Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed, and Varies among Participating Plans
Released: 2007-01-22T00:00:00

Letter

Background

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 workers 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. The government pays a portion of each enrollee’s total health insurance premium. 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.

As of 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.

Growth in Average FEHBP Premiums Has Recently Slowed and Was Lower Than That of Other Purchasers

The average annual growth in FEHBP premiums slowed from 2002 through 2007 and was generally lower than the growth for other purchasers since 2003. Premium growth rates of the 10 largest FEHBP plans by enrollment varied to a lesser extent than did growth rates of smaller plans from 2005 through 2007. The growth in the average FEHBP enrollee premium contribution generally tracked average premium growth and was generally similar to recent growth in enrollee premium contributions for surveyed employers.

Growth in Average FEHBP Premiums Slowed and Was Lower Than That of Other Purchasers in Recent Years

After a period of decreases in 1995 and 1996, FEHBP premiums began to increase in 1997, to a peak increase of 12.9 percent in 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.).

FEHBP Premium Growth Varied Less for Large Plans Than for Smaller Plans from 2005 through 2007

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 in 2007. The average annual premium growth for these plans fell within a similar range for 2005 through 2007. (See table 1.)

Premium growth rates across the smaller FEHBP plans in 2007 varied more widely, from a decrease of 43 percent to an increase of 27.1 percent.

The average premium growth in 2006 also varied by such characteristics as plan type, plan option, geography, and share of retirees.

Premium growth for FFS plans (6.0 percent) was lower than for HMO plans (8.5 percent).

Premium growth for low-option plans (2.6 percent) was lower than that for high-option plans (7.3 percent).

Premium growth was higher for regional HMO plans in the southern United States (9.2 percent) than for regional HMO plans elsewhere (from 7.2 percent to 8.7 percent).

Premium growth for plans with 20 percent or fewer retirees (4.5 percent) was lower than for plans with greater than 20 percent retirees (7 percent).

Growth in Average FEHBP Enrollee Premium Contributions Tracked Average Premium Growth and Was Comparable with That of Surveyed Employer Plans

Growth in average FEHBP enrollee premium contributions generally paralleled premium growth from 1994 through 2007. The average annual growth in enrollee premium contributions during this period was 6.9 percent, while premium growth was 6.1 percent. After decreasing in 1995, average enrollee premium contributions began to increase, rising to a peak of 12.8 percent in 1998. Paralleling premium growth trends, the average annual growth in enrollee premium contributions has slowed since 2002, except for an upward spike in 2006. (See fig. 2.)

The growth in average FEHBP enrollee premium contributions was generally similar to that of surveyed employer plans. (See fig. 3.) From 1994 through 2006, the average annual growth in FEHBP enrollee premium contributions ranged from a decrease of 1.2 percent to an increase of 12.8 percent, compared with a decrease of 10.1 percent to an increase of 20.9 percent for surveyed employer plans. From 2003 through 2006, the average annual increase in FEHBP enrollee premium contributions— 8.8 percent—was comparable with that of surveyed employer plans.

The growth in enrollee premium contributions for the 10 largest FEHBP plans by enrollment ranged from negative 1.1 percent to 51.5 percent in 2007. The growth in enrollee premium contributions for smaller FEHBP plans varied more widely, from negative 62.6 percent to 86.8 percent.

Projected Growth in Several Factors Contributed to Average FEHBP Premium Growth

Projected increases in the cost and utilization of services and in the cost of prescription drugs accounted for most of the average premium growth across FEHBP plans. However, projected withdrawals from reserves offset much of this growth from 2006 through 2007. Officials we interviewed from most of the FEHBP plans said 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. Our interviews with officials from two large plans and our analysis of the potential effect of the subsidy showed that it would have lowered the growth in premiums and enrollee premium contributions for 2006. OPM officials stated that the subsidy was not necessary because its intent 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.

Projected Increases in the Cost and Utilization of Health Care Services Accounted for Most of the Premium Growth but Were Mitigated by Use of Reserves in Recent Years

Projected increases in the cost and utilization of health care services and the cost of prescription drugs accounted for most of the average FEHBP premium growth from 2000 through 2007. Absent projected changes associated with other factors, projected increases in the cost and utilization of services alone would have accounted for a 6 percent increase in 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 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 increases for 2000 through 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 increased premium growth—by less than 1 percent—from 2000 through 2005. However, projected withdrawals from reserves helped offset the effect of increases by about 2 percent for 2006 and 5 percent for 2007. (See fig. 4.) According to OPM, increases in the actual cost and utilization of services in 2006 were lower than projected for that year, and therefore the projected withdrawals from reserves were not made in 2006. Because of the resulting higher reserve balances, plans and OPM projected even larger reserve withdrawals for 2007.

Detailed data on total claims expenditures and expenditures by service category actually incurred were available for five large FEHBP plans. These data showed that total expenditures per enrollee increased an average of 25 percent from 2003 to 2005. Most of this increase in total expenditures per enrollee was explained by expenditures on prescription drugs and on hospital outpatient services. (See table 2.)

Plan Officials Differed on Whether OPM’s Decision Not to Accept the Retiree Drug Subsidy Would Have Affected FEHBP Premium Growth

Officials we interviewed from several plans stated that the retiree drug subsidy would have had a small effect on premium growth because of two factors. 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.

Officials from OPM explained that there was no need to apply for the subsidy because its intent was to encourage employers to continue offering prescription drug coverage to enrolled Medicare beneficiaries, which all FEHBP plans were already doing. As such, the government would be subsidizing itself to provide coverage for prescription drugs to Medicare-eligible federal employees and retirees. 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.

Changes in the Cost and Utilization of Services and Enrollee Demographics Accounted for Differing Premium Growth among FEHBP Plans

Officials we interviewed from most of the plans with higher-than-average premium growth stated that increases in the cost and utilization of services as well as a high share of elderly enrollees and early retirees were key drivers of premium growth. Our analysis of these plans’ financial and enrollee demographic data showed that these plans experienced faster- than-average growth in the cost and utilization of services and faster-than- average growth in their share of elderly enrollees and retirees in recent years. Officials we interviewed from most of the plans with lower-than- average premium growth cited adjustments made for previously overestimated projections of cost growth. Officials also cited benefit changes that resulted in less generous coverage for prescription drugs. Our analysis of financial data provided by two of these plans showed that the increase in their per-enrollee expenditures for prescription drugs was significantly lower than average in recent years. In addition, our analysis of enrollment data found that these plans experienced greater declines than average in their share of aging enrollees.

Plans with High Premium Growth Had Higher-Than- Average Increases in the Cost and Utilization of Services and Faster Rising Shares of Elderly Enrollees

Officials we interviewed from most of the plans with higher-than-average premium growth cited large increases in the actual cost and utilization of services as one of the key cost 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 the five large FEHBP plans.

Although enrollee demographics were projected to have a small effect on premium growth in the average FEHBP plan for 2006, change in enrollee demographics was cited as a key cost factor for most plans with higher- than-average premium growth. Officials we interviewed from five of these plans stated that an aging population and higher shares of early retirees were factors driving premium growth for their plans. For example, officials from two plans cited a high concentration of elderly enrollees in their respective service areas of southern New Jersey and Pennsylvania, while officials from another plan cited an aging population in its service area of San Antonio, Texas.

Our comparison of the demographic characteristics of the eight plans with higher-than-average premium growth with those of all FEHBP plans from 2001 through 2005 supports the officials’ statements that unique demographic profiles contributed to higher premium increases. (See table 3.)

Plans with Lower-Than- Average Premium Growth Cited Adjustments for Previously Overestimated Cost Growth and Benefit Changes and Had Greater Declines in the Shares of Elderly Enrollees

Officials we interviewed from most of the plans with lower-than-average premium growth for their plans in 2006 cited adjustments for previously overestimated projections of cost growth. Officials from two of these plans stated that projections for a new low-option plan they had recently introduced were pegged high because of concerns about potential migration of high-cost enrollees from their high-option plan. The actual cost increases of enrollees in the low-option plan in 2004 (the basis for 2006 rates) turned out to be lower than projected. Officials from two other plans said that the projected cost growth of 14 percent to 20 percent in 2004 (the basis for 2006 rates) for those plans was much higher than the actual cost growth in 2006 of about 5 percent to 8 percent.

Officials we interviewed from three plans with lower-than-average growth cited lower-than-anticipated rates of increase in prescription drug costs caused by benefit changes that resulted in less generous coverage to explain low rates of premium growth for their plans. Our analysis of financial data provided by two of these 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. The six plans with lower-than-average premium growth also had greater declines in their share of elderly enrollees compared with all plans from 2001 through 2005. (See table 4.)

Agency Comments and Our Evaluation

We received comments on a draft of this report from OPM (see app. II). OPM said the draft report confirms that growth in average FEHBP premiums has slowed and has been lower than that of other large employer purchasers for the last several years. Regarding the projected withdrawals of reserves for 2007, OPM said that the actual drawdown could be lower if the actual increase in the cost and utilization of services in 2007 is less than projected. We agree this could occur, and as we noted in the draft report and as OPM said in its comments, the projected withdrawals of reserves for 2006 were ultimately not made because of lower than expected increases in the cost and utilization of services in that year. Regarding the manner in which premiums are set, OPM said that rate negotiations between OPM and the plans are guided by projections of future costs that are based on a retrospective analysis of actual costs, and that adjustments to the reserve accounts of most plans are made when actual costs differ from the projections. OPM said that, as a result, these reserve adjustments help stabilize premium growth over time and ensure that premiums ultimately reflect actual cost increases. We agree with this characterization of the effect of reserve adjustments. Regarding our discussion of benefit changes that resulted in less generous coverage for prescription drugs, OPM said that some plans modified their prescription drug benefit to create incentives to use generic medications, and that this does not result in a less generous benefit. While we agree that plans can change benefits to encourage generic drug utilization without resulting in less generous coverage, officials from three of the six plans we interviewed with lower-than-average premium growth said that they made benefit changes that resulted in less generous coverage. OPM provided other comments describing aspects of FEHBP and provided technical comments that we incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. At that time, we will send copies of this report to the Director of OPM and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 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 report. Randy Dirosa, Assistant Director; Iola D’Souza; Menq-Tsong P. Juang; and Timothy Walker made key contributions to this report.

Appendix I: Scope and Methodology

To identify growth trends in the average Federal Employees Health Benefits Program (FEHBP) premiums and enrollee premium contributions, we analyzed trend data for 1994 through 2007 from the Office of Personnel Management (OPM). To identify the variation in premium trends across plans by plan characteristics, we analyzed detailed plan-level premium data and enrollment data for 2003 through 2006 from OPM. We examined the variation in premiums based on plan type—fee- for-service (FFS), health maintenance organization (HMO), and consumer- directed health plan (CDHP)—plan option (high option, low option); geography (West, Midwest, South, Northeast); and share of retirees.

To compare FEHBP premium trends with those of other purchasers, we obtained premium trend data for 1994 through 2007 from the California Public Employees’ Retirement System (CalPERS)—the second largest public purchaser of employee health benefits after FEHBP—and from surveys of employer-sponsored health benefits conducted by KPMG Peat Marwick from 1993 through 1998 and by Kaiser Family Foundation/Health Research and Educational Trust (Kaiser/HRET) from 1999 through 2006.

To identify factors contributing to average FEHBP premium growth trends for all plans, we obtained and analyzed OPM summary reports on the projected effects of various factors on premium growth for all FEHBP plans from 2000 through 2007. We analyzed more detailed data obtained individually from five large FFS plans on actual growth in per-enrollee expenditures by service category, including prescription drugs, hospital outpatient care, hospital inpatient care, and physician and other services, from 2003 through 2005.

To examine the reasons for differing premium growth trends among FEHBP plans, we conducted interviews with officials from 14 plans with higher- or lower-than-average premium growth in either 2006 or the 3-year period from 2004 through 2006, and analyzed financial data provided by some of these plans. We limited our study sample to plans participating in FEHBP for at least 3 years and with at least 5,000 enrollees in 2005. Among these plans, we identified those with premium growth for 2006 or the average annual growth for the 3-year period from 2004 through 2006 of above or below one standard deviation of the mean. Of the 23 plans meeting these criteria, we selected 14 plans. (See table 5.)

We analyzed aggregate data on the actual growth in per-enrollee expenditures by service category from 2003 through 2005 provided by officials from some of these plans and demographic enrollment data from 2001 through 2005 from OPM.

We also explored with officials from OPM and the selected plans the potential effect of the retiree drug subsidy on premium growth had OPM applied for the subsidy and used it to offset premiums. To estimate the effect the subsidy would have had on average premium growth, we first calculated the total annual amount of the subsidy that would have been available for all Medicare-eligible beneficiaries in FEHBP using 2006 enrollment data and an estimate by the Centers for Medicare & Medicaid Services of the average annual subsidy per Medicare beneficiary in 2006 (about $670). We then divided this amount by total annual premiums for all FEHBP enrollees in 2005.

We did not independently verify the data from OPM, the selected FEHBP plans, CalPERS, or the Kaiser/HRET surveys. We performed certain quality checks, such as determining consistency where similar data were provided by OPM and the plans. We collected and evaluated information from OPM regarding collection, storage, and maintenance of the data. We reviewed all data for reasonableness and consistency and determined that these data were sufficiently reliable for our purposes. We conducted our work from January 2006 through December 2006 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the Office of Personnel Management