The federal government has provided health insurance benefits to its employees through FEHBP since 1960. The Congress established FEHBP primarily to help the government compete with private-sector employers in attracting and retaining talented and qualified workers. All active and retired federal workers and their dependents are eligible to enroll in FEHBP plans, and about 86 percent of eligible workers and retirees participate in the program. As of July 2002, FEHBP provided health insurance coverage to about 8.3 million individuals, including 2.2 million active workers, 1.9 million retirees, and an estimated 4.2 million of their dependents. The government pays a portion of each enrollee’s health insurance benefit premium cost. Currently, as set by statute, the government pays 72 percent of the weighted average premium of all health benefit plans participating in FEHBP, but no more than 75 percent of any plan’s premium. The premiums are intended to cover enrollees’ health care costs, plans’ expenses, reserves, and OPM’s administrative costs. Total FEHBP health insurance premiums paid by the government and enrollees were about $22 billion in 2001. The legislative history of the FEHBP statute indicates that the Congress wanted enrollees to exercise choice among various plan types and, by using their own judgment, select health plans that best meet their specific needs. The FEHBP statute authorizes OPM to contract with FFS plans which include the Blue Cross and Blue Shield (BCBS) service benefit plan and plans sponsored by federal employee and postal organizations, such as those for the Foreign Service and rural letter carriers and comprehensive medical plans (commonly known as HMOs), thereby providing choice to enrollees. Some plans offer two levels of benefits, which provide enrollees with more options, and some plans also offer a point-of-service (POS) option that provides an enrollee a choice of using the plan’s health care providers or, by paying a higher fee, selecting providers outside of the plan’s provider network. By statute, OPM is responsible for negotiating contracts with the FFS plans and HMOs each year. Under this authority, OPM can negotiate these contracts without regard to competitive bidding requirements. Those plans meeting the minimum requirements specified in the statute and regulations may participate in the program and their contracts may be automatically renewed each year. However, plans can choose to terminate their contracts with OPM at the end of the contract period, and under certain circumstances OPM has the authority to terminate contracts. As part of its contracting responsibility, OPM negotiates benefits and premiums with each plan. In April of each year, OPM sends a letter to all approved and participating FFS plans and HMOs—its annual “call letter”— to solicit proposed benefit and premium changes for the next year, which are due by the end of May. The statute does not define a specific benefit package that must be offered but indicates the core health care services that plans must cover. Each plan therefore proposes its own benefit package in response to the call letter. In addition, the plans propose the premiums for these benefits, which must be provided for two levels of coverage—self-only and self and family. As a result, each plan’s benefit package and premiums can differ. OPM attempts to complete its negotiations by August so that brochures describing the plans’ benefits and premiums can be ready for the FEHBP open season that begins in November and lasts about a month. FEHBP’s brochures, which OPM approves each year, facilitate enrollee plan comparisons and selections. During each open season, federal workers and retirees are free to switch to other plans for the next calendar year, regardless of any preexisting health conditions. Thus, enrollees can determine which plans best meet their needs. OPM data show that in 2000 and 2001 less than 5 percent of enrollees switched plans. Thirteen FFS plans participated in FEHBP in 2002. Overall, about 70 percent of federal employees and retirees who participate in FEHBP were enrolled in FFS plans. Enrollees in these plans can choose their own physicians and hospitals and the plan reimburses the provider or the enrollee for the cost of each covered service provided up to a stated limit. In addition, 11 of the 13 FFS plans had preferred provider organization (PPO) networks, and by using providers in these networks, enrollees can spend less in cost-sharing requirements compared to non-PPO providers. The FEHBP statute establishes the rate-setting process for FFS plan premiums. FFS plans are experience rated—that is, the premiums are to be updated each year based on past claims experience and benefit adjustments. As a result, premiums are designed to cover the cost of all claims filed for enrollees as well as plan profit and administrative costs and, therefore, will differ for each FFS plan. In 2002, all active federal workers and retirees could enroll in the BCBS service benefit plan and in six of the FFS employee organization plans. (See table 1.) The remaining six FFS organization plans were available only to members of the sponsoring organizations. In 2002, 170 HMOs, located in local markets throughout the country, participated in FEHBP and accounted for about 30 percent of FEHBP enrollees. HMO enrollees must generally use a plan’s provider network to obtain services. OPM has established the rate-setting process for HMOs participating in FEHBP in regulations. For most HMOs, OPM bases the FEHBP premium rate on the rates paid to the HMO by the two other employer-sponsored groups with the most similarly sized enrollments in that community. This ensures that FEHBP obtains a rate that is at least comparable to the lower of the rates paid by two other similarly sized groups, with adjustments to account for differences in the demographic characteristics of FEHBP enrollees and the benefits provided. The number of HMOs available to federal workers and retirees depends on the area where they live or work. In 2002, 11 states had no HMOs participating in FEHBP and, in the other states and the District of Columbia, the median number of HMOs available to federal enrollees was two. Some local markets had higher HMO participation. For example, the Washington, D.C., area and southern California had at least four HMOs in which federal workers and retirees could enroll in 2002. A few plans accounted for the largest share of FEHBP enrollment. The largest plan—the BCBS service benefit plan—had about half of the 2002 enrollment. The three largest plans, including BCBS, were all FFS plans and accounted for almost two-thirds of FEHBP enrollment. About two- thirds of the 183 participating FFS plans and HMOs enrolled fewer than 5,000 active federal workers and retirees, and slightly less than a third of all plans enrolled fewer than 1,000 in 2002. The three other large purchasers we reviewed varied in the extent to which they provide coverage through HMOs, FFS plans, and PPOs as well as in the number of plans they offer. GM, the largest private-sector purchaser of employer-sponsored health insurance, purchased coverage for about 1.2 million workers, retirees, and their dependents through 81 FFS plans, 31 PPOs, and 136 HMOs in 2002. About 71 percent of the unionized employees and retirees and about 63 percent of the salaried employees and retirees were enrolled in FFS plans and PPOs. CalPERS purchased coverage in 2002 for about 1.2 million active and retired state and local government public employees and their family members who obtained coverage through nearly 1,100 local government agencies, including schools, and the state of California. About 74 percent of CalPERS enrollees were in 7 HMOs, with the remainder in 2 PPOs and 3 plans covering members of such associations as the association of highway patrolmen in 2002. PBGH, a California employer coalition, purchased HMO coverage through its Negotiating Alliance for 19 large employers. About 350,000 workers, retirees, and dependents were in PBGH’s 7 HMOs in 2002. This represented about 70 percent of participants in these employers’ plans. Participating employers made their own arrangements for non-HMO coverage, primarily through PPOs, for the remaining employees. From 1991 through 2002, health insurance premiums for FEHBP increased on average 5.9 percent a year compared to 6.4 percent for large employers—those in the Kaiser/HRET survey with 5,000 or more employees—and 5.8 percent for CalPERS. (See fig. 1.) FEHBP average premium increases have exceeded 10 percent beginning in 2001, but higher premium increases were partially offset by some plans reducing benefits— mostly increased enrollee cost sharing—and some enrollees switching to plans with lower premiums. Generally, FEHBP premiums increased at a lower rate than premiums for other large employers and CalPERS during the first half of the last decade, but increased faster during the second half. For example, cumulatively from 1991 to 1996, premiums increased on average about twice as fast for large employers (6.1 percent per year) than for FEHBP (3.2 percent per year). Premiums for CalPERS also increased faster (5.1 percent per year) on average during this period than for FEHBP. During the mid-1990s, the rate of change in premiums was negative for both FEHBP and CalPERS and as a result average premiums declined temporarily. FEHBP premiums declined on average by about 4 percent in 1995, while CalPERS premiums declined on average from 0.8 to 4 percent per year from 1995 to 1997.