THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

10/16/2001

HOUSE COMMITTEE ON GOVERNMENT REFORM SUBCOMMITTEE ON CIVIL SERVICE

Chairman Weldon, Ranking Member Davis, Members of the Subcommittee, my name is Colleen Kelley and I am the National President of the National Treasury Employees Union (NTEU). NTEU represents more than l55,000 federal employees across 25 agencies and departments of the federal government.

I want to first congratulate you, Dr. Weldon, on your Chairmanship of the Civil Service Subcommittee. NTEU worked closely with your predecessor, Mr. Scarborough, and we look forward to working closely with you as well. I hope that we will have an opportunity to sit down and discuss issues of mutual concern in the near future.

As the President of the Nation's largest independent federal employee union, and on behalf of the dedicated men and women of the federal government, thank you for scheduling this hearing on the exorbitant rate increases in the Federal Employees Health Benefits Program (FEHBP).

As the Chairman knows, the federal government faces a human capital crisis. The most critical compensation elements of federal employment - pay, retirement and health benefits have come under attack in recent years - attacks that have limited the federal government's ability to be competitive with the private sector. Attracting, and then keeping, employees with the best skills is a challenge for all employers, and especially for the federal government.

Inadequate pay and benefits are the primary obstacles the federal government faces in attracting and retaining highly qualified individuals and recruiting the federal workforce we will need for tomorrow. The Federal Employees Health Benefits Program used to be considered a crown jewel in the federal employee benefit package; today an increasing number of federal employees cannot even afford its coverage. It has rapidly become prohibitively expensive for lower paid employees and, unattractive to prospective employees.

More than nine million federal employees, retirees and their families depend on the FEHBP for health insurance coverage. NTEU members, and I think all federal employees and retirees, are understandably alarmed over the dramatic premium increases they have been faced with in recent years in the FEHBP. As you know, earlier this month, the Office of Personnel Management (OPM) announced average l3% rate increases for FEHBP plans in 2002. This announcement follows average FEHBP premium hikes of l0.5% in 200l, 9.3% in 2000, and 9.5% in l999.

As alarming as these increases are, they are only averages. A closer look at the most popular FEHBP plan, Blue Cross-Blue Shield Standard Option, provides even more startling figures. Blue Cross-Blue Shield is the FEHBP's largest plan, representing more federal families than any other FEHBP plan. Since l998, premiums for Blue Cross Standard Option Family coverage have increased 43%. While the average FEHBP premium will rise l3% in 2002, Blue Cross' Standard Option Family coverage will rise l7%. Premiums for employees choosing Blue Cross Standard Option Single coverage will rise 20% in 2002.

Thus, in the last five years, Blue Cross' Standard Option Family coverage premiums have increased 60%. To put these increases into perspective, from l998 to 200l, federal salaries have increased an average of l3%. I think it is easy to see why federal employees find the FEHBP increasingly unaffordable.

Mr. Chairman, based on the l990 Census data, Florida's l5th Congressional District is home to more than 23,000 federal employees and retirees. A typical federal employee in the l5th Congressional District earning $25,8ll annually (GS-6, Step 4) paid $56.58 every two weeks for his or her Blue Cross Standard Option Family insurance coverage in l998. By 200l, that same employee's salary had risen to $28,975, however, the biweekly premium for Blue Cross' Standard Option Family coverage had increased to $80.9l. In l998, FEHBP premiums consumed 8.6% of this employee's take home pay; by 200l that number had jumped to ll% of this individual's take home pay. In 2002, it will increase dramatically once again.

As FEHBP premiums consume ever greater portions of employee take home pay, it is critical that the FEHBP receive careful scrutiny. NTEU does not believe that scrutiny has occurred this year.

In May, NTEU sent letters to every member of this Committee raising concerns about published reports that Blue Cross had proposed merging its High and Standard Option programs and would offer a new, basic benefit package in 2002. Despite the fact that NTEU represents more than l55,000 federal employee and retiree participants in the FEHBP, employees who will pay an average of 28% of the negotiated premiums, NTEU was offered no input and received no information concerning these changes. Such information would have assisted us in helping explain these many changes and premium hikes to our members.

As you know, for 2002, Blue Cross has merged its High and Standard Option plans and will offer a new Basic level of coverage. The long term effects of this change are unknown; we have no idea what impact this will have on future rates, the stability of the FEHBP program or even whether the need exists for this new streamlined plan in the FEHBP. However, what is known is that in the short term, this will result in increased premiums for those in Blue Cross Standard Option and the need for a major education campaign of both employees and retirees by Blue Cross and OPM about the new Basic Option benefit package.

NTEU believes it is very important that employees understand that more than just the names have changed - Blue Cross High did not just get renamed Standard and Blue Cross Standard did not simply change its name to Blue Cross Basic. Although we have not seen any plan materials for the new Blue Cross Basic plan, my understanding is that with very few exceptions, it will provide benefits only when using an in-network provider, a concept considerably different from the Blue Cross Standard and High Option plans of 200l. Employees and retirees misunderstanding these changes could find themselves with inadequate health insurance coverage to meet their needs next year.

Mr. Chairman, there seems to be little disagreement that the federal government needs to better utilize the size of the FEHBP pool to obtain a better rate from insurance carriers and health care providers. As the Nation's largest employer-sponsored health insurance program, NTEU believes we must examine why our insurance premiums are increasing at a higher rate than those of other large employers. According to the Kaiser Family Foundation's Employer Health Benefits 200l Annual Survey (September, 200l), health insurance premiums increased an average of l0.8% in 200l in "jumbo" firms, which are described as those with 5,000 or more employees. The average increase in the FEHBP will be l3%. The annual Kaiser survey painted a similar picture with firms with 5,000 or more employees in 2000, reporting average premium increases of 7.l%. FEHBP premiums increased l0.5% last year. Despite the size of the pool of FEHBP participants - 9 million federal employees, retirees and their families - FEHBP premiums seem to continue to outpace premiums for other large employer-sponsored health benefit plans.

I also want to point out that the differences the annual Kaiser Survey reveals do not stop with the premiums. The federal government as an employer pays an average of 72% of the health insurance premium for its employees, with employees paying the other 28%. There is a sharp contrast between private sector employer contributions toward employee health benefits and the portion the federal government pays for its employees.

As the attached chart from the 200l Kaiser Family Foundation's Employer Health Benefits Survey shows, the average employee participating in employer-sponsored health insurance pays l5% of the premium for single coverage and 27% of the premium when choosing family coverage. The chart shows further that the percentage of health insurance premiums private sector employees have been required to pay has either remained constant or decreased during the last five years. Contrast this with federal employees who are required to pay an average of 28% of the premium whether they choose single or family coverage. Not surprisingly, when asked, employers cited recruitment and retention of employees as one of the main reasons they continue to absorb the lion's share of health insurance premium increases for their employees.

Furthermore, a December, 2000 Bureau of Labor Statistics analysis of Employee Benefits in State and Local Governments found similar trends. Most state and local government employers pay at least 80% of the health insurance premium for their employees, with some paying as much as 90% of employee health insurance premiums.

In one effort to address the effect federal employee health insurance premiums have on the federal government's human capital crisis, NTEU worked with Congressman Steny Hoyer on the introduction of bipartisan legislation, H.R.l307, that would increase the employer share of FEHBP premiums from the current average of 72% to the most common industry standard, 80%. NTEU sees H.R.l307 as an important first step in making the federal government an employer of choice and urges this Subcommittee to hold hearings on this legislation as well. Without competitive pay and benefits, the federal government will never be able to effectively compete for the talent it needs. H.R.l307 represents a modest step in addressing the human capital crisis the federal government faces.

While premium increases of the magnitude experienced in the FEHBP result from a number of factors, none seems to be driving these increases as rapidly as prescription drug costs. Health insurance premiums have been rising at several times the rate of inflation for several years now; spending for prescription drugs is the largest factor behind these rising costs.

In 2000, the Office of Personnel Management indicated that prescription drugs represented a significant portion of program costs and premiums in the FEHBP. At that time, $l of every $4 in FEHBP costs represented drug expenditures. When announcing 200l premium increases, OPM stated that a full 40% of that year's premium increase was the result of prescription drug costs. For 2002, prescription drug costs continue to increase at an alarming rate.

There is little question that the patchwork of prescription drug purchase arrangements that exists in the FEHBP contributes to these increases. NTEU believes that OPM should negotiate discount prescription drug rates for the FEHBP similar to those available under the Federal Supply Schedule (FSS), a reduced rate drug schedule used primarily by the Veterans Administration for its hospitals.

In l999, one small FEHBP plan that provides health insurance coverage to agents who protect the President, the Special Agents Mutual Benefit Association (SAMBA), sought permission to purchase prescription drugs from the FSS. OPM and the Veterans Administration approved this two year pilot program with the goal of determining whether OPM should ultimately establish its own separate schedule to purchase prescription drugs for all FEHBP participants.

Before the OPM pilot could get off the ground, three major pharmaceutical companies - Pfizer, Merck and Parke-Davis - who supply 90% of the prescription drugs purchased by SAMBA enrolles, refused to sell any drugs to SAMBA if they purchased drugs from the FSS, forcing termination of the pilot plan. SAMBA's drug purchases, with its l7,000 FEHBP members, would have amounted to 3 pills of every l,000 these drug companies sell, a minuscule loss of profit to an industry with double digit billion dollar annual profits. OPM's hope of determining whether or not the development of a similar schedule for all FEHBP plans might be a viable way of reigning in drug costs, and thus premiums, was quashed.

Lost too, were the savings to taxpayers inherent in negotiating discount prescription drug rates. The SAMBA pilot was estimated to save $2.4 million a year; savings that would have flowed to both federal employees and to taxpayers. Reducing drug costs program-wide in the FEHBP holds the potential to save much more. Because the federal government as an employer pays 72% of FEHBP premiums for its employees, the savings that would ultimately flow to taxpayers by negotiating discount prescription drug rates are enormous.

Although the pharmaceutical industry has temporarily thwarted the federal government's attempts to reign in costs in the FEHBP program, NTEU believes that this idea continues to merit exploration and urges this Subcommittee to pursue it. NTEU believes that, at a minimum, the Office of Personnel Management should be directed to study the merits of negotiating discount prescription drug rates for the FEHBP.

In conclusion, Mr. Chairman, NTEU very much appreciates this opportunity to appear before your Subcommittee. Our goal is to insure that the FEHBP provides the 9 million federal employees, retirees and their families who rely on it for their health insurance needs with the best coverage at the best possible rates. I look forward to working with you toward that end. Thank you.