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. 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. 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.). 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 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 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 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.)