Federal Health Benefits Program

GAO believes that the administrative costs of the fee-for-service portion of the Federal Employees Health Benefits Program were higher than those costs for the other large health benefits program GAO reviewed primarily because the carriers were not given enough incentive to cut their operational expenses. Although small in relation to benefit payments, the program's administrative costs--more than half a billion dollars in 1988--are significant. GAO estimates that the potential annual savings could range from at least $35 million in the short term, by improving Office of Personnel Management (OPM) controls over the operational expenses of the fee-for-service plans, to about $200 million through legislative reforms that change the way contractors are chosen and paid. Incentives can be more effectively provided through the competitive selection of contractors. If the program were restructured to have competitively selected commercial insurers assume all or part of the insurance risk, GAO believes that the cost of the program's administrative services could be better controlled. Regardless of whether the program is legislatively reformed, however, OPM needs to do more to ensure that the carriers provide quality services at reasonable prices.

GAO found that: (1) in 1988, the fee-for-service (FFS) portion of FEHBP cost $8.56 to administer for each $100 of paid benefits, which was 51 percent more than the reviewed large insured nonfederal programs' average cost ratio, 84 percent more than the CHAMPUS cost ratio, and 89 percent more than the reviewed self-insured nonfederal programs' average cost ratio; (2) within FEHBP, the administrative costs for the 17 largest FFS plans varied; (3) some cost differences could be attributed to conducting annual open seasons, processing enrollment changes, and other factors that GAO lacked sufficient data to measure, such as differing benefits structures, enrollee characteristics, and benefit cost activities; (4) FEHBP and the reviewed programs use contractors to pay and process their health benefits claims; (5) since OPM structured FEHBP to include certain plans regardless of their cost-effectiveness, OPM cannot use competitive procedures to select carriers that provide the most cost-effective administrative services; (6) OPM has not provided carriers with sufficient incentives to improve efficiency and reduce costs; (7) although OPM negotiated a new method for adjusting expense ceilings to limit future increases, it has not negotiated expense ceiling reductions or determined whether its expense levels are reasonable; and (8) legislation requiring OPM to select FEHBP contractors through competitive procedures could strengthen its ability to obtain administrative services at prices comparable to the other reviewed programs.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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