Federal Employees Health Benefits Program (FEHBP)

Federal Employees Health Benefits Program (FEHBP) Introduction The Federal Employees Health Benefits Program (FEHBP), which currently covers nine million active and retired federal employees and their dependents, is the nation s largest employer-sponsored health insurance plan. Although politicians in recent years have touted FEHBP as a model health insurance program, its participants consider it anything but a model. In the last four years, premiums have risen by an average of 49 percent, far faster than the average growth of health care costs generally during the same period. In addition to outof-control premium increases, FEHBP participants have suffered unpredictable shifts in covered benefits from year to year, and the sudden disappearance of popular plans. Finally, in spite of being forced to pay anywhere from 28% to 30% of premiums, federal employees have no meaningful voice in the program on issues such as coverage, quality standards, or the mix of benefits and costs. FEHBP has both structural and political flaws. Each makes the program more expensive than it should be for both the government, and federal employees. The changes in FEHBP sought by AFGE are aimed at lowering costs without reducing benefits, improving the accountability of both the plans and the Office of Personnel Management (OPM), and achieving parity with the benefits provided by large private and public sector employers. The Cost of Coverage: FEHBP s Most Serious Flaw This year s average premium increases of 13.3% follow the pattern of 1998, 1999, 2000, and 2001 when the Office of Personnel Management approved average hikes of 7.2%, 9.5%, and 9.3%, 10.5% respectively. These increases occurred at the same time that the general rate of inflation hovered between 2 and 3 percent, and health care costs generally rose by 6% to 7% per year. While average premiums in FEHBP increased by 50% over the past five years, premiums in Blue Cross/Blue Shield s Standard Option, the most popular plan in the program, rose by 60% for families and 63% for individuals. FEHBP does not succeed in the most basic test of a health insurance program: It does not produce universal coverage for its target population federal employees, retirees, and their families. Because OPM is loath to draw attention to the system s flaws, it collects little data on those who do not participate in FEHBP but are otherwise eligible to do so. The most recent attempt to measure the size of this group, as well as its reasons for declining to participate in FEHBP, was 1992, when OPM contracted with Gallup to survey a small sample of nonparticipants. From that sample, it is estimated that approximately 250,000 federal employees who are eligible for the full employer subsidy under FEHBP not only do not use FEHBP, but they are entirely uninsured. The remainder of non-participants have health coverage from another source, predominantly from

a spouse or from previous military service. There are no data on the number of uninsured federal retirees who are or were eligible for FEHBP coverage. The reason most commonly cited by uninsured federal employees to explain their lack of participation in FEHBP was its prohibitive cost. The terms offered to federal employees under FEHBP are substantially worse than those offered to the employees of other large, unionized employers, both in the private and public sector. While on average the government pays just 72% of premiums and not more than 75%, other large employers pay at least 80% and often 100%, according to recent data published by the Bureau of Labor Statistics (BLS), and the Kaiser Family Foundation. The government knows it has a big problem on its hands with FEHBP. The big insurance and pharmaceutical companies dictate to OPM the terms of their annual contracts, not the other way around. OPM, for the most part, complies. In fact, OPM steadfastly refuses to allow federal unions a voice in negotiating over benefits or prices in spite of our status as purchasers rather than just consumers. This state of affairs goes unremarked as long as there is a reasonable level of price stability and quality in the program. But when premiums spiral out of control, and claims are left unpaid as the large insurers slowly drive the smaller regional plans out of business, as has been the case in the past six years and counting, OPM is left to defend the indefensible. Poor Management by OPM: FEHBP s Other Most Serious Flaw Forty nine plans pulled out of FEHBP at the end of 2001; 50 if Blue Cross/Blue Shield High Option is counted. This group represented about 27 percent of all FEHBP plans. The departures forced 135,000 FEHBP enrollees to find a new plan, and many no longer had an HMO Option. The so-called freedom to choose among plans has long been touted as one of FEHBP s strengths, yet the continual disappearance of popular plans makes a mockery of that supposed virtue. In central Pennsylvania, 14,000 FEHBP enrollees no longer have an HMO option in FEHBP. Several states now have only one HMO in FEHBP, including North Carolina (which last year had 5 HMOs), West Virginia (which last year had 3 HMOs), Rhode Island, and South Carolina. The state of Delaware now has no HMO option. OPM announces these departures in its now familiar there s nothing we can do fashion. Nominally in charge of this $17 billion program, OPM has allowed the big plans to segment the FEHBP market so that premiums now reflect only the risk of the group, rather than the value of medical benefits provided. Federal employees, retirees, and their dependents are the losers in this game of risk selection, and the big insurance companies are the winners. OPM, which should be playing an active role of oversight and control, just throws up its hands.

The most egregious example of OPM s failure to administer FEHBP in the interests of taxpayers or enrollees has been the way it handled Blue Cross/Blue Shield s replacement of its High Option Plan with a new Basic plan. OPM allowed Blue Cross/Blue Shield to withdraw the most expensive plan in the entire FEHBP, replace it with a much less expensive plan, and still continue to charge the government and FEHBP enrollees the same amount of money it would have charged if the change had not been made! Blue Cross managed to simultaneously lower the ceiling and the floor on FEHBP benefits and keep its prices as high as if they had done neither. By OPM s own accounting, if it had not agreed to this maneuver, premiums in the Standard Option would have risen by 12.5 percent in 2002 instead of 15 percent. Two million federal employees and retirees will pay an extra $55 per pay period to Blue Cross/Blue Shield that they would not be paying if OPM had done its job of protecting the interests of taxpayers and enrollees in its annual negotiations with the insurance carriers. Of course, the $55 will be compounded annually for as long as the Standard Option remains in FEHBP, adding insult to injury forever. The disappearance of plans and the unilateral passing on to Standard Option enrollees all the costs of Blue Cross/Blue Shield s former High Option participants are two examples of events in FEHBP which would not have won the approval of federal employees if we had been at the negotiating table hammering out terms for the 2002 FEHBP contract year. The fact is that 650,000 federal and District of Columbia employees who participate in and pay for FEHBP have elected to have AFGE speak for them. Indeed, our union exists to give voice to the concerns and interests of federal employees. Giving federal employees a seat at the FEHBP negotiating table will assure that there is at least one participant whose goal would be to stretch each taxpayer and enrollee dollar as far as possible to provide affordable, reliable, high quality health insurance. The Administration s Stealth Attack on Retiree FEHBP Coverage Senator Fred Thompson (R-Tenn.) has introduced a package of so-called civil service reforms on behalf of the Bush Administration in the form of two bills, S.1612 and S.1613 which together are referred to as the Freedom to Manage Act, and the Managerial Flexibility Act. The latter includes a proposal which would have a dramatic impact on agency budgets, placing enormous new budget responsibility for future costs of providing FEHBP coverage to federal retirees. Today, FEHBP retiree health insurance costs are mandatory costs paid centrally from a fund set up for that purpose out of OPM. Under the legislation, agencies would have to set aside funds from their current salary accounts money from discretionary spending authority to cover the estimated present value of the cost of providing FEHBP coverage for each worker on the payroll when they retire. While there is no way to project what retiree health care costs under FEHBP will be for the current workforce, each year an estimate will have to

be made. And the estimated costs will come right out of regular agency discretionary spending for personnel costs. No extra funding to cover these new costs will be provided. It is important to note that this proposal is not a proposal to eliminate or even to reduce retiree FEHBP coverage yet. But it sets the stage for cuts or elimination by making the costs of this benefit a huge discretionary budget item for agencies. This is in spite of the fact that the accounting shift by itself will not even have any impact whatsoever on the actual cost to the government of providing the benefit. It merely shifts costs to agencies discretionary accounts, and will force them to cut other spending to accommodate it if extra annual discretionary budget authority is not provided to agencies to cover it. AFGE is opposing S.1612 and S.1613 not only because of the threat to retiree FEHBP coverage this proposal represents, but also because both bills contain numerous other provisions dangerous to federal employees (see AFGE Civil Service Reform Issue Paper for further information about these bills). AFGE s Legislative Solution At the same time that the Bush administration prepares to cut health insurance benefits for federal employees, the General Accounting Office, the Department of Defense, and many other government-related organizations from AFGE to the Council for Excellence in Government to Senior Executives Association have shown that the federal government must take some bold steps to recruit a new generation of federal employees with the requisite skills and commitment to carry out the work of federal agencies and programs. What GAO has called a human capital crisis is the confluence of several important phenomena: The impending retirement of half of the federal workforce, the reluctance of employees with important training and experience in federal agencies to resist more lucrative compensation in either the private sector or state and local government, and the relentless contracting out of government work which has eliminated hundreds of thousands of what would have been career jobs in the federal sector. Contracting out has meant that a whole generation of federal workers has lost the opportunity to work its way up and maintain institutional knowledge in federal agency work. The GAO s Comptroller General David Walker identifies the culprit as a twodecade insistence upon viewing federal employees as a cost to be cut rather than an asset to be cultivated. The government s approach to health insurance in FEHBP amply illustrates his point. Rather than try to set an example for the private sector, or even to meet prevailing standards in large firms and state governments, the federal government has tried to get by on the cheap. Not only is the government s 72% contribution to FEHBP premiums too low to produce universal coverage for the federal workforce, it amounts to $1,100 less per

employee per year than other large employers pay in both the private and public sectors. Employees of the U.S. Postal Service bargain collectively over both wages and their employer s share of FEHBP health insurance benefits. Postal workers pay 15% of FEHBP premiums while the Postal Service pays 85%. The Federal Deposit Insurance Corporation (FDIC), a federal agency that regulates the banking industry, also negotiates with its employee union over health insurance and pays 85% of FEHBP premiums as well. In both cases, the employer does so not because of the overwhelming power of the union, but because it is a best practices business decision to do so. Simply put, employers who fail to pay an adequate or fair share of health insurance premiums are the ones facing human capital crises, and those who pay their fair share do not. The time has come for the federal government to improve its funding of FEHBP, and provide federal employees with a better premium split. AFGE has long supported reforms that would allow the government to use the size of FEHBP, and its potential leverage over the insurance and pharmaceutical industries to produce savings which would render FEHBP more affordable for federal employees. For years, cost shifting onto federal employees has been the government s only response to out-of-control premium increases. Forcing employees to shoulder a higher share of FEHBP costs has been justified as producing an incentive to be more diligent in restricting utilization and lowering costs. What s good for the goose is good for the gander. With the government shouldering a higher portion of FEHBP s costs, perhaps OPM and OMB will be motivated to do more than rubber-stamp the demands of these politically powerful industries. Representative Steny Hoyer (D-Maryland) has introduced H.R. 1307, a bill which would change the financing formula for FEHBP so that agencies would pay 80% of the weighted average of premiums, with a maximum of 83% of any given plan. This legislation would improve the affordability of FEHBP immensely. The current average contribution is 72% with a maximum of 75%, and moving to an average of 80% with a maximum of 83% would open the door to health insurance to many of the 250,000 uninsured federal workers who cannot afford coverage at today s rates. This bill is an important attempt to make FEHBP more affordable for federal workers and their families. It is also a smart response to the government s much-discussed human capital crisis. Closing the gap between the federal government and other employers in both the private and public sectors in the area of health insurance benefits would go a long way toward improving prospects for recruiting and retaining the next generation of federal employees.

Conclusion The legislation introduced by Representative Hoyer which improves the FEHBP financing formula to make the government s own group health insurance program the most efficient means of delivering health care coverage more affordable and more accessible is an important step Congress should take to respond to the fact that FEHBP is increasingly unaffordable to federal employees and their families. In addition, AFGE will continue to pursue an opportunity to have a direct role representing federal employees in the annual negotiations with FEHBP carriers regarding coverage and premiums. We will also continue to seek structural reforms that take aim at a major cause of premium inflation prescription drug prices. In 2002, AFGE urges Congress to take the high road, and pass legislation which will improve FEHBP affordability with an 80-20 financing split.