MORE VALUE FOR FEDERAL EMPLOYEES: CAFETERIA BENEFIT PLANS

5/21/2002

Committee on Government Reform Civil Service Subcommittee

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 very much appreciate your scheduling this hearing today to examine issues surrounding the Federal Employees Health Benefits Program (FEHBP). It is my understanding that you are also interested in exploring whether or not a cafeteria benefits plan might be a viable way of delivering benefits to federal employees.

NTEU's members are increasingly concerned about the exorbitant rate increases in FEHBP plans in recent years. As NTEU's President, I have been received a growing list of complaints from our members. As you know, not only have premiums skyrocketed, but many participating FEHB plans have simultaneously increased their required copayments and deductibles, limited covered services and dropped participating physicians from their programs. In addition, health maintenance organizations in many parts of the country have announced that they will no longer participate in the FEHBP. Federal employees are being required to pay considerably more for coverage with health choices that continue to shrink.

As the Chairman knows very well, the federal government is in the midst of a human capital crisis. Attracting and keeping employees with the best skills is a challenge for all employers; it has become a particularly significant challenge for the federal government. What used to be considered one of the premiere programs in the federal employee benefit package - the FEHBP - is today often regarded as a disincentive by those considering employment with the federal government. The FEHBP has become prohibitively expensive for lower paid employees and unattractive to prospective employees.

Last October, the Office of Personnel Management announced average l3% rate increases for FEHBP plans in 2002. This increase followed average FEHBP premium hikes of l0.5% in 200l, 9.3% in 2000, and 9.5% in l999. Employees choosing the most popular FEHBP plan, Blue Cross-Blue Shield Standard Option Family coverage for 2002, were faced with l7% premium increases. Moreover, since l998, premiums for Blue Cross Standard Option Family coverage have increased by 43%.

To provide a better perspective on what these increases have meant to the average federal employee, from l998 to 200l, federal salaries increased an average of l3%. I think its easy to see why federal employees find the FEHBP increasingly unaffordable.

The federal government as an employer currently 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 own employees. According to the 200l Kaiser Family Foundation's Employer Health Benefits Survey, 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.

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; some pay as much as 90% of employee health insurance premiums.

Bipartisan legislation, introduced by Congressman Hoyer, is pending before your Committee that can help address this critical issue. H.R.l307 would increase the employer share of FEHBP premiums from the current average of 72% to the most common industry standard, 80%. NTEU, as well as 84 of your colleagues in the House of Representatives have endorsed this legislation. When I last appeared before your Subcommittee in October, 200l, I urged you to convene hearings on this important bill. Unfortunately, your Subcommittee has yet to consider this legislation.

Recently, Congresswoman Morella introduced H.R.4580, which among other things, would increase the federal government's contribution toward employee health benefits from 72% to 76%. Both of these bills are important steps toward making the federal government an employer of choice. Absent competitive pay and benefits, the federal government will never effectively compete for the talent it needs. H.R.l307 and H.R.4580 represent modest steps in addressing our human capital crisis.

NTEU has pressed for improvements in the federal benefit package over the years that we believe are key to recruiting and retaining the best employees. For example, NTEU worked closely with the last Administration to put in place a mechanism to permit federal employees to pay their FEHBP premiums with before-tax wages. Called a Premium Conversion Plan, it is a benefit employers are permitted to offer their employees under Section l25 of the Internal Revenue Code. Although private sector employers had widely offered this benefit to their employees since l978, the federal government did not make it available to its own employees until the year 2000.

Most medium and large employers, as well the majority of state and local governments, provide Premium Conversion Plans to their employees. Furthermore, employees of the U.S. Postal Service, the Federal Judiciary, the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision and the Federal Reserve System have participated in Premium Conversion for many years. The extension of this benefit to the entire federal sector not only enhances the ability of the federal government to more effectively compete in the labor market, it will help those federal employees who, until now, were unable to afford FEHBP coverage, better able to purchase coverage. As a result of this one provision, the average federal employee has experienced a $450 increase in annual take home pay. I also want to applaud the Congress for subsequently making Premium Conversion Plans available to legislative branch employees.

The same section of the tax code that authorizes the establishment of Premium Conversion Plans, Section l25, permits employers to make Flexible Spending Accounts (FSAs) available to their employees. NTEU also strongly supports extending Flexible Spending Accounts to the full federal sector. Like Premium Conversion Plans, FSAs have been available to employees of medium and large employers, state and local governments as well as to employees of the U.S. Postal Service and the other federal agencies listed above. As far back as l994, the Department of Labor reported that 69% of full time state and local government employees were eligible to participate in FSAs.

An employee eligible for a Flexible Spending Account would set aside a specific amount of money at the beginning of each year to pay certain health care costs such as deductibles and copayments as well as some medical costs not covered by insurance plans, as well as dependent care benefits, if the employee chooses. These set-asides are accomplished through payroll deductions each pay period. As the employee incurs expenses that meet IRS rules, the employee files a claim with the employer and is reimbursed with his or her own pre-tax FSA contributions for these medical and dependent care expenses.

NTEU has met with OPM Director James in an effort to make FSAs available to the entire federal workforce. It is our understanding from conversations with Director James that OPM is committed to broadening the availability of FSAs as soon as possible. We are also encouraged that the Bush Administration's FY 2003 budget recommends permitting FSA participants to carry up to $500 in unused benefits in an FSA forward into the next calendar year. This would be a positive step in encouraging more employees to take advantage of this benefit. Under current law, amounts that an employee sets aside for medical and dependent care expenses, but does not use, are forfeited to the federal government at the end of the calendar year.

Some employers also choose to offer their employees what is called a cafeteria benefits plan. This is sometimes also referred to as a Flexible Benefits Plan, not to be confused with Flexible Spending Accounts which permit employees to shelter their own money on a pre-tax basis to help with out of pocket medical and child care expenses.

NTEU does not support extending cafeteria benefits, or Flexible Benefits Plans to the federal workforce for a number of reasons which I will outline for the Subcommittee.

Under a cafeteria benefits plan, employees are usually given a pool of money to spend on an array of benefits that the employer has chosen to include in the package. Benefits typically included in such a mix are health insurance, life insurance, additional annual leave, or other benefits the employer may choose to include.

Cafeteria benefits, or Flexible Benefits Plans, are often used by employers as a method of controlling the costs of benefits they provide to their employees. This is accomplished by limiting increases in the annual pool of money employees are given to purchase these benefits. Employers often use the increase in the Consumer Price Index (CPI) as the benchmark for annual increases in the pot of money they provide employees for the purchase of benefits. With simple inflation averaging 2 to 3 percent in recent years and annual health insurance premium increases averaging between l0 and l3 percent, it would not take long before employees would be required to forgo other benefits just to continue to maintain the health insurance coverage they choose.

Indeed, a l989 Employee Benefit Research Institute (EBRI) report entitled, "Flexible Benefits for Federal Employees" details exactly the reason NTEU opposes the introduction of cafeteria, or flexible benefits for federal employees.

The report states, "Flexible benefits can help employers control costs in several ways. First, they can relieve some of the pressure on employers to offer and help fund new benefits. Second, employers can use flexible plans to break the automatic link between their contribution and the cost of inflation-prone benefits such as health insurance." The report continues, "...this practice limits employer exposure by shifting inflation costs to the employees."

Earlier in this testimony, I detailed the reasons NTEU believes the federal government needs to move in the direction of increasing the share of FEHB premiums it pays for its employees. NTEU is not opposed to providing federal employees with benefit choices, however, we will not support proposals that in reality will have the effect of limiting employee choice by shifting health care inflation costs away from the government as the employer and onto its employees.

Rather than enhancing the federal government's ability to compete in the labor market, it would be difficult not to view the introduction of cafeteria benefits as a major step backwards and a further disincentive to federal employment. I hope that this Committee, too, will firmly reject this notion.

Health insurance is usually the core benefit available in a cafeteria, or Flexible Benefits Plan. The EBRI report referenced above points out that, "As currently structured, the Federal Employees Health Benefits Program (FEHBP) is unsuited to that (Flexible Benefits Plan) role." NTEU agrees with that assessment.

As the Chairman knows, both current and retired federal employees participate in the FEHBP. Under the present law, only current employees are eligible to participate in plans available under Section l25 of the tax code, such as Flexible Benefits Plans. Thus, introduction of such a plan for the active workforce would necessitate separating health insurance programs for current and retired federal employees. In our view, the introduction of a Flexible Benefits Plan would only serve to further destabilize the FEHBP program.

In conclusion, Mr. Chairman, NTEU believes there are many steps this Committee could take to address the crisis in the FEHBP. Introducing cafeteria benefits, or Flexible Benefits Plans into the federal benefit package is not one of them. I look forward to working with you on these issues in the coming months and urge you again to hold hearings on H.R.l307 and H.R.4580 during this session of Congress.