Federal Employees' Health Plans: Premium Growth and OPM's Role in Negotiating Benefits
Published: 2002-12-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal employees' health insurance premiums have increased at double-digit rates for 3 consecutive years. GAO was asked to examine how the Federal Employees Health Benefits Program's (FEHBP) premium trends compared to those of other large purchasers of employer-sponsored health insurance, factors contributing to FEHBP's premium growth, and steps the Office of Personnel Management (OPM) takes to help contain premium increases compared to those of other large purchasers. GAO compared FEHBP to the California Public Employees' Retirement System (CalPERS), General Motors, and a large private-employer purchasing coalition in California as well as data from employee benefit surveys.
section_title: What GAO Found
paragraphs: FEHBP's premium trends from 1991 to 2002 were generally in line with other large purchasers--increasing on average about 6 percent annually. OPM announced that average FEHBP premiums would increase about 11 percent in 2003, 2 percentage points less than in 2002 and less than some other large purchasers are expecting. FEHBP enrollees would likely have paid even higher premiums in recent years if not for modest benefits reductions and enrollees who shifted to less expensive plans. Increasing premiums are related to the plans' higher claims expenditures. For FEHBP's three largest plans, about 70 percent of increased claims expenditures from 1998 to 2000 was due to prescription drugs and hospital outpatient care. Most of the increase in drug expenditures was due to higher plan payments per drug, while the increase in hospital outpatient care expenditures was due to higher utilization. OPM relies on enrollee choice, competition among plans, and annual negotiations with participating plans to moderate premium increases. Whereas some large purchasers require plans to offer standardized benefit packages and reject bids from plans not offering satisfactory premiums, OPM contracts with all plans willing to meet minimum standards and allows plans to vary benefits, maximizing enrollees' choices. Each year, OPM suggests cost containment strategies for plans to consider and relies on participating plans to propose benefits and premiums that will be competitive with other participating plans. OPM generally concurred with our findings.

section_title: Letter
paragraphs: After a period of decline in the mid-1990s, federal employees’ health  insurance premiums have increased at double-digit rates in recent years.  During the past 5 years, premiums for the Federal Employees Health  Benefits Program (FEHBP)—which is the nation’s largest purchaser of  employer-sponsored health benefits with about 8.3 million covered lives— have increased cumulatively by about 50 percent. For 2003, premiums are  expected to increase on average about 11 percent following an average  increase of about 13 percent in 2002.
Concerned about the continuing increases in FEHBP premiums, you asked  that we analyze these premium increases and the Office of Personnel  Management’s (OPM) approaches to containing cost growth and compare  these increases and approaches to other large public- and private-sector  purchasers of employer-sponsored health benefits. To do this, we  examined  trends for FEHBP’s premiums compared to premiums for other large  purchasers over the last decade,  factors that contributed most to FEHBP’s recent premium growth, and    steps that OPM takes to help contain premium increases compared to  those of other large purchasers.
To identify trends in the federal government’s and other large purchasers’  health insurance premiums over the last decade, we obtained premium  data from OPM, from the California Public Employees’ Retirement System  (CalPERS)—the second largest public purchaser of employee health  benefits—and, for other large purchasers, from the Kaiser Family  Foundation/Health Research and Educational Trust (Kaiser/HRET)  surveys of private employer-sponsored health benefits. To identify factors  contributing to FEHBP premium trends, we analyzed available OPM data,  including summary reports it received on enrollees’ health care utilization  and related claim expenditures for 1998 through 2000 from the three  largest nationwide plans participating in FEHBP. These three plans are all  fee-for-service (FFS) plans and represented 90 percent of FEHBP  enrollment in FFS plans and almost two-thirds of FEHBP enrollment in all  plans. We also interviewed OPM officials. To ascertain how OPM and  selected large purchasers attempt to control costs, we interviewed  actuaries and other officials at OPM, CalPERS, General Motors (GM)—the  largest private purchaser of employee health benefits in the United  States—and the Pacific Business Group on Health (PBGH), a California- based purchaser representing 19 large employers. To obtain information  on large purchasers’ cost containment strategies in general, we reviewed  the literature and interviewed employee health benefit consultants. In  addition, we reviewed the applicable statute and regulations and  interviewed representatives of major plans participating in FEHBP and  federal employee unions.
Appendix I provides more detailed information on our methodology. We  performed our work from December 2001 through December 2002 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The federal government has provided health insurance benefits to its  employees through FEHBP since 1960. The Congress established FEHBP  primarily to help the government compete with private-sector employers  in attracting and retaining talented and qualified workers. All active and  retired federal workers and their dependents are eligible to enroll in  FEHBP plans, and about 86 percent of eligible workers and retirees  participate in the program. As of July 2002, FEHBP provided health  insurance coverage to about 8.3 million individuals, including 2.2 million  active workers, 1.9 million retirees, and an estimated 4.2 million of their  dependents. The government pays a portion of each enrollee’s health  insurance benefit premium cost. Currently, as set by statute, the  government pays 72 percent of the weighted average premium of all health  benefit plans participating in FEHBP, but no more than 75 percent of any  plan’s premium. The premiums are intended to cover enrollees’ health  care costs, plans’ expenses, reserves, and OPM’s administrative costs.  Total FEHBP health insurance premiums paid by the government and  enrollees were about $22 billion in 2001.
The legislative history of the FEHBP statute indicates that the Congress  wanted enrollees to exercise choice among various plan types and, by  using their own judgment, select health plans that best meet their specific  needs. The FEHBP statute authorizes OPM to contract with FFS plans  which include the Blue Cross and Blue Shield (BCBS) service benefit plan  and plans sponsored by federal employee and postal organizations, such  as those for the Foreign Service and rural letter carriers and   comprehensive medical plans (commonly known as HMOs), thereby  providing choice to enrollees. Some plans offer two levels of benefits,  which provide enrollees with more options, and some plans also offer a  point-of-service (POS) option that provides an enrollee a choice of using  the plan’s health care providers or, by paying a higher fee, selecting  providers outside of the plan’s provider network.
By statute, OPM is responsible for negotiating contracts with the FFS  plans and HMOs each year. Under this authority, OPM can negotiate these  contracts without regard to competitive bidding requirements. Those  plans meeting the minimum requirements specified in the statute and  regulations may participate in the program and their contracts may be  automatically renewed each year. However, plans can choose to terminate  their contracts with OPM at the end of the contract period, and under  certain circumstances OPM has the authority to terminate contracts.
As part of its contracting responsibility, OPM negotiates benefits and  premiums with each plan. In April of each year, OPM sends a letter to all  approved and participating FFS plans and HMOs—its annual “call letter”— to solicit proposed benefit and premium changes for the next year, which  are due by the end of May. The statute does not define a specific benefit  package that must be offered but indicates the core health care services  that plans must cover. Each plan therefore proposes its own benefit  package in response to the call letter. In addition, the plans propose the  premiums for these benefits, which must be provided for two levels of  coverage—self-only and self and family. As a result, each plan’s benefit  package and premiums can differ.
OPM attempts to complete its negotiations by August so that brochures  describing the plans’ benefits and premiums can be ready for the FEHBP  open season that begins in November and lasts about a month. FEHBP’s  brochures, which OPM approves each year, facilitate enrollee plan  comparisons and selections. During each open season, federal workers  and retirees are free to switch to other plans for the next calendar year,  regardless of any preexisting health conditions. Thus, enrollees can  determine which plans best meet their needs. OPM data show that in 2000  and 2001 less than 5 percent of enrollees switched plans.
Thirteen FFS plans participated in FEHBP in 2002. Overall, about 70  percent of federal employees and retirees who participate in FEHBP were  enrolled in FFS plans. Enrollees in these plans can choose their own  physicians and hospitals and the plan reimburses the provider or the  enrollee for the cost of each covered service provided up to a stated limit.  In addition, 11 of the 13 FFS plans had preferred provider organization  (PPO) networks, and by using providers in these networks, enrollees can  spend less in cost-sharing requirements compared to non-PPO providers.
The FEHBP statute establishes the rate-setting process for FFS plan  premiums. FFS plans are experience rated—that is, the premiums are to  be updated each year based on past claims experience and benefit  adjustments. As a result, premiums are designed to cover the cost of all  claims filed for enrollees as well as plan profit and administrative costs  and, therefore, will differ for each FFS plan. In 2002, all active federal  workers and retirees could enroll in the BCBS service benefit plan and in  six of the FFS employee organization plans. (See table 1.) The remaining  six FFS organization plans were available only to members of the  sponsoring organizations.
In 2002, 170 HMOs, located in local markets throughout the country,  participated in FEHBP and accounted for about 30 percent of FEHBP  enrollees. HMO enrollees must generally use a plan’s provider network to  obtain services. OPM has established the rate-setting process for HMOs  participating in FEHBP in regulations. For most HMOs, OPM bases the  FEHBP premium rate on the rates paid to the HMO by the two other  employer-sponsored groups with the most similarly sized enrollments in  that community. This ensures that FEHBP obtains a rate that is at least  comparable to the lower of the rates paid by two other similarly sized  groups, with adjustments to account for differences in the demographic  characteristics of FEHBP enrollees and the benefits provided. The number  of HMOs available to federal workers and retirees depends on the area  where they live or work. In 2002, 11 states had no HMOs participating in  FEHBP and, in the other states and the District of Columbia, the median  number of HMOs available to federal enrollees was two. Some local  markets had higher HMO participation. For example, the Washington,  D.C., area and southern California had at least four HMOs in which federal  workers and retirees could enroll in 2002.
A few plans accounted for the largest share of FEHBP enrollment. The  largest plan—the BCBS service benefit plan—had about half of the 2002  enrollment. The three largest plans, including BCBS, were all FFS plans  and accounted for almost two-thirds of FEHBP enrollment. About two- thirds of the 183 participating FFS plans and HMOs enrolled fewer than  5,000 active federal workers and retirees, and slightly less than a third of  all plans enrolled fewer than 1,000 in 2002.
The three other large purchasers we reviewed varied in the extent to  which they provide coverage through HMOs, FFS plans, and PPOs as well  as in the number of plans they offer. GM, the largest private-sector  purchaser of employer-sponsored health insurance, purchased coverage  for about 1.2 million workers, retirees, and their dependents through 81  FFS plans, 31 PPOs, and 136 HMOs in 2002. About 71 percent of the  unionized employees and retirees and about 63 percent of the salaried  employees and retirees were enrolled in FFS plans and PPOs. CalPERS  purchased coverage in 2002 for about 1.2 million active and retired state  and local government public employees and their family members who  obtained coverage through nearly 1,100 local government agencies,  including schools, and the state of California. About 74 percent of  CalPERS enrollees were in 7 HMOs, with the remainder in 2 PPOs and   3 plans covering members of such associations as the association of  highway patrolmen in 2002. PBGH, a California employer coalition,  purchased HMO coverage through its Negotiating Alliance for 19 large  employers. About 350,000 workers, retirees, and dependents were in  PBGH’s 7 HMOs in 2002. This represented about 70 percent of participants  in these employers’ plans. Participating employers made their own  arrangements for non-HMO coverage, primarily through PPOs, for the  remaining employees.
section_title: Rise in FEHBP Premiums Has Been Similar to Increases for Other Large Purchasers
paragraphs: From 1991 through 2002, health insurance premiums for FEHBP increased  on average 5.9 percent a year compared to 6.4 percent for large  employers—those in the Kaiser/HRET survey with 5,000 or more  employees—and 5.8 percent for CalPERS. (See fig. 1.) FEHBP average  premium increases have exceeded 10 percent beginning in 2001, but higher  premium increases were partially offset by some plans reducing benefits— mostly increased enrollee cost sharing—and some enrollees switching to  plans with lower premiums.
Generally, FEHBP premiums increased at a lower rate than premiums for  other large employers and CalPERS during the first half of the last decade,  but increased faster during the second half. For example, cumulatively  from 1991 to 1996, premiums increased on average about twice as fast for  large employers (6.1 percent per year) than for FEHBP (3.2 percent per  year). Premiums for CalPERS also increased faster (5.1 percent per year)  on average during this period than for FEHBP.
During the mid-1990s, the rate of change in premiums was negative for  both FEHBP and CalPERS and as a result average premiums declined  temporarily. FEHBP premiums declined on average by about 4 percent in  1995, while CalPERS premiums declined on average from 0.8 to 4 percent  per year from 1995 to 1997.
Cumulatively from 1997 to 2002, FEHBP average premiums grew about   2 percentage points per year faster than those of CalPERS and large  employers—8.6 percent per year compared to 6.5 and 6.7 percent per year,  respectively. Much of the difference in premium increases between  FEHBP and other major purchasers during this period occurred in 1998  and 1999. OPM attributes much of FEHBP’s premium growth in these  years to changes made to the reserve balances maintained by FEHBP  plans. FEHBP’s average premium increase of 13.3 percent in 2002 was  similar to increases for other large purchasers, but about 4 percentage  points higher than the CalPERS increase.
OPM announced in September 2002 that average premiums would increase  by 11.1 percent in 2003 for all FEHBP plans. Premiums for FEHBP’s FFS  plans were expected to increase on average by 10.5 percent, while HMO  premiums were expected to rise an average of 13.6 percent. This  represents the third straight year of double-digit premium increases for  FEHBP, but this increase was less than FEHBP’s average increase in 2002,  and less than those many other employers anticipate. While 2003  premiums for many large employers were still being negotiated at the time  of our work, two employee benefit consulting firms reported preliminary  findings from surveys of employee health benefits managers that  anticipated overall premium increases of from 13 to 15 percent, and  average HMO premium increases of 16 percent, for 2003. CalPERS in  particular is facing a significant premium increase in 2003. Premiums for  CalPERS’ HMOs—which enroll the bulk of its participants—were  expected to increase an average of 26 percent in 2003. Premiums for  CalPERS’ two PPOs were expected to increase about 19 and 22 percent.
FEHBP’s premium increases in recent years would have been higher but  for increased cost-sharing requirements for employees and retirees as well  as shifts in enrollment to plans with lower premiums. Over the last 6 years,  FEHBP plans have been required to cover certain new benefits, but plans  have also had some offsetting benefit reductions—mostly increased  enrollee cost sharing—thereby resulting in a net benefit reduction. Like  many FEHBP and other large employers’ health plans, from 2000 through  2002, three large FFS plans increased or introduced cost-sharing features  such as copayments or coinsurance for prescription drugs and physicians  as well as deductibles for other services, as the following examples  illustrate.
BCBS raised its standard option employee copayment for PPO home and  physician visits from $12 to $15, and raised its annual deductible from $200  to $250 per individual and from $400 to $500 for families. BCBS also  introduced cost sharing for mail-order prescription drugs for Medicare  beneficiaries, which the plan had previously waived.
The Government Employees Hospital Association, Inc. (GEHA) raised the  copayment for a physician office visit from $10 to $15, and raised  employee coinsurance for non-PPO providers from 20 percent to   25 percent. In addition, GEHA raised its annual deductible from $250 to  $300 per individual and from $500 to $600 for families, and increased the  maximum annual out-of-pocket limit from $4,500 to $5,500.
Mail Handlers raised the standard option deductible from $200 to $250 per  individual, and from $600 to $750 for families.
Enrollees who have shifted to plans with lower premiums have also  reduced FEHBP’s average premium increases. Specifically, OPM’s  actuarial estimates indicate that FEHBP enrollees who switch to plans  offering lower premiums have reduced average premium increases about   1 percent per year since 1997. For 2003, OPM anticipated that this  phenomenon would offset the overall premium increase by about   1.2 percent from what it otherwise would have been. Our analysis shows  that, from 1999 to 2002, more than two-thirds of plans with premium  increases lower than the median FEHBP premium increase gained  enrollment.
section_title: Increases in Expenditures for Prescription Drugs and Hospital Outpatient Care Drove Most of Recent Rise in Premiums for FEHBP’s Largest Plans
paragraphs: FEHBP premium increases are related to prior years’ increased claims  expenditures, which for the three largest FEHBP plans from 1998 to 2000  were in large part driven by increasing expenditures for prescription drugs  and hospital outpatient care. Increasing plan payments per drug  dispensed accounted for most of the increase in expenditures for drugs,  while increasing utilization accounted for the increase in hospital  outpatient care expenditures.
Our analysis of 1998 to 2000 claims data for FEHBP’s three largest plans— all FFS plans—indicate that per-enrollee claims expenditures increased by  about 12.6 percent, including increases of about 8.6 percent from 1998 to  1999, and about 3.7 percent from 1999 to 2000. We specifically examined  claims expenditures for these three plans because HMOs typically do not  track or report claims data to OPM and the three plans we reviewed  represented about 90 percent of FFS enrollees and about two-thirds of  total FEHBP enrollees. Claims expenditures for prescription drugs and  hospital outpatient care accounted for more than 70 percent of the overall  increase in per-enrollee claims expenditures for these plans from 1998  through 2000, while hospital inpatient care and physician visits accounted  for most of the remainder. Increases in claims for prescription drugs  accounted for the largest share (47 percent) of the overall increase in  claims expenditures from 1998 to 2000 and increased at the fastest rate  during this period—by nearly one-fourth. (See table 2.)
The increase in per-enrollee claims expenditures for each of these services  represents changes in plan payments per service and utilization for these  categories. Specifically, figure 2 shows that increasing plan payments per  service played the larger role in changing claims expenditures for  prescription drugs, hospital inpatient care, and physician visits—  66 percent of the $235 increase in expenditures for prescription drugs,   76 percent of the $57 increase for hospital inpatient care, and 93 percent of  the $45 increase for physician visits. Utilization increases accounted for all  of the increase in expenditures for hospital outpatient care and the  remainder of the increases for prescription drugs, hospital inpatient care,  and physician visits.
Aging FEHBP enrollees and the changing health care market may have  contributed to increasing plan payments and utilization. Increased  utilization was in part associated with FEHBP’s aging enrollee population.  OPM actuaries estimate that a 1-year increase in the average age of the  FEHBP population translates into almost a 3.3 percent increase in total  health costs. From 1998 through 2000, the average age of FEHBP enrollees  increased by about half a year, from 61.6 years to 62.1 years. Recently,  higher payments have also resulted from providers’ negotiations with  managed care plans. In the early and mid-1990s, managed care plans were  able to extract significant discounts from providers that they included in  their networks. However, in recent years studies have indicated that  providers have secured higher payments in part due to consolidations— particularly among hospitals in some major metropolitan areas—that may  have increased their market power. In addition, there is some evidence in  these studies that physicians are demanding and receiving higher fees.
section_title: OPM’s Reliance on Competition among Plans and Annual Negotiations to Contain Premium Increases Differs in Some Ways from Other Large Purchasers
paragraphs: Consistent with the design of FEHBP, which encourages enrollee choice,  OPM relies on competition among plans and its annual negotiations with  participating plans to moderate FEHBP plans’ premium increases. To  maximize enrollees’ choices among plans, OPM contracts with all plans  meeting minimum standards and allows plans to propose varying benefit  designs. In its annual negotiations with the plans, OPM suggests various  cost containment strategies for plans to consider as they prepare their  benefit and premium proposals, and for 2003 placed more emphasis on  encouraging the plans to propose approaches to control cost increases.  Other major purchasers, such as CalPERS, PBGH, and GM, adopt different  approaches in developing their health benefit offerings such as negotiating  based on a standardized benefit package and contracting only with plans  with which they reach a satisfactory agreement. As large purchasers face  escalating premiums, they continue to look for new ways to help control  costs, including offering plans that make enrollees more sensitive to the  costs of health care by giving them more control over their health care  spending, charging enrollees more when they go to higher cost hospitals,  or focusing more attention on managing chronic health care conditions.
subsections: section_title: FEHBP Encourages Enrollee Choice and Competition for Enrollment among Plans
paragraphs: OPM contracts with all plans meeting certain standards and requirements.  As long as plans continue to meet the minimum standards, OPM does not  exclude them from the program. Although the statute gives OPM the  authority to remove plans from FEHBP under certain circumstances, OPM  officials said that they have not recently exercised this authority primarily  because they wanted to maximize enrollee choice and minimize enrollee  disruption, especially in less populated areas of the country.
While FFS plans and HMOs do not have to compete against one another to  participate in FEHBP, they do have to compete with other plans to attract  enrollees. One way plans compete is by the benefits they offer. Since the  FEHBP statute does not define a specific benefit package, but rather  requires plans to offer a core set of benefits, plans propose the benefits  they will offer to remain competitive within their own market areas,  whether national or local. Each year, OPM negotiates each plan’s benefits  package, ensuring that the costs for any new benefits proposed by the plan  are offset by reductions in other benefits.
Plans also compete for enrollees based on their premiums. By statute,  premiums must “reasonably and equitably” reflect the cost of the benefits  provided by the different plan types participating in FEHBP. Premiums  for FFS plans are experience rated. Over time, their premiums  approximately equal average service expenditures, administrative costs,  and profits. If OPM and the plans set premiums too high or too low in one  year, OPM makes appropriate adjustments to premiums and reserve  balances in subsequent years. To set FEHBP premium rates for the HMOs,  OPM relies on the negotiations that these plans conduct with two similarly  sized purchasers in each market, requiring FEHBP to receive the lower of  the two rates. OPM’s Office of the Inspector General conducts periodic  audits to assure the validity of these rates.
The government’s method for setting premium contributions provides  plans an incentive to price their products competitively since enrollees  pay less for lower cost plans and pay the entire cost exceeding the  maximum government share. For example, for a plan with a self-only  premium of $3,200 per year, the enrollee would pay $800 and the  government would pay the other 75 percent ($2,400). For a plan costing  $3,400, the enrollee would pay $856 while the government would pay the  maximum $2,544. For any plan costing more, the enrollee would have to  pay the entire additional cost—a plan costing $3,600, for example, would  require a $1,056 annual premium from the enrollee while the government  share would remain at $2,544. Few plans have premiums much higher than  the amount where the enrollee would receive the maximum government  share: Only 19 of the 183 plans in 2002 had premiums more than 10 percent  above $3,392 (the premium equivalent to the maximum government share  of $2,544), while 97 had premiums at least 10 percent below this amount.
section_title: OPM Uses Annual Negotiations with Plans to Help Moderate Premium Increases
paragraphs: Each year, OPM’s “call letter” provides its negotiation objectives and calls  for the plans’ new benefit and premium proposals. OPM uses its annual  letter to give guidance regarding the goals to be achieved and the types of  cost containment efforts plans may want to consider to help contain  premium increases. OPM encourages plans to consider implementing cost  containment strategies each year as they draft their FEHBP benefit and  premium proposals.
During negotiations over benefits and premiums, OPM tends to focus its  cost containment efforts on plans that submit proposals with the highest  premium increases or those that are outliers in some other way. To some  degree, OPM relies on the competitive nature of the program to achieve  results in that each plan must weigh the potential effect of its benefit  offerings and premiums on its market share. Changes in benefits, and any  resulting premium changes, can affect a plan’s enrollment, but there is a  trade-off since increased benefits may be attractive to potential enrollees  while the associated increased premium may deter enrollment.
OPM has encouraged plans to consider several strategies to help moderate  premium increases. For example, for contract year 1998, OPM encouraged  FFS plans to expand and strengthen their existing PPO arrangements by  obtaining discounts when cost effective. For that year, it also encouraged  all plans to consider proposing a point-of-service (POS) product. OPM’s  call letter stated that POS products were an effective way to introduce  enrollees to the concept of managed health care. For contract years 2001  and 2002, OPM’s call letters encouraged ways to control rising prescription  drug costs including use of drug formularies and three-tier drug benefits— that is, lower cost sharing for generic and brand name drugs on a plan’s  formulary than for drugs not included on the formulary.
Even more than in past years, OPM’s latest call letter for contract year  2003 challenged plans to identify ways to reduce premium increases. OPM  asked plans to propose innovative ideas to help contain these increases.  For 2003, OPM also encouraged plans to consider several specific cost  containment strategies including increasing enrollees’ out-of-pocket costs,  reemphasizing the need to manage prescription drug costs, and putting  more emphasis on care management for enrollees who have chronic  conditions. In addition, the call letter told plans to expect very tough  negotiations, a specific direction OPM did not include in past letters.
On September 17, 2002, OPM announced that FEHBP premiums would  increase by an average of about 11.1 percent for 2003, about 2 percentage  points less than in 2002. In addition, OPM officials indicated that, while  some individual plans increased or decreased benefits, overall benefit  levels would be largely similar to those available in 2002. OPM officials  reported that the initial proposals submitted by the plans would have  resulted in a 13.4 percent increase for 2003. Following negotiations with  OPM on benefits and premiums, the average increase was reduced to   12.4 percent. OPM officials anticipated that the remaining savings from the  initial proposals would result from FEHBP enrollees switching to lower  cost plans during the open enrollment season.
section_title: Other Large Purchasers Use Different Approaches in Negotiations and Cost Containment
paragraphs: Whereas OPM contracts with all plans meeting minimum standards and  negotiates benefit packages that can vary with each plan, other large  purchasers we reviewed follow a different approach. CalPERS, GM, and  PBGH conduct negotiations based on a standardized benefit package. At  the end of the negotiations, these purchasers can decide not to contract  with a plan that does not meet their standards in such areas as cost or  quality. Some of these purchasers also reward enrollees by paying more of  the premiums when enrollees choose plans the purchasers consider to be  the best value. Continuing premium increases have caused these and many  other large purchasers to search for ways to reduce their premium costs.  While many purchasers first look to shift more of the costs to their  employees by taking such actions as increasing plan deductibles, some are  also exploring new strategies to help contain these increases.
subsections: section_title: Three Other Large Purchasers Offer Standardized Benefits, Facilitating Comparisons for Purchasers and Enrollees, and May Not Contract with All Plans
paragraphs: The three large purchasers we reviewed rely on a standardized benefits  package when conducting negotiations, particularly in negotiations with  HMOs. CalPERS standardized benefits and copayments across its HMOs in  1993 to be able to better assess differences in plans’ costs, and GM also  negotiates with HMOs using a standardized benefits package. PBGH, in  conjunction with other national purchasers, developed an annual request  for proposals that it uses for its standardized HMO benefit package.
Along with using standardized benefit packages, some large purchasers  exclude plans if they cannot negotiate a satisfactory agreement with them.  During its negotiations for benefit year 2002, for example, CalPERS  rejected bids from all participating HMOs as too high and then allowed  them to resubmit revised bids. CalPERS rejected the bids because the  proposed increases were twice as high as those that occurred in the past   5 years and were considerably higher than what CalPERS had expected.  CalPERS ultimately dropped 3 of its 10 HMOs at the end of its negotiations  that year. For benefit year 2003, CalPERS dropped 2 of the remaining   7 HMOs at the end of its negotiations to help control premium increases  and to provide the best value for those premiums. GM reviews and scores  HMOs on the basis on quality and cost. Plans scoring relatively low will  either be dropped or be given a year to improve.
Like FEHBP, some other large purchasers vary the premiums some  employees pay to encourage enrollment in certain plans. For example, as  part of its value purchasing strategy, which the company started in 1997,  GM evaluates HMOs for quality and value and encourages salaried  employees to enroll in those plans it rates as higher value plans. For  salaried employees, GM covers a larger share of the premiums for HMOs  designated as higher value. GM estimates that it saves about $4.6 million  annually by having its salaried employees move into HMOs designated as  higher value and that these employees save about $2 million in premiums.  Also, PBGH states that it focuses its purchasing efforts on plans it has  identified as high quality and some employers participating in the group  support PBGH’s effort by setting their premium contributions to  encourage employee enrollment in plans considered to be high value.
section_title: Some Large Purchasers Consider New Strategies to Control Rising Premiums
paragraphs: Over the next several years, analysts predict that double-digit health  insurance premium increases will continue. As a result, many large  purchasers are searching for ways to slow this growth. Shifting more of  the costs to employees is one of the first cost containment strategies  employers consider as premium rates escalate. In particular, many of the  largest employers have increased deductibles for PPO plans. For example,  employer survey data show that the average annual deductible for self- only in-network PPO coverage increased from $175 in 1999 to $310 in 2002,  while out-of-network deductibles increased from $272 in 1999 to $529 in  2002. Similarly, very large employers are increasingly using multiple-tier  cost sharing for prescription drugs as a cost containment strategy.  According to another employer survey, 22 percent of PPOs had a three-tier  drug copayment in 2000, but the number increased to 40 percent in 2001.
Some large purchasers, including OPM and those we reviewed, are  beginning to explore new strategies to help reduce escalating costs. For  example, some are in the early stages of considering “consumer-driven”  plans that provide employees with more financial incentives to be  sensitive to health care costs and more control over their health care  spending decisions. As this concept covers a wide range of possible  approaches, there is no single definition. However, all approaches tend to  shift more decision-making responsibility regarding health care from  employers to employees. For example, they could provide employees with  a personal spending account, which the employer would fund at different  levels. One plan funds these accounts at $1,000 for an individual or at  $2,000 for a family. Employees could use this money to pay medical  expenses. If employees spend all the money in their accounts, they would  have to spend their own money until a deductible amount—which for one  plan was $600 for an individual employee and $1,200 for a family—is met.  Then, coverage through an insurance policy purchased by the employer  would begin. In some approaches, employees who do not spend all the  money in their accounts could carry the money over from year to year. To  date, as these plans are so new, few people are enrolled—several studies  have estimated that fewer than 1 percent of enrollees with employer- sponsored health insurance are in some form of consumer-driven health  plans.
Other new strategies that some purchasers are considering include plans  that contain provisions to help reduce hospital costs and costs for  enrollees with chronic conditions. For example, CalPERS and PBGH are  exploring the use of financial incentives for enrollees when choosing from  which hospital to receive care. Such plans are now becoming available but  represent a very small share of the market. These plans offer tiered  copayments for enrollees that are lower for hospitals that offer the best  rates and are higher for those that are more expensive. Another approach  attracting attention among many large employers is disease management,  which focuses attention on chronic illnesses such as asthma, diabetes, and  heart disease that generate a large amount of health care expenditures.  For example, CalPERS, PBGH, and GM are all actively involved in  pursuing disease management programs. Also, in its call letter for contract  year 2003, OPM encouraged FEHBP plans to consider using disease  management programs. However, according to one employer survey, many  purchasers said that disease management programs are too new and data  are not yet available to assess the benefits compared to the costs.
section_title: Comments from OPM and Other Reviewers
paragraphs: We provided a draft of this report to OPM, CalPERS, GM, and PBGH for  their review. OPM generally concurred with our study findings,  highlighting its negotiating strategy as contributing to average FEHBP  premiums for 2003 being below national trends. OPM also indicated that in  the coming year it will strengthen its efforts by adding enhanced consumer  education to provide enrollees with additional information for making  informed choices. CalPERS and GM also concurred with our findings.  PBGH, along with OPM and CalPERS, provided technical comments,  which we incorporated as appropriate. (App. II contains the full text of  OPM’s comments.)
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. We will then send copies to the Director of OPM, other interested  parties, and appropriate congressional committees. We will also make  copies available to others on request. In addition, this report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
Please call me at (202) 512-7118 or John Dicken at (202) 512-7043 if you  have any additional questions. N. Rotimi Adebonojo and Joseph Petko  were major contributors to this report.
section_title: Appendix I: Methodology
paragraphs: To compare premium trends for the Federal Employees Health Benefits  Program (FEHBP) and other large purchasers over the last decade, we  obtained data from the Office of Personnel Management (OPM), the  California Public Employees’ Retirement System (CalPERS), and surveys  of private employer-sponsored health benefits conducted by the Kaiser  Family Foundation and the Health Research and Educational Trust  (Kaiser/HRET).
To identify factors driving FEHBP’s recent premium growth, we analyzed  several OPM data sources, including summary reports it received from the  three largest nationwide plans on enrollees’ health care service utilization  and related plan payments for 1998 through 2000. These three plans are all  fee-for-service (FFS) plans and accounted for 90 percent of FEHBP  enrollment in FFS plans and almost two-thirds of the total FEHBP  enrollment. We analyzed expenditure and utilization data for services,  including hospital inpatient care, hospital outpatient care, physician visits,  prescription drugs, laboratory services, surgery, and mental health and  substance abuse for 1998 through 2000 for the three largest plans. These  summary data are submitted to OPM by each FFS experience-rated plan,  reporting utilization and expenditures incurred by the plan in a calendar  year and paid in that calendar year and through the first 9 months of the  next calendar year. Because each plan reports its data to OPM slightly  differently, we aggregated expenditures and utilization for multiple   categories of services, including hospital inpatient, hospital outpatient,  prescription drugs, and physician visits—and all other services. We  adjusted each plan’s expenditures by enrollment as reported by the plans  to OPM to calculate per-enrollee expenditure and utilization, and  calculated a payment per unit for each category of service. We weighted  the expenditure and utilization for the three plans by their respective  enrollments for each year from 1998 to 2000. We calculated the increase in  per-enrollee claims expenditure attributable to increased plan payments  from 1998 through 2000 using the change in plan payments over the   3 years and assuming utilization remained steady at the 1998 level.  Similarly, we calculated the increase in per-enrollee claims attributed to  increased utilization using the change in utilization from 1998 to 2000 and  assuming plan payments were constant at the 2000 level.
In addition, using OPM’s data for all FEHBP plans, we compared each  plan’s premium and enrollment changes from 1999 through 2002. We could  only do this analysis for those plans that participated in FEHBP in each of  the comparison years—for example, in both 2001 and 2002. We identified  how many plans with premium changes less than and greater than the  median premium gained and lost enrollment. These counts do not include  plans that dropped out of FEHBP because we do not know what type of  premium and enrollment changes these plans would have experienced in  the following year. We also reviewed the literature and interviewed OPM  officials and actuaries at the Hay Group, Hewitt Associates LLC, and  William M. Mercer, Inc.
To examine the steps OPM takes to control FEHBP costs, we interviewed  officials in OPM’s Office of Insurance Programs and Office of the Actuary.
To obtain the plans’ perspectives, we interviewed officials at the Blue  Cross Blue Shield Association and at Kaiser Permanente—two large plans  participating in FEHBP. We also interviewed representatives from two  federal employee unions—the American Federation of Government  Employees and the National Treasury Employees Union.
To examine how other large purchasers negotiate health benefits and  attempt to control costs, we reviewed the literature and employee benefit  surveys; interviewed employee benefit consultants; and interviewed  officials of three large purchasers of employer-sponsored health  insurance, including CalPERS—the largest public purchaser of health  insurance after the federal government, Pacific Business Group on Health  (PBGH)—a California-based purchaser representing 19 large employers,  and General Motors (GM)—the largest private purchaser of employer- sponsored health benefits. See table 3 for selected characteristics of  FEHBP and the other large group purchasers.
section_title: Appendix II: Comments from the Office of Personnel Management