Federal Employees Health Benefits Program
Premiums Continue to Rise, but Rate of Growth Has Recently Slowed
Gao ID: GAO-07-873T May 18, 2007
Average health insurance premiums for plans participating in the Federal Employees Health Benefits Program (FEHBP) have risen each year since 1997. These growing premiums result in higher costs to the federal government and plan enrollees. The Office of Personnel Management (OPM) oversees FEHBP, negotiating benefits and premiums and administering reserve accounts that may be used to cover plans' unanticipated spending increases. GAO was asked to discuss its December 22, 2006 report, entitled Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed, and Varies Among Participating Plans (GAO-07-141). In this report, GAO reviewed (1) FEHBP premium trends compared with those of other purchasers, (2) factors contributing to average premium growth across all FEHBP plans, and (3) factors contributing to differing trends among selected FEHBP plans. GAO reviewed data provided by OPM relating to FEHBP premiums and factors contributing to premium growth. For comparison purposes, GAO examined premium data from the California Public Employees' Retirement System (CalPERS) and surveys of other public and private employers. GAO also interviewed officials from OPM and eight FEHBP plans with premium growth that was higher than average and six FEHBP plans with premium growth that was lower than average.
Growth in FEHBP premiums recently slowed, from a peak of 12.9 percent for 2002 to 1.8 percent for 2007. Starting in 2003, FEHBP premium growth was generally slower than for other purchasers. Premium growth rates for the 10 largest FEHBP plans by enrollment--accounting for about three-quarters of total enrollment--ranged from 0 percent to 15.5 percent for 2007. Projected increases in the cost and utilization of health care services and in the cost of prescription drugs accounted for most of the average annual FEHBP premium growth for 2000 through 2007. Absent other factors, these increases would have raised 2007 average premiums by 9 percent. Other projected factors, including benefit changes resulting in less generous coverage and enrollee migration to lower-cost plans, slightly offset average premium growth. In 2006 and 2007, projected withdrawals from reserves helped offset average premium growth--by 2 percentage points for 2006 and 5 percentage points for 2007. To explain the factors associated with premium growth, officials GAO interviewed from most of the FEHBP plans with higher-than-average premium growth cited increases in the cost and utilization of services as well as a high share of elderly enrollees and early retirees. Officials GAO interviewed from most plans with lower-than-average premium growth cited adjustments made for previously overestimated projections of cost growth, and some officials cited benefit changes that resulted in less generous coverage for prescription drugs. The plans with lower-than-average premium growth also experienced a decline of 0.5 years in the average age of their enrollees compared with an increase of 0.5 years in the average age of all FEHBP enrollees.
GAO-07-873T, Federal Employees Health Benefits Program: Premiums Continue to Rise, but Rate of Growth Has Recently Slowed
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Testimony:
Before the Subcommittee on Oversight of Government Management, the
Federal Workforce, and the District of Columbia, Committee on Homeland
Security and Governmental Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:30 a.m. EDT:
Friday, May 18, 2007:
Federal Employees Health Benefits Program:
Premiums Continue to Rise, but Rate of Growth Has Recently Slowed:
Statement of John E. Dicken:
Director, Health Care:
GAO-07-873T:
GAO Highlights:
Highlights of GAO-07-873T, a testimony before the Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and Governmental
Affairs, U.S. Senate
Why GAO Did This Study:
Average health insurance premiums for plans participating in the
Federal Employees Health Benefits Program (FEHBP) have risen each year
since 1997. These growing premiums result in higher costs to the
federal government and plan enrollees. The Office of Personnel
Management (OPM) oversees FEHBP, negotiating benefits and premiums and
administering reserve accounts that may be used to cover plans‘
unanticipated spending increases.
GAO was asked to discuss its December 22, 2006 report, entitled Federal
Employees Health Benefits Program: Premium Growth Has Recently Slowed,
and Varies Among Participating Plans (GAO-07-141). In this report, GAO
reviewed (1) FEHBP premium trends compared with those of other
purchasers, (2) factors contributing to average premium growth across
all FEHBP plans, and (3) factors contributing to differing trends among
selected FEHBP plans. GAO reviewed data provided by OPM relating to
FEHBP premiums and factors contributing to premium growth. For
comparison purposes, GAO examined premium data from the California
Public Employees‘ Retirement System (CalPERS) and surveys of other
public and private employers. GAO also interviewed officials from OPM
and eight FEHBP plans with premium growth that was higher than average
and six FEHBP plans with premium growth that was lower than average.
What GAO Found:
Growth in FEHBP premiums recently slowed, from a peak of 12.9 percent
for 2002 to 1.8 percent for 2007. Starting in 2003, FEHBP premium
growth was generally slower than for other purchasers. Premium growth
rates for the 10 largest FEHBP plans by enrollment”accounting for about
three-quarters of total enrollment”ranged from 0 percent to 15.5
percent for 2007.
Projected increases in the cost and utilization of health care services
and in the cost of prescription drugs accounted for most of the average
annual FEHBP premium growth for 2000 through 2007. Absent other
factors, these increases would have raised 2007 average premiums by 9
percent. Other projected factors, including benefit changes resulting
in less generous coverage and enrollee migration to lower-cost plans,
slightly offset average premium growth. In 2006 and 2007, projected
withdrawals from reserves helped offset average premium growth”by 2
percentage points for 2006 and 5 percentage points for 2007.
To explain the factors associated with premium growth, officials GAO
interviewed from most of the FEHBP plans with higher-than-average
premium growth cited increases in the cost and utilization of services
as well as a high share of elderly enrollees and early retirees.
Officials GAO interviewed from most plans with lower-than-average
premium growth cited adjustments made for previously overestimated
projections of cost growth, and some officials cited benefit changes
that resulted in less generous coverage for prescription drugs. The
plans with lower-than-average premium growth also experienced a decline
of 0.5 years in the average age of their enrollees compared with an
increase of 0.5 years in the average age of all FEHBP enrollees.
Figure: Growth in Average Premiums for FEHBP and Other Purchasers:
[See PDF for Image]
Source: OPM, CalPERS, and Kaiser Family Foundation/Health Research and
Educational Trust.
[End of figure]
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-873T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John E. Dicken at (202)
512-7119 or dickenj@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the findings from our December
2006 report entitled Federal Employees Health Benefits Program: Premium
Growth Has Recently Slowed, and Varies among Participating
Plans.[Footnote 1] For this report, we were asked to examine the nature
and extent of premium increases in the Federal Employees Health
Benefits Program (FEHBP) and the potential effect on premium growth of
the Medicare retiree drug subsidy, had OPM applied for the subsidy and
used it to offset premium growth.[Footnote 2] Federal employees' health
insurance premiums have increased each year since the late 1990s, and
these increases pose higher costs for the federal government and plan
enrollees.[Footnote 3] About 8 million federal employees, retirees, and
their dependents receive health coverage through plans participating in
the FEHBP, the largest employer-sponsored health insurance program in
the country. The Office of Personnel Management (OPM) administers the
program by contracting with multiple health insurance carriers to offer
health plans through the program and negotiates benefits and premium
rates with each carrier. OPM also administers reserve accounts for each
plan that may be used to cover plans' unanticipated spending
increases.[Footnote 4]
My remarks today will focus on (1) recent FEHBP premium growth trends
compared to those of plans offered by other purchasers, (2) the factors
that contributed to average premium growth trends across all FEHBP
plans as well as the effect the Medicare retiree drug subsidy would
have had on premium growth, and (3) the factors that contributed to
differing premium growth among selected FEHBP plans. These remarks are
based on information contained in our December 2006 report.
In conducting our work, we analyzed historic and recent premium trend
data from 1994 through 2007 from OPM for all FEHBP plans and compared
them with premium data from the California Public Employees' Retirement
System (CalPERS)--the second largest public purchaser of employee
health benefits--and surveys of multiple employer-sponsored health
plans from Kaiser Family Foundation/Health Research and Educational
Trust (Kaiser/HRET).[Footnote 5] To identify factors contributing to
average FEHBP premium growth trends across all FEHBP plans, we analyzed
OPM summary reports assessing the effect of projected changes in
various factors, including the cost and utilization of services,
enrollee demographics, and use of reserves, on premium growth trends
from 2000 through 2007.[Footnote 6] We also examined aggregate data on
the actual growth in per-enrollee expenditures from 2003 through 2005
for 5 large FEHBP plans.[Footnote 7] We explored with officials from
OPM and 14 selected FEHBP plans the potential effect on premium growth
of the retiree drug subsidy if OPM had applied for the subsidy and used
it to mitigate premium growth. The 14 plans were selected because of
size (at least 5,000 enrollees) and length of participation in the
FEHBP (at least 3 years). To examine the reasons for differing premium
growth trends among FEHBP plans, we conducted interviews with officials
from these 14 plans. Eight of the plans had higher-than-average premium
growth, and six of the plans had lower-than-average premium growth for
either (a) 2006 or (b) the 3-year period from 2004 through 2006. A
detailed explanation of our scope and methodology is contained in
appendix I of the December 2006 report. We conducted our work for that
report from January 2006 through December 2006 in accordance with
generally accepted government auditing standards.
In summary, we found that growth in average FEHBP premiums recently
slowed from a peak of 12.9 percent for 2002 to 1.8 percent for 2007.
This was lower than growth for other purchasers from 2003 through 2007.
Premium growth rates for the 10 largest FEHBP plans by enrollment,
accounting for about three-quarters of total enrollment, ranged from 0
to 15.5 percent for 2007, but varied more widely across the smaller
FEHBP plans.
Projected increases in the cost and utilization of health care services
and in the cost of prescription drugs accounted for most of the average
annual premium growth across all FEHBP plans for 2000 through 2007.
Absent projected decreases in the costs of other factors, these
increases would have raised 2007 average premiums by about 9 percent,
rather than the 1.8 percent actual increase for that year. During this
same period, projected decreases in the costs associated with certain
other factors, including benefit changes that resulted in less generous
coverage and enrollee migration to lower-cost plans, generally helped
offset premium growth to a small extent. In 2006 and 2007, projected
withdrawals from reserves particularly helped offset average premium
growth by about 2 percentage points for 2006 and about 5 percentage
points for 2007. Regarding the potential effect of the retiree drug
subsidy, most plan officials we interviewed stated that the subsidy
would have had a small effect on premium growth for 2006 had OPM
applied for the subsidy and used it to mitigate premium growth.
Officials from two large plans with higher-than-average shares of
retirees, however, stated that the subsidy would have lowered their
plans' premium growth--officials from one plan said by at least 3.5 to
4 percentage points for their plan. We estimated that the subsidy would
have lowered premium growth across all FEHBP plans for 2006 by more
than 2 percentage points on average, from the 6.4 percent average
growth rate for 2006 to about 4 percent. OPM officials said that OPM
did not apply for the subsidy because the intent of the subsidy was to
encourage employers to continue offering prescription drug coverage to
Medicare-eligible enrollees, and FEHBP plans were already doing so.
To explain the factors associated with premium growth, officials we
interviewed from most of the plans with higher-than-average premium
growth cited increases in the cost and utilization of services as well
as a high share of elderly enrollees and early retirees. Officials we
interviewed from most plans with lower-than-average premium growth
cited adjustments made for previously overestimated projections of cost
growth, and some officials cited benefit changes that resulted in less
generous coverage for prescription drugs. The plans with lower-than-
average premium growth also experienced a decline of 0.5 years in the
average age of their enrollees compared with an increase of 0.5 years
in the average age of all FEHBP enrollees.
Background:
The FEHBP is the largest employer-sponsored health insurance program in
the country, providing health insurance coverage for about 8 million
federal employees, retirees, and their dependents through contracts
with private insurance plans. All currently employed and retired
federal employees and their dependents are eligible to enroll in FEHBP
plans, and about 85 percent of eligible workers and retirees are
enrolled in the program. For 2007, FEHBP offered 284 plans, with 14 fee-
for-service (FFS) plans, 209 health maintenance organization (HMO)
plans, and 61 consumer-directed health plans (CDHP). About 75 percent
of total FEHBP enrollment was concentrated in FFS plans, about 25
percent in HMO plans, and less than 1 percent in CDHPs.
Total FEHBP health insurance premiums paid by the government and
enrollees were about $31 billion in fiscal year 2005. As set by
statute, the government pays 72 percent of the average premium across
all FEHBP plans but no more than 75 percent of any particular plan's
premium.[Footnote 8] The premiums are intended to cover enrollees'
health care costs, plans' administrative expenses, reserve accounts
specified by law, and OPM's administrative costs. Unlike some other
large purchasers, FEHBP offers the same plan choices to currently
employed enrollees and retirees, including Medicare-eligible retirees
who opt to receive coverage through FEHBP plans rather than through the
Medicare program. The plans include benefits for medical services and
prescription drugs.
By statute, OPM can negotiate contracts with health plans without
regard to competitive bidding requirements.[Footnote 9] Plans meeting
the minimum requirements specified in the statute and regulations may
participate in the program, and plan contracts may be renewed
automatically each year. OPM may terminate contracts if the minimum
standards are not met.[Footnote 10]
OPM administers a reserve account within the U.S. Treasury for each
FEHBP plan, pursuant to federal regulations. Reserves are funded by a
surcharge of up to 3 percent of a plan's premium.[Footnote 11] Funds in
the reserves above certain minimum balances may be used, under OPM's
guidance, to defray future premium increases, enhance plan benefits,
reduce government and enrollee premium contributions, or cover
unexpected shortfalls from higher-than-anticipated claims.
On January 1, 2006, Medicare began offering prescription drug coverage
(also known as Part D) to Medicare-eligible beneficiaries.[Footnote 12]
Employers offering prescription drug coverage to Medicare-eligible
retirees enrolled in their plans could, among other options, offer
their retirees drug coverage that was actuarially equivalent to
standard coverage under Part D and receive a tax-exempt government
subsidy to encourage them to retain and enhance their prescription drug
coverage.[Footnote 13] The subsidy provides payments equal to 28
percent of each qualified beneficiary's prescription drug costs that
fall within a certain threshold and is estimated to average about $670
per beneficiary per year. OPM opted not to apply for the retiree drug
subsidy.
Growth in Average FEHBP Premiums Has Recently Slowed and Was Lower Than
That of Other Purchasers:
The average annual growth in FEHBP premiums has slowed since 2002--
declining each year from 2003 through 2007--and was generally lower
than the growth for other purchasers since 2003. After a period of
decreases in 1995 and 1996, FEHBP premiums began to increase for 1997,
to a peak increase of 12.9 percent for 2002. The growth in average
FEHBP premiums began slowing in 2003 and reached a low of 1.8 percent
for 2007. The average annual growth in FEHBP premiums was faster than
that of CalPERS and surveyed employers from 1997 through 2002--8.5
percent compared with 6.5 percent and 7.1 percent, respectively.
However, beginning in 2003, the average annual growth rate in FEHBP
premiums was slower than that of CalPERS and surveyed employers--7.3
percent compared with 14.2 percent and 10.5 percent, respectively. (See
fig. 1).
Figure 1: Growth in Average Premiums for FEHBP and Other Purchasers,
1994 through 2007:
[See PDF for image]
Source: OPM, CalPERS, and Kaiser/HRET.
Note: The 2007 average premium growth rate for employer plans in the
Kaiser/HRET surveys was not available at the time we completed our work
for this testimony.
[End of figure]
The premium growth rates for the 10 largest FEHBP plans by enrollment-
-accounting for about three-quarters of total FEHBP enrollment--ranged
from 0 percent to 15.5 percent for 2007. Premium growth rates across
the smaller FEHBP plans varied more widely.
Regarding enrollee premiums--the share of total premiums paid by
enrollees--the growth in average enrollee premiums generally paralleled
total premium growth from 1994 through 2007. In 2006, average monthly
FEHBP premiums were $415 for individual plans and $942 for family plans
in total. The enrollee premium contributions were $123 for individual
plans and $278 for family plans.
Projected Growth in Several Factors Contributed to Average FEHBP
Premium Growth:
Projected increases in the cost and utilization of services and in the
cost of prescription drugs accounted for most of the average annual
premium growth across FEHBP plans for the period from 2000 through
2007, although projected withdrawals from reserves offset much of this
growth for 2006 and 2007. Absent projected changes associated with
other factors, projected increases in the cost and utilization of
services and the cost of prescription drugs would have accounted for a
9 percent increase in average premiums for 2007. Projected increases in
the cost of and utilization of services alone would have accounted for
about a 6 percent increase premiums for 2007, down from a peak of about
10 percent for 2002. Projected increases in the cost of prescription
drugs alone would have accounted for about a 3 percent increase in
premiums for 2007, down from a peak of about 5 percent for 2002.
Enrollee demographics--particularly the aging of the enrollee
population--were projected to have less of an effect on premium growth.
Projected decreases in the costs associated with certain other factors,
including benefit changes that resulted in less generous coverage and
enrollee choice of plans--typically the migration to lower-cost plans-
-generally helped offset average premium growth for 2000 through 2007
to a small extent.
Projected withdrawals from reserves offset average premium growth for
2006 and 2007. Officials we interviewed from most of the plans stated
that OPM monitored their plans' reserve levels and worked closely with
them to build up or draw down reserve funds gradually to avoid wide
fluctuations in premium growth from year to year. Projected additions
to reserves nominally contributed to average premium growth--by less
than 1 percentage point--for 2000 through 2005. However, projected
withdrawals from reserves offset average premium growth by about 2
percentage points for 2006 and 5 percentage points for 2007.[Footnote
14] (See fig. 2.)
Figure 2: Projected Changes in Various Factors Affecting FEHBP Premium
Growth, 2000 through 2007:
[See PDF for image]
Source: OPM.
[End of figure]
We also reviewed detailed data available for five large FEHBP plans on
claims actually incurred from 2003 through 2005. These data showed that
most of the increase in total expenditures per enrollee was explained
by expenditures on prescription drugs (34 percent) and on hospital
outpatient services (26 percent).
Officials we interviewed from several FEHBP plans stated that the
retiree drug subsidy would have had a small effect on premium growth
had OPM applied for the subsidy and used it to offset premiums. First,
drug costs for Medicare beneficiaries enrolled in these plans accounted
for a small proportion of total expenses for all enrollees, and the
subsidy would have helped offset less than one-third of these expenses.
Second, because the same plans offered to currently employed enrollees
were offered to retirees, the effect of the subsidy would have been
diluted when spread across all enrollees. However, officials we
interviewed from two large plans with high shares of elderly enrollees
stated that the subsidy would have lowered premium growth for their
plans. Officials from one of these plans estimated that 2006 premium
growth could have been 3.5 to 4 percentage points lower.
Our analysis of the potential effect of the retiree drug subsidy on all
plans in FEHBP showed that had OPM applied for the subsidy and used it
to offset premium growth, the subsidy would have lowered the 2006
premium growth by 2.6 percentage points from 6.4 percent to about 4
percent.[Footnote 15] The reduction in premium growth would have been a
onetime reduction for 2006.[Footnote 16] Absent the drug subsidy, FEHBP
premiums in the future would likely be more sensitive to drug cost
increases than would be premiums of other large plans that received the
retiree drug subsidy for Medicare beneficiaries.
OPM officials explained that there was no need to apply for the subsidy
because the intent of the subsidy was to encourage employers to
continue offering prescription drug coverage to Medicare-eligible
enrollees, and FEHBP plans were already doing so. The potential effect
of the subsidy on premium growth would also have been uncertain because
the statute did not require employers to use the subsidy to mitigate
premium growth.
Changes in the Cost and Utilization of Services and Enrollee
Demographics Accounted for Differing Premium Growth Among FEHBP Plans:
Officials we interviewed from most of the FEHBP plans with higher-than-
average premium growth in 2006 cited increases in the actual cost and
utilization of services and high shares of elderly enrollees and early
retirees as key drivers of premium growth. Our analysis of financial
data provided by six of these plans showed that the average increase in
total expenditures per enrollee from 2003 through 2005 was about 40
percent--compared with the average of 25 percent for five large FEHBP
plans that represented about two-thirds of total FEHBP enrollment. From
2001 through 2005, the average age of enrollees across all eight plans
with higher-than-average premium growth increased by 2.7 years--
compared with an average increase of 0.5 years across all FEHBP plans.
Officials we interviewed from most of the FEHBP plans with lower-than-
average premium growth in 2006 cited adjustments for previously
overestimated projections of cost growth and benefit changes that
resulted in less generous coverage for prescription drugs as factors
that limited premium growth. Our analysis of financial data provided by
two plans showed that per-enrollee expenditures for prescription drugs
increased by 3 percent for one plan and 13 percent for the other from
2003 through 2005--compared with 30 percent for the average of the five
large FEHBP plans. Also, from 2001 through 2005, the average age of
enrollees across all six of these plans decreased by 0.5 years--
compared with an average increase of 0.5 years across all FEHBP plans.
Mr. Chairman, this concludes my prepared remarks. I would be happy to
answer any questions that you or other Members of the subcommittee may
have.
Contacts and Acknowledgements:
For future contacts regarding this testimony, please contact John E.
Dicken at (202) 512-7119 or dickenj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. Randy Dirosa, Assistant Director; Iola
D'Souza; and Timothy Walker made key contributions to this testimony.
FOOTNOTES
[1] GAO-07-141 (Washington, D.C.: Dec. 22, 2006).
[2] As of January 1, 2006, employers offering prescription drug
coverage to Medicare-eligible retirees enrolled in their plans could
apply for a tax-exempt government subsidy. See Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173,
117 Stat. 2066, 2125 (2003). OPM has chosen not to apply for the
subsidy.
[3] GAO previously reported on federal employees' health insurance
premium trends through 2003. See GAO, Federal Employees' Health Plans:
Premium Growth and OPM's Role in Negotiating Benefits, GAO-03-236
(Washington, D.C.: Dec. 31, 2002).
[4] Pursuant to 5 U.S.C. § 8909.
[5] Kaiser/HRET has conducted surveys of employer-sponsored health
benefits since 1999. These surveys capture data from employers ranging
in size from 3 to 300,000 or more workers. KPMG Peat Marwick conducted
the surveys before 1999. We analyzed premium growth trends for CalPERS
from 1994 through 2007. We analyzed premium growth trends for Kaiser/
HRET surveyed employers from 1994 through 2006, because the Kaiser/HRET
survey data available when we prepared our December 2006 report did not
include growth rates for 2007.
[6] Premium rates for each year are prospectively set by individual
FEHBP plans based on their projections of growth for various factors.
OPM calculates the average premium growth across all FEHBP plans and
estimates the composite projected growth in each of these factors
across all FEHBP plans based on the plans' projections. Actual growth
for each factor may differ from these projections.
[7] OPM was not able to provide these data for all FEHBP plans for
2005. These 5 plans accounted for about 90 percent of fee-for-service
enrollment and about 67 percent of total FEHBP enrollment.
[8] The Balanced Budget Act of 1997 established the government's
current share of the premiums beginning in the 1999 contract year. Pub.
L. No. 105-33, §7002, 111 Stat. 251, 662 (amending 5 U.S.C. §8906). OPM
determines separate averages for individual plans and for family plans.
Although the average enrollee premium contribution is 28 percent of the
average premium for all plans, enrollee premium contributions can be
higher than 28 percent for plans with premiums significantly higher
than the average FEHBP plan. For example, the 2006 monthly premium for
a particular FEHBP plan was $642, compared with the average premium of
$415. Because the government's share is $299 (72 percent of $415), the
enrollee premium contribution for this particular plan was $343 ($642
minus $299), or about 53 percent of the plan's premium.
[9] 5 U.S.C. §8902.
[10] OPM can terminate a plan's contract at the end of the contract
term if fewer than 300 federal employees and retirees were enrolled
during the two preceding contract terms. In addition, if a plan fails
to meet minimum standards, OPM can withdraw its approval after giving
the plan notice and providing an opportunity for a hearing.
[11] 5 U.S.C.§8909. Reserves may also be credited with any unused
portions of funds set aside for OPM's administrative expenses and
income from investment of the reserves. In the case of FFS plans,
reserves may also be credited with portions of excess premiums that may
remain after claims and the plan's administrative costs and other
financial obligations have been met. These excess premiums may not be
transferred into reserve accounts for most HMO plans.
[12] For more information on Medicare Part D, see GAO, Retiree Health
Benefits: Options for Employment-Based Prescription Drug Benefits under
the Medicare Modernization Act, GAO-05-205 (Washington, D.C.: Feb. 14,
2005).
[13] In general, according to the Centers for Medicare & Medicaid
Services, actuarial equivalence measures whether the expected amount of
paid claims under the employers' prescription drug coverage is at least
equal to the expected amount of paid claims under the standard
prescription drug coverage under Medicare Part D. The conference
committee report for the legislation authorizing this subsidy indicated
a belief by the committee that the subsidy would help employers retain
and enhance their prescription drug coverage in the face of increasing
pressure to drop or scale back such coverage. H.R. Conf. Rep. No. 108-
391, at 484 (2003).
[14] OPM officials said that reserves had a larger effect in mitigating
average premium growth for 2007 for FFS plans compared with HMO plans,
because FFS plans had larger accumulated reserves upon which they could
draw. According to OPM officials, increases in the actual cost and
utilization of services in 2006 were lower than projected for that
year, and therefore the projected withdrawals from reserves were not
made in 2006. Because of the resulting higher reserve balances, plans
and OPM projected even larger reserve withdrawals for 2007.
[15] We used the nationwide average subsidy estimated by the Centers
for Medicare & Medicaid Services to be about $670 per Medicare-eligible
retiree. The actual subsidy for Medicare-eligible retirees in FEHBP may
have varied from this average. Officials from CalPERS stated that the
subsidy, which they had received but had not decided how to use as of
August 2006, amounted to 13 to 17 percent of the total premium for
Medicare-eligible enrollees in 2006. They stated that the subsidy would
have a greater effect on premiums for CalPERS enrollees because, unlike
FEHBP, CalPERS offers separate plans for employed enrollees and
retirees (including Medicare beneficiaries), and the subsidy would thus
be applied exclusively to premiums for retirees.
[16] Continued use of the subsidy in subsequent years would affect
actual FEHBP premiums but not their rate of increase.
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