Rising Rates

ne day in early September, Office of Personnel Management Director Janice Lachance was stopped outside the Oval Office by one of President Clinton's personal guards. The Secret Service agent wasn't challenging her right to be there-she was on her way out of a White House event on health insurance reform-he simply had a question about his insurance.

"I apologize, I know I should just call somebody in your office, but I wanted to ask you something," the agent said, according to Lachance. "My family and the other agents are all desperate for dental benefits. Are we going to get some for next year?"

"I had to tell him no," says Lachance.

Several weeks later Lachance had more bad news for that agent and the millions of other participants in the Federal Employees Health Benefits Program (FEHBP): Premium rates for calendar year 2000 would rise substantially for the third straight year, up an average of 9.3 percent. And more than 40 more plans were dropping out of the program, following a loss of more than 60 plans in 1999.

The FEHBP is by far the largest employer-sponsored health insurance program in the country, covering nearly 9 million federal and postal employees, retirees, survivors, spouses and dependent family members. The program, which will include 13 fee-for-service plans and nearly 300 managed care organizations next year, often is cited as a model combination of competition and control. The FEHBP has been touted as a potential blueprint for Medicare reform, and a test is under way to allow military retirees who lack health insurance coverage into the program. Politicians of both parties-most recently Democratic presidential candidate Bill Bradley-have proposed using the FEHBP as a vehicle to cover the uninsured.

But as the recent rate increases and plan dropouts show, the FEHBP is experiencing the same pressures as other large health insurance plans. Its participant pool is aging quickly and new benefits are being added virtually every year, translating into more demand for health care and higher premiums.

The annual FEHBP open season-this year running from Nov. 8 to Dec. 13-allows enrollees to change plans or levels of coverage. If past patterns hold, there will be a net switch to less costly coverage. But that will not change the forces driving premiums upward. Proposals are arising to revise the managed competition design of FEHBP, with some interests saying that more management is needed and others saying that more competition is the answer. But all sides agree on one thing: Further premium increases are inevitable if something isn't done.

"At this rate, we're not going to be able to keep this as an affordable program," says Lachance.

External Forces

The FEHBP cost hikes mirror increases in large plans in both the private sector and other levels of government. Cost control measures imposed in recent years have helped hold down inflation in some areas, but not enough to offset growth in others.

For example, in 1981, 52 percent of total claims paid by FEHBP's fee-for-service plans went to cover inpatient hospital care. In 1998, just 22 percent did. Payments for inpatient hospital surgery went down from 11 percent of total claims in 1981 to just 3.5 percent last year. Meanwhile, the percentage of claims paid that went for outpatient benefits has risen steadily.

Even more significantly, payments for prescription drugs have climbed from just 4 percent of total claims in 1981 to 24 percent in 1998. That reflects a national trend in which health plans' drug costs are rising at about 20 percent a year, according to an April 1999 report by the Employee Benefit Research Institute.

Several factors are at work in the rising prescription drug costs. Drugs more often are being used as treatments for conditions that otherwise might require more expensive alternatives, such as chemotherapy or even surgery. Newer drugs are more expensive than the ones they replace. Loosening of rules restricting direct advertising of drugs to consumers has increased demand, as has the emergence of "lifestyle" drugs such as Viagra.

A basic principle of health care is that while younger people generally use prescription drugs only for acute episodes of illness, older people are more likely to be on maintenance programs for high cholesterol and other conditions. Within FEHBP, OPM says the average prescription drug expense for an enrollee aged 45 to 49 is about $400 a year, but for people aged 65 to 69 it's three times as much. Older people are more likely to consume other health services as well.

Such factors are having a major effect on the FEHBP because the federal workforce is aging. Restrictions on federal hiring in recent years have boosted the average age of a federal employee to about 45. During the downsizing push, thousands of older workers took early retirement, but they and their families remained eligible for FEHBP coverage, unlike workers in many private health plans.

"If this group mirrored, for example, Microsoft, I don't imagine we would have near the cost pressures," says Steve Gammarino, senior vice president and program manager for FEHBP plans at Blue Cross/Blue Shield Association, the largest FEHBP plan. "But this group doesn't mirror Microsoft. It mirrors a group that hasn't grown since Jimmy Carter was put in office. Restrictions on growth have pretty much resulted in a stagnant, aging population."

"If we were insuring the FEHBP work force of the 1970s today, even with the prices and the technology, we wouldn't be paying what we're paying for prescription drugs," agrees Tom DeYulia, group vice-president for government relations at CNA, which underwrites the Mail Handlers plan, the second-largest FEHBP plan.

But Bill Smith, director of retirement benefits for the National Association of Retired Federal Employees, notes that when retirees hit age 65, Medicare becomes the primary payer in almost all cases and FEHBP acts mainly to fill in gaps in coverage for federal retirees. "I'm not sure the aging population really has a dramatic impact," Smith says. "It's obvious that the older population would use more prescriptions and more services, for example. But with that Medicare primary coverage feature there, a lot of that gets charged to Medicare."

But representatives of the health plans note that while the retiree contingent of FEHBP has been growing rapidly, the average age of all FEHBP enrollees in 1998 was 58-well under the age at which Medicare kicks in.

"As long as you've got an aging active workforce and you have a tremendous number of annuitants that are 55 to 65 and not Medicare-eligible, you're going to have a difficult time keeping premium increases down," says DeYulia, who was staff director of the House Post Office and Civil Service Committee from 1983 to 1989.

Another factor driving recent premium increases is that plans in general no longer are drawing down their financial reserves as they did in previous years to dampen premium increases. The earlier drawdowns, coupled with competitive and political pressures on plans, are credited with helping keep FEHBP premiums relatively flat in the mid-1990s.

Additionally, experts say, FEHBP enrollees tend to be educated consumers of health care, using their coverage to their maximum benefit. And in health care, the educated choice is not always the least expensive choice. In fact, it's often the most expensive choice-for example, finding the best surgeon to perform an operation or the leading expert to treat a child's serious illness.

FEHBP plans have taken various steps to control costs, such as requiring enrollees to obtain pre-admission certification before hospital stays. They have also tried to steer enrollees into less expensive options by creating financial incentives to stay within networks of physicians and hospitals that give the plans discounts on costs. But plans say they have only so much leeway, given the government's controls.

Internal Changes

Practically every year, new requirements are added to the FEHBP in the annual "call letter" in which OPM tells carriers what it wants covered and begins negotiating with them over premiums for the upcoming year. By OPM's count, there have been 17 significant mandates since 1992, some of them building on previous ones.

"We have a system that we can keep adding features as the science warrants or as the industry warrants," says Lachance. "I'm not going to sit back and deny federal employees [a benefit] if the science has advanced to the point that they should have that and it's beneficial for them. I'm always going to err on the side of adding benefits as either the science or the state of the industry or the economy warrants."

Although OPM specifies the requirements, they often are initiated, or at least actively encouraged, from outside the agency. Members of both parties and both chambers in Congress have been instrumental in adding benefits through the 1990s, including prostate cancer screening, bone-marrow transplants for treating breast cancer and fuller coverage for contraceptives. Meanwhile, the White House has pushed the program's patients' rights provisions and expanded mental health benefits.

"Every one of those benefits is basically a seed for inflationary growth," says George Nesterczuk, staff director of the House Government Reform Subcommittee on the Civil Service, who is quick to acknowledge Congress' role in adding mandates. "The problem is the way the FEHBP has been managed in the last several years. We've been planting more and more of those seeds through mandates that OPM has imposed on all plans," he says. "Any one benefit in the first year it's offered may be pennies on the dollar. But once people get used to it and start taking advantage of it, it grows in its utilization. We're seeing clearly a greater utilization of the benefits."

OPM officials don't even like to use the word "mandate," saying that one person's unnecessary cost is another person's vitally needed coverage. But semantics aside, they say new requirements for coverage add relatively little to the cost of the program. By their estimate, which they believe is high, the mandates of the 1990s account for only about $330 million of the $18 billion in enrollee and government premium costs in 1999.

In most cases, OPM officials say, carriers did not even seek higher premiums to cover the costs of new requirements. The main exception was the bone-marrow transplant procedure, which is by far the most expensive of the recent mandates, at an estimated annual cost of $120 million. Some plans also made minor adjustments for the 1999 addition of patients' rights protections, whose cost OPM estimates at $3.8 million a year.

Cost issues aside, questions have arisen of whether the mandates have changed the very nature of the FEHBP. "The program has been converted from a health insurance program to pay for unanticipated expensive health treatments to one in which it's almost become, like many health programs, prepaid health care," says DeYulia. The FEHBP "was initiated as a private individual choice competitive model," says Gammarino. "You wanted a number of competitors and you wanted them to provide choice. If you mandate and restrict, which the government is continuing to do, then you reduce choice of what's available out there. I think that's problematic going forward, because then we all look like vanilla."

"Nothing could be farther from the truth. This is not a vanilla program," replies an OPM official. "We have worked very hard, particularly over the last 10 years, to make sure that the medical benefits offered in this program by every plan are comprehensive and are designed to cover the most frequently occurring needs that people are going to have." OPM officials stress that the FEHBP's purpose is not to create a perfectly open market for health care competition, but to provide an important element of the government's overall compensation package. OPM also believes that having benefit packages that are too different from each other runs the risk of "adverse selection," in which enrollees with certain shared traits concentrate in a certain plan because of its low cost or attractive features. That effect-in particular a high percentage of older enrollees drawn to generous hospital, home care and other benefits-was a key reason that Aetna withdrew from the FEHBP in 1989.

The withdrawal of Aetna, at the time the fifth-largest plan, turned out to be the first of an exodus that later saw departures of other national plans, including several sponsored by employee organizations. But the greatest number of defections have been among the health maintenance organizations, which flocked to the program in the 1980s and early 1990s. The dropouts among HMOs generally affect relatively few enrollees-the plans that are leaving this year, for example, have an average of only 1,000 people-but nevertheless the House Civil Service Subcommittee has asked the General Accounting Office to report on the cause. OPM is looking into it too, although officials say they think the plans are leaving for their own internal business reasons and not because of the FEHBP's design or management. In most cases, the plans found they could not compete effectively for enrollees. Other dropouts were due to mergers of insurers, officials say.

"I think you still have enough health plans in there to have good competition. But you have a lot of churning in that program," says Paul Fronstin, a senior research associate at the Employee Benefit Research Institute. "It seems like there's always some kind of adverse selection going on because of the choices people have.

"People keep changing health plans every single year based on price, as opposed to quality. People change based on price because most people are healthy. So you have more flexibility there and what the health plans wind up doing is competing for the healthy people."

Says Lachance, "We think that fundamentally the 9 million people we represent have choices, they all have options no matter where they live in the country. We're comfortable that people have the choices they need to meet their requirements for themselves and their families."

Less Management or More?

Still, plan dropouts have caused concern that FEHBP is becoming less internally competitive, potentially reducing enrollee choice and contributing to higher premiums. The program "is much less competitive today than it was 15, 18 years ago," says Nesterczuk. "What would help the FEHBP tremendously would be to allow the carriers to start modifying their plans to try to compete with each other for greater market share."

"What really needs to happen in the FEHBP is less control by OPM and I say that as a guy who ran the program at OPM," agrees Jim Morrison, who was OPM associate director in charge of FEHBP from 1981 to 1987. He is now president of Morrison Associates, a public relations and consulting firm whose primary account is lobbying for Blue Cross/Blue Shield on the FEHBP program. "I now see it from a different perspective and I see this attempt to micromanage, to provide politically attractive benefits," he says. "This program is becoming a poster child for both sides of the aisle. The conservatives tout it because of the free market aspect and the Clinton administration uses it as a political football."

Advocates of a more open FEHBP market believe that with more freedom, carriers could design lower-cost plans. They might drop some current benefits-possibly adding in others, possibly not-or they might try to hold down premiums through higher deductibles and co-payments. Bills pending in Congress would allow FEHBP to include plans based on "medical savings accounts," featuring very high deductibles and very low premiums, coupled with tax-favored accounts to help enrollees pay out-of-pocket costs.

OPM says it wants to avoid creating niche programs. "I don't know that I want somebody coming in and marketing to the single 30-something healthy person who doesn't smoke and works out every day in the gym," says Lachance. "Somebody's going to take that plan who probably shouldn't and I think we have to be really careful about that. We have to make sure that people will be protected when unforeseen things happen to them."

Instead, OPM is considering how the government could get more leverage from having such a large pool of participants. It currently is focusing on areas that are not part of the basic comprehensive package, such as dental and vision care. Officials also see the potential for lowering the costs of prescription drugs, but such an effort seems farther down the road.

Exactly how the new approaches would work is still under discussion, but it could involve the government negotiating directly with providers for certain benefits. "I think if we go out in the private marketplace with 9 million customers and ask, what can you do for us, we're probably going to come up with a benefit that is both needed and affordable and can be a model for other employers. There's a way for us to use this buying power," Lachance says.

Some employee representatives favor such a move. Bobby L. Harnage, president of the American Federation of Government Employees, says, "If you really wanted competition, then you would design six or eight plans, enough to give federal employees the flexibility to go shopping for what they need and they can afford. You would put them on the table and say, 'Now, providers, bid on these. Low bidder gets it.' That would be true competition."

However, any such changes would require legislation, which would be difficult to move, at least in he current Congress. There's skepticism that the government could manage such an effort well or could get a better deal from providers than the insurance carriers now get.

"There is no way that if the government tries to direct contract it's going to bring prices down. That's just a blueprint for failure. That's the Medicare model, which is out of control," says Morrison. "This is not a question of more volume. You could set a price by legislative or administrative fiat. But what they don't seem to understand is that you can always legislate the same price but you can't ever legislate the lowest price."

Even if the program were deregulated, it's questionable how much more variety of coverage the carriers would create. A carrier that voluntarily dropped a benefit could lose enrollees to another that retained it. It's much easier to get a benefit into the program than out of it.

"Which benefits do you not want to cover?" asks Robert Levi, director of government relations for the National Association of Postmasters of the United States and a former House Compensation and Benefits Subcommittee staff member. "I don't know of anyone who's going to oppose making sure that FEHBP covers routine vaccines for kids. Prostate cancer screenings, mammography-all politically popular. Does it increase costs? Yes, but I think that's a cost that we need to pay to give adequate health care coverage to beneficiaries.

"You have to get down to what is health care insurance for. It's to insure you against the risk of disease. That's a necessity but it also does not come cheap."

Eric Yoder is a Washington-based journalist with 18 years of experience covering the government.