 

how the USPS plan would be defined. Officials noted, however, that if USPS offers an 

HMO option, the HMO would be subject to the PHSA requirements as an insured plan.

Employees and Retirees 

Would Have Many but Not 

All of the Same 

Protections under the 

USPS Plan That They Have 

under FEHBP
Page 41 GAO-13-658 U.S. Postal Service

pertaining to all federal employees and retirees in FEHBP, which could 

leave postal retirees more vulnerable to increases in their contribution 

rates. Though USPS officials have indicated the agency’s intention to 

keep contribution rates for current retirees consistent with those of 

retirees within FEHBP, the proposed legislative language does not 

require USPS to do so. Under FEHBP, postal retiree contribution rates 

depend on the government contribution rate to premiums for federal 

employees and retirees, a rate that is established by federal law.81 Under 

USPS’s proposal, initial contribution rates for employees and retirees 

would be set by USPS and there are no standards provided for this initial 

determination. USPS may also subsequently change contribution rates, 

and, because the employee unions do not represent retirees, those 

changes would not be subject to the collective bargaining process. 

Officials from the association for federal retirees raised concerns about 

retirees’ lack of representation within the context of the USPS proposal.

If USPS withdraws its employees and retirees from FEHBP, enrollment in 

FEHBP would decline by an estimated 25 percent, which is about 1 

million of the 4 million employees and retirees enrolled in the program. 

The percentages of enrollees who are employees and retirees would 

likely remain about the same (see table 9).

82

Table 9: Comparison of FEHBP Enrollment in 2011 and under a USPS Withdrawal 

from FEHBP

Employees Retirees Total

FEHBP enrollment as of 2011 2,236,059 (56%) 1,791,419 (44%) 4,027,478

USPS enrollment 512,216 (51%) 482,587 (49%) 994,803 

Estimated FEHBP enrollment if 

USPS withdraws from FEHBP

1,723,843 (57%) 1,308,832 (43%) 3,032,675 

Source: GAO analysis of OPM data.

Note: Numbers represent FEHBP contracts, not the number of covered lives. OPM officials estimated 

that total covered lives in FEHBP was about 8 million in 2011.

 815 U.S.C. § 8906(b).

 

82According to 2013 data from USPS, postal retirees enrolled in FEHBP now outnumber 

employees enrolled in the program. 

A USPS Withdrawal

from FEHBP Would

Significantly Reduce

Program Enrollment

but Is Not Expected

to Adversely Affect

Most Nonpostal 

Enrollees
Page 42 GAO-13-658 U.S. Postal Service

In addition, the remaining FEHBP enrollee population would likely be 

somewhat younger, with increases in the proportion of enrollees who are 

ages 23 through 44 (see table 10).

Table 10: Comparison of Age Distribution of FEHBP Enrollment in 2011 and 

Estimated Distribution under a USPS Withdrawal from FEHBP

Percentage of enrollment in age range

Under 23 23-34 35-44 45-54 55-64

65 and 

older

Enrollment as of 

2011

0.2 9.3 11.9 19.6 25.3 33.8

Estimated 

enrollment if 

USPS withdraws 

from FEHBP

0.2 11.3 12.6 18.6 24.3 32.9

Source: GAO analysis of OPM data.

Note: Numbers may not add due to rounding. The age-based 2011 enrollment data represents 

FEHBP contracts, not the number of covered lives. The data did not break retirees down into postal 

and nonpostal categories, so our estimates assume that the age distribution of postal and nonpostal 

retirees was similar. We tested that assumption by reviewing other OPM data on the age distribution 

of postal and nonpostal retirees.

Despite the significant reduction in FEHBP enrollment, it is unlikely that 

most nonpostal enrollees would be affected beyond small increases or 

decreases in premiums. Interviews with OPM officials and representatives 

from selected FEHBP plans indicated that most nonpostal enrollees’ 

plans would likely continue to participate in FEHBP despite a USPS 

withdrawal, even if plans lost up to 50 percent of enrollment. For example, 

representatives from a postal union that offers three plans in FEHBP—all 

with postal enrollment of less than 25 percent—told us that the 

association plans to remain in the program regardless of USPS’s 

participation, because the plans would remain profitable. Representatives 

from the selected plans that had postal enrollment of less than 50 percent 

expected that a USPS withdrawal would have some small effect on 

nonpostal enrollees’ premiums. For example, representatives from the 

plan with the largest enrollment expected that a USPS withdrawal might 

lead to a small increase or decrease in premiums depending on the 

claims experience of those withdrawing compared with remaining 

enrollees. Representatives from another large plan estimated a slight 

decrease (1 to 2 percent) in premiums for the remaining enrolled 

population. Some plan representatives noted that administrative costs 

would be spread over a smaller number of people, which could magnify 

any increases or partially offset any reductions in premiums, as premiums 
Page 43 GAO-13-658 U.S. Postal Service

account for those costs. However, OPM officials noted that plan 

administrative costs are generally a percentage of total claims costs, 

about 5 percent, and that the percentage would likely remain the same 

under a USPS withdrawal.

A USPS withdrawal could result in some nonpostal enrollees needing to 

select new FEHBP plans. OPM officials told us that the small number of 

FEHBP plans where enrollment is primarily postal employees and retirees 

would likely withdraw from the program, because the plans would no 

longer have enrollees or the plans would not be able to remain 

competitive with other FEHBP plans without postal enrollees. Of the 147 

FEHBP plans offered in 2011, enrollment was primarily composed of 

postal employees and retirees (70 percent or more) in 4 plans—2 national 

fee-for-service plans run by postal unions and 2 HMOs with enrollment of 

around 1,000 (see table 11). If USPS were to withdraw its employees and 

retirees from FEHBP, one of the 2 affected postal union sponsored plans 

would lose its entire enrollment, and the other would lose 76 percent of its 

enrollment.83

Table 11: Number of FEHBP Plans at Various Levels of Postal Enrollment and the 

Number of Postal and Nonpostal Enrollees in Those Plans as of 2011

If the 4 plans with 70 percent or more postal enrollment 

discontinue participation in the program under a USPS withdrawal, an 

estimated 1 percent (about 29,000) of the approximately 3 million 

nonpostal enrollees in FEHBP would need to select a new health plan. 

Another roughly 62,000 nonpostal enrollees would be affected if plans 

with 50 percent to 69 percent postal enrollment decided to leave FEHBP.

Percentage of 

enrollment that postal 

enrollees represent

Total number 

of plans

Postal 

enrollment

Nonpostal 

enrollment

70% or more 4 123,383 28,940

50 to 69% 20 108,478 62,266

30 to 49% 40 95,096 167,774

20 to 29% 30 584,738 2,181,778

19% or less 53 83,108 591,917

Source: GAO analysis of OPM data.

Note: The enrollment numbers represent FEHBP contracts, not the number of covered lives. OPM 

officials estimated that total covered lives in FEHBP was about 8 million in 2011.

 83OPM officials noted that under current federal law new employee association sponsored 

health plans cannot join FEHBP. 
Page 44 GAO-13-658 U.S. Postal Service

Nonpostal enrollees who have to select new plans would have multiple 

options, but changing plans may have adverse effects for some. Plans 

leaving FEHBP and enrollees needing to select a new plan are a common 

occurrence. From 2008 through 2012, more than 100 plans left FEHBP, 

affecting about 100,000 enrollees.84 In all states, nonpostal enrollees in 

the 4 plans that may choose to depart the program as a result of a USPS 

withdrawal would have at least 10 fee-for-service plan options from which 

to choose and may also have one or more HMO options.85

OPM officials told us that they do not expect that a USPS withdrawal 

would have more extensive effects than a small number of plans exiting 

the program. However, they also noted that any time a large change 

occurs in the program there can be unintended and unforeseen issues 

that arise. FEHBP has not experienced a reduction in enrollment of this 

size in the past. The program’s experience with groups of employees 

leaving includes those that left in the 1980’s when six federal agencies 

introduced their own health plans to provide an alternative to FEHBP for 

employees.

Most of the 

29,000 enrollees most likely to be affected would also be able to choose a 

plan with a similar premium to the enrollee’s departing plan. However, as 

was previously discussed, enrollees choosing a new plan with a similar or 

lower premium could face higher total costs because of differences in 

coverage levels and cost-sharing requirements. Some nonpostal 

enrollees who would have to select a new plan may also have to find new 

providers. Having to identify new providers could cause disruptions in 

health care for some enrollees, which representatives from one postal 

union and the association for federal retirees raised as a concern.

86

 84The most significant year of plan departures was 2009 when 35 plans withdrew requiring 

about 70,000 enrollees to select a new plan.

These agencies had relatively small numbers of employees 

(from about 150 to 8,500) and, therefore, their employees’ leaving FEHBP 

85Though HMOs may be offered in all states, they may not be offered in all counties of 

those states.

86The six federal agencies that provided health plans included: the Federal Deposit 

Insurance Corporation, Office of the Comptroller of the Currency, Farm Credit 

Administration, Overseas Private Investment Corporation, Federal Reserve Board, and 

Federal Home Loan Bank Board. Employees selecting the agency plan could return to 

FEHBP 5 years before retirement to qualify for FEHBP coverage as an annuitant. See 

GAO, U.S. Employees Health Benefits: Independent Agencies Offering Their Own Health 

Plans, GAO/HRD-89-49 (Washington, D.C.: Mar. 2, 1989). 
Page 45 GAO-13-658 U.S. Postal Service

had a much smaller effect on enrollment than would a USPS 

withdrawal.87 OPM officials stated that these agencies, like USPS, have 

the legal authority to provide an alternative health care plan to 

employees. Officials noted that other federal agencies do not have that 

authority. Other agencies also do not have the direct financial incentive 

that USPS has to control and manage health care costs, because those 

agencies are not responsible for retiree health benefit liabilities.

USPS would likely realize large financial gains from reducing its liabilities 

for retiree health care by implementing its own health plan, thereby 

significantly reducing the need for future prefunding payments. Most of 

USPS’s financial gains are achieved by increasing the use of Medicare, 

both by increasing enrollment in Parts A and B and gaining Medicare 

subsidies for prescription drug coverage under Part D, thereby increasing 

Medicare spending. Thus, the primary policy decision for Congress to 

make with respect to USPS’s proposed health care plan is whether to 

increase postal retirees’ use of Medicare, thereby decreasing USPS costs 

and increasing Medicare costs.

If Congress does not act on USPS’s proposal for a new USPS health care 

plan, we continue to believe that Congress and USPS need to reach 

agreement on a comprehensive package of actions to improve USPS’s 

financial viability. In previous reports, we have provided strategies and 

options, to both reduce costs and enhance revenues, that Congress could 

consider to better align USPS costs with revenues and address 

constraints and legal restrictions that limit USPS’s ability to reduce costs 

and improve efficiency. We also continue to believe that Congress would 

need to modify the current statutory schedule for prefunding USPS’s 

retiree health benefits payments in a fiscally responsible manner. In this 

regard, as we have reported, USPS should continue to prefund any 

unfunded retiree health benefits liabilities to the maximum extent that its 

finances permit.

 87According to OPM officials, all agencies returned their employees to FEHBP in the 

1990s. According to OPM officials, when the agencies returned to FEHBP, the 

requirement for 5 years of continuous coverage in FEHBP prior to retirement to be eligible 

for FEHBP as an annuitant had to be waived for some retirees. 

Conclusions
Page 46 GAO-13-658 U.S. Postal Service

If Congress decides to move forward with USPS’s proposed health plan 

as part of a broader reform package, other important policy issues remain 

to be addressed to reduce the risks of the proposed plan.

• First, under one alternative USPS’s proposal would allow its health 

plan assets to be invested in stocks, private sector bonds, and other 

non-Treasury securities exposed to risk of losses. We agree with the 

U.S. Treasury Department that it is important to ensure the safety of 

fund assets supporting USPS health benefits for both current postal 

employees and retirees by restricting these assets to investments in 

federally guaranteed Treasury securities. However, we would suggest 

broadening the investment options beyond the special-issue Treasury 

securities currently used for PSRHBF and federal pension funds to 

include inflation-indexed Treasury securities, to allow for partial 

protection against future inflation. Also, if Congress were to permit 

USPS to invest retiree health funds in non-Treasury securities, we 

would suggest that because of USPS’s uncertain financial prospects 

and mature plan population, USPS not be permitted to use a discount 

rate, for prefunding purposes, that anticipates average long-term 

returns on such assets in excess of such long-term returns expected 

on Treasury securities before such returns have actually been 

achieved.

• Second, we conclude that the USPS proposal for allowing health fund 

assets to be transferred to unrelated postal funds in any year that 

assets supporting the USPS health plan exceeded the liabilities is not 

fiscally prudent. If USPS were to consistently exercise this option to 

help maintain its financial solvency, this could result in an unfunded 

liability for retiree health benefits.

• Third, under USPS’s proposal, there can be some risk of overly 

optimistic assumptions in valuing the funded status of USPS’s health 

plan, potentially leading to inadequate funding of benefits, because 

USPS’s proposal does not provide for independent selection or 

oversight of assumptions, despite other safeguards USPS has 

proposed in this area. This risk could be reduced by having 

assumptions selected by an independent third party, such as an 

independent board of actuaries.

• Fourth, the USPS proposal ensures that postal employees and 

retirees in the USPS health plan will receive many but not all of the 

protections that FEHBP provides. Unlike FEHBP, there would be no 

statutory formula to establish USPS’s share of the costs of retiree 

health benefits. This lack of a statutory formula means that there 

would be no limits on the share of costs that retirees may be required 

to contribute. The USPS proposal would require the plan to comply 

with other standards that protect enrollees in FEHBP and in nearly all 
Page 47 GAO-13-658 U.S. Postal Service

other private health insurance plans, e.g., standards prohibiting plans 

from setting lifetime limits on the value of coverage and relating to the 

review of appeals of benefit denials. However, without an express 

statutory requirement, it is unclear whether these standards would 

apply to a USPS plan.

Finally, in previous reports, we have stated—and continue to believe—

that Congress should require arbitrators to consider the financial condition 

of USPS in any binding arbitration of collective bargaining over wages 

and benefits. Such a requirement would be even more important if USPS 

establishes its own health plan and its health benefits and contribution 

levels become subject to collective bargaining.

A key matter for Congress to consider is whether or not to move forward 

with a USPS health plan that would result in an increase in retirees’ use 

of Medicare. If Congress decides to approve this proposal, then Congress 

should also weigh the impact on other issues, including:

1. safeguards for all USPS health plan fund assets by placing 

appropriate constraints on their asset allocations, such as limiting 

investments to Treasury securities and inflation-indexed Treasury 

securities or, if Congress chooses to permit investments in nonTreasury securities, constraints on the discount rate for prefunding 

purposes so as not to anticipate returns on risk-bearing assets in 

excess of those on Treasury securities before such returns have 

actually been achieved;

2. standards for the disposition of any surplus health plan assets that 

reduce the risk of a new unfunded liability emerging in the future, 

standards such as amortizing any surplus to mirror the amortization of 

any unfunded liability, or using any surplus to offset normal cost 

payments;

3. designation or creation of an independent entity responsible for the 

selection of actuarial assumptions used to annually determine the 

funded status of USPS’s health plan for purposes of determining 

prefunding payments; and

4. protections for postal employees and retirees that are comparable to 

those under FEHBP, including a formula for USPS retirees’ 

contribution to the costs of their health coverage.

Matters for 

Congressional 

Consideration
Page 48 GAO-13-658 U.S. Postal Service

We provided a draft of this report to USPS, the U.S. Treasury

Department, and OPM for review and comment. USPS provided 

comments by letter, which are reprinted in Appendix III; the U.S. Treasury 

Department and OPM did not provide comments by letter. USPS also 

provided technical comments, as did the U.S. Treasury Department, 

which we incorporated as appropriate. USPS commented that it 

appreciated our thorough and rigorous analysis and took no position on 

our Matters for Congressional Consideration. 

In its comments, USPS emphasized that its proposed restructuring of

health care benefits is a key element of USPS business plans that it 

stated provide a path to solvency and fiscal sustainability for USPS. 

USPS also emphasized a number of other points related to its proposed 

health care plan: the potential effects of its proposed plan on Medicare 

finances; the investments of assets to finance retiree health benefits; and 

the effects on plan participants, including employees and retirees. 

First, USPS noted that with regard to the effect of the proposed plan on 

Medicare’s finances, Congress should consider that USPS and postal 

employees have been contributing to Medicare for almost 30 years and 

would be able to fully benefit from those contributions under the proposed 

plan. USPS stated that the annual savings to USPS and participants 

from the increased use of Medicare represents less than one day’s claims 

under Medicare, but are a lifeline to USPS and vital to its business plans. 

As our report stated, USPS projected that its plan would increase the 

more than $550 billion spent annually for Medicare by an average of 

roughly $1.3 billion a year in the first 5 years of its health plan, which 

accounts for offsetting increases in Medicare premiums and drug 

discounts. However, the additional costs from USPS’s proposed plan 

would have to be weighed alongside the fiscal pressures already faced by 

Medicare. 

Second, USPS indicated that our report accurately reflected that USPS 

has proposed two alternative methods of investing USPS health plan 

assets and that either approach—investing solely in Treasury securities 

or in a mix that could include other types of assets—would be satisfactory 

to USPS.

Third, USPS stated that it had reviewed the graphs, tables and text we 

prepared to illustrate the potential effect on enrollees if the proposed 

USPS plan is adopted and found the material to be accurate. USPS 

agreed that our report was accurate in concluding that total costs for 

some postal employees and retirees could be higher under the proposed 

Agency Comments 

and Our Evaluation
Page 49 GAO-13-658 U.S. Postal Service

plan, but stated that the majority of enrollees would benefit economically 

from the proposed plan and provided information elaborating on this 

point. Our report states that while the majority of enrollees—between 63 

and 97 percent—would likely pay similar or lower premiums under the 

proposed plan; some enrollees could be at risk for higher costs 

depending on the amount and cost of care they use, their use of out-ofnetwork providers, and whether they have family coverage. USPS also 

stated in its comments that our report did not discuss the positive effects 

of USPS’s proposed plan on retirees. We disagree with this assessment. 

The report presents the changes in benefits and costs that retirees would 

face under the proposed plan, including those that expand coverage and 

others that could result in higher costs for retirees. 

As we agreed with your offices, unless you publicly announce the 

contents of this report earlier, we plan no further distribution of it until 30 

days from the date of this letter. At that time, we will send copies of this 

report to the appropriate congressional committees, the Postmaster 

General, OPM, the U.S. Treasury Department, CMS, OMB, and other 

interested parties. In addition, the report will be available at no charge on 

GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions on this report, please contact 

John E. Dicken at dickenj@gao.gov or call (206) 512-7114; Lorelei St. 

James at stjamesl@gao.gov or Frank Todisco at todiscof@gao.gov or call 

(202) 512-2834. Contact points for our Offices of Congressional Relations 

and Public Affairs may be found on the last page of this report. Contact 

information and key contributors to the report are listed in appendix IV.

John E. Dicken

Director

Health Care
Page 50 GAO-13-658 U.S. Postal Service

Lorelei St. James

Director

Physical Infrastructure Issues

Frank Todisco

Chief Actuary

Applied Research and Methods

The undersigned meets the qualification standards of the American 

Academy of Actuaries to render the actuarial findings contained in this 

report regarding the measurement issues, funding issues, and risks 

associated with retiree health care obligations.

Frank Todisco, FSA, MAAA, EA

Chief Actuary
Appendix I: The Proposed Health Care Plan of 

the U.S. Postal Service

Page 51 GAO-13-658 U.S. Postal Service

The U.S. Postal Service’s (USPS) health plan would provide coverage for 

the approximately 1 million postal employees and retirees who are 

currently enrolled in the Federal Employees Health Benefits Program 

(FEHBP). It is designed to increase postal retirees’ enrollment in 

Medicare and take advantage of Medicare subsidies for employer-based 

prescription drug plans. Aspects of the proposed plan would include:

Eligibility: All active employees, including bargaining unit and nonbargaining unit employees, would be eligible to participate in USPS’s 

proposed plan. Further, all current retirees and survivors would be 

eligible. Employees would be eligible for coverage in retirement under the 

same circumstances that they are currently eligible for coverage under 

FEHBP—5 years of continuous coverage in the plan before retirement 

and eligibility for an immediate annuity. Under the USPS proposal, USPS 

employees and retirees would no longer be eligible to participate in 

FEHBP.

Benefits: Under the USPS proposal, for the first year of the health plan, 

the type and the average level and value of benefits for current retirees 

(including those who retire within one year of the date of enactment of the 

proposed legislation) and employees would be comparable to the most 

highly enrolled FEHBP plan.1

Plan options: USPS would offer three plan options within a national 

preferred provider organization plan that would provide varying levels of 

coverage—referred to as the high, middle, and value options. USPS 

estimates that the value of benefits under the high option would be 

slightly higher than the value of benefits of the most highly enrolled 

FEHBP plan. The value of the benefits of the middle option would be 

After the first year, benefits for current 

retirees must continue to meet that standard. For employees, benefits 

would no longer have to meet that standard after the first year; however, 

any changes to benefits for employees would be subject to collective 

bargaining. Benefits for employees who retire a year or more after the 

effective date (i.e., future retirees) would also not be subject to the 

standard of comparable value to the most highly enrolled FEHBP plan.

 1

The proposal provides that the “aggregate actuarial value of benefits shall be at least 

equivalent to that of the FEHB plan with the highest enrollment.” For those eligible for 

Medicare, the aggregate actuarial value will include the value of Medicare benefits. The 

actuarial value of the benchmarked coverage would be documented in an actuarial 

opinion that meets actuarial standards of practice.

Appendix I: The Proposed Health Care Plan 

of the U.S. Postal Service
Appendix I: The Proposed Health Care Plan of 

the U.S. Postal Service

Page 52 GAO-13-658 U.S. Postal Service

slightly lower; and the value of the benefits under the value option—

designed to provide a more limited benefit—would be significantly lower. 

USPS would offer an HMO option in geographic areas where large 

numbers of postal employees are currently enrolled in HMOs—

specifically, staff or facility-model HMOs—within FEHBP. As of April 

2013, USPS had not determined in which geographic areas HMOs would 

be offered or what services would be covered and at what levels.

Premiums: Premium rates would vary across the plan options and 

depending upon which of the four tiers of coverage the employee or 

retiree needs: self-only, self-and-spouse, self-and-children, or self-andfamily. USPS estimates that employee contributions in the first year would 

equal 26 percent of the cost of the high option, 18 percent of the middle 

option, and 17 percent of the value option. Retiree contributions are 

estimated at 32 percent of the cost of the high option and 25 percent of 

the middle and value options. As with benefits, initial premium 

contribution rates would be set by the governance board. Any changes to 

employee contribution rates would be subject to the collective bargaining 

process.

Plan administration: The USPS plan would be self-insured, which means 

that USPS would set aside its own funds to pay for benefits rather than 

purchasing insurance from an insurance company. USPS would 

administer enrollment, which it currently does for employees participating 

in FEHBP, but would contract with one or more outside entities to 

administer benefits. USPS plans to use a competitive bidding process to 

hire one or more plan administrators, which would be responsible for 

providing a national provider network, offering care management and 

patient assistance, processing and reviewing claims, and paying 

providers.
Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Page 53 GAO-13-658 U.S. Postal Service

All material in this appendix was summarized from information provided 

by USPS on the aspects of its proposed health plan financing.1 GAO did 

not independently verify the legal accuracy of any of the statements or 

material contained in the appendix.

The USPS proposal would establish advance funding of its health plan 

based on payment of a normal cost and amortization of any unfunded 

liability or surplus of its retiree health care liabilities over an amortization 

period ending at the later of 40 years after the new plan is implemented, 

or 15 years from the then-current year, beginning with the fiscal year 

ending after the implementation date (e.g., September 30, 2014, if the 

implementation date is January 1, 2014).2 The USPS proposal seeks a 

repeal of all PAEA scheduled and deferred payments to prefund retiree 

health benefits that have statutorily fixed payments through 2016 and 

then amortize remaining unfunded retiree health benefit liabilities starting 

in 2017. In addition, USPS stated that under its proposed health plan, 

there would be no explicit federal guarantee of USPS health benefits for 

USPS employees, annuitants, or survivors, including any participants in 

the USPS health plan.

Under one option of USPS’s legislative proposal (which USPS refers to 

as “Scenario 2”), the existing Postal Service Retiree Health Benefits Fund 

(PSRHBF) would be transferred into a newly created Postal Service 

Health Benefits Fund (HBF). Assets of this new fund could be invested in 

stocks, private sector bonds, and other non-Treasury securities exposed 

to risk. According to USPS, in response to concerns that have been 

expressed about the investment of assets for retiree health care in other 

than Treasury securities under Scenario 2, it developed a different option 

for financing its health plan (which it refers to as “Scenario 1”). Under 

Scenario 1, the PSRHBF would be continued and used to finance retiree 

health benefits under USPS’s health plan. USPS officials have stated that 

Congress’s adoption of either scenario is acceptable to USPS and they 

are open to any reasonable resolution of issues of asset management by 

Congress.

 1

All references to titles below are to titles of the United States Code.

2

This schedule would approximately parallel timeframes currently applicable to the Postal 

Service Retiree Health Benefits Fund in subsection (d)(2)(B) of section 8909a of title 5.

Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Funding the USPS 

Health Plan, Including 

Financing of Any 

Unfunded Liabilities 

and Repeal of Current 

Statutory Prefunding 

and Amortization 

Payments

USPS Has Proposed Two 

Options to Finance Its 

Proposed Health Plan for 

Congress to Consider
Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Page 54 GAO-13-658 U.S. Postal Service

Under one option for financing the proposed USPS health plan (which 

USPS refers to as “Scenario 1”) the PSRHBF would be continued and 

used to finance retiree health benefits under USPS’s health plan, though 

without continued OPM management since the health plan would be 

administered by USPS. All future funding of USPS’s retiree health 

benefits liability would be deposited into the PSRHBF. According to 

USPS, if Scenario 1 summarized above is adopted by the Congress, 

USPS would expect that all funds set aside for retiree health care benefits 

would be retained in the PSRHBF, and would not be commingled with the 

funds USPS would use (including any reserve funds such as for incurred 

but not reported claims and for margin for claims fluctuation) that might be 

maintained in the financing of the active employee health benefit plan.

Under Scenario 1, USPS stated that the current and future assets of the 

PSRHBF would continue to be invested as now, in special-issue Treasury 

securities or otherwise as might be directed by the Congress. USPS also 

stated that it would prefer to have some input on the structure of the asset 

holdings so that the PSHRBF’s investments were matched by duration to 

the expected benefit payments. USPS said that could be accommodated 

with the use of Treasury securities and is a sounder way of matching 

assets and liabilities than is currently in place.

Under one option of USPS’s legislative proposal (which USPS refers to 

as “Scenario 2”), the USPS health plan would be financed by the newly 

created HBF, which would be established by law.3

• The balance of the PSRHBF transferred to the HBF no later than 30 

days after enactment with the PSRHBF abolished upon such transfer. 

USPS would make no further contributions to the PSRHBF.

The HBF would be a 

revolving fund within the U.S. Treasury, available to USPS without fiscalyear limitation to pay benefits claims and administrative expenses 

incurred under the USPS health plan. The HBF would contain deposits 

that include:

• The balance of the OPM-managed Employee Health Benefits Fund 

(i.e., the fund that finances FEHBP) that is allocable to contributions 

by USPS, its officers and employees, and its annuitants, including any 

amounts held by OPM in any reserve fund. (USPS would bear no 

 3

All provisions summarized for Scenario 2 would be specified by federal law under 

USPS’s legislative proposal for its health care plan.

Scenario One: PSRHBF 

Used to Finance Retiree 

Health Benefits under 

USPS’s Health Plan

Scenario Two: New HBF to 

Finance USPS Health Plan
Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Page 55 GAO-13-658 U.S. Postal Service

further liability for contributions to the Employee Health Benefits 

Fund.)

• USPS contributions under its health plan.

• Contributions of USPS employees, officers, and annuitants, and the 

dependents of such persons, under the USPS health plan.

• Interest that may be earned on investments of the HBF.

• Any other receipts of USPS that are allocable to the USPS health 

benefits plan.

• U.S. Treasury Department payments for service of officers and 

employees of the former U.S. Post Office Department that are 

allocable to the Treasury under section 8906(g)(2) of title 5 (i.e., the 

federal government picks up the portion of costs attributable to pre1971 service).

After PSRHBF assets are transferred into the HBF, these transferred 

assets would be comingled with the HBF assets and could be used for 

any purpose that the HBF could be used. This would permit (but not 

require) PSRHBF assets to be used after their transfer into the HBF for 

purposes other than USPS retiree health benefits, such as for USPS 

health benefits for current employees. However, USPS has stated that if it 

is able to form its own health care plan outside of FEHBP and thereby 

reduce its remaining retiree health benefit liability to zero, the funds it has 

already set aside in the PSRHBF would be dedicated solely to the 

payment of retiree health benefits. USPS has further asserted that the 

HBF would be fully insulated from creditors so that, even in the event of 

USPS insolvency, retiree health benefits would continue to be paid.

In this regard, USPS indicates that federal law would not allow assets of 

the HBF to be used to (1) loan monies to the Postal Service Fund, such 

as to enable it to remain solvent; (2) cover other required USPS 

payments to the federal government, such as for pensions and workers’ 

compensation, if USPS did not have sufficient funds to make such 

payments; and (3) finance USPS investments in property for post offices 

or other USPS operations, in delivery vehicles or technology for postal 

operations, or in nonpostal initiatives to generate revenue.

Under Scenario 2, USPS would be authorized to invest sums in the HBF 

in instruments or obligations selected by one or more qualified 

professional asset managers. For purposes of such investments, 

“qualified professional asset manager” would have the meaning under 

section 8438(a)(8) of title 5. Through these investments, USPS would 

seek to increase investment returns on more than $40 billion in assets of 

the HBF. Investment decisions for HBF assets would not require the 

approval of the Secretary of the Treasury, or for the Secretary to be 

Investment of Assets of HBF
Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Page 56 GAO-13-658 U.S. Postal Service

advised before the purchase or sale of any instrument or obligation of the 

HBF.

Under Scenario 2, HBF assets could be invested in non-Treasury 

securities, such as stocks and bonds, as well as commodities, foreign 

currency, and real property. In this regard, USPS stated that federal law 

would allow the HBF to acquire a controlling interest in stock of a private 

company, if such an action was consistent with the Committee’s fiduciary 

responsibilities (including the responsibility to diversify where the assets 

in the HBF are invested).

The USPS Governors would be required to appoint a 7-member 

Committee (the Committee) to oversee the investment and management 

of the assets of the HBF. Members of the Committee would be required to 

have substantial experience, training, and expertise in the management 

of financial investments and health benefit plans.

The Committee would be required to have, at all times, members that 

include at least 1 person recommended by the Secretary of the Treasury, 

at least 1 person recommended by the labor organizations recognized 

under chapter 12 of title 39, and at least 1 person recommended by the 

supervisors’ and postmasters’ organizations specified in section 1004(i) of 

title 39. Each member of the Committee would be appointed for a term of 

4 years, subject to a one-time reappointment, except that of the members 

first appointed, 3 members shall be appointed for terms of 4 years; 2 

members shall be appointed for terms of 3 years; and the remaining 

members shall be appointed for terms of 2 years. In addition, Committee 

members would be subject to the following provisions applicable to 

fiduciaries under Employee Retirement Income Security Act (ERISA): 

sections 1104 through 1106, 1108, and 1110 of title 29, notwithstanding 

section 1021(e) of title 39 and section 1003(b)(1) of title 29, and with the 

provisions of sections 1131 and 1132 of title 29 applying only to the 

extent those provisions concern the performance of fiduciary 

responsibilities.

USPS officials told us that their principal concern is that they would prefer 

to have the question of the potential disposition of excess assets set 

aside for retirees addressed in the legislation, to avoid the uncertainties 

they told us have arisen with respect to that question in the funding of the 

Civil Service Retirement System and the Federal Employees Retirement 

System. They noted that it is possible to envision some circumstances in 

which the surplus could be quite large, and as a result, some guidance 

USPS-Appointed Committee to 

Oversee the HBF

Transfer of Any Surplus 

Health Plan Assets to 

Postal Service Fund
Appendix II: U.S. Postal Service Proposals for 

Health Plan Financing

Page 57 GAO-13-658 U.S. Postal Service

from Congress as to the potential disposition of surplus, under whatever 

strictures Congress would see fit to impose, would be appropriate. They 

told us that while they made an initial proposal in their August 2011 

legislative language, they are open to any reasonable resolution of this 

issue.

Under Scenario 2, in any year when the amount of assets in the HBF 

exceeds this fund’s estimated actuarial liability, USPS could authorize the 

surplus amount to be transferred to the Postal Service Fund, provided 

that such authorization is made pursuant to a recommendation by a 

majority of the Committee. Before approving such a recommendation, the 

Committee would be required to obtain an opinion and report by an 

actuary—who would be required to hold membership in the American 

Academy of Actuaries and be qualified in the evaluation of healthcare 

insurance obligations—in accordance with generally accepted actuarial 

practices and principles, with a certification that a decision to transfer 

funds would not violate the statutory criteria that the amount of assets in 

the HBF exceeds this fund’s estimated actuarial liability.
Appendix III: Comments from the U.S. Postal 

Service

Page 58 GAO-13-658 U.S. Postal Service

Appendix III: Comments from the U.S. Postal 

Service
Appendix III: Comments from the U.S. Postal 

Service

Page 59 GAO-13-658 U.S. Postal Service

Now on p. 37.

Now on p. 30.

Now on p. 30.
Appendix III: Comments from the U.S. Postal 

Service

Page 60 GAO-13-658 U.S. Postal Service

Now on pp. 35-36.

Now on pp. 33-34.
Appendix III: Comments from the U.S. Postal 

Service

Page 61 GAO-13-658 U.S. Postal Service
Appendix III: Comments from the U.S. Postal 

Service

Page 62 GAO-13-658 U.S. Postal Service
Appendix III: Comments from the U.S. Postal 

Service

Page 63 GAO-13-658 U.S. Postal Service

Now on pp. 35-36.
Appendix III: Comments from the U.S. Postal 

Service

Page 64 GAO-13-658 U.S. Postal Service
Appendix IV: GAO Contacts and Staff 

Acknowledgments

Page 65 GAO-13-658 U.S. Postal Service

John E. Dicken, (202) 512-7114 or dickenj@gao.gov

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov

Frank Todisco, (202) 512-2834 or todiscof@gao.gov

In addition to the individuals named above, Robert F. Dacey, Chief 

Accountant; Beryl H. Davis, Director, Financial Management and 

Assurance; Gary T. Engel, Director, Financial Management and 

Assurance; Susan J. Irving, Director for Federal Budget Analysis, 

Strategic Issues; Thomas J. McCool, Director, Center for Economics, 

Applied Research and Methods; Susan E. Offutt, Chief Economist; Phyllis 

Anderson; Teresa Anderson; Susan Barnidge; George Bogart; Russ 

Burnett; Colin Fallon; Krister Friday; Kenneth John; Gene Kuehneman;

Michael Kendix; Hannah Laufe; Kristi Peterson; Steve Robblee; Friendly 

Vang-Johnson; and Crystal Wesco made key contributions to this report.

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contacts

Staff 

Acknowledgments

(544186)
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