Federal Employees Health Benefits Program: Premiums Continue to Rise, but Rate of Growth Has Recently Slowed
Published: 2007-05-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Average health insurance premiums for plans participating in the Federal Employees Health Benefits Program (FEHBP) have risen each year since 1997. These growing premiums result in higher costs to the federal government and plan enrollees. The Office of Personnel Management (OPM) oversees FEHBP, negotiating benefits and premiums and administering reserve accounts that may be used to cover plans' unanticipated spending increases. GAO was asked to discuss its December 22, 2006 report, entitled Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed, and Varies Among Participating Plans (GAO-07-141). In this report, GAO reviewed (1) FEHBP premium trends compared with those of other purchasers, (2) factors contributing to average premium growth across all FEHBP plans, and (3) factors contributing to differing trends among selected FEHBP plans. GAO reviewed data provided by OPM relating to FEHBP premiums and factors contributing to premium growth. For comparison purposes, GAO examined premium data from the California Public Employees' Retirement System (CalPERS) and surveys of other public and private employers. GAO also interviewed officials from OPM and eight FEHBP plans with premium growth that was higher than average and six FEHBP plans with premium growth that was lower than average.
section_title: What GAO Found
paragraphs: Growth in FEHBP premiums recently slowed, from a peak of 12.9 percent for 2002 to 1.8 percent for 2007. Starting in 2003, FEHBP premium growth was generally slower than for other purchasers. Premium growth rates for the 10 largest FEHBP plans by enrollment--accounting for about three-quarters of total enrollment--ranged from 0 percent to 15.5 percent for 2007. Projected increases in the cost and utilization of health care services and in the cost of prescription drugs accounted for most of the average annual FEHBP premium growth for 2000 through 2007. Absent other factors, these increases would have raised 2007 average premiums by 9 percent. Other projected factors, including benefit changes resulting in less generous coverage and enrollee migration to lower-cost plans, slightly offset average premium growth. In 2006 and 2007, projected withdrawals from reserves helped offset average premium growth--by 2 percentage points for 2006 and 5 percentage points for 2007. To explain the factors associated with premium growth, officials GAO interviewed from most of the FEHBP plans with higher-than-average premium growth cited increases in the cost and utilization of services as well as a high share of elderly enrollees and early retirees. Officials GAO interviewed from most plans with lower-than-average premium growth cited adjustments made for previously overestimated projections of cost growth, and some officials cited benefit changes that resulted in less generous coverage for prescription drugs. The plans with lower-than-average premium growth also experienced a decline of 0.5 years in the average age of their enrollees compared with an increase of 0.5 years in the average age of all FEHBP enrollees.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the findings from our December  2006 report entitled Federal Employees Health Benefits Program:  Premium Growth Has Recently Slowed, and Varies among Participating  Plans. For this report, we were asked to examine the nature and extent of  premium increases in the Federal Employees Health Benefits Program  (FEHBP) and the potential effect on premium growth of the Medicare  retiree drug subsidy, had OPM applied for the subsidy and used it to offset  premium growth. Federal employees’ health insurance premiums have  increased each year since the late 1990s, and these increases pose higher  costs for the federal government and plan enrollees. About 8 million  federal employees, retirees, and their dependents receive health coverage  through plans participating in the FEHBP, the largest employer-sponsored  health insurance program in the country. The Office of Personnel  Management (OPM) administers the program by contracting with multiple  health insurance carriers to offer health plans through the program and  negotiates benefits and premium rates with each carrier. OPM also  administers reserve accounts for each plan that may be used to cover  plans’ unanticipated spending increases.
My remarks today will focus on (1) recent FEHBP premium growth trends  compared to those of plans offered by other purchasers, (2) the factors  that contributed to average premium growth trends across all FEHBP  plans as well as the effect the Medicare retiree drug subsidy would have  had on premium growth, and (3) the factors that contributed to differing  premium growth among selected FEHBP plans. These remarks are based  on information contained in our December 2006 report.
In conducting our work, we analyzed historic and recent premium trend  data from 1994 through 2007 from OPM for all FEHBP plans and compared  them with premium data from the California Public Employees’  Retirement System (CalPERS)—the second largest public purchaser of  employee health benefits—and surveys of multiple employer-sponsored  health plans from Kaiser Family Foundation/Health Research and  Educational Trust (Kaiser/HRET). To identify factors contributing to  average FEHBP premium growth trends across all FEHBP plans, we  analyzed OPM summary reports assessing the effect of projected changes  in various factors, including the cost and utilization of services, enrollee  demographics, and use of reserves, on premium growth trends from 2000  through 2007. We also examined aggregate data on the actual growth in  per-enrollee expenditures from 2003 through 2005 for 5 large FEHBP  plans. We explored with officials from OPM and 14 selected FEHBP plans  the potential effect on premium growth of the retiree drug subsidy if OPM  had applied for the subsidy and used it to mitigate premium growth. The  14 plans were selected because of size (at least 5,000 enrollees) and length  of participation in the FEHBP (at least 3 years). To examine the reasons  for differing premium growth trends among FEHBP plans, we conducted  interviews with officials from these 14 plans. Eight of the plans had higher- than-average premium growth, and six of the plans had lower-than-average  premium growth for either (a) 2006 or (b) the 3-year period from 2004  through 2006. A detailed explanation of our scope and methodology is  contained in appendix I of the December 2006 report. We conducted our  work for that report from January 2006 through December 2006 in  accordance with generally accepted government auditing standards.
In summary, we found that growth in average FEHBP premiums recently  slowed from a peak of 12.9 percent for 2002 to 1.8 percent for 2007. This  was lower than growth for other purchasers from 2003 through 2007.  Premium growth rates for the 10 largest FEHBP plans by enrollment,  accounting for about three-quarters of total enrollment, ranged from 0 to  15.5 percent for 2007, but varied more widely across the smaller FEHBP  plans.
Projected increases in the cost and utilization of health care services and  in the cost of prescription drugs accounted for most of the average annual  premium growth across all FEHBP plans for 2000 through 2007. Absent  projected decreases in the costs of other factors, these increases would  have raised 2007 average premiums by about 9 percent, rather than the   1.8 percent actual increase for that year. During this same period,  projected decreases in the costs associated with certain other factors,  including benefit changes that resulted in less generous coverage and  enrollee migration to lower-cost plans, generally helped offset premium  growth to a small extent. In 2006 and 2007, projected withdrawals from  reserves particularly helped offset average premium growth by about   2 percentage points for 2006 and about 5 percentage points for 2007.  Regarding the potential effect of the retiree drug subsidy, most plan  officials we interviewed stated that the subsidy would have had a small  effect on premium growth for 2006 had OPM applied for the subsidy and  used it to mitigate premium growth. Officials from two large plans with  higher-than-average shares of retirees, however, stated that the subsidy  would have lowered their plans’ premium growth—officials from one plan  said by at least 3.5 to 4 percentage points for their plan. We estimated that  the subsidy would have lowered premium growth across all FEHBP plans  for 2006 by more than 2 percentage points on average, from the 6.4 percent  average growth rate for 2006 to about 4 percent. OPM officials said that  OPM did not apply for the subsidy because the intent of the subsidy was to  encourage employers to continue offering prescription drug coverage to  Medicare-eligible enrollees, and FEHBP plans were already doing so.
To explain the factors associated with premium growth, officials we  interviewed from most of the plans with higher-than-average premium  growth cited increases in the cost and utilization of services as well as a  high share of elderly enrollees and early retirees. Officials we interviewed  from most plans with lower-than-average premium growth cited  adjustments made for previously overestimated projections of cost  growth, and some officials cited benefit changes that resulted in less  generous coverage for prescription drugs. The plans with lower-than- average premium growth also experienced a decline of 0.5 years in the  average age of their enrollees compared with an increase of 0.5 years in  the average age of all FEHBP enrollees.
subsections: section_title: Background
paragraphs: The FEHBP is the largest employer-sponsored health insurance program  in the country, providing health insurance coverage for about 8 million  federal employees, retirees, and their dependents through contracts with  private insurance plans. All currently employed and retired federal  employees and their dependents are eligible to enroll in FEHBP plans, and  about 85 percent of eligible workers and retirees are enrolled in the  program. For 2007, FEHBP offered 284 plans, with 14 fee-for-service (FFS)  plans, 209 health maintenance organization (HMO) plans, and 61  consumer-directed health plans (CDHP). About 75 percent of total FEHBP  enrollment was concentrated in FFS plans, about 25 percent in HMO  plans, and less than 1 percent in CDHPs.
Total FEHBP health insurance premiums paid by the government and  enrollees were about $31 billion in fiscal year 2005. As set by statute, 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. The  premiums are intended to cover enrollees’ health care costs, plans’  administrative expenses, reserve accounts specified by law, and OPM’s  administrative costs. Unlike some other large purchasers, FEHBP offers  the same plan choices to currently employed enrollees and retirees,  including Medicare-eligible retirees who opt to receive coverage through  FEHBP plans rather than through the Medicare program. The plans  include benefits for medical services and prescription drugs.
By statute, OPM can negotiate contracts with health plans without regard  to competitive bidding requirements. Plans meeting the minimum  requirements specified in the statute and regulations may participate in the  program, and plan contracts may be renewed automatically each year.  OPM may terminate contracts if the minimum standards are not met.
OPM administers a reserve account within the U.S. Treasury for each  FEHBP plan, pursuant to federal regulations. Reserves are funded by a  surcharge of up to 3 percent of a plan’s premium. Funds in the reserves  above certain minimum balances may be used, under OPM’s guidance, to  defray future premium increases, enhance plan benefits, reduce  government and enrollee premium contributions, or cover unexpected  shortfalls from higher-than-anticipated claims.
On January 1, 2006, Medicare began offering prescription drug coverage  (also known as Part D) to Medicare-eligible beneficiaries. Employers  offering prescription drug coverage to Medicare-eligible retirees enrolled  in their plans could, among other options, offer their retirees drug  coverage that was actuarially equivalent to standard coverage under Part  D and receive a tax-exempt government subsidy to encourage them to  retain and enhance their prescription drug coverage. The subsidy  provides payments equal to 28 percent of each qualified beneficiary’s  prescription drug costs that fall within a certain threshold and is estimated  to average about $670 per beneficiary per year. OPM opted not to apply for  the retiree drug subsidy.
section_title: Growth in Average FEHBP Premiums Has Recently Slowed and Was Lower Than That of Other Purchasers
paragraphs: The average annual growth in FEHBP premiums has slowed since 2002— declining each year from 2003 through 2007—and was generally lower  than the growth for other purchasers since 2003. After a period of  decreases in 1995 and 1996, FEHBP premiums began to increase for 1997,  to a peak increase of 12.9 percent for 2002. The growth in average FEHBP  premiums began slowing in 2003 and reached a low of 1.8 percent for 2007.  The average annual growth in FEHBP premiums was faster than that of  CalPERS and surveyed employers from 1997 through 2002—8.5 percent  compared with 6.5 percent and 7.1 percent, respectively. However,  beginning in 2003, the average annual growth rate in FEHBP premiums  was slower than that of CalPERS and surveyed employers—7.3 percent  compared with 14.2 percent and 10.5 percent, respectively. (See fig. 1).
The premium growth rates for the 10 largest FEHBP plans by enrollment— accounting for about three-quarters of total FEHBP enrollment—ranged  from 0 percent to 15.5 percent for 2007. Premium growth rates across the  smaller FEHBP plans varied more widely.
Regarding enrollee premiums—the share of total premiums paid by  enrollees—the growth in average enrollee premiums generally paralleled  total premium growth from 1994 through 2007. In 2006, average monthly  FEHBP premiums were $415 for individual plans and $942 for family plans  in total. The enrollee premium contributions were $123 for individual  plans and $278 for family plans.
section_title: Projected Growth in Several Factors Contributed to Average FEHBP Premium Growth
paragraphs: Projected increases in the cost and utilization of services and in the cost of  prescription drugs accounted for most of the average annual premium  growth across FEHBP plans for the period from 2000 through 2007,  although projected withdrawals from reserves offset much of this growth  for 2006 and 2007. Absent projected changes associated with other factors,  projected increases in the cost and utilization of services and the cost of  prescription drugs would have accounted for a 9 percent increase in  average premiums for 2007. Projected increases in the cost of and  utilization of services alone would have accounted for about a 6 percent  increase premiums for 2007, down from a peak of about 10 percent for  2002. Projected increases in the cost of prescription drugs alone would  have accounted for about a 3 percent increase in premiums for 2007, down  from a peak of about 5 percent for 2002. Enrollee demographics— particularly the aging of the enrollee population—were projected to have  less of an effect on premium growth. Projected decreases in the costs  associated with certain other factors, including benefit changes that  resulted in less generous coverage and enrollee choice of plans—typically  the migration to lower-cost plans—generally helped offset average  premium growth for 2000 through 2007 to a small extent.
Projected withdrawals from reserves offset average premium growth for  2006 and 2007. Officials we interviewed from most of the plans stated that  OPM monitored their plans’ reserve levels and worked closely with them  to build up or draw down reserve funds gradually to avoid wide  fluctuations in premium growth from year to year. Projected additions to  reserves nominally contributed to average premium growth—by less than  1 percentage point—for 2000 through 2005. However, projected  withdrawals from reserves offset average premium growth by about   2 percentage points for 2006 and 5 percentage points for 2007. (See fig. 2.)
We also reviewed detailed data available for five large FEHBP plans on  claims actually incurred from 2003 through 2005. These data showed that  most of the increase in total expenditures per enrollee was explained by  expenditures on prescription drugs (34 percent) and on hospital outpatient  services (26 percent).
Officials we interviewed from several FEHBP plans stated that the retiree  drug subsidy would have had a small effect on premium growth had OPM  applied for the subsidy and used it to offset premiums. First, drug costs for  Medicare beneficiaries enrolled in these plans accounted for a small  proportion of total expenses for all enrollees, and the subsidy would have  helped offset less than one-third of these expenses. Second, because the  same plans offered to currently employed enrollees were offered to  retirees, the effect of the subsidy would have been diluted when spread  across all enrollees. However, officials we interviewed from two large  plans with high shares of elderly enrollees stated that the subsidy would  have lowered premium growth for their plans. Officials from one of these  plans estimated that 2006 premium growth could have been 3.5 to   4 percentage points lower.
Our analysis of the potential effect of the retiree drug subsidy on all plans  in FEHBP showed that had OPM applied for the subsidy and used it to  offset premium growth, the subsidy would have lowered the 2006 premium  growth by 2.6 percentage points from 6.4 percent to about 4 percent. The  reduction in premium growth would have been a onetime reduction for  2006. Absent the drug subsidy, FEHBP premiums in the future would  likely be more sensitive to drug cost increases than would be premiums of  other large plans that received the retiree drug subsidy for Medicare  beneficiaries.
OPM officials explained that there was no need to apply for the subsidy  because the intent of the subsidy was to encourage employers to continue  offering prescription drug coverage to Medicare-eligible enrollees, and  FEHBP plans were already doing so. The potential effect of the subsidy on  premium growth would also have been uncertain because the statute did  not require employers to use the subsidy to mitigate premium growth.
section_title: Changes in the Cost and Utilization of Services and Enrollee Demographics Accounted for Differing Premium Growth Among FEHBP Plans
paragraphs: Officials we interviewed from most of the FEHBP plans with higher-than- average premium growth in 2006 cited increases in the actual cost and  utilization of services and high shares of elderly enrollees and early  retirees as key drivers of premium growth. Our analysis of financial data  provided by six of these plans showed that the average increase in total  expenditures per enrollee from 2003 through 2005 was about 40 percent— compared with the average of 25 percent for five large FEHBP plans that  represented about two-thirds of total FEHBP enrollment. From 2001  through 2005, the average age of enrollees across all eight plans with  higher-than-average premium growth increased by 2.7 years—compared  with an average increase of 0.5 years across all FEHBP plans.
Officials we interviewed from most of the FEHBP plans with lower-than- average premium growth in 2006 cited adjustments for previously  overestimated projections of cost growth and benefit changes that  resulted in less generous coverage for prescription drugs as factors that  limited premium growth. Our analysis of financial data provided by two  plans showed that per-enrollee expenditures for prescription drugs  increased by 3 percent for one plan and 13 percent for the other from 2003  through 2005—compared with 30 percent for the average of the five large  FEHBP plans. Also, from 2001 through 2005, the average age of enrollees  across all six of these plans decreased by 0.5 years—compared with an  average increase of 0.5 years across all FEHBP plans.
Mr. Chairman, this concludes my prepared remarks. I would be happy to  answer any questions that you or other Members of the subcommittee may  have.
section_title: Contacts and Acknowledgements
paragraphs: For future contacts regarding this testimony, please contact John E.  Dicken at (202) 512-7119 or dickenj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Randy Dirosa, Assistant Director; Iola D’Souza;  and Timothy Walker made key contributions to this testimony.
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