PPACA’s excise tax on high-cost employer-sponsored health insurance is imposed when the value of employees’ health coverage exceeds a threshold, referred to as the tax’s applicable dollar limit. The applicable dollar limit was established in statute for 2018, the year the tax was originally to be implemented. PPACA stipulated that for 2019, the applicable dollar limit would increase by the amount of the Consumer Price Index for All Urban Consumers (CPI-U), plus an additional 1 percent. Starting in 2020, the applicable dollar limit would then increase in step with the CPI-U each year thereafter. The Consolidated Appropriations Act, 2016 delayed the tax’s implementation until 2020. Some economists have noted that because health care premiums have historically outpaced the CPI-U, it can be expected that the share of employers impacted by the tax should grow over time. The basis for determining the value of employees’ health coverage that is measured against the applicable dollar limit of the tax—referred to as applicable coverage—is defined in statute. Applicable coverage includes both the employer’s and the employee’s pre-tax contributions to the premium for a group health plan and to a flexible spending arrangement, Archer Medical Savings Account, health savings account, or health reimbursement arrangement. The amount of an employee’s applicable coverage that exceeds their applicable dollar limit—known as the excess benefit—is subject to the tax. Because applicable coverage can vary by employee, for example, depending on whether or not they chose to contribute to a flexible spending arrangement or health savings account, the tax is determined separately for each employee. As a result, the tax could be owed for some employees and not others. The age and gender adjustment is designed to make the applicable dollar limit—the threshold for the tax—higher for employers with workforce demographics that are typically costlier than average. Specifically, the law stipulates that the age and gender adjustment would increase the applicable dollar limit by an amount equal to the excess of a) the premium cost of the BCBS Standard plan, if priced for the age and gender characteristics of all employees of an employer, over b) the premium cost of the BCBS Standard plan, if priced for the age and gender characteristics of the national workforce. In 2015, the IRS released a notice outlining a draft proposal for how the age and gender adjustment might be implemented. The notice proposed using BCBS Standard plan premium and claims cost data (including claims costs classified into 5- year age and gender groups), as well as CPS national workforce data, to produce published tables that an employer could use to calculate its age and gender adjustment based on its specific workforce data. In its notice, IRS asked for comments on whether the calculation of group costs should rely on actual claims data from the BCBS Standard plan or, as an alternative, on “national claims data reflecting plans with a design similar to that of the .” FEHBP provides health care coverage to federal employees, retirees, and their dependents through health insurance carriers that contract with OPM. In 2015, FEHBP provided an estimated $47.9 billion in health care benefits to roughly 8.2 million individuals, according to agency officials. Carriers offer plans in which eligible individuals may enroll to receive health care coverage. For the 2015 plan year, FEHBP options included fee-for-service plans that were available nationwide, plans available only to certain types of federal employees (e.g., postal workers), and plans offered by health maintenance organizations that were available only in certain regions. Of these plans, some were high-deductible plans and consumer-driven plans. Generally, individuals are able to choose from several plans, but most FEHBP contract holders were in plans offered by the BCBSA. In addition to offering the Standard plan, BCBSA also offers the Basic plan, and combined, these two plans are among the most popular of FEHBP plans. The BCBS Standard plan has many characteristics that experts cited as important when considered for use as the basis of the age and gender adjustment. However, they also noted that it has limitations because it is not fully representative of the national workforce, has selection bias, and has experienced declining enrollment in recent years. Experts identified alternative cost data sources, but these data sources also have limitations. Some experts also expressed concern with the use of a premium value as the basis for the adjustment and suggested alternative approaches. According to industry and actuarial experts we interviewed and stakeholders that commented on IRS’s notices for the age and gender adjustment, BCBS Standard plan data have several benefits when considered for use as the basis of an age and gender adjustment, as stipulated in the law. Specifically, it is a large dataset that includes several years of data and is readily available (convenient). Experts we spoke with identified these as important characteristics for cost data that is to be used as the basis of an age and gender adjustment. Specifically, experts noted that the data source should have the following characteristics: Be representative. Several experts noted that the data source should reflect the demographics of the broader U.S. population, the national workforce, or the population eligible for employer-sponsored insurance, to the extent possible. Differences in the demographics between the broader population and the data source used for an adjustment could have an impact on health care costs and utilization and, thus, have an impact on the adjustment. Be large. Several experts pointed out that an ideal data source would be large, in terms of the number of individuals covered, in part due to the fact that there needs to be sufficient data within each of the age and gender groups. Contain several years of data. Some experts pointed out the benefit of using a data source that has been in existence for some time and that has several years of data so that one would have confidence that the data for a given year are not unusual. Be convenient. For the purposes of the government’s use, several experts also noted that convenience of the data source could be important to consider—such as the ease with which the government can access and use the data and the costs for obtaining them. Notably, the data from the BCBS Standard plan meet several of these characteristics because the plan is large, relatively popular, and covered just over 3 million members across the United States in 2015, making it the FEHBP plan with the highest enrollment. It is also a mature plan that has been in existence since 1959. Finally, it is convenient in that it is already available and familiar to the federal government, and BCBSA already provides summary cost and enrollment data to OPM on an annual basis. However, experts and stakeholders identified two important limitations to using BCBS Standard plan cost data as the basis of an age and gender adjustment: 1) not being representative of the national workforce due to selection bias and 2) declining enrollment. Selection bias. Enrollment in the BCBS Standard plan is affected by selection bias among the FEHBP options that may result in it not being representative of the national workforce. Within the FEHBP, federal employees can choose among many different health plan options. The BCBS Standard plan is a relatively expensive plan within the FEHBP and covers older and sicker members compared to other, less expensive plans, such as the other nationwide BCBS FEHBP option, BCBS Basic. Actuarial experts also noted that the BCBS Standard plan may be less attractive to healthier individuals and younger families who may be more attracted to the FEHBP health maintenance organization options, including high-deductible and consumer-driven plans, or the BCBS Basic plan. Officials from OPM noted, and our review of two years of cost data confirm, that members in the BCBS Standard plan generally have higher health care costs than their counterparts in BCBS Basic and that this is particularly true for younger members. While other employers may offer more than one plan, most employers do not provide the number of options that the federal government provides, so selection bias among plans offered by other employers may be less extreme. Experts and stakeholders noted that the selection bias within the FEHBP of more young members with higher health care costs in the BCBS Standard plan may result in an age and gender adjustment that is not adequate. For example, in part because the BCBS Standard plan disproportionately covers young members with higher health care costs, the ratio of the average claims costs of the older age groups to the average claims costs of the younger age groups is smaller than it would be in a plan that did not have that particular selection bias issue. As such, the ratios of costs for older age groups to costs for younger age groups would be understated compared to the ratios calculated based on data of a more representative population. If the claims cost data used for the adjustment had ratios that were understated in this way, then the adjustment based on these data might also be too small, for example, for employers with older demographics. Some experts and stakeholders also noted selection bias in the FEHBP more broadly, in that its members, who include employees as well as retired former employees and their dependents, are not representative of the national workforce. For example, they noted that the federal workforce is skewed to a higher proportion of older workers than the national workforce. However, some experts we spoke with asserted that this may not be a limitation that would generally affect the use of FEHBP data for the age and gender adjustment because relative costs between older and younger employees in the federal workforce are likely similar to those of the national workforce. Declining enrollment. In addition, while the BCBS Standard plan is large, it has experienced declining enrollment in recent years. Specifically, from 2010 through 2015, enrollment in the BCBS Standard plan decreased by over 10 percent. In contrast, enrollment in the BCBS Basic plan increased significantly from 2010 through 2015—a 46 percent increase in contract holders. (See table 1.) Notably, the cumulative enrollment for the two BCBS FEHBP plans has been relatively stable over time. OPM officials noted that over time, this shift in enrollment from the Standard to the Basic plan may further exaggerate the demographic differences between Standard plan members and other populations, including the Basic plan and the general employed population. They also noted that it was possible that the BCBS Standard plan could continue to experience an enrollment decline, becoming more disproportionately skewed to older and higher-cost members. Finally, OPM, IRS, and Treasury officials all noted that any one plan offering could be discontinued. For example, in 2002, BCBSA merged its High Option plan in FEHBP with the Standard plan and added the Basic Option plan. Experts cited other potential cost data sources, but each of these sources also has limitations. These sources and their limitations include the following: The Agency for Healthcare Research and Quality—a research agency within the HHS—maintains Medical Expenditure Panel Survey data collected through its annual survey, which contains cost information based on respondent recollection and provider reported data. According to agency officials, its 2014 dataset includes information on over 7,500 employer-sponsored insurance contract holders. While these data are grounded in a nationally representative probability sample and include the years 1996 to present, the survey’s relatively smaller size may prove to be a limitation when classified into the necessary age and gender groups. Agency officials noted that several years of data could be pooled to ameliorate this issue. Blue Health Intelligence—an independent licensee of BCBSA— maintains data from many, but not all, BCBS plans across markets. Its dataset is large; however, because the members covered in the data only include BCBS members, it is not known whether the data are representative of national demographics. In addition, using these data would likely require contracting with Blue Health Intelligence for proprietary data, making this option potentially inconvenient. The Health Care Cost Institute (HCCI)—a research institute— maintains claims data from plans offered by Aetna, Humana, Kaiser Permanente, and UnitedHealthcare. According to HCCI representatives, its most recent year of data covers over 40 million employer-sponsored members. HCCI’s dataset is large and includes the years 2007 to 2015, but it is not known whether the data are representative of the national workforce. HCCI representatives told us that the data contain members in all 50 states and the District of Columbia, but some states have lower counts of members. They also noted that the data can be adjusted through weighting to make them more representative. However, as of June 2017, HCCI data did not contain information from BCBS plans, which represent the majority of enrollment in the insurance market in many states. In addition, it is not possible to identify costs by coverage type, such as self-only, which is needed to calculate the age and gender adjustment. Truven Health Analytics, an IBM company (Truven) is a healthcare data and consulting company that maintains the MarketScan claims database. According to Truven representatives, its 2015 dataset covers claims from 28.5 million members across its various clients and includes data mostly from large employers with self-funded health plans. Truven’s MarketScan dataset is large and goes back to 1995, but Truven’s data are comprised of a convenience sample—data collected from organizations that happen to be clients of Truven—and it is not known whether the data are representative of the national workforce. Truven representatives told us that the data contain members in all 50 states, but some states have lower counts of members. They also noted that the data can be adjusted through weighting to make them more representative. In addition, using Truven data would likely require contracting with Truven for proprietary data, making this option potentially inconvenient. Because these alternative data sources also have limitations, coupled with benefits identified related to the BCBS Standard plan, some experts stated that, while imperfect, the BCBS Standard plan is a fairly reasonable option for the basis of the age and gender adjustment. However, because of its noted limitations, its use could result in adjustments to the tax threshold that are not as effective as they could be for certain employers—in particular, for employers with older employees. Some experts we interviewed and stakeholders that commented on IRS’s notices for the age and gender adjustment raised concerns about tying an adjustment to a premium value. As stipulated by PPACA, the age and gender adjustment would increase the applicable dollar limit by “…an amount equal to the excess of aa) the premium cost of the [BCBS Standard plan], if priced for the age and gender characteristics of all employees of the individual’s employer, over bb) the premium cost of the , if priced for the age and gender characteristics of the national workforce.” This could be achieved by establishing a dollar value for the adjustment by taking an employer-specific premium cost and subtracting a national premium cost, both priced using the BCBS Standard plan costs applied to the national and employer-specific workforces, respectively. This would create a specific dollar difference that would represent the adjustment for that employer. It could also be achieved by creating an adjustment factor by taking the percentage difference of these employer-specific and national premium costs. Two actuarial experts and one industry expert we spoke with suggested that a percentage difference approach would be more appropriate than a dollar difference approach. Specifically, one actuarial expert contended that the value of the adjustment could be distorted if the value of the BCBS premium cost in any given year was unusually high or low. In either year, the percentage difference between costs priced for the national workforce compared to the employer’s workforce should be the same (assuming no changes to the workforce makeup), but the dollar difference would not be the same. (See table 2.) If a percentage difference approach were used, the adjustment factor created through this approach would need to be converted to a dollar value to determine a specific adjustment amount. All three experts who suggested this approach noted that the adjustment factor could simply be applied to the tax’s applicable dollar limit, which will increase over time in line with the CPI-U. A similar approach could be to apply the adjustment factor to a portion of the tax’s applicable dollar limit, for example, a portion estimated to represent health premium costs, excluding estimated costs associated with other health benefits such as flexible spending arrangements or health savings accounts. Another approach could be to apply the adjustment factor to a value that represents actual health care costs, such as an estimated average employer-sponsored premium, which would increase over time in line with health care inflation. We note that the decision on what to apply the adjustment factor to when using a percentage difference approach would be dependent on the policy goal: Limit the rate of growth of the adjustment value to general inflation. If the adjustment factor were applied to the applicable dollar limit for the tax year or a portion of that limit, then the adjustment dollar amount would be expected to increase somewhat more slowly over time than it would if it were tied to an amount representing actual health care costs, which would rise at the steeper rate of health care inflation. This could be preferable if the policy goal were to limit the rate of growth of the adjustment dollar amount to a rate lower than the typical health care inflation rate. Keep the rate of growth of the adjustment value in line with health care inflation. If the policy goal were to allow the adjustment dollar amount to increase in step with health care inflation, then it would be preferable to tie the adjustment to an amount representing employer-sponsored health plan costs. The number of employers who received the age and gender adjustment that became subject to the tax would increase more quickly over time if the adjustment were tied to the applicable dollar limit that increases with the CPI-U than it would if tied to an amount representing health care costs. Combining data from multiple FEHBP plans could mitigate some of the limitations of sole reliance on the BCBS Standard plan data as the basis for the age and gender adjustment, including concerns regarding selection bias. Several experts and stakeholders who commented on IRS’s notices suggested this approach. They noted that combining data from multiple FEHBP plans, such as data from the BCBS Standard and Basic plans, could mitigate concerns. They specifically said that an adjustment based on data from the BCBS Standard plan alone may not be adequate due to the plan’s selection bias within the FEHBP, as previously discussed. The BCBS Standard plan is a relatively expensive plan within the FEHBP and covers members with higher health care costs compared to other less expensive plans, including the BCBS Basic plan. We found that combining the data from these two plans could mitigate this selection bias. Specifically, we found that the adjustment may be particularly affected by selection bias among young Standard plan contract holders with higher health care costs. In particular, combining 2015 data from these two plans increased the percentage of young contract holders, and also increased the ratio of the average claims costs of older contract holders to the average claims costs of younger contract holders. (See fig. 1.) In addition to mitigating certain selection bias concerns, combining data from multiple FEHBP plans could address concerns regarding the BCBS Standard plan’s declining enrollment. Combining data from multiple FEHBP plans—such as the BCBS Standard and BCBS Basic plans— would result in a more stable underlying enrollment population, based on current enrollment trends. Our analysis of OPM data shows that increases in BCBS Basic plan enrollment exceeded declines in BCBS Standard plan enrollment, resulting in a net increase in combined enrollment. Specifically, the number of contract holders enrolled in BCBS Standard and BCBS Basic plans combined increased 3.2 percent from 2010 through 2015. (See table 3.) In addition, combined contract holders accounted for 65 percent of all FEHBP contract holders. Some experts and stakeholders also suggested that combining data from more FEHBP plans could further improve the data, by capturing individuals who select other types of plans, such as health maintenance organizations or high-deductible health plans. However, we note that combining data from different plans would require appropriate actuarial adjustments to account for cost differences that result from benefit design and other differences among the plans. Using combined FEHBP data as the basis for the age and gender adjustment to include a broader selection of younger members could result in a different adjustment that could increase the adjustment amount for some employers. For example, we calculated a hypothetical, illustrative adjustment amount using the BCBS Standard plan only, as well as using BCBS Standard plan data combined with BCBS Basic plan data. We did this for a hypothetical employer with a workforce that is, on average, older than the national workforce—an employer that would likely receive an age and gender adjustment—without making any actuarial adjustments to the data. We found that combining 2015 cost data for active federal government workers enrolled in the BCBS Standard and BCBS Basic self-only coverage plans resulted in a higher adjustment amount for the hypothetical employer than did an adjustment based on BCBS Standard data alone. This also resulted in a higher percentage difference adjustment factor for the hypothetical employer. (See table 4.) According to our analysis, combining the BCBS Standard and BCBS Basic data resulted in an increase in the ratio between the average claims costs of the oldest and youngest groups, yielding higher age and gender adjustment amounts for our hypothetical employer. We found that different adjustment amounts could have an impact on the total amount of taxes owed for an employer’s workforce depending on the number of employees to which the tax was applied. For example, the adjustment amounts could determine whether or not an employee’s coverage is subject to the tax and, if the employee’s coverage is subject to the tax, how much tax is owed. Using the previously presented hypothetical example of an employer with a workforce that is older, on average, than the national workforce can illustrate the potential impact. In this example, we compare the hypothetical tax owed for 100 similar workers employed by that employer to illustrate the difference in the total taxes owed depending on whether the data used as the basis for the age and gender adjustment are the BCBS Standard data alone or the combined BCBS Standard and Basic data. (See table 5.) Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Although the current law specifies the use of premium cost data from the BCBS Standard plan, relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an appropriate and adequate age and gender adjustment. Because the Consolidated Appropriations Act, 2016 delayed the implementation of the age and gender adjustment until 2020, an opportunity exists for IRS to consider options for mitigating the limitations of the BCBS Standard plan premium cost data. IRS and Treasury officials told us they are considering what flexibility they have under the statute to do so. The age and gender adjustment was designed to increase the applicable dollar limit of the tax for employers with employees that are expected to be costlier than average so that taxes are owed based on the plan design and not based on member costs. Use of the BCBS Standard plan premium costs as the basis of the age and gender adjustment, as stipulated in the law, has certain limitations, primarily because of selection bias. Further, data limitations may become more pronounced over time because the plan has been experiencing declining enrollment. Other potential data source options exist, but these options also have limitations. Combining data from multiple FEHBP plans could mitigate selection bias concerns, as well as any concerns about the future of the BCBS Standard plan alone. However, if data were pooled from plans with different benefit structures, the data may need to be actuarially adjusted. Nonetheless, because of its limitations, using the BCBS Standard plan data alone as the basis of the age and gender adjustment could result in an adjustment that is not as effective as it could be at increasing the applicable dollar limit for employers with costlier than average employees. We recommend that, in implementing the age and gender adjustment, the Commissioner of Internal Revenue consider taking steps to mitigate the limitations of the BCBS Standard plan premium cost data—such as by combining data from multiple FEHBP plans. If combining the costs of plans with different benefit structures, the Commissioner should consider whether an appropriate actuarial adjustment should be used. If the Commissioner interprets that the statute does not provide the flexibility to mitigate the limitations of the BCBS Standard plan premium cost data by combining data from multiple sources or by other means, we recommend seeking that authority from Congress. We provided a draft of this report to IRS and OPM for review and comment. The draft report was also reviewed by Treasury. Subsequent to reviewing the draft, IRS and Treasury officials contacted us to share some of their concerns with the wording of the recommendation related to combining claims costs of multiple health plans with varying designs. As a result of these discussions, we clarified our recommendation language so that it more explicitly focused on the need to mitigate the limitations of the BCBS Standard plan data. We continue to believe that it is worthwhile to consider using cost data from multiple FEHBP plans, but, as we note in the report, if this is done, an actuarial adjustment should be considered. We then shared the clarified recommendation language with the agencies. We later received written comments from IRS, which are reproduced in appendix I. We also received technical comments on the draft from both IRS and OPM, which we incorporated as appropriate. We did not receive additional comments from Treasury. In its written comments, IRS neither agreed nor disagreed with our recommendation, but stated that it would consider the recommendation as it continues to review comments received in response to an agency notice and work with the Department of the Treasury to issue guidance on the age and gender adjustment. We are sending copies of this report to the Commissioner of Internal Revenue and the Acting Director of the Office of Personnel Management. 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 II. In addition to the contact named above, Gerardine Brennan (Assistant Director), Kate Nast Jones (Analyst-in-Charge), Barbara Hansen, and Laurie Pachter made key contributions to this report. Also contributing were Sandra George, Emei Li, Vikki Porter, Jennifer Rudisill, and Jennifer Stratton.

Summary: Some stakeholder groups have questioned the use of the BCBS FEHBP Standard plan premium costs as the basis of the age and gender adjustment, as stipulated by PPACA. The Consolidated Appropriations Act, 2016 includes a provision for GAO to report on the suitability of using these data for this purpose. This report examines: 1) the benefits and limitations of using FEHBP BCBS Standard plan data as the basis of the age and gender adjustment, and what alternatives to these data could be considered; and 2) how any limitations to BCBS Standard plan data could be mitigated. GAO reviewed IRS documentation; interviewed industry experts and officials from IRS, the Office of Personnel Management (OPM), the Department of Treasury, and other agencies; reviewed comment letters submitted in response to IRS notices; and analyzed 2010 and 2015 cost and enrollment data from OPM. The Patient Protection and Affordable Care Act (PPACA) included a revenue provision for a 40 percent excise tax on high-cost employer-sponsored health coverage to be administered by the Internal Revenue Service (IRS). The tax would be imposed when an employee's annual cost of coverage exceeds an established dollar limit. This limit could be adjusted upward if an employer's workforce—based on its age and gender characteristics—was likely to have higher health costs than the national workforce, on average. This adjustment, known as the age and gender adjustment, is based on the premise that older individuals and younger females tend to have higher health care costs than other individuals. It is designed to lower the tax burden so that taxes are owed based on the plan design and not based on the health care costs of its members. PPACA stated that this adjustment would be made based on the premium costs of the Blue Cross and Blue Shield (BCBS) Standard plan under the Federal Employees Health Benefits Program (FEHBP). The BCBS Standard plan has benefits and limitations for use as the basis of the adjustment. The benefits include that it is a large, national, decades-old, convenient data source, in that it is already known by, and available to, the federal government. However, there are some specific limitations to its use. The BCBS Standard plan has selection bias within FEHBP because members have a choice among many plans, and, compared to other options available to federal employees, it is a relatively expensive plan that covers members with higher health care costs. GAO's analysis of OPM data found that these higher costs are particularly true for younger members. The plan's enrollment has declined in recent years. Furthermore, officials noted that any one plan offering could be discontinued. The selection bias in the BCBS Standard plan may result in an age and gender adjustment that is not adequate. For example, because the BCBS Standard plan covers young members with higher health care costs, the ratio between the average claims costs of the younger and older members in that plan is smaller than it would be in a plan that did not have that particular selection bias issue. Therefore, the age and gender adjustment could be too small. While experts GAO spoke with identified several potential alternative sources of cost data for use as the basis of the adjustment, those alternatives also had limitations, such as not being convenient sources of data and potentially not being representative of the national workforce. To mitigate limitations of the BCBS Standard plan, these data could be supplemented with data from other FEHBP plans, such as the BCBS Basic plan, which is known to have younger members with lower health care costs and increasing enrollment. GAO found that using combined data from these two sources could result in a different adjustment for some employers—in particular, for those with older employees. Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an adequate age and gender adjustment. GAO recommends that, in implementing the age and gender adjustment, IRS consider taking steps to mitigate the limitations of the BCBS Standard premium cost data, such as by combining data from multiple FEHBP plans. IRS neither agreed nor disagreed with GAO's recommendation, but stated that it would consider the recommendation as it works to implement the age and gender adjustment.