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Akaka Spotlights Rising Federal Employee Insurance Premiums

By John Reichard, CQ HealthBeat Editor

May 18, 2007 -- Sen. Daniel K. Akaka, chairman of a Senate Homeland Security and Governmental Affairs subcommittee, held a hearing Friday to call attention to rising health insurance premiums paid by federal employees and retirees—a surprising choice of topic, perhaps, given that those premiums rose only 1.8 percent in 2007.

But the Hawaii Democrat noted at the Oversight of Government Management Subcommittee hearing that the growth was that low in large part because the Office of Personnel Management (OPM) dipped into reserve funds held by the Federal Employees Health Benefits Program (FEHBP) to hold down premium increases. Akaka also was critical of OPM for not applying for the subsidy employers can receive from the Medicare program if they continue to offer their retirees prescription drug coverage.

In his opening statement Akaka said, "Premium growth is a problem because it consistently outpaces the cost-of-living adjustments and average annual pay raise" received by federal employees.

If not for use of the reserve funds and a decision by insurers to offer less generous benefits in 2007, among other factors, premiums would have risen 9 percent on average rather than 1.8 percent, according to testimony by Government Accountability Office officials.

Six percentage points of the 9 percent hike that otherwise would have occurred stemmed from the rising cost and utilization of health care services, while the other 3 percentage points resulted from projected increases in the cost of prescription drugs.

FEHBP is closely watched nationally, not only because the eight million federal employees and retirees in the program make it the nation's largest employer-sponsored health plan, but also because its competitive marketplace is viewed as a model for taming health cost increases.

Although Akaka expressed concerns about rising premiums, GAO's analysis of the program did note that FEHBP's costs are growing more slowly than that of other employer-sponsored health plans. Based on a study completed by the auditing agency in December, GAO Representative John E. Dickens said, "We found that growth in average FEHBP premiums recently slowed from a peak of 12.9 percent for 2002 to 1.8 percent."

Dickens said that the subsidy employers can obtain from Medicare for offering prescription drug coverage to retirees would have lessened premium increases had OPM chosen to apply for it. He testified that the subsidy would have held average FEHBP premium growth in 2006 to 4 percent rather than the 6.4 percent that premiums actually grew.

Big plans with a large number of retirees might have seen a bigger impact on premiums had they received the subsidy, Dickens added. He said an executive with one large plan told the GAO that the subsidy would have lowered premium growth by up to 4 percentage points.

The 2003 Medicare overhaul law (PL 108-173) sought to stem the erosion in retiree prescription drug coverage by paying employers to continue those benefits. The subsidy averages about $670 per retiree in companies that receive it.

But Nancy H. Kichak, OPM's chief actuary, said that a federal review of whether to apply for the subsidy concluded that it would be inappropriate to do so.

"This review found no good rationale for the federal government to pay itself to continue providing prescription drug coverage to federal retirees, especially since OPM has no plans to eliminate this coverage," Kichak testified.

Alan G. Lopatin, legislative counsel for the 4.6 million-member National Active and Retired Federal Employees Association, said, "We are bewildered" by the decision not to take advantage of the subsidy. It doesn't make "street sense," he said. "We can't say that everything is being done to contain premium growth if more than $1 billion is left on the table every year."

"It is fair to say that other public and private employers who had no intention of reducing or ending their retiree drug benefits decided to apply for the payment anyway," Lopatin said.

Akaka said he was disappointed with OPM's decision not to pursue the subsidy. "I believe we all have a common goal to offer a range of comprehensive health care plans and ensure the lowest possible premiums," he said.

Akaka also questioned Kichak about another approach to holding down health costs: Giving OPM authority to negotiate directly with the drug industry over prescription drug costs. Kichak said OPM's evaluation of the issue showed that private insurers participating in FEHBP are effectively contracting with private pharmacy benefit managers to control rising drug costs. "I'm not looking for any more authority," she declared.

Lawmakers at the hearing also questioned witnesses about the impact of Health Savings Accounts on the affordability of health plans in FEHBP. Critics of "HSAs," which entail the use of high-deductible health plans, say their low premium charges will lure relatively healthy employees away from more traditional health plans relied on by older, sicker federal employees and retirees for affordable coverage.

"Less healthy enrollees avoid HSAs . . . because they could pay thousands of dollars in out-of-pocket costs," Lopatin testified. But as healthy enrollees leave and traditional plans come to be dominated by sicker, more costly enrollees, their premiums will rise and benefits will erode, he said. "Ultimately, this would be the death knell" for traditional plans, he said.

But Stephen Gammarino, senior vice president for national programs at the Blue Cross-Blue Shield Association, said of HSAs that, "materially, they haven't affected the [FEHB] program as a whole."

Lopatin agreed, noting that only 0.2 percent of FEHBP enrollees in 2006 were enrolled in an HSA or similar plan. But if "HSAs blossom" many federal workers would be at risking of losing affordable coverage, he said.

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