The Federal Employees Health Benefits Program

12/11/2002

Committee on Government Reform Civil Service Subcommittee

Chairman Weldon, Ranking Member Davis, Members of the Subcommittee, my name is Colleen M. Kelley and I am the National President of the National Treasury Employees Union (NTEU). NTEU represents more than l50,000 federal employees across 28 agencies and departments of the federal government.

We very much appreciate being invited to appear before your Subcommittee today to share our thoughts on the many issues facing the Federal Employees Health Benefits Program (FEHBP). The annual FEHBP Open Season, which concluded earlier this week, ushered in several changes in the federal health program, several of which are of great concern to NTEU and its members.

As you know, the average ll.l% premium increase for 2003 marks the fifth year in a row of exorbitant rate increases in the federal health program. The 2002 rate increase averaged l3.3%. For 200l the increase was l0.5%; in 2000 it was 9.3% and in l999, 9.5%. As you also know, federal employee salary increases have not kept pace with these rate hikes, forcing many participating employees - as well as retirees - to closely examine whether or not they can afford to continue in the program. To the extent federal employees are finding the FEHBP increasingly unaffordable and prospective employees are discouraged from seeking employment with the federal government as a result of the health program's costs, this is an issue none of us can afford to ignore.

For 2003, six of the seven participating FEHBP fee-for-service plans that are open to all employees and retirees raised their premiums. However, this doesn't even begin to tell the full story of the costs employees and retirees are faced with. At the same time plans are increasing their premiums, they are often simultaneously increasing their required copayments and deductibles, limiting their covered services, dropping participating physicians from their programs and increasing the amount of prescription drug copays that enrollees must pay out of pocket.

Moreover, eleven participating Health Maintenance Organizations (HMOs) dropped out of the program for 2003, several more have curtailed their offerings in certain parts of the country and still others have reduced the service areas in which they operate.

While health insurance premiums have risen dramatically in the private sector in recent years as well, it is important to point out that private sector employees continue to pay, on average, less for their health insurance - both in terms of percentage of premium and in terms of monthly cost - than their federal counterparts.

The respected Kaiser Family Foundation's 2002 Annual Survey of Employer Health Benefits reports that, "on average employees are now paying $38 per month ($454 per year) for single coverage," and "$l74 per month ($2,084 per year) for family coverage." The differences between average private sector monthly premiums and the monthly amounts federal employees pay for the most popular FEHBP plan are startling.

For 2003, a federal employee choosing Blue Cross-Blue Shield Standard Option Self Only coverage will pay $98.93 each month, or $l,l87.l6 annually. An employee choosing family coverage under Blue Cross Standard Option will pay $227.98 each month for this coverage, or $2,735.76.

This sharp contrast continues when we look at the percentage of premium employees are required to absorb. The federal government currently pays an average of 72% of the health insurance premium for its employees. Yet, the Kaiser study points out that on average, employees in the private sector are required to pay only l6% of premium for self only coverage and 27% for family coverage.

NTEU believes we have a responsibility to look at the impact these issues have had, and will continue to have, on the ability of the federal government to attract and retain employees. This same Kaiser study makes the impact in the private sector clear - it reports that employers who have passed along health insurance cost increases to their employees are feeling the effects with regard to their ability to attract and retain workers. Of the firms that increased the amount their employees must pay for health insurance coverage in 2002, Kaiser reports that 4l% found that it was subsequently more difficult to attract and retain employees.

These factors have helped to form the basis of NTEU's support for legislation to increase the employer share of FEHBP premiums from the current average of 72% to 80%. As the Chairman knows, bipartisan legislation was introduced by Congressman Steny Hoyer in the l07th Congress to accomplish this important goal. Although the Subcommittee did not consider this legislation, H.R.l307 nonetheless was endorsed by 94 members of the House of Representatives.

NTEU anticipates that Congressman Hoyer will reintroduce this important legislation in the l08th Congress and we will work closely with his office to secure its passage. In addition, we hope that this Subcommittee will give the legislation early and fair consideration. By placing the federal government on somewhat more level ground with the private sector employers with which it competes, H.R.l307 represents a key first step in insuring that the federal government will be able to compete now and in the future for the talent it needs.

Over the years, NTEU has pressed for other improvements in the federal benefit package that we believe are central to recruiting and retaining the best employees. For example, we 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 Premium Conversion, it is a benefit private sector employers have offered to their employees since l978. While the federal government did not make Premium Conversion Accounts available to its employees until 2000, NTEU is nonetheless grateful that federal employees are finally able to take advantage of the benefits Premium Conversion offers.

NTEU believes that the extension of this benefit throughout the federal sector enhances the ability of the federal government to compete in the labor market. Moreover, the average federal employee has experienced a $450 annual increase in take home pay as a result of Premium Conversion. Hopefully, this will also help those employees unable to afford FEHBP coverage to be better able to purchase it.

NTEU is also pleased that the current Administration has agreed to make full Flexible Spending Accounts (FSAs) available to the federal workforce in mid-2003. Like Premium Conversion Accounts, FSAs have been available to private sector workers for many years. An employee eligible for an FSA account sets aside a specific amount of money each year to pay certain health care and dependent care expenses on a pre-tax basis. Qualifying expenses include out-of-pocket medical expenses such as copayments and deductibles, routine physicals and immunizations that may not be covered by insurance, braces, vision exams, eyeglasses and even child and elder care expenses.

The savings associated with FSAs can be considerable. An employee in the Civil Service Retirement System (CSRS) who is in the l5% tax bracket and sets aside $2,000 in an FSA account for medical and dependent care expenses can expect savings of more than $420 annually. An employee in the l5% income tax bracket who participates in the Federal Employees Retirement System (FERS) and also sets aside $2,000 in an FSA account can expect to save $550 annually.

As the Chairman also knows, however, only current federal employees are permitted to participate in Premium Conversion. Under current law, federal retirees will also be excluded from participation in Flexible Spending Accounts. NTEU strongly supports extending these key health care cost reducing benefits to retired federal employees and urges this Subcommittee to look carefully at these issues in the next Congress. Congressman Tom Davis introduced H.R.2l25 in the l07th Congress and although it was not acted upon before the Congress' conclusion, I expect that it will be reintroduced early in 2003. I urge its favorable consideration.

As NTEU has made clear in past testimony, we have serious reservations about the introduction of Medical Savings Accounts (MSAs), or similar insurance products, into the FEHBP. These products have the potential to add dramatic costs to the federal health program. MSAs tend to attract younger, healthier enrollees and reward lower health care usage with cash balances. Less healthy and older health care enrollees tend to be left in the traditional health offerings. As a result, the premiums for those traditional health plans rise. This is precisely the fear the Congressional Budget Office (CBO) expressed when it estimated that adding MSAs to the FEHBP would increase federal spending by almost $l billion over five years.

While I recognize that the new American Postal Workers Union (APWU) plan is not an MSA, its introduction into the FEHBP family and its potential impact on future rate stability are cause for concern. Much like an MSA, this "Consumer-Driven Plan" is expected to be most attractive to younger and healthier FEHBP enrollees.

FEHBP participants signing up for APWU's new Consumer-Driven Plan will be provided with a health care spending account worth $l,000 for individuals and $2,000 for families. Enrollees can use this money for almost any health-related service, however, once the money has been spent, the next $600 (or $l,200 for families) of care must come directly from the enrollees' pocket. Only after this level of health care spending has been reached will the plan begin to pay 85% of in-network health care services and 60% of out-of-network care. If the enrollee does not spend all of the $l,000 (or $2,000 for family enrollment) in his or her health care spending account, the money can be carried forward to the next plan year - assuming the enrollee does not opt out of the Consumer-Driven Plan during the next open season.

Simply put, the plan rewards enrollees with either cash balances or extra health care coverage for not using medical care. Siphoning off healthy FEHBP participants while leaving those with higher utilization levels in the traditional plans seems to defy the underlying principle of group health insurance by separating these two groups of individuals. The impact of this plan on future FEHBP rates is obviously not known at this time, however, NTEU wants to make sure the Subcommittee is aware of our serious concerns.

Finally, Mr. Chairman, I want to point out that one of the largest factors in the rise in FEHBP premiums over the years has been prescription drug costs. There is little question that the patchwork of prescription drug purchase arrangements that exists in the FEHBP contributes to these annual increases. NTEU continues to believe that the Office of Personnel Management must negotiate discount prescription drug rates for the FEHBP similar to those available under the Federal Supply Schedule (FSS) used by Veterans Administration hospitals.

As you may recall, in l999, one small FEHBP plan attempted to purchase its drugs from the FSS. Unfortunately, the Special Agents Mutual Benefit Association's (SAMBA) proposal was thwarted when three major pharmaceutical companies - Pfizer, Merck and Parke-Davis refused to sell drugs to SAMBA if they were permitted to purchase drugs from the FSS.

Although this pilot project would have resulted in a minuscule loss of profit to these three major drug companies and would have provided valuable data on whether or not OPM's development of a similar drug schedule for the FEHBP would help reign in drug costs in the program, the pilot was not permitted to go forward.

The SAMBA pilot had been estimated to save $2.4 million a year, savings that would have flowed to federal employees and retirees as well as to taxpayers. Although the pharmaceutical industry has thus far prevented the FEHBP from as much as even examining the value of creating such a drug schedule for use by FEHBP plans, the idea continues to merit exploration. At a minimum, NTEU believes that the Office of Personnel Management should be encouraged to study the merits of negotiating discount prescription drug rates for the FEHBP and hopes that this Subcommittee will work with them to this end.

In conclusion, Mr. Chairman, NTEU certainly appreciates this opportunity to appear before you. We very much look forward to working with you in the l08th Congress on the key issues facing the FEHBP that we have outlined here today. Thank you.