Federal Employees Health Benefits Program: Enrollment Remains Concentrated Despite More Plan Offerings and Effects of Adding Plan Types Are Uncertain
Released: 2017-11-06T00:00:00

Letter

Background

FEHBP was established primarily to help the government compete with private-sector employers in attracting and retaining talented and qualified workers. As indicated by the legislative history of the original FEHBP statute, lawmakers wanted enrollees to exercise choice among various plan types and, by using their own judgment, select health plans that best meet their specific needs. While participation in FEHBP is voluntary, in 2015, 85 percent of federal workers and 90 percent of federal retirees were enrolled in the program.

Each FEHBP carrier offers one or more plans, and these plans can have up to three options, or levels of benefits, depending on which type of plan is being offered. Although they may differ in the specific benefits they provide, all FEHBP plans cover basic hospital, surgical, physician, emergency, and mental health care, as well as childhood immunizations and certain prescription drugs. However, FEHBP plans offer different levels of benefits, with many plans offering a choice between a more expensive plan option, which offers a higher level of coverage, and a less expensive plan option, which offers a lower level of coverage. FEHBP enrollees can purchase individual or family coverage. Beginning in 2016, enrollees could also purchase coverage for themselves and one eligible family member, referred to as “self plus one” coverage. FEHBP enrollees can change health care plans during an annual open enrollment period or at other times if they experience a qualifying life event, such as a change in family status. OPM data indicates that between 2005 and 2015, the annual percentage of FEHBP enrollees who changed their plan enrollment by choice—rather than because of mergers or plan terminations—ranged from 5 to 7 percent.

The FEHBP statute limits the program to four specific plan types: (1) one service benefit plan—a government-wide plan with two levels of benefits; (2) one government-wide indemnity benefit plan; (3) employee organization plans; and (4) and comprehensive medical plans—also known as HMO plans. OPM generally refers to these plan types as either FFS plans (the service benefit plan and the employee organization plans), or HMO plans (comprehensive medical plans). Within the categories of FFS and HMO plans, there can be significant variation in the plan designs and enrollee cost sharing. Most FFS plans have PPO arrangements, which usually have lower out-of-pocket expenses (i.e., a smaller copayment and/or a reduced or waived deductible) when enrollees use providers within the plan’s preferred network. Compared with HMOs, PPOs typically offer their enrollees a greater choice of providers and have less plan management of the care that enrollees receive. HMOs provide or arrange for comprehensive health care services on a prepaid basis through designated plan physicians, hospitals, and other providers in particular locations. Each HMO sets a geographic area for which health care services will be available. Some HMOs offer a point of service product that offers FEHBP enrollees the choice of using a designated network of providers or using non-network providers at an additional cost.

Additionally, in 2003 and 2005 respectively, FEHBP also began offering consumer-driven health plan (CDHP) and high-deductible health plan (HDHP) designs that are coupled with a tax-advantaged account to help enrollees pay for qualified medical expenses. Any of the FEHBP plan types may be offered with a CDHP or HDHP design, and therefore CDHPs and HDHPs can be either FFS or HMO plans. Enrollees in typical CDHPs have responsibility for certain up-front medical costs, an employer-funded account that enrollees may use to pay these up-front costs, and catastrophic coverage with a high deductible. CDHP enrollees receive full coverage of in-network preventive care. HDHPs offer low premiums but higher deductibles and annual out-of-pockets limits combined with a tax-advantaged account. HDHPs can have first dollar coverage (no deductible) for preventive care and higher out-of-pocket copayments and coinsurance for services received from non-network providers.

OPM is responsible for negotiating health benefits and premiums with FFS and HMO plans. Each year, OPM sends a letter to all approved and participating FFS and HMO plans—its annual “call letter”—to solicit proposed benefit and premium changes for the next calendar year, which are due by the end of May. The descriptions of both covered and excluded benefits are incorporated into the final contracts. Each plan subsequently prints brochures describing the benefits and costs according to a standard format, as specified by OPM. The brochures are binding statements of benefits and exclusions that plans must follow as parties to FEHBP contracts. 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.

The federal government and FEHBP enrollees generally each bear a portion of the cost of FEHBP plan premiums. By statute, the government generally pays 72 percent of the weighted average premium of all health benefit plans participating in FEHBP, but no more than 75 percent of any particular plan’s premium, while enrollees pay the balance. Premium prices vary across plans and within plans and depend on whether an enrollee is enrolled in self-only, family, or self plus one coverage. The premiums are intended to cover enrollees’ health care costs, plans’ expenses, reserves, and OPM’s administrative costs.

Although there has been some minor fluctuation in the number of FEHBP enrollees over time, total program enrollment has remained around 8 million enrollees since 2000. As the Congressional Research Service has reported previously, FEHBP enrollment is concentrated among a small number of carriers and BCBSA has the largest share of total program enrollment by far. See figure 1 for the total FEHBP enrollment and enrollment market share of the top five carriers in the program from 2000 through 2015.

The Number of Available FEHBP Plan Offerings Increased Since 2007 and Enrollment Was Increasingly Concentrated Available FEHBP Plan Offerings Generally Increased in Recent Years, although Variation Existed among Counties

The number of plan offerings available to FEHBP enrollees generally increased from 2007 through 2015. In 99 percent of counties nationwide, enrollees had more plan offerings in 2015 than they had in 2007. The median number of plan offerings available in a county increased from 19 in 2007 to 24 in 2015. Most of these offerings were the nationwide FFS plans that are available in all counties. There were 17 such plan offerings in 2007 and 19 in 2015. The remaining plan offerings were HMOs that were available in more limited areas. While the total number of HMO plans that participated in FEHBP decreased from 2007 through 2015, the median number of HMO plan offerings in a county increased. This suggests that those HMO plans in FEHBP in 2015 generally participated in more counties than was the case in 2007. (See table 1 for a comparison of plan offerings in 2007 and 2015.)

Despite increases in the availability of the median number of HMO plan offerings in a county, there was wide variation in the number of HMO offerings available to enrollees in a given county. For example, while FFS plan offerings were available nationwide, in some counties enrollees had no HMO plan offerings. Since 2007, however, the number of counties without any HMO plan offerings available declined from 18 percent to less than 2 percent in 2015. Most counties had a couple of HMO plan offerings, and some counties had at least 10 HMO offerings. For example, in 2015, enrollees in one county in New York had 15 HMO plan offerings, giving enrollees a total of 34 offerings from which to select coverage. (See fig. 2 for the range of available HMO plan offerings among counties across all years.)

Regarding reasons for the variation in available FFS and HMO plan offerings, OPM officials told us that plans participating in FEHBP enter and withdraw based on internal business decisions and often in response to changing economic conditions. For example, according to OPM officials, some plans may enter the program with the expectation of gaining a target market share. OPM officials also noted that decreases in plan participation in the past may have been a response to premium increases that impacted plans’ ability to effectively compete. In addition, a 2012 OPM report noted that many prominent HMO plan carriers have reduced the number of states in which they participated since 1985.

Market Share Held by the Largest FEHBP Carrier in Each County, Generally BCBSA, Increased from 2000 through 2015

FEHBP enrollment within counties generally became more concentrated from 2000 through 2015, although most of that growth occurred prior to 2007. The share of the market held by the largest carrier increased from a county median of 58 percent in 2000 to 70 percent in 2007, to 72 percent in 2015. Similarly, the combined median county market share of the three largest carriers increased from 86 to 90 percent over the same time period. However, we observed that the median market share held by the second and third largest carrier generally decreased over time. This suggests that the increases in combined market share held by the three largest carriers were generally due to increases observed in the single largest carrier. Although there was little change in the median county market share of the top five carriers, these carriers accounted for nearly all enrollments in a county in each of the years we examined. (See fig. 3 for a comparison of the market share held by the three largest carriers over time.)

We found that these increases in concentration were widespread. Overall, from 2000 through 2015, almost 90 percent of counties experienced an increase in the market share held by the largest carrier. Over this period, the percentage of counties in which the largest carrier held at least half of the market also increased—from 70 percent in 2000 to 93 percent in 2015. Additionally, the proportion of counties where at least 80 percent of the market share was held by the top three carriers increased from about 76 percent of counties in 2000 to 94 percent of counties in 2015. (See fig. 4 for maps showing the market share of the largest carrier in each county in 2000 and 2015.)

Similar to the combined median county market share of the top five carriers, nationwide FFS plans’ combined median county market share accounted for almost all FEHBP enrollment and showed a slight increase from 97 percent in 2000 to 99 percent in 2015, although variation existed in some counties. Comparatively, the combined median county market share held by HMO plans decreased from 6 percent to 2 percent. In addition, in each year since 2000, 16 to 30 percent of counties had all of their FEHBP enrollment in FFS plans, and, in years for which we had HMO plan availability data, almost all of these counties offered at least one HMO plan offering. At the same time, we observed a small number of counties each year where HMO plans’ combined market share was at least 50 percent.

BCBSA was the largest carrier in almost all counties nationwide and the share of these markets held by its two nationwide FFS plan options increased from 2000 through 2015. While BCBSA was already the largest carrier in 93 percent of counties in 2000, by 2015 it was the largest in 98 percent of counties. Over this same time period, the median county market share held by BCBSA also increased—from 58 percent in 2000 to 72 percent in 2015. Most of BCBSA’s 14 percent market share increase occurred between 2000 and 2008.

Other carriers had significantly smaller median county market shares, but they had the highest share in a certain limited number of counties.

The Government Employees Health Association, Inc. (GEHA), another carrier offering nationwide FFS plans, had the second highest program-wide market share in 2015, and an 8 percent median county market share. GEHA held the second or third largest market share in 77 percent of counties in 2015, reaching as high as 65 percent of the county market share, for example, in a county in Texas, but was the largest carrier in less than 1 percent of counties.

Kaiser Permanente—which offers HMO plans—was the third largest carrier program-wide in 2015 and held the largest market share among HMOs (6 percent), though its market share decreased slightly over time. In counties where a Kaiser Permanente plan was available in 2015 (fewer than 200 out of more than 3,000 counties nationwide), those plans had a median county market share of 8 percent; however, in some counties Kaiser Permanente plans held a larger market share, for example, reaching as high as 64 percent in one county in California. In counties where Kaiser Permanente plans were available in 2015, it was the largest carrier 8 percent of the time and the second or third largest carrier in a majority of cases. (See table 2 for a description of market share and position for the three carriers with the largest program-wide market share within FEHBP.)

BCBSA’s increased FEHBP market share may be due to a number of factors. For example, officials from several FEHBP carriers told us that BCBSA’s market share performance was tied to several factors, including brand recognition, comparably favorable plan premiums, and enrollee population characteristics. According to an OPM report, another factor contributing to BCBSA’s increased market share was the introduction of the Basic option to the Service Benefit Plan in 2002. Compared to its Standard option, this nationwide FFS plan option restricts enrollees to a more narrowly defined provider network (with some limited exceptions) and offers lower premiums, thereby broadening BCBSA’s ability to compete with other lower cost plans. As shown in table 3, while program-wide enrollments in BCBSA’s nationwide FFS plan options have increased by 32 percent following the introduction of the Basic option, enrollments in the Standard option decreased, suggesting that enrollees are shifting to the Basic option or plans offered by other carriers.

In addition, a study published in 2012 noted that BCBSA market concentration was the possible outcome of the carrier’s established provider network and lower relative administrative costs. For examples of BCBSA’s and other carriers’ premiums, plan offerings, and market shares in 2015, in select counties, see appendix I.

FEHBP Market Share Concentration among the Largest Carriers Was Generally Similar to the Large Group Market and More Concentrated than Medicare Advantage

The combined market share for the three largest FEHBP carriers in a state was generally similar to the large group market and higher than Medicare Advantage. As shown in figure 5, in 2014, the median state market share for FEHBP was 89 percent compared to 90 percent in the large group market and 74 percent for Medicare Advantage. And, the range of state market shares held by the three largest carriers in Medicare Advantage and the large group market (69 and 62 percentage points, respectively) was wider than in FEHBP (23 percentage points). However, programmatic differences between the three selected markets, such as varying enrollee demographics, market sizes, and program designs, make it difficult to draw conclusions about these contrasting market trends.

For each market and each year, the 50 states and the District of Columbia were ranked from highest to lowest market share for the combined three largest carriers in each state and then divided into four groups based on those rankings.

FEHBP enrollment data could not be separated from the overall large group market data used to calculate state-level market share in prior GAO reports. In 2014, we estimated that FEHBP plans accounted for about 20 percent of the 44 million total enrollments in the large group market nationally.

Compared to Medicare Advantage and the large group market, the state market shares held by the largest carrier in FEHBP generally held a larger share of the market. For example, in 2014, the median market share held by the largest carrier in a state was higher in FEHBP (75 percent) than both Medicare Advantage (35 percent) and the large group market (59 percent).

Stakeholder Opinions and Cost Estimates Do Not Offer Clear Consensus about the Potential Effects of Expanding OPM’s Contracting Authority

Stakeholders Generally Supported Expanding OPM’s Authority, but Said Using That Authority to Add Regional PPO Plans Could Have Negative Effects

Seven of the 10 stakeholders we interviewed, and who commented on OPM’s contracting authority, generally supported expanding OPM’s contracting authority to allow it to contract with a greater variety of health plan types than are currently offered in FEHBP. Stakeholders we interviewed that offer HMO plans generally supported this expansion. However, the 2 stakeholders that offer nationwide FFS plans and 1 stakeholder that represents federal employees opposed it. Most of the concerns expressed by these 3 stakeholders were related specifically to the potential effects of OPM adding regional PPO plans to FEHBP.

Five of the seven stakeholders we interviewed who supported expanding OPM’s contracting authority said that adding additional plan types could result in both positive and negative effects. In terms of positive effects, one stakeholder said the authority could potentially allow OPM to offer different types of plans—such as value-based plan designs and accountable care organizations—that could lead to improved benefit options and health outcomes for enrollees. One stakeholder also told us that OPM’s expanded authority would enable the agency to improve transparency by allowing plans to contract with OPM as the type of plan they actually are, rather than fitting into outdated statutorily established categories, which the stakeholder characterized as an “antiquated labeling system.” Another stakeholder said that participation by new plans in FEHBP would foster competition and help keep health plan costs down. One stakeholder also noted that if plan expansion would only be undertaken when it is in the best interests of FEHBP and its enrollees— as OPM has indicated would be the case—there was little or no downside to such expanded authority. Additionally, in April 2013, three FEHBP carriers that offer HMO plans sent a letter to Congress in favor of expanding OPM’s authority, citing that it would “ensure OPM has the tools it needs to lower costs and provide federal workers access to innovation, choice, and value” and would allow more competition in the program.

Some stakeholders we interviewed, however, suggested that any positive effects of expanding OPM’s authority and adding new plan types could be limited due to other aspects of FEHBP that affect competition and discourage participation by carriers. In particular, these stakeholders cited concerns related to costs associated with FEHBP enrollees who are Medicare-eligible but who do not enroll in Medicare, and the formula that determines the government’s contributions to enrollee premiums. According to these stakeholders, this creates unfair competitive advantages for the nationwide plans and BCBSA in particular. They also cited FEHBP’s system for assessing the performance of participating carriers, which they said discourages competition and participation by carriers in FEHBP, particularly for certain HMO plans. OPM reported that it was open to considering some program changes related to these concerns; however, some proposed changes could require changes to the FEHBP statute. For more information about stakeholder comments regarding these other aspects of FEHBP, see appendix II.

Some of the 10 stakeholders we interviewed and who commented on OPM’s contracting authority also identified other potential negative effects that could occur with expanding OPM’s contracting authority. For example, 1 stakeholder said that an increase in plan types offered could lead to a subsequent increase in OPM’s administrative costs. In addition, several of these stakeholders said that adding more plans to FEHBP would exacerbate an existing problem of choice overload for enrollees. One of the stakeholders said that FEHBP enrollees are already confused by the number of available plan offerings, and that the current information provided to enrollees does not allow for easy comparison of their choices. They noted that additional expansion of offerings will only complicate enrollees’ plan analysis.

Consistent with these concerns, studies that we reviewed related to consumer choice and decision-making processes in health insurance markets suggest that adding additional plans may not always yield positive effects or improve competition. For example, a 2016 report by the RAND Corporation found that health insurance consumers are unlikely to change plans, even as better choices become available. Additionally, a 2009 study examining the Swiss health insurance market similarly found that as the number of choices offered to individuals grows their willingness to switch plans declines. The study found persistently low rates of plan switching despite high variation in premiums between plans, and found that more choice inhibited plan switching. It concluded that having a large number of plans to choose from likely reduces the effectiveness of consumer decision making, and that simplifying health plan decision making by reducing the number of choices might result in more price competition among insurers, and benefit consumers.

Additionally, 6 of the 10 stakeholders we interviewed and who commented on OPM’s contracting authority said that there would potentially be negative effects if OPM were to use the expanded authority to add regional PPO plans to FEHBP. For example, 5 of these 6 stakeholders said there could be instability and higher premiums in FEHBP if new regional PPO plans were able to “cherry pick” low cost areas in which to participate. This was of particular concern to 1 of the 2 stakeholders we spoke to who offer nationwide plans. Because they offer the same premiums nationally, they said the lower-cost areas of the country help subsidize the premiums of the higher-cost areas. If these nationwide plans lost customers in lower-cost areas to regional PPO plans, then their premiums would likely rise. These 2 stakeholders and a third said, therefore, that adding regional PPO plans could result in nationwide carriers discontinuing their coverage due to their inability to compete with regional plans. According to 1 stakeholder that offers a nationwide FFS plan, if the nationwide carriers dropped out of the program, plan offerings would be significantly reduced in certain areas of the country and some areas could potentially be left with no offerings at all. Additionally, in 2014 and 2015, six nationwide FEHBP carriers, including the two we interviewed, sent letters to Congress expressing their opposition to legislation that would add new plan types in FEHBP. In the letters, they cited negative effects such as program destabilization, increased premiums, and fewer consumer choices—all of which were specifically tied to the proposal to add regional PPO plans to FEHBP.

Two of the 10 stakeholders we interviewed and who commented on OPM’s contracting authority, however, said that adding regional PPO plans to FEHBP would have positive effects. For example, 1 of these stakeholders that offers HMO plans and referred to FEHBP’s plan type labels as antiquated noted that this would enable them to promote their existing FEHBP products—currently categorized as HMO plans—more appropriately as regional PPO plans. This stakeholder said the current categorization causes enrollees to erroneously believe their plans are more restrictive than the plans listed as nationwide FFS plans.

When we shared these stakeholder concerns about expanding OPM’s contracting authority with OPM officials, they told us that the agency has existing strategies and is working towards implementing additional ones, which officials said should allow it to address many of these concerns. For example, OPM officials said in January 2017 that the agency was in the process of building models that would allow it to simulate the impact that adding new plan types would have on FEHBP, but that the agency is still years away from being able to make such assessments. The officials said that the agency would only seek to introduce new plan types that it determines to be in the best interests of FEHBP enrollees and the federal government. With regards to enrollee confusion over the number of plan choices, the OPM officials said that the agency is improving the tools enrollees can use to learn about the available plans. For open season in 2016, the agency released what it considers to be a new and improved Plan Comparison Tool on its website that enables enrollees to gain more knowledge about their health plan options before making a selection. According to the officials, some of the improved functions of the tool include more details about the plan benefits and services, clearer definitions of the health insurance terms, and easier ability to compare the plans. Officials also told us that they expect to make more improvements to the tool in future years based on feedback from the FEHBP enrollees who use it. OPM officials said the agency would continue existing plan negotiation strategies that, among other things, would prevent plans from “cherry picking”—that is, offering products in only the most profitable service areas—by ensuring that new carriers provide services in contiguous regions that include both low- and high-cost areas. Additionally, related to the concern that nationwide plans might withdraw from the program if regional PPO plans were introduced, OPM officials noted that if, for example, BCBSA were to cancel its nationwide plan options, another carrier might step up to gain the service benefit plan designation and provide nationwide service.

Estimates of the Financial Effects of Expanding OPM’s Contracting Authority Differed on Whether Costs Will Increase or Decrease

We identified three significantly differing estimates of the financial effects on the federal budget that expanding OPM’s FEHBP contracting authority would have. However, these estimates are based on different assumptions about a variety of factors such as premium changes, administrative costs, and enrollment, and only limited information was available about the methodologies used for each set of estimates. It is also important to note that the assumptions used in developing these estimates are subject to professional judgment and have inherent uncertainty regarding whether the assumed scenarios will be realized. The three estimates include:

The President’s Budget for fiscal year 2017 estimated that expanding FEHBP to a greater variety of plan types would save $88 million from 2017 through 2026. According to information provided by OPM, the estimate considered the effect of a broad expansion of OPM’s authority to add new plan types, and OPM did not indicate whether the agency specifically considered the effect of adding regional PPOs to FEHBP when developing this estimate. OPM officials told us that these savings were based on a number of assumptions, including an estimate of the number of enrollees that will migrate to new plan types based on previous FEHBP experience and projecting a medical loss ratio of 90 percent for the new plan types added to FEHBP. However, in follow-up with the agency, OPM officials were not able to provide us with more detailed information about how these savings were calculated. The Congressional Budget Office, in its analysis of the budget proposal, estimated a range from $50 million in savings to $50 million in costs over the 10-year period.

A 2014 study from the Center for Health and Economy that examined the effects of introducing regional PPOs to FEHBP across three scenarios estimated cost savings ranging from $1.2 to $2.1 billion over 7 years (2015 to 2021). The study provided limited information about the data, assumptions, and methodology the center used to develop its estimates. The study did explain that the center modeled the projected impact on enrollment, average premiums, and the federal budget of adding regional PPOs to FEHBP using three different sets of assumptions about how expensive the newly introduced regional PPO plans would be. Under each scenario, the center estimated shifts over time in enrollment from existing FEHBP plan designs (FFS, HMO, CDHP, and HDHP) to the new PPO plans— and assumed that these new plans would achieve 10 percent of the market share throughout the analysis period. The study also projected decreases in average FEHBP premiums and a corresponding reduction in total government contributions in each scenario.

A December 2013 study conducted by Avalere Health at BCBSA’s request specifically examined the effect of adding regional PPOs into FEHBP and estimated an increase in spending of $7.8 billion over 10 years (2014 to 2023). In developing its estimates, the study noted that it assumed that the BCBSA national plans dissolve and would break into regional plans in response to new regional plan competition. The study stated that the $7.8 billion in increased costs was based on an assumption that both regional PPOs and BCBSA regional plans would have higher administrative costs as compared to BCBSA’s national plans. The study estimated that these costs would be offset slightly by an initial anticipated decrease in premiums resulting from new plans introducing competition into these regions.

Agency Comments

We provided a draft of this product to OPM for comment. The agency did not provide any comments.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to OPM and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III.

Appendix I: Federal Employees Health Benefits Program (FEHBP) Plan Attributes for Selected Counties in 2015

In table 4, we present information about a selection of counties that reflect a range of FEHBP attributes, but which are not intended to be a representative sample of all counties. We chose counties with a range of total enrollments, market shares held by different plan offerings (with different enrollee premiums), and number of health maintenance organization (HMO) plan offerings.

Appendix II: Stakeholder Opinions about Other Federal Employees Health Benefits Program Aspects That Affect Competition

Some of the stakeholders we interviewed suggested that any positive effects of expanding the Office of Personnel Management’s (OPM) contracting authority and adding additional plan types to the Federal Employees Health Benefits Program (FEHBP) could be limited because of other aspects of the program that affect competition and discourage carrier participation. In particular, stakeholders cited concerns related to: Medicare-eligible enrollees, the government contribution formula for FEHBP premiums, and FEHBP’s plan performance assessment system.

Medicare-eligible enrollees. Six of the 11 stakeholders we interviewed suggested that problems associated with Medicare-eligible enrollees negatively affect FEHBP premiums, and 5 of the 6 noted these problems create an unfair competitive advantage for the nationwide FEHBP plans. These stakeholders suggested that because certain older, Medicare- eligible FEHBP enrollees tend to incur higher health care costs, they drive up premiums. Some stakeholders noted that plans—in particular, health maintenance organizations (HMOs) that offer service in areas with higher concentrations of older enrollees—experience challenges keeping premium rates competitive with the nationwide plans like those offered by the Blue Cross Blue Shield Association (BCBSA). Additionally, 3 stakeholders we interviewed that offer HMO plans pointed specifically to costly retirees who opt not to enroll in in Medicare coverage of outpatient services, known as Part B, making it difficult for them to compete. FEHBP retirees eligible to enroll in Medicare are not required to do so, and some maintain only their FEHBP coverage instead. While there is no penalty for choosing not to enroll in Medicare, retirees who later decide to enroll in Part B must pay a penalty. For retirees in FEHBP who choose not to enroll in Medicare, their FEHBP plan remains the primary payer and they continue to receive the same level of coverage through that plan as they did prior to becoming eligible for Medicare. Two stakeholders said that charging the same rates to the retiree population without Part B and the active employee population—a scenario that occurs in FEHBP—is not typical of the private, commercial insurance market.

In a recent publication, one of the stakeholders we interviewed reported that these types of issues have been a problem for FEHBP since its inception, and that it is therefore in the interest of every enrollee to join plans with the lowest proportion of high-cost retirees. The stakeholder noted that this distorts plan selection and alters results, noting that while the Kaiser plans on the West Coast do an outstanding job of keeping costs low for enrollees, they have a disproportionate number of retirees who correctly understand that they do not need to enroll in Medicare. According to the stakeholder, this puts Kaiser at a disadvantage since it has to cover the age-related costs of these enrollees.

Stakeholders we interviewed offered a number of potential solutions for OPM to address these challenges. For example, two stakeholders suggested that OPM could introduce some form of risk adjustment into FEHBP to assist plans that have a disproportionate number of Medicare- eligible enrollees. Risk adjustment provides a way to correct for imbalances that occur when some carriers attract a larger share of enrollees at low risk for expensive claims and other carriers attract a larger share of enrollees at high risk for expensive claims. One of the two stakeholders suggested that FEHBP could introduce a budget-neutral risk adjustment program that adjusts the amount of a plan’s premium that is paid by the government based on a plan’s ratio of age-65 retirees with Medicare (Parts A, B, or both) to those without. The stakeholder said that this would greatly improve plan competition over time.

OPM officials agreed with stakeholders that providing nationwide service is an advantage for carriers like BCBSA in high cost areas, but noted that it is a disadvantage in low cost areas, and said that, similarly, a lack of risk adjustment in the program works both in favor of and against BCBSA and HMOs. OPM officials said, for example, that the BCBSA Standard option would likely benefit from risk adjustment, while the BCBSA Basic option would likely be negatively impacted. OPM officials also said that risk adjustment could be a way for the agency to compensate plans that have enrollees with higher than average risk and to improve competition by discouraging plans from avoiding those higher risk enrollees. However, officials noted that risk adjustment would require the agency to have reliable claims-level data from each of the plans, which the agency does not have. In January 2017, OPM officials said that the agency is in the process of collecting claims data from FEHBP carriers and expects to have a sufficiently reliable data set by July 2018. OPM officials also noted that before implementing any form of risk adjustment in FEHBP they would have to use that data to determine the effects on the program, and they would also need to determine whether doing so would require any legislative changes.

Some stakeholders we interviewed also suggested retirees could be incentivized to enroll in Medicare Part B (for example, by waiving the Medicare Part B late enrollment fee for FEHBP retirees, or by having FEHBP plans subsidize Part B premiums), and two stakeholders went as far as suggesting that Medicare enrollment should be required for those eligible. OPM officials said that they already encourage enrollment in Medicare Part B; in particular, they noted that in their annual call letters they have encouraged carriers to offer benefits in their plans that incentivize Medicare enrollment for eligible FEHBP enrollees. However, OPM officials said that they are open to pursuing additional approaches that would encourage FEHBP retirees to fully participate in Medicare coverage.

The government contribution formula for FEHBP premiums. Five of the 11 stakeholders we interviewed suggested that the government contribution formula for FEHBP premiums negatively impacts program competition. The FEHBP statute establishes the amount the government contributes towards the costs of FEHBP plan premiums. By statute, the government pays an amount equal to 72 percent of the weighted average premium across all FEHBP plans, but no more than 75 percent of any particular plan’s premium. Enrollees generally pay the remaining premium. As such, enrollee contributions will generally be 25 percent for lower-premium plans and can be higher than 28 percent if their plan’s premiums are significantly higher than the weighted average FEHBP plan.

Some stakeholders we interviewed noted that BCBSA has an advantage under the contribution formula, and that the existing formula does not incentivize enrollees to choose low cost plans. Two stakeholders noted that BCBSA’s large program market share—66 percent of total program enrollment in 2015—allows it significant influence over the government contribution amount. Therefore, several stakeholders suggested that BCBSA’s enrollees end up paying closer to the minimum of 25 to 28 percent of their premium’s costs. Conversely, other plans—particularly HMOs operating in high cost areas—may have premiums that are higher than BCBSA’s and the weighted program average, resulting in their enrollees having to pay considerably more than 28 percent of their total premium’s costs. Two stakeholders said that, as a result, carriers may exit the program once their premiums exceed the weighted program average. Additionally, two stakeholders we interviewed suggested that the formula does not incentivize enrollees to choose lower cost plans because the maximum government contribution amount is 75 percent— regardless of whether the plan’s premiums are less than the weighted FEHBP average. See table 5 for examples of how the government contribution formula affects the share of premiums that enrollees pay.

Some stakeholders we interviewed proposed solutions to the concerns they identified with the government contribution formula. For example, two stakeholders suggested that the formula be changed so that plans that cost less than 72 percent of the weighted average would be covered either in full or to a greater extent by the government. They noted that this would incentivize enrollees to choose lower cost plan options and would strengthen the competitiveness of lower-cost plans—particularly as compared to the BCBSA options. One stakeholder also suggested that the government contribution formula could be varied by metropolitan regions (i.e., vary government and enrollee premium contributions based on regional health care costs), which they suggested would lead to more carriers introducing more plan offerings overall. While the government contribution formula is set in statute, OPM officials said that they are open to pursuing changes that would encourage FEHBP enrollees to select the health plans that meet their current and expected health care needs at affordable costs.

FEHBP plan performance assessment system. Five of the 11 stakeholders we interviewed cited concerns with OPM’s system for assessing FEHBP plan performance, with 2 noting that it discourages competition and participation in FEHBP. OPM announced a new methodology for assessing plan performance in a letter to carriers in 2015, noting that the agency would use a discrete set of quantifiable measures to examine aspects of contract performance and link this performance assessment to the profit plans receive. OPM reported in the letter that it implemented performance assessment to move away from paying for procedures or services and towards paying for value and prevention of disease. It also noted that the system was intended to create a more objective performance standard and provide more transparency for enrollees. Stakeholders we interviewed, however, were particularly critical of the way in which community-rated plans are assessed in this new system, noting that plans are penalized rather than rewarded. Regulations specify a process by which OPM may withhold a portion of payments to a community-rated carrier based on plan performance thereby reducing the carrier’s profits. Two of these stakeholders said that the only way for a plan to not receive a financial penalty is to get a perfect score on the assessment and said that it is impossible to receive such a score. Therefore, one stakeholder noted that the system is extremely discouraging to carriers, particularly to new carriers considering joining FEHBP. Additionally, two stakeholders said that the measures used in the assessment—Healthcare Effectiveness Data and Information Set (HEDIS) and Consumer Assessment of Healthcare Providers and Systems (CAHPS) measures—favor certain types of HMOs. For example, one stakeholder noted that some carriers can have problems meeting the HEDIS measure for breast cancer screening rates, because they have to get patients to go to a separate mammography center while carriers that are part of more integrated health systems can offer mammograms in-house.

With regard to how the plan performance assessment system could be improved, stakeholders we interviewed suggested that OPM should switch to a reward or incentive-based system for community-rated carriers. Several stakeholders suggested that OPM could implement a system similar to the Medicare Advantage star ratings system. In December 2016, OPM officials told us that they were listening to community-rated plans’ concerns regarding the performance assessment penalty and would consider adjustments to address these concerns. Then in March 2017, in response to some of these concerns, OPM issued a letter to FEHBP carriers proposing an update to the assessment of community-rated plans that would allow carriers with high-performing plans to avoid any financial penalties. Regarding the concern about the use of HEDIS and CAHPS measures, OPM officials said that these measures are well-established and commonly required by other commercial and government payers, such as Medicare Advantage. Nonetheless, OPM officials said that the plan performance system will continuously be improved through the introduction of new measures and the retirement of measures on which all FEHBP plans have achieved satisfactory performance.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact:

Staff Acknowledgments

In addition to the contact named above, William Hadley (Assistant Director), Kristi Peterson (Assistant Director), Christina Ritchie (Analyst in Charge), Leonard Brown, William Garrard, Daniel Ries, and Said Sariolghalam made key contributions to this report. Also contributing were Sandra George, Emei Li, Yesook Merrill, Laurie Pachter, Vikki Porter, Jennifer Rudisill, Frank Todisco, and Merrile Sing.

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Private Health Insurance: Concentration of Enrollees among Individual, Small Group, and Large Group Insurers from 2010 through 2013. GAO-15-101R. Washington, D.C.: December 1, 2014.

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