[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
FEHBP: OPM'S POLICY GUIDANCE FOR 2001
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE CIVIL SERVICE
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JUNE 13, 2000
__________
Serial No. 106-218
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
71-983 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
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Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on the Civil Service
JOE SCARBOROUGH, Florida, Chairman
ASA HUTCHINSON, Arkansas ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
JOHN L. MICA, Florida DC
DAN MILLER, Florida THOMAS H. ALLEN, Maine
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Garry Ewing, Staff Director
Jenifer Hemingway, Deputy Staff Director
Bethany Jenkins, Clerk
Tania Shand, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 13, 2000.................................... 1
Statement of:
Flynn, William ``Ed'', III, Director, Retirement and
Insurance Service, Office of Personnel Management.......... 5
Gammarino, Stephen W., senior vice president, Blue Cross/Blue
Shield Association; Bobby L. Harnage, Sr., national
president, American Federation of Government Employees,
AFL-CIO; and Scott Nystrom, adjunct scholar, the Mercatuus
Center at George Mason University.......................... 43
Letters, statements, etc., submitted for the record by:
Flynn, William ``Ed'', III, Director, Retirement and
Insurance Service, Office of Personnel Management
Information concerning per member costs.................. 28
Information concerning premium rate increases............ 26
Information concerning prescription drug costs........... 27
Prepared statement of.................................... 8
Gammarino, Stephen W., senior vice president, Blue Cross/Blue
Shield Association, prepared statement of.................. 46
Harnage, Bobby L., Sr., national president, American
Federation of Government Employees, AFL-CIO, prepared
statement of............................................... 61
Nystrom, Scott, adjunct scholar, the Mercatuus Center at
George Mason University, prepared statement of............. 81
Scarborough, Hon. Joe, a Representative in Congress from the
State of Florida:
Prepared statement of.................................... 3
Prepared statement of Colleen M. Kelley.................. 31
FEHBP: OPM'S POLICY GUIDANCE FOR 2001
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TUESDAY, JUNE 13, 2000
House of Representatives,
Subcommittee on the Civil Service,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:15 a.m., in
room 2154, Rayburn House Office Building, Hon. Joe Scarborough
(chairman of the subcommittee) presiding.
Present: Representatives Scarborough, Morella, Cummings,
and Norton.
Staff present: Garry Ewing, staff director; Jennifer
Hemingway, deputy staff director; Bethany Jenkins, clerk;
Earley Green, minority assistant clerk; and Tania Shand,
minority professional staff member.
Mr. Scarborough. The hearing will come to order.
I welcome everyone to this hearing and thank you for your
interest in the Federal Employees Health Benefits Program
[FEHBP].
One of the most important duties of this subcommittee is to
oversee this critical program. Approximately 9 million Federal
employees, retirees, and their families rely on FEHBP for
health care coverage. The program has been widely cited as a
model employer-sponsored health benefits program and even as a
model for reforming Medicare. The key to its success has been
the affordable premiums and consumer choice that results from
hundreds of health benefits plans competing for the business of
individual employees and retirees.
Even though it is an excellent program, the FEHBP, like all
health care plans today, faces serious challenges. Premiums
have risen dramatically over the past 3 years, and another
substantial increase seems imminent for 2001.
The purpose of today's hearing is to examine OPM's
administration of this critically important program. We will
examine the policies established in OPM's call letter for 2001,
as well as several ongoing matters.
I was disappointed to see in this year's call letter no
retreat from OPM's practice of continuing to impose mandates on
the FEHBP. In previous hearings, we have been warned that
mandates drive up premiums. Though each mandate looks
reasonable when considered in isolation, their cumulative
effect is to increase program costs and deprive consumers and
carriers of the flexibility to meet their needs while
controlling costs.
And once again, it appears that drug costs are major
contributors to rising health care costs. As anyone who reads
the newspapers knows, Congress is very concerned about rising
drug costs. This subcommittee is no less concerned. But before
either this subcommittee or this Congress rush to propose or
approve a solution, I strongly believe we must first develop a
complete understanding of the causes of this situation and the
impact of possible responses to it. We must follow the
Hippocratic oath and, ``First do no harm.'' We should not let
short-run pressures lead us to embrace approaches that will do
long-term harm to our employees and retirees by degrading the
quality of health care coverage under the FEHBP.
I now pass the mic over to my ranking member, Mr. Cummings.
[The prepared statement of Hon. Joe Scarborough follows:]
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Mr. Cummings. Thank you, Mr. Chairman. The subcommittee
convened a hearing on the administration policy guidance issue
in the Office of Personnel Management call letter. At the
hearing for the 2000 call letter, we addressed the impact of
President Clinton's executive memorandum mandating FEHBP
compliance with the Patient Bill of Rights and the application
of cost accounting standards to FEHBP contracts. While there
are many new issues to address at this hearing, a few are
reoccurring.
This year's call letter reflects President Clinton's
directive for mental health and substance abuse treatment
parity in the Federal Employees Health Benefits Program and, to
the maximum extent possible, a reduction in medical errors and
enhanced patient safety in the program.
Specifically, the 2001 call letter calls for health plans'
coverage for mental health and substance abuse to be identical
to traditional medical care deductibles, coinsurance, co-pays
and day and visit limitations. To reduce medical errors and
improve the quality of health care, FEHBP plans are required to
report to OPM on their patient safety initiative, to educate
and inform enrollees about safety, and to work with other
health care providers to improve patient safety programs.
I look forward to hearing testimony on both of these
initiatives. Rising premium and prescription drug costs are of
ongoing concern to the subcommittee. Last session I called for
hearings on this issue. Federal employees have endured dramatic
increases in their health care premiums for 3 straight years.
The 9.3 percent FEHBP premium increase for 2000 was preceded by
a 9.5 percent increase in 1999 and a 7.2 percent increase in
1998.
The increases in FEHBP premiums reflect what is occurring
throughout the health care marketplace which, among other
things, can be attributed to an aging population and an ever-
increasing prescription drug cost. Forty-one percent of postal
and nonpostal FEHBP enrollees are over the age of 61. Given the
aging Federal work force and the fact that older Americans are
the largest consumers of prescription drugs, the Federal
Government has a responsibility to all its employees to explore
any and all avenues that may contain premium and prescription
drug costs.
Finally, I understand that there is some controversy over
the application of cost accounting standards to FEHBP
contracts. Cost accounting standards are designed to increase
the uniformity and consistency for which cost accounting data
is supplied by contractors to the government for the purposes
of assisting in either negotiation, pricing, or administration
of contracts. CAS are applied to all contractors that performed
under negotiated cost-based pricing arrangements with the
Federal Government in order to ensure that costs are properly
allocated. Blue Cross and Blue Shield continues to raise
concerns about the difficulties of implementing cost accounting
standards on FEHBP plan contracts.
The American Federation of Government Employees believes
that FEHBP contracts should be subject to the standards so
agencies can ensure the accuracy of bills submitted by
contractors.
I am looking forward to testimony from all the witnesses on
all of these issues. I am particularly interested in your views
on how to maintain premium and prescription drug costs. Federal
employees are feeling the effects of these increased costs
every day. With that, Mr. Chairman, I thank you.
Mr. Scarborough. Thank you, Mr. Cummings. We have two
votes, but I think we have time to hear Mr. Flynn's testimony
so let me ask you, Mr. Flynn to come up. Mr. Flynn was
appointed as Associate Director for Retirement and Insurance at
the Office of Personnel Management in 1994. He directs the
Federal retirement systems, and the Federal Employees Health
Benefits Program and the group life insurance program, and in
1999 President Clinton recognized Mr. Flynn with a
distinguished senior executive award. He has been a frequent
witness before this subcommittee and we welcome you back here
today.
Let me ask you to rise so we can administer the oath.
[Witness sworn.]
Mr. Scarborough. Mr. Flynn you may begin your statement.
STATEMENT OF WILLIAM ``ED'' FLYNN III, DIRECTOR, RETIREMENT AND
INSURANCE SERVICE, OFFICE OF PERSONNEL MANAGEMENT
Mr. Flynn. Good morning, Mr. Chairman and Mr. Cummings. I
want to thank you for your invitation to be here today to
discuss our policy guidance to health plans participating in
the Federal Employees Health Benefits Program. We are pleased
to report that the Federal Employee Program continues to be a
model employer-based health benefits program that owes its
success to market competition and informed consumer choice. We
remain committed to providing access to high-quality,
affordable health coverage for Federal employees and retirees
and members of their families.
Our approach each year concentrates on desired outcomes,
leaving as much flexibility as possible for individual plans to
make specific proposals that will best serve their members.
Today I would like to discuss our major initiatives for
next year: mental health and substance abuse parity and
reducing medical errors and improving patient safety. At the
White House Conference on Mental Health last June, the
President directed OPM to achieve benefit parity for mental
health and substance abuse treatment in the Federal Employees
Health Benefits Program. Next year all plans will provide
coverage for clinically proven treatments for mental illness
and substance abuse in a manner identical to coverage for other
medical conditions. Deductibles, coinsurance, copayments and
day and visit limitations will parallel one another under
parity.
Based on research by the National Institute of Mental
Health and others, indicating a growing consensus on treatment
protocols and the effectiveness of managed care delivery
systems, we concluded that it is possible to expand access to
care in an affordable way.
A preliminary review of proposals for next year indicates
that plans will use networks of providers extensively to
deliver the parity benefit. Now, the degree of management
within those networks will vary from plan to plan, as is
typically the case. Most analysts familiar with the Federal
Employees Health Benefits Program assume that parity might
increase costs somewhere between 1 and 3 percent of the total
premium. We will know that with certainty when our negotiations
are concluded later this summer, but all of the evidence
suggests that we will be well under the upper level of that
range.
Late last year, the Institute of Medicine report on medical
errors riveted our attention on this topic. The President set a
goal for the Nation to reduce preventable medical errors by 50
percent over 5 years. We believe patient safety is a vital
issue demanding priority attention from all of us. We are not
imposing any unique requirements on health plans. We are,
however, requiring their support of effective strategies that
promote health care quality.
These efforts will not result in any cost increases this
year. We will require plans to advise us on error reduction
strategies they currently have in place and to describe their
future plans to strengthen their safety program and will
publicize this information to our members this fall. We have
asked plans to designate a person or an office to manage their
patient safety initiatives.
We are also encouraging plans to consider error reduction
strategies endorsed by others such as the Business Roundtable's
Leapfrog Group.
We stress the importance of working with providers and
others to implement systems that ensure patients receive
appropriate services in optimal settings and that providers who
employ sound practices are noted and rewarded.
Finally, in 2002 we will require all plans to begin seeking
accreditation from a nationally recognized organization that
has incorporated patient safety standards into its
accreditation requirements.
Now, the call letter also provided guidance on several
other issues, including sections on prescription drug benefits,
and coverage for high-dose chemotherapy and autologous bone
marrow transplants. The statement I have submitted for the
record covers each of these topics and several others and I
will be happy to answer any questions you may have about them.
Finally, the budget for next year assumes an average
premium increase of 8.7 percent. While useful for budget
planning purposes, the actual amount will not be known until
our negotiations have been completed at the end of the summer.
The trends that we described last year continue to affect our
program and those of other employers. While the summer's
negotiations will yield the final result, I am not optimistic
about the trends we continue to see. Last fall Director
Lachance said these premium increases were unacceptable--she
continues to feel that way--and that she intended to seek
amendments to the current law to counteract them.
We want the ability to set standards for health plan
participation that will promote health care quality and cost
effectiveness and we want authority to achieve economies and
efficiencies of scale by contracting directly for selected
benefits. A draft proposal to accomplish these objectives is
currently under development within the administration, and when
the internal clearance process is completed, we expect to
transmit it to the Congress for their consideration.
Mr. Chairman, that concludes my statement. I would be happy
to answer any questions that you may have.
Mr. Scarborough. Thank you, Mr. Flynn.
[The prepared statement of Mr. Flynn follows:]
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Mr. Scarborough. We will get back to you on those questions
after our two votes. We will stand in recess for approximately
15 minutes.
[Recess.]
Mr. Scarborough. While we are waiting for Mr. Cummings to
come back, Mr. Flynn, I will ask a few questions and then we
will give Mr. Cummings the same opportunity.
I wanted to ask you first of all about OPM proposing to
allow SAMBA to purchase prescription drugs for its mail order
program off a Federal supply schedule at a discount. What is
the status of SAMBA's access to the FSS for prescription drugs?
Mr. Flynn. I expect, Mr. Chairman, that we will have
resolved that completely within a matter of days. We do know
that we have now reached a framework of agreement under which
SAMBA will be able to access the Federal supply schedule for
prescription drugs for their mail order program. Details of
that are being worked out, but it would be a 2-year pilot
effort. We look forward to seeing the results of that and
whether or not the savings generated might be applicable to
other carriers in the FEHBP.
Mr. Scarborough. OK. So what is OPM's position regarding
plan-wide access to the Federal supply schedule?
Mr. Flynn. OPM's position is that we want to make sure that
we get maximum savings on the drugs that we purchase on behalf
of our members. Now, there are a variety of ways in which that
might be done. Access to the Federal supply schedule gives us
the opportunity to see some actual results in practice and to
make a judgment about what ought to be done for the future.
Mr. Scarborough. How much does the FEHBP program spend per
year on prescription drugs?
Mr. Flynn. In round numbers, it is $1 out of every $4. We
have a $20-billion-a-year program, which means $5 billion each
year goes toward prescription drugs.
Mr. Scarborough. OK. For the past 2 consecutive years the
law has exempted carrier contracts in the FEHBP from the
application of cost accounting standards, and I was wondering
is OPM currently devoting any resources or conducting any
activities aimed at implementing these standards?
Mr. Flynn. Well, Mr. Chairman, the activity that we have
been engaged in within OPM, with representatives of the
carriers, and with staff of the Cost Accounting Standards Board
has been an effort to look at the generic standards that the
board has created, and which are intended to apply to Federal
contracts above a certain threshold, and look for ways in
which, given their applicability to those Federal contracts,
they might be adapted for use in the Federal Employees Health
Benefits Program. That has been the focus of our effort, Mr.
Chairman.
Mr. Scarborough. Just for the record, I was talking to your
good friend, Mr. Mica, going over to the vote. He sends his
best. I don't know if he will make it here or not. He was
complaining about the continued rise every year in the cost of
the plan, and again he blamed the mandates for the increase.
What did you say the increase was this year, 8.7 percent?
Mr. Flynn. The 8.7 figure is what was included in the
budget projection, President's budget for fiscal year 2001.
Mr. Scarborough. What was it the year before that?
Mr. Flynn. Last year it was 9.3 percent, and I believe 9.5
the year before that. We will check that and make sure that we
have it correct for the record.
[The information referred to follows:]
This year's average premium rate increase of 9.3 percent
follows a 9.5 percent increase in 1999 and a 7.2 percent
increase in 1998.
Mr. Scarborough. Over the past 3 years, that cost has
skyrocketed, close to 30 percent. Now, Mr. Mica, and I think
myself and others, might say that the mandates which have been
added add to that. What is your best explanation why you
believe that the cost of this plan has skyrocketed close to 30
percent over just the past 3 years? That certainly is a burden,
obviously, on the working men and women that take part in the
program.
Mr. Flynn. Mr. Chairman, just as you and others find it
unacceptable, we do as well. Emphatically so.
Let me say to you that mandates, although I would tend to
characterize them as objectives of ours as a purchaser of
health benefits for an employed and retired population, have
done very, very little to impact those increases over the past
3 years. In fact, the increases have come about primarily from
three areas. First, the aging of the Federal population that is
covered, and you'll hear reference to this in testimony today
from the Blue Cross and Blue Shield Association.
Second, the combined impact of medical technology and
utilization. And I include in that increases in the cost of
prescription drugs. They have been running probably, on
average, 20 percent a year for the past 3 or 4 years and, as I
mentioned a minute ago, now account for $1 in every $4 in the
program. And third, medical inflation in general. What we are
experiencing in this program, while I don't want to resort to
it as an excuse, is what other employers are facing as well.
That is why we believe that it is so important to undertake
some initiatives to get some handle on these premium increases
so we can at least mitigate the rise and maintain an affordable
program for the almost 9 million people who participate in it.
Mr. Scarborough. I am not being combative here, I am just
curious, would you think--and obviously you guys should know
this, you should be looking into it--but have costs for private
insurance programs across the industry shot up by 30 percent
over the past 3 years?
Mr. Flynn. Costs for private employer-sponsored programs
are shooting up dramatically. It is very difficult, because you
have a lot of apples and oranges and pomegranates and pears out
there, to try and compare that to the Federal Employees Health
Benefits Program and its statutory structure. But as a general
rule, and I think you will hear it in testimony from others
this morning, yes, they are.
Mr. Scarborough. Are they going up at that rate?
Mr. Flynn. They are going up at similar rates, Mr.
Chairman.
Mr. Scarborough. Mr. Cummings.
Mr. Cummings. Mr. Flynn, I want to go back to the
chairman's question with regard to the prescription drugs. You
said, now $1 out of every $4?
Mr. Flynn. That's correct, Mr. Cummings.
Mr. Cummings. Has that percentage changed? In other words,
3 or 4 years, were we still spending $1 out of $4?
Mr. Flynn. That percentage has changed dramatically over
the years, over the history of this program. There was a time
when prescription drugs accounted for 3 to 5 percent of the
total cost of the program. They now account for 25 percent.
That was in the early eighties. I will check that for the
record, but I believe that is pretty close.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T1983.019
Mr. Flynn. Now, costs have increased for a lot of reasons.
I think it is important to say that prescription drugs are an
important component today in the healthiness of people who
participate in this program and other health insurance
programs. So they have increased in terms of cost and in terms
of their proportion, but they have also had a very good impact
in terms of the health of the population covered.
Nonetheless, prescription drugs are the fastest growing
component of the health care equation today, and they challenge
us to look for ways in which we can do appropriate actions to
mitigate those rises because they are making premiums
unaffordable for some people.
Mr. Cummings. It seems to me that we do have a major
problem, because when you look at the fact that you've got--
retirees get basically the same benefit, right?
Mr. Flynn. Yes, sir.
Mr. Cummings. So in other words, the government pays the
same percentage?
Mr. Flynn. Retirees participate fully in the FEHBP. When
they turn 65, Medicare becomes their primary insurer and the
FEHBP becomes the secondary; but the package of benefits is the
same.
Mr. Cummings. So you have a situation where people are
retiring, they are getting older and it makes sense for them to
stay in the program. With the way medical costs are these days,
I don't see--I guess you have about 99 percent people staying
in the FEHBP program?
Mr. Flynn. Not quite that high, Mr. Cummings; 85 percent.
Mr. Cummings. That is still high. So you have an older
population. You have got a population that also probably needs
prescription drugs more. Have you looked at what point--is
there a line where, say, people if they get over 65--have you
ever done any analysis like that? Where you see where a large
chunk of that prescription drug money is spent? Is there a
certain age, or is it spread throughout? I would guess that it
would be more for older people.
Mr. Flynn. You are correct. We have seen presentations from
our health plans. We have looked at data and our actuaries have
analyzed that as well. There is a curve and the curve begins to
increase at a more rapid rate as one ages. It is just a natural
function of the aging process, yes, sir.
Where that line is particularly, I couldn't say; but I
would certainly be glad to come back to you with some
information that might shed some light on that.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T1983.020
Mr. Cummings. I was talking to Mr. Mica, too, and he was
talking about this whole thing of mandated benefits, and I
think the chairman talked about it briefly. But when you
answered the question, you said it is not the mandated
benefits?
Mr. Flynn. No, sir.
Mr. Cummings. So when I add up everything that we have
talked about in the last 4 minutes, how do you bring the
premiums down? It seems like it is a rocket going up and to try
to push it back down is going to be kind of difficult because
it seems like it is something that is already in motion.
Mr. Flynn. I don't think that you bring premiums down. I
don't think that is the case. I think what we have to find a
way to do is make the rate of increase in premiums more
moderate through the use of things that other private employer-
sponsored health plans have done. It has been demonstrated that
plans that offer high quality do so cost effectively. Let's
look for ways to use the purchasing power of the program at
large as opposed to broken up into 280 or 300 parts to get the
best value possible for the Federal employees and participants.
Those are tools that can bring the rate of increase down.
But consider we are a very large health program--we have 9
million people. But, when you figure there are 250 million
people in the United States we represent only 3 to 4 percent of
health care consumers. So, we are part of the equation but we
are not the driving part of the equation.
Mr. Cummings. Mr. Harnage, the president of the American
Federation of Government Employees, he is going to get up here
in a few minutes and he is going to be concerned about the role
that the union folks have played in this process. If you will
recall, the last hearing we talked about the role of the union.
And if I remember correctly, you said that you welcomed their
participation because you thought it was important. I am just
wondering, has OPM taken to include employee organizations in
the benefit design and the administration of FEHBP?
Mr. Flynn. Mr. Cummings, I also recall that testimony from
last year, and we have taken a number of steps to bring, not
only AFGE and some of the other unions that represent employees
which participate in this program, but the National Association
of Retired Federal Employees as well, into our discussions
about how we can make this program better. I think that we have
made an honest substantive effort for that to occur. I will let
Mr. Harnage speak for himself. I think he would like to see
even more, and I understand that.
I will do the best I can to make sure that their members
and others are involved as we move this program forward.
Mr. Cummings. Do you think that they have had any impact on
what you have done at all? I'm just curious.
Mr. Flynn. They and others have done two things that I
think are helpful. They have kept us focused on the issue of
the impact of rising health care costs on Federal employees and
the ability of the Government to get its work done. That is a
very important thing to keep right in front of us.
The second thing that they have done is they have come to
us with ideas for helping to mitigate the impact of this on
Federal employees. This October 1 we will implement a premium
conversion plan for Federal employees across government. That
means that they will be able to pay their share of the health
insurance premium with pretax dollars and the effect of that
will be to put an average $434 into the pocket of every Federal
employee who participates in the Federal Employees Health
Benefits Program. That came to us from those organizations and
will have that kind of an impact. So yes, they have been very
helpful.
Mr. Cummings. Finally, sometimes when we sit in these
hearings we wonder how much people do talk; in other words,
people who need to talk, like you and Mr. Harnage and others.
It sounds like you are having some good discussions. Is there
any--and so I am going to do a little facilitating here. Is
there anything that they can do that would help you? It is in
their interest to help you help their employees. Is there
anything that they can do that you can think of that they are
not doing that can help you in trying to accomplish all of the
things that you just talked about?
Mr. Flynn. I certainly can't speak for the organizations.
The point that I want to make is--and I appreciate your efforts
at facilitation--I want to be regularly at the table with them
so that as they have ideas we look at ways in which we can make
them come about when we and they agree that they make sense and
can have a beneficial impact on this program. I will pledge
that we will continue that, but I don't have anything specific
in mind right now.
Mr. Cummings. I just wanted to make sure that they are
doing their piece. It is one thing for Mr. Harnage to come up
here and say things are not working out. I want to make sure if
you have something to say about him, you might as well say it
while you are a few feet apart. I wouldn't want you to leave
and----
Mr. Flynn. No, Mr. Cummings, believe me, we appreciate not
only in this area but in all areas, the advice and suggestions
that AFGE and others bring to the table.
Mr. Scarborough. Thank you, Mr. Cummings. And Mr. Cummings
is available for marriage counseling and mediation for any
legal cases in the District of Columbia and Maryland after
hours.
Connie, if you can give us an opening statement--and I
would like to ask unanimous consent that the statement of
Colleen Kelley, president of the National Treasury Employees
Union be included as part of the record.
[The prepared statement of Ms. Kelley follows:]
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Mrs. Morella. Thank you, Mr. Chairman. I appreciate your
holding this oversight hearing to discuss the administration of
the Federal Employees Health Benefits Program. I know that all
members of this subcommittee will concur that the best possible
health care for our Federal employees is among our highest
priorities.
This year's policy guidelines as outlined by OPM emphasized
several initiatives that I believe are essential to maintaining
and improving the FEHBP. The first mandate by OPM is to
stipulate that mental health and substance abuse parity be
achieved by the 2001 contract year. I want to applaud this
initiative and OPM's very direct involvement in crafting it. In
fact, I recently held a meeting with representatives of the
Washington Psychiatric Society, SAMHSA, the AMA, IMH, the
American Psychological Association, and OPM. And Mr. Flynn was
there and his colleagues to discuss the implementation plan.
The goal of the meeting was to ensure that parity is
incorporated in the most effective and seamless way possible
and that all of the participants--they felt while certain
changes should be made, the overall plan was sound.
In addition, I want to applaud the decision by OPM to
demand patient safety initiatives to reduce medical errors. The
data from the November Institute of Medicine report showed that
anywhere between 44,000 and 98,000 lives are lost each year to
medical errors. This number is obscenely high. I know that
several Members of Congress have drafted bills to remedy the
situation, myself included, and I champion any efforts to
diminish the accidental loss of lives in our hospitals and with
our health care providers.
There are two areas that I am concerned about and that I am
pleased that this committee will address. The first one was
brought up last year, involving the premium increases in the
FEHBP, and some discussion has ensued on that this morning. As
I noted last May, premiums in private employer-sponsored health
plans have risen at a slower rate in the past, and we want to
make sure that our Federal employees are not paying
unnecessarily high premiums, and I note, Mr. Flynn, that you
said it is about the same. I think it is maybe a little higher.
I also want to ensure that the autologous bone marrow
transplants for breast cancer are not hindering use of more
effective breast cancer treatments. I know that OPM's goal is
to bring about the most positive outcome for enrollees and I
hope that this hearing will allow us to come to an agreement on
how to best treat the most serious episodes of breast cancer.
Those are some of the points that I wanted to bring out.
In the line of questioning, if I could have permission to
ask just a couple of questions, one has to do with the
prescription drugs, which has been mentioned, and it is
something that we hear about all the time, Members of Congress
taking constituents over to Canada to buy those prescription
drugs, and we look to the Federal Government to being a real
model.
I am curious; has OPM looked into doing some of that hard
negotiating that has been done through the Veterans
Administration for the very best price of prescription drugs
and some of our other Federal entities? Are we doing anything
in that regard, Mr. Flynn?
Mr. Flynn. Mrs. Morella, I mentioned just before you came
in, we will have our SAMBA health plan gaining access to the
VA's prescription drug schedule for a pilot period in an
evaluation to determine whether something like this would make
sense for the balance of the plans that participate in the
Federal Employees Health Benefits Program.
There are a number of other things that we and our
participating health plans are doing to try to attack, confront
directly, the issue of the rising costs of prescription drugs.
We have undertaken a number of cost-containment initiatives in
past years. The institution of pharmacy benefit management
programs and the encouragement to use generic drugs when they
are therapeutically equivalent to brand names are examples of
discounts that currently exist on prescription drugs in the
program. Clearly we need to do more.
You will hear also this morning from the Blue Cross and
Blue Shield Association about some of the things that they have
underway. Those are the kinds of things that we think are
necessary. We want to always be careful, however, as we seek to
control these costs, that we don't do so in ways that simply
move or shift costs onto participants in the plan who have no
other real alternatives. So it is a balancing that takes place
here.
But these are the kinds of things that have been done. They
are the kinds of things that are underway now. And we are
looking at ways in which we can use the purchasing power of
this program to get the best discounts and prices possible.
Mrs. Morella. I hope that you will share that with us
because I think it is important that we are focusing on this,
and again the Federal Government is considered to be exemplary
in this regard.
I am curious, whatever statistics you discern with that 25
percent increase, whether it is people living longer and taking
more drugs, and maybe having more prescribed, maybe more money
going into research. I think it is kind of an interesting area
for us to pursue as much as we can.
My final question has to do with medical errors. As you
probably know, I have legislation in that would not mandate but
very strongly urge all health care providers to be involved
with a data base which would be confidential; the information
would not be subject to subpoena or discovery in any
administrative or civil proceeding. You discuss working with
networks to implement accountability systems. I know that you
don't necessarily want to mandate specific provisions for
reducing medical errors, but are you also concerned about the
lack of accountability--or that accountability systems could be
too punitive and prevent and discourage the reporting of
medical errors?
Mr. Flynn. Mrs. Morella, we don't want to do anything that
would be perceived to, or would in fact, drive reporting of
medical errors underground. And I think some of the kinds of
things that you've talked about in terms of the punitive
aspects may do that. This is a very important area when you
think of medical errors and how to deal with them. It is not an
area that is something that we mandate or control in the
Federal Employees Health Benefits Program--and if I can just
use that as a jump-off point to talk about our approach.
Our approach in this area was to recognize that this is an
issue that affects the entire health care system, and that if
we were to do things that are unique or that are very
prescriptive, we could actually thwart the ability to address
the serious issues of medical errors in a way that makes sense
across the entire system. So our approach was to say that what
we expect health plans to do is to cooperate in that national
effort and, as part of that cooperation, to give us information
that we can then in turn provide our participants, the Federal
employees, retirees and family members, to help them to choose
health plans. And that information then could be made available
to other health plan members conceivably.
But we didn't want to overlap any efforts that were going
on in other areas. For example, the National Quality Forum is
addressing this area. A number of groups I mentioned, such as
the Leapfrog Group of the Business Roundtable, are looking at
promoting computerized physician order entry systems for
prescription drugs, evidence-based hospital referrals for
certain kinds of procedures and intensive care specialists in
intensive care units. We think that these make sense and people
ought to know about them when they make choices about their
health care.
There is a requirement which will go into effect in 2002.
Beginning in that year, all Federal employee health plans need
to seek accreditation from a national organization which
incorporates patient safety standards into their accreditation
process, and that is where some of that accountability comes
in. We think that makes a lot of sense.
Mrs. Morella. The idea is to urge hospitals and health care
providers to report what their errors are and receive in turn
the incentive to be able to correct them in the future, and I
am glad that you are proceeding in that particular regard. I
know that there are a lot of companies that are coming up with
remedies. I saw one recently, a machine to help with
prescriptions, and I think it is an important issue. Thank you,
Mr. Chairman.
Mr. Scarborough. Thank you, Mr. Flynn. We certainly
appreciate your patience answering the questions and look
forward to seeing you again soon.
Mr. Flynn. Thank you.
Mr. Scarborough. I would like to call up the second panel.
We have Stephen Gammarino, Bobby Harnage, and Scott Nystrom.
Mr. Gammarino is senior vice president for the Blue Cross and
Blue Shield Association. He has extensive experience in health
care administration and is responsible for the planning and
direction of the Federal Employees Program, serving almost 4
million enrollees. Mr. Gammarino has been a frequent witness
before this committee on FEHBP issues and we certainly
appreciate his efforts.
Bobby Harnage is the National President of the American
Federation of Government Employees. AFGE represents more than
600,000 Federal and District of Columbia employees, and this is
Mr. Harnage's second appearance before this subcommittee and we
appreciate your time and efforts here and look forward to
hearing AFGE's views.
Scott Nystrom is an adjunct scholar at the Mercatus Center
at George Mason University. Dr. Nystrom served as a senior
policy adviser to the Bipartisan Commission on Entitlement and
Tax Reform chaired by Senators Bob Kerrey and John Danforth. He
has worked on the Hill as budget associate senior legislative
assistant at the House of Representatives and at the Office of
Personnel Management, analyzing health issues among others.
This is Dr. Nystrom's first appearance before the subcommittee
and we certainly welcome him also. If you all could stand I
will administer the oath.
[Witnesses sworn.]
Mr. Scarborough. We will begin with you, Mr. Gammarino.
STATEMENTS OF STEPHEN W. GAMMARINO, SENIOR VICE PRESIDENT, BLUE
CROSS/BLUE SHIELD ASSOCIATION; BOBBY L. HARNAGE, SR., NATIONAL
PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-
CIO; AND SCOTT NYSTROM, ADJUNCT SCHOLAR, THE MERCATUUS CENTER
AT GEORGE MASON UNIVERSITY
Mr. Gammarino. Mr. Chairman, good morning and thank you for
the opportunity to appear before you today to comment on the
Office of Personnel Management's policy and guidance for 2001.
What I would like to do is summarize my written testimony. I
would like to submit the testimony for the record.
In your letter of invitation, you requested our views on
how various proposals and recommendations contained in the 2001
call letter would affect the costs and quality of health care
coverage offered through the FEHBP and any other issues that
are important to Blue Cross and Blue Shield Service Benefit
Plan. In addition, you requested that I discuss efforts by Blue
Cross and Blue Shield to restrain prescription drug costs.
As a general rule, Blue Cross and Blue Shield Association
opposes Federal mandates and believes that they have a long-
term adverse effect on the ability to provide affordable health
care coverage. However, the level of impact can vary
significantly depending on the degree of flexibility afforded
the health plans.
My testimony today will focus on two major initiatives
prescribed in OPM's call letter: the first, achieving mental
health and substance abuse parity; and the second, improving
the quality of health care by reducing medical errors and
increasing patient safety.
Blue Cross and Blue Shield has worked closely with OPM to
develop and enhance the mental health substance abuse [MHSA]
benefits. We have appreciated OPM's ongoing involvement of the
carriers and leaders in the managed behavioral health care
field to better understand the implications of this enhanced
benefit for the program. In order to comply with this mandate
and control the benefit and administrative costs associated
with it, we are developing a benefit proposal that utilizes a
care management strategy. The Service Benefit Plan intends to
buildupon existing local Blue Cross and Blue Shield plans'
managed behavioral health networks. We are prepared to work
closely with the agency to ensure that enrollees use benefits
in the context of a care management strategy designed to
promote the appropriate use of those benefits.
Additionally, it is unlikely that we will know the true
cost of this benefit for 3 to 5 years as it will take time for
members and providers to understand the program and for the
inherent delivery patterns to change.
The second initiative is patient safety. Patient safety is
a critical and sensitive problem that demands the respect and
attention of all stakeholders. We support the President and the
agency's initiatives to reduce medical errors and increase
patient safety in all health care settings. However, it is
important to understand that it is the physician and the
hospital communities, not the local health plans, who must
devise the clinical strategies to address patient safety
concerns. The primary role of the local plan like the FEHBP
Blue Cross and Blue Shield must be to respond to physician and
hospital initiatives, and to then support their needs with our
own resources.
We are committed to working with providers, independent
accreditation agencies and others to implement patient safety
programs. Blue Cross and Blue Shield Service Benefit Plan has
developed and shared with OPM a number of initiatives that
focus on improving health quality and patient safety.
In the letter of invitation, the subcommittee also asked us
to focus on prescription drug cost trends and how prescription
drugs have contributed to the overall costs of health
insurance. Making drug coverage affordable to our members and
keeping premiums stable continues to be the one most difficult
challenging initiative facing our program.
Prescription drug cost trends continue to be nearly three
times greater than our other trends in other areas, and
currently our program spends about 30 percent of our premium
dollar associated with drugs. These cost trends continue to be
driven by the rapid development of new, expensive drug
therapies which substitute for less expensive existing
therapies, rising prices for existing drugs, and heightened
demand and utilization of prescription drugs fueled by the ever
expanding direct-to-consumer advertising.
It is important to realize that this program is dealing
with an aging population. The average member in the FEHBP is 54
years old. And the average member in the Blue Cross and Blue
Shield standard option is 60. Data has shown that the quantity
of medical resources and specifically prescription drugs
increases as individuals age.
It is also important to understand that these trends are
not dissimilar to those experienced industry-wide. In addition
to the Service Benefit Plan's numerous initiatives, we are also
focusing on a number of other areas from the Association's
perspective. As part of this effort to restrain prescription
drug costs, the Association, that is Blue Cross and Blue
Shield, is a founding member of the RxHealth Value Coalition, a
coalition of 30 consumer groups, private employers, purchasers,
providers, labor unions and others that seek to ensure credible
analysis is done to ensure that these drugs provide value to
the community.
In addition, we have also launched an independent not-for-
profit pharmacy evaluation program known as Rx Intelligence.
This is scheduled to become operational June 30. It will be an
independent company designed to alert employers, insurers, and
consumer groups to new drugs nearing regulatory approval. It
will provide quick analysis of these medicines once they are on
the market and conduct indepth reviews and cost benefit
analysis of these new and existing drugs.
Additionally, your letter asked that we address any other
important issues. We remain concerned about the
administration's continued efforts to impose cost accounting
standards on the FEHBP. Blue Cross and Blue Shield Association
has actively sought exemption for the past 2 years, after an
exhaustive analysis determined that the cost accounting
standards are fundamentally incompatible and inappropriate for
our health insurance system. Despite the clear will of Congress
and the overwhelming strength of the arguments against imposing
these standards, the administration continues to oppose this
exemption. Applying CAS will not only not add value to the
program, it would degrade the commercial capabilities on which
our plans' core business depend.
Therefore, as I have testified before, Blue Cross and Blue
Shield cannot sign any contract with the agency that contains
the CAS clause or otherwise seeks to implement these standards
which have been exempted by law.
In conclusion, the Federal Employees Health Benefits
Program is widely admired throughout the country as a model of
efficiency and effectiveness due to the private sector
competition and consumer choice. Blue Cross and Blue Shield is
very proud of the role that the Blue Cross and Blue Shield
plans have played in helping to make this program as successful
as it is today, and we look forward to finding ways to preserve
and improve the strength and stability of the program for
Federal workers and their family members. Thank you.
Mr. Scarborough. Thank you, Mr. Gammarino.
[The prepared statement of Mr. Gammarino follows:]
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Mr. Scarborough. Mr. Harnage, welcome back and we certainly
look forward to hearing your testimony.
Mr. Harnage. Mr. Chairman and subcommittee members, I have
submitted my written testimony and I ask that it be entered
into the record.
A year ago, this committee held a hearing to examine the
source of what was then a 2-year run-up in FEHBP premiums that
infuriated our Members and many members of the subcommittee.
Well, here we are again, 1 year later, and many millions of
dollars poorer, as premiums in FEHBP again rose by over 9
percent this year. Again, Federal workers are seeing their
hard-won pay raises eaten up by the health insurance premiums.
Since last year's hearing, OPM and AFGE have been engaged
in some dialog regarding the administration and pricing of
FEHBP, but this dialog has fallen far short of the relationship
we want. We still pay roughly a third of the $18 billion annual
cost of FEHBP, not counting the out-of-pocket copayments and
deductibles; yet OPM maintains that only it has the right to
make decisions on how the entire $20 billion is spent.
We contend that our $6 billion of financial responsibility
should come with a voice on how the money is spent. There is no
good reason why 6 to 7 billion out of pockets of Federal
employees does not justify a seat at the table so that we can
represent our own priorities and raise our own questions in
negotiations with health insurance companies.
On behalf of the more than 600,000 Federal and District of
Columbia workers AFGE represents and for whom the health
benefit plan is the only reasonable choice, I ask the
subcommittee to affirm that workers' voices should be heard in
the annual negotiations over the terms of the health benefit
contracts.
I want to say in the strongest possible terms that we do
not believe that OPM speaks for us. Each year brings new
evidence that our interests are not well represented by OPM.
There has been no slowdown in premium inflation. The insurance
companies are increasingly emboldened to press for less
scrutiny of their contracts, fewer restrictions on benefit
design, no restraint on how they obtain or what they charge for
prescription drugs, and of course a blank check at the premium
setting.
Following tradition, OPM again refers to the insurance
companies as its partners in this year's call letter and
congratulates them for cooperation and collaboration on many
policy issues. If OPM describes its own relationship to the
insurance companies as one of partnership, where does that
leave us? Federal employees are tired of a situation where OPM
collaborates with the insurers and passes the costs of such a
cozy arrangement to us and our fellow taxpayers.
Time constraints preclude me from raising all of the
issues, but I would like to touch on a few. The first is OPM's
proposal to carve out or contract directly for certain health
insurance benefits such as dental, vision, and prescription
drugs and make them ``employee-pay-all.'' This proposal was
included in both President Clinton's 2001 budget proposal and
OPM's call letter to carriers for 2001. The idea is that OPM
would step in to use its previous unexercised buying power to
obtain a good group rate and then leave the rest to us. The
employee-pay-all approach may be thoroughly consistent with the
winner-take-all economic policies of the past 20 years, but it
is in direct contrast to the values that AFGE upholds and we
want no part of it.
The second is prescription drug prices and their effect on
the health benefit premiums. Our employer is in a unique
position to address this problem. The time is long overdue to
make available to health benefit programs the discount and
favorable treatment that the Federal Government has arranged
for the benefits of the veterans and the military health care
systems, Medicare, Medicaid, the Bureau of Prisons, and the
Public Health Service.
The third issue is that for the last 2 years, insurance
companies and the health benefit program have been exempt from
the government cost accounting standards. The Federal
Government imposes cost accounting standards on contractors as
a safeguard. The standards from which health benefit program
carriers have sought and won exemption in each of the past 2
years prohibit health insurers from passing on to the
government illegitimate expenses.
In conclusion, it is almost impossible to open a newspaper
today without reading about the impending crisis facing Federal
agencies as they struggle to address the aging of the Federal
work force and the challenge of recruiting, training, and
retaining their replacements. The solution is so obvious that
no one seems to recognize it.
The Federal Government operates in a competitive world.
Downsizing, contracting out and privatization, and salaries and
health insurance that are seriously inferior to what is offered
in the private sector and State and local governments are the
causes. The solutions must be addressed. The Federal Government
must stop trying to get by on the cheap with regard to employee
compensation.
Inadequate salaries and an over-expensive health insurance
program are really two sides of the same coin. More than
200,000 Federal employees who are nominally eligible to
participate in the health benefit program are uninsured,
largely because they cannot afford the premiums. The lack of
affordability of the health benefit program and the pretense
that the government is powerless to improve the situation are
problems that must be faced.
The Federal Government's CAS should be applied vigorously
to make sure that every health care dollar devoted to the
Federal Employees Health Benefits Program is actually spent on
the program and its beneficiaries.
Finally, OPM should look around for a new partner to work
with to sustain a minimum cost, efficient, and comprehensive
health insurance program for Federal workers. We have a mutual
interest in the best possible benefit at the lowest possible
cost. OPM's collaboration with the insurance companies has not
served the interest of the beneficiaries, the taxpayers, or the
Federal workers, retirees and their families.
Mr. Chairman, that concludes my remarks and I am glad to
answer any questions.
Mrs. Morella [presiding]. Thank you, Mr. Harnage.
[The prepared statement of Mr. Harnage follows:]
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Mr. Morella. I would like to recognize Scott Nystrom for
his comments.
Mr. Nystrom. Thank you, Madam Chairman. Thank you for
asking me to testify on potential economic effects of allowing
the Federal Employees Health Benefits Program health insurance
carriers access to the Federal supply schedule for prescription
drugs.
My goal today is not to advocate for particular policies,
but rather to help analyze issues from an economic and market
process perspective. I would like to highlight two potential
economic consequences of allowing FEHBP carriers to access FSS
for prescription drugs this morning. The first potential
consequence would be to increase prices for nonFEHBP purchasers
of certain prescription drugs. The second potential consequence
would be to increase prices of prescription drugs for agencies
currently receiving discounts on prescription drug prices from
the FSS.
The market provides incentive for companies to generate
enough aggregate revenue from their existing drug portfolio so
they can fund promising new drug research ideas. If aggregate
revenue for a company is reduced from one segment of the drug
purchasing market, the company is likely to develop strategies
to find resources to fund the next generation of promising new
drug research ideas. This pressure to continually fill the
pipeline with new drugs can be a major pricing consideration
for pharmaceutical companies.
One of the greatest misconceptions is that there is one way
to go about prescription drug pricing. For example, many
believe that all pharmaceutical companies price their products
based on how much they have already invested to discover and
develop a drug and then add on whatever profit they want. On
the contrary, pharmaceutical companies, as rational economic
actors, are not likely to consider what economists call ``sunk
costs'' when pricing pharmaceutical products.
Pharmaceutical companies go through a very complex process
to determine what price to charge for newly discovered drugs.
The first consideration is often the current and historical
prices of competing drugs already on the market. Another
consideration may be other similar and competitive drugs about
to come to market. Another competitive factor may be the level
of promotion among competing products.
Prescription drug prices are related to future investment
of undiscovered drugs. Pharmaceutical companies want to invest
in new drugs to meet consumers' wants in order to increase
returns to investors. However, investment resources are scarce.
Pharmaceutical companies have a relatively limited amount
of funds available compared to the near-infinite number of
ideas for promising drug research. These companies must rank
and prioritize the drug research ideas. The companies must then
decide how many of the drug research ideas can be funded with
available resources. More resources translate into more drug
research ideas funded. Consequently, there is always pressure
to price a company's existing drug portfolio high enough in the
aggregate to fund promising new drug research ideas within the
company.
As a result, if aggregate revenue for a company is reduced,
as one segment of the drug purchasing market receives larger
discounts than the previous year, the company has incentive to
raise enough revenue to fund the next unfunded promising new
drug research idea. The above scenario is more than a
theoretical concern. We have considerable evidence based on the
Medicaid prescription drug rebate program.
OBRA 1990 established a system for pharmaceutical
manufacturers beginning in 1991 to grant States rebates for
drugs dispensed and paid for by State Medicaid programs. States
would receive discounts from the list price equal to the best
price available to private sector volume purchasers for
manufacturers' drugs in exchange for a Federal mandate to
eliminate restrictive State formularies.
The legislation altered the best price discounts offered by
manufacturers in the first 3 years in the rebate program.
Manufacturers responded to the Medicaid rebate by reducing the
volume discounts they had offered to reduce the size of their
legislative rebates and maintain revenue levels sufficient to
fund priority research ideas and profitability. The average
best-price Medicaid discount was reduced from roughly 33
percent in 1991 to about 23 percent by the second quarter of
1994. At that point it leveled off.
The Congressional Research Service reported that some
manufacturers responded to the requirement to offer Medicaid
their best price by raising prices charged to other customers,
such as hospitals and HMOs, instead of lowering the prices to
State Medicaid programs.
CRS cites the experience of Department of Veterans Affairs
as evidence of government-induced shifting of the costs of
rebates to other purchasers. Until 1991 the VA enjoyed deep
discounts for certain drugs. Beginning in 1991, VA reported
significant price increases due, they believe, to the
implementation of OBRA 1990 best-price regulation.
In conclusion, I want to say whether or not it is a good or
bad idea to extend the FSS to all FEHBP health insurance
carriers is beyond the scope of my testimony. However, past
evidence suggests that any attempt to provide access to the FSS
for FEHBP prescription drug purchases is likely to lead to
higher prices for certain yet undetermined prescription drugs
for the nonFEHBP purchasers. Three groups that immediately come
to mind are retail purchasers who are facing higher out-of-
pocket costs due to rising prices. That group would include
about a third of all Medicare beneficiaries. Current FSS
purchasers, the Department of Veterans Affairs, the Department
of Defense, the Public Health Service and the Coast Guard are
likely to experience higher prices if this policy were to be
taken to its logical conclusion.
Smaller managed care plans with lower volume of purchasing
needs and weaker negotiating positions with manufacturers and
wholesalers also would likely see higher prices.
One thing is that the FEHBP program drug expenditures of
about $5 billion dwarfs the FSS with estimated pharmaceutical
sales of $1.6 billion in 1999. In short, the FEHBP has the
potential to become the major pharmaceutical purchaser from the
FSS if allowed to participate.
If the SAMBA pilot were extended to all FEHBP carriers for
all drug purchases, there is considerable uncertainty about the
extent of the price increases and which nonFEHBP purchasers
would be more likely to experience price increases. However,
history suggests that price increases for certain prescription
drugs for nonFEHBP purchasers are likely to occur if the SAMBA
pilot were expanded. Thank you very much.
Mrs. Morella. Thank you, Dr. Nystrom and all of the
panelists for their testimony.
[The prepared statement of Mr. Nystrom follows:]
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Mrs. Morella. I will start with Mr. Harnage, because we
heard your testimony and we also heard the questioning that Mr.
Cummings had posed with regard to your concern about OPM not
speaking that clearly for AFGE, for its members, in the annual
negotiation with the carriers.
What do you think should be done? First of all, what
expertise would AFGE bring to the negotiations? Second, would
you recommend that other parties be included in the
negotiations? And I also wonder why--maybe you might sponsor a
plan, an AFGE plan like some unions might do. Maybe you would
like to address that, Mr. Harnage, to give us direction so,
working with OPM, we can make sure that you are included.
Mr. Harnage. First of all, I haven't given any thought
about AFGE having its own health benefit program. We did many
years ago, but because of the problems that we had with people
meddling in the business, we found it much better to get out of
the business and try to make the Federal Employees Health
Benefits Program better. What I mean by that is--I will give
you an example. One year we looked at Blue Cross and Blue
Shield, Aetna and AFGE's plan, and came up with a Cadillac plan
which would provide the best benefits available for Federal
employees. Although our cost went from $12 to $16 premium, and
we would love to see those premiums again, it was considered
inflationary because it was a 25 percent increase in cost. That
same year, Blue Cross and Blue Shield was an $18 premium with
less insurance. We weren't allowed to be competitive, and the
excuse that Mr. Divine gave us, and we all remember him, was
that he had to maintain the competitive edge. So it wasn't
looking for the best deal for the government or the taxpayers,
it was looking for the best deal for the insurers. So we got
out of the business. I am not too sure that I want to get back
into that.
We have seen an improvement in our opportunity to talk with
OPM about the program. Our problem is that we are not getting
to the substance of the issues and we are not participating
directly with the carriers so that we can bring our opinions
and thoughts to the consideration.
We travel all around the Beltway and deal with Congressmen
and their staffs and committees and subcommittees and their
staff. I have work groups working in the Pentagon and OMB and
OPM, all over government, and I think everybody will recognize
that we bring quite a bit of expertise to the table. We give
people more facts to consider; not that we are always right,
but it is good food for thought. If I don't have the expertise
that they need, I will certainly get it. But there is no need
for me to get that expertise and not have an opportunity to use
it, so the excuse that we are not qualified is not a real
justification for not letting us be at the table.
Mrs. Morella. You are not at the table but you can offer
suggestions?
Mr. Harnage. Exactly. We have some discussions in what is
referred to as a work group, but we are not getting down to the
nuts and bolts.
Mrs. Morella. Would you include other parties?
Mr. Harnage. Sure. We think we are the best, but we would
allow them to be in the room also.
Mrs. Morella. You said employees could not afford the
premiums. I will ask later whether that is a great number and
what you would do to resolve that.
But let me get on to Mr. Gammarino. A constituent of mine
suffers from periodic migraine headaches, cluster headaches,
and her prescription drug is for Imitrex, and each prescription
includes 6 doses and can be refilled 3 times a year, 18 doses
per year. These migraines plague her once or twice a month.
With the medication she can function normally, and without it
the pain is too intense for her to do anything.
In her particular FEHBP program, prescription drug costs
are controlled by limiting the number of doses. Clearly her
plan is trying to hold down costs, which is laudable, but it
seems like the cost restraint objective could be met as well by
making more widespread use of the Federal supply schedule's
discount prices for those covered by other FEHBP plans. Would
you comment on that?
Mr. Gammarino. Well, I heard two questions. One was
associated with this particular case and the quality assurance
program that this health plan has associated with ensuring that
the medication is dispensed according to the guidelines, not
knowing the particular case. That is one issue that the health
plan is involved in screening for this.
I would say one is a program that also has these prior
approval programs. The goal is not cost containment. It is part
of the patient safety. There are FDA guidelines for dispensing
drugs. One of the issues that we all face is that many times
the pressures at the point of dispensing is to go beyond those
guidelines. So not knowing that particular case, there is a
balance between quality and cost.
The second question gets to the Federal supply schedule. I
can't tell you how strongly I am opposed to it. One is, from my
layperson's reading of the statutory requirements to obtain
these types of discounts, I think it is inappropriate for any
FEHBP carrier to receive them.
Second, this is not a government program. It is not
Medicare, it is not Medicaid. This is a program that the
government has chosen to use, the private insurer competitive
model to provide the type of care and health care coverage that
enrollees would like.
I think a couple of questions should be asked. I don't know
the specifics of what SAMBA is actually requesting or what they
are actually going to get, but if I were a Federal enrollee I
might ask two questions. One is, what drugs am I going to be
allowed to receive if I use the VA price schedule? Is there any
type of restrictions associated with that? I don't know the
answer.
Second, where do you stop? If you want to use the VA price
schedule, and this clearly is driven by cost and not quality,
this initiative, then do you use other Federal advantages? Do
you go far--would the enrollees next expect to, instead of
having the selection of health care providers like Georgetown
and Johns Hopkins, would they be able to get access to the VA
facilities, if price is the sole objective of these types of
initiatives?
So I think from the enrollee point of view I would be
concerned and have some questions about where the government is
going when they seek to go this route.
Mrs. Morella. I thank you.
In the next round of questioning, I would ask Dr. Nystrom
also about his opinion on that Federal supply schedule concept.
But my time has now expired. I am pleased to recognize Mr.
Cummings.
Mr. Cummings. Thank you very much, Madam Chair.
Let me ask you this, Mr. Gammarino. You mentioned a few
minutes ago this whole idea of prescription drugs being
advertised on television. I guess that is what you are talking
about.
Mr. Gammarino. That is one of the primary vehicles, and
print campaigns also.
Mr. Cummings. So you all can see--has this--if I understand
your testimony, you believe that there is a direct link between
that advertising and the fact that more and more people are
getting these prescriptions?
Mr. Gammarino. Yes. Studies have been done. For example,
the top 10 drugs today that are advertised, that are--the
Claritins, etc., they make up 20 percent of the prescription
dollar today. I think there have been enough studies already to
show a direct correlation.
If you just go back 5 years in terms of how information was
dispensed, primarily drugs were under the control of a doctor.
They were heavily detailed by drug manufacturers. They had all
of the information. The Information Age has changed all of
that. We applaud that, but one of the problems you have is now
you have the consumer, that patient walking into their doctor
with that ad, and they say, ``I have the migraine; I not only
want relief, but I want relief with this.'' That is the real
world. I think studies have shown that doctors feel
considerable pressure to meet that demand.
Mr. Cummings. The way it used to be, if you did that, it
was because one of your neighbors or friends said, we have the
same problem and I am using so-and-so drug. That is probably
about the only way it would have come up.
Mr. Gammarino. Right. So the informed consumer is driving
some demand, and that is not all bad. We support and are going
to continue to provide ways to allow our members to receive
information. I think one of the things that we have to ensure
is that the information is balanced and that they see more than
just the green fields and the yellow flowers that they see in
the ad, that they have been exposed to the fine print that
shows how drugs, if they are misused, you can have adverse
reactions and wind up in the emergency room.
Mr. Cummings. Do you think one of the factors for the
greater use of drugs is this whole movement--it is kind of old
now--towards ambulatory care as opposed to people spending time
in hospitals? Do you think that has had any impact at all? In
other words, people more or less taking care of themselves
outside the hospital? Has any of that had an affect, such as
Mr. Flynn saying at one time it was 3 percent and now it is $1
out of $4 spent for drugs?
Mr. Gammarino. I am sure that is a piece of it. There are
so many components. One thing that I would like everybody to
reflect when they talk about the changes, everybody seems to
focus on price. And I will be the first to tell you I would
like better discounts and will try to achieve them. But the
reality is, Mr. Cummings and Mrs. Morella, that if we got the
VA pricing schedule, you would still have us up here. You would
still have us up here asking why the rates are the way they
are, because that is not the primary reason that these health
care costs are where they are today.
The milieu has changed. Drugs are a benefit for enrollees.
They are used very differently today. I mean, my father had a
heart attack at 53. That is the first time he was identified as
having that condition. No prior use of drugs. Today an
individual probably is on blood pressure medicine at 30 and he
is on it for the rest of his life. And the reality is that it
costs money, and the reality is that Blue Cross and Blue Shield
specifically is here to serve those people, and we use our
leverage in the marketplace to make it as affordable as
possible, but the reality is that many of these people need
this medical care.
Mr. Cummings. What are your suggestions as to how to
prevent the costs from going up? I am trying to stabilize them
to some degree. Seeing this 30 percent over the last 3 years,
and now it looks like we have another 8.7 percent possibly
coming up, and I know you must think about this all of the time
and try to figure out what you can do, and is there anything
that we can do as a Congress to help out?
Mr. Harnage. Well, there are two ways to--I think three
ways to effect change in this area. One is benefit design. Two
is the price that we pay for the services; that is, the
discounts that we get from the providers and the drug
manufacturers. And the third is ensuring that it is used where
it is appropriate. I think we are going to need a combination
of all of those. I know that we are going to spend a lot of
time trying to educate our enrollees about how to make informed
decisions because this is a market today that is driven by the
consumer, make no mistake about it. The insurance companies
have very little control over utilization, and I would tell
you, and I would say if you had a panel of physicians up here,
many of them would tell you they lost control over how things
are used. So a lot of our efforts are going to be on the
enrollee.
We feel that this particular population would be--would
adapt very well to information and education. They are smart.
They are educated. They have information tools through the
Internet, etc., that if we make a big push with the support of
the agency, AFGE, other groups, we think that we can make an
impact that way. But we are not going to do it in restricting
care. We are not going to do it in saying no.
With that I will respond to any other questions you have.
Mr. Cummings. Thank you.
Mrs. Morella. I am pleased to now recognize the gentlewoman
from the District of Columbia, Ms. Norton.
Ms. Norton. Thank you, Mrs. Morella. I apologize and regret
that I could not be here to hear the Office of Personnel
Management's testimony.
I do want to say this for the record. That I am very
disappointed in OPM and FEHBP in the last few years and the
increases that the Federal workers have had to absorb. During
the time that the President was seeking to universalize health
care, an effort that the Congress turned back, FEHBP was
continually cited as a model--even if we couldn't do it that
way when the President proposed several different approaches to
get to universal health care. Look at what the Federal
Government does for its employees and the Members of Congress,
and you will see that they take advantage of the large number
of employees and they provide model health care and they keep
costs down. Bull.
In fact, we saw that costs were kept down for a number of
years, and I believe that the reason that those costs were kept
down was almost entirely in response to the threat of universal
health care, because as soon as that threat passed, not only
were increases experienced throughout the private marketplace,
but right here where we were supposed to have a model system,
costs began to jump straight up.
I have asked that question at prior hearings of this kind
and I was assured that there were different market conditions
now, and I must tell you, I no longer believe that. One reason
I no longer believe that is because the costs keep going up,
and another is because OPM appears to be moving backward.
I want to say in no uncertain terms, when we have 60
million people without health care, at a time when we are only
incrementally, child by child perhaps, trying to get people who
are not covered, the whole notion that OPM would come forward
with an employee-pay-all notion is preposterous and outrageous.
The Federal Government is not going to be able to hire
doodedly squat if in fact it continues to go in this direction.
The Federal Government is facing a complete evacuation of the
Federal Government because of the numbers of retirees, we have
already downsized the number, and because, very frankly, where
it is at today is in the private sector. That is where all of
the sex appeal is. That is where the tech jobs are. So the
model work force that we have had, we would have a hard time
getting it if we paid 100 percent of health care, the way many
private companies do, and now we are going in the opposite
direction. Do you expect somebody to want to work for the
Federal Government?
I think this is so outrageous when the analysts are already
beginning to do what I can only call scary analysis of who is
going to run this government. The President was right to do
voluntary downsizing, to right-size the government. It should
have stopped now, at least a couple of years ago, when you
consider that we are taking the head off the body, and the
people who make things run have found out that they can make a
lot more money making things run for the private sector, and
the people who have not yet gotten their careers started don't
even want to talk to Federal recruiters.
And now what does OPM say? We are going to carve out some
stuff that you can pay for yourself and maybe we will help you
out a little bit and referee when you do that. This is crazy.
It is going to hurt the Federal service and every Member of
Congress when we run a government that cannot be run with the
first class people that we have been able to attract in no
small part because of retirement and health benefits.
The private sector has long ago leapfrogged over us and
what we see is an FEHBP that I no longer consider a model, and
an FEHBP who is pricing our people out of it. The Federal
Government has nothing to be proud of. You have the largest
work force in the country, you have something to work with. You
have got market strength. You can make things happen not only
for the Federal Government worker but for everybody else by
leading the way.
We are not using the economy of scale that is ours simply
because we have the largest work force in the country. We are
diddling and acting as if we were some corporate employer
trying to save money and trying to carve out, until he finds
out that his competitors are stealing all of his workers. Our
competitors have been doing that now for at least a couple of
decades, and we are asleep at the wheel. The way to become
completely unconscious is to start messing over people's health
benefits, to keep allowing these benefits to go up without
finding some way to contain these costs.
I don't know what you have had to say today, but I hope
that OPM had something to say that begins to move beyond their
business as usual. This is the old 1940's Federal Government
approach to employee benefits, especially health benefits and
the need for the Federal Government to retain and recruit
workers. Thank you, Madam Chair.
Mrs. Morella. Thank you, Ms. Norton.
Dr. Nystrom, I would like to ask you about the Federal
supply schedule and your opinions.
Mr. Nystrom. My response today to being asked to be a
witness was that there are impacts, there are consequences of
extending the FSS schedule to the FEHBP program. And the
consequence--we can project the direction--that is, prices in
other segments of the market will probably go up, but it is
difficult to predict exactly which segments will be hardest hit
and which drugs will have their prices raised by the industry
if the deep discounts enjoyed by VA and other agencies are also
included through the FEHBP.
Mrs. Morella. I noted also, switching around, Mr.
Gammarino, I know that you have to leave by 12:30. I am going
to ask you one question. You have permission to leave at any
time and we appreciate you being here. I am interested in your
response to the medical errors concept that we talked about and
the fact that there is legislation, and the bill that I have
been pushing was crafted with the U.S. Pharmacopeia in terms of
the data bases and the voluntary reporting of errors in order
to share solutions. I wonder if you might comment on that.
Mr. Gammarino. What I would like to comment on is how we
can participate in this activity. We do have a role, although
we don't dispense drugs and we don't deliver health care. We do
have information and we are probably the best source of
information for many patients because we have through our
claims records, we have the history of the drugs that they have
received and the medical care that they are getting today. We
have a number of things that we want to look at. We have one
pilot that we have talked to OPM about and we are both excited
about exploring it.
It would take an initiative that is in the private sector
of Blue Cross and Blue Shield, specifically the Empire Blue
Cross and Blue Shield plan, that allows us to provide
information to the patient's attending doctor that would allow
that provider the information to better manage that
individual's care.
We have seen it work in the area of drugs where one
physician may not know about how drugs are being dispensed by
other physicians that that patient may be receiving and that
can actually save lives.
It can also be used in other areas of medical care to red-
flag and provide information to the provider if in fact, for
example, a person with chronic diabetes is not receiving the
types of followup care he or she may be needing. We hope to
have this pilot going later this summer and we hope next year
to have various forms of this pilot out there in other Blue
Cross and Blue Shield plans. We are excited about the ability
to support this initiative, particularly with the unique role
that we can play.
Mrs. Morella. Excellent. I am glad to hear that.
Ms. Norton, did you have a question that you wanted to ask
of Mr. Gammarino before he leaves?
Ms. Norton. No.
Mrs. Morella. Mr. Harnage, what can we do about these
Federal employees that you say find the premiums prohibitive?
Do you have a suggestion, or is this just a suggestion about
the statement that we can't keep having medical costs go up
year after year?
Mr. Harnage. The basic question that I continue to ask
myself is why is the largest employer in the United States
paying the highest premium and doesn't have as good of health
care as much smaller employers do, and why aren't we looking at
what is going on? We want to follow the best practices of the
private sector, and I don't particularly like that term because
it indicates a reverse. I can remember when the Federal
Government set the precedent and was looked at as the model
employer. Why aren't we looking at those employers that are
much smaller than the U.S. Government that have better plans at
a lower cost and see what they are doing that the Federal
Government could be doing?
We are not taking advantage of the volume that we represent
at the marketplace. The comment was made that this is not a
government program, and I am inclined to agree with that,
although the government is paying for it. What we do is we ask
each year in November for the individual Federal employee to go
shopping, and they go shopping for what they can afford, not
for what they need; instead of the Federal Government going
shopping for them in volume, and saying here are the programs
that we want to provide for our employees regardless of what
you charge for them.
Instead of taking the opportunity for volume dealing, we
are letting the insurers tell us what it costs and then letting
the Federal employee do the shopping for us. I think that has
got things backwards. Those are the simple questions that you
ask yourself.
When we talk about the Federal supply on the prescription
drugs, that it is going to increase the costs for those
currently participating in it, I think that is missing the
mark. We are looking at everything as if we had 50 different
governments in the United States, and we have only one. So if
you reduce the cost of the Federal Employees Health Benefits
Program by $1, but you increase the cost of the other
participants by a dime, it doesn't take a rocket scientist to
know that you are 90 cents better off overall.
And to compare the Federal Government to the private
sector, to the entire population of the country, you have to be
talking about socialized medicine to make that comparison. We
have to compare the Federal Government as an employer, not to
the population. But if we increase the cost for a tin of
aspirin by a nickel, but we reduce the government's cost by a
dime, that person that is paying that additional nickel is
getting a dime's worth of benefit in reduced taxes. Again, it
doesn't take a Ph.D. to figure out that you are saving money.
That is what we are looking at. The Federal employees are
the largest single group of taxpayers in this country. We have
an interest in what taxes are. If we can reduce the cost of
government, we can reduce the cost of our taxes as well.
Mrs. Morella. I thank you for that very thoughtful
statement. And I will pick up finally with Dr. Nystrom again,
because of something that earlier had been in the testimony
that Mr. Harnage had presented, again dealing with prescription
drugs and the fact that drug prices are higher in the United
States than in Europe and Mexico, Canada, and that drugs for
humans are more expensive than drugs for animals.
I just wonder how you would respond to this statement. Are
Americans being gouged by drug companies? Mr. Gammarino raised
a number of concerns about government policies that may
contribute to high drug costs, and I wondered if you would
agree with any of them, or do you believe that some policies of
the Federal Government do artificially raise the costs of
drugs; and if so, what are these policies? I wanted to get your
opinion on the prescription drug a bit more.
Mr. Nystrom. I guess I would not use colorful language like
``gouged.'' I would say that the market, on the contrary--for
example, you talk of other countries having lower drug prices.
Many of these countries have price controls on their
pharmaceutical products, and as a result I think an economist
would look at those countries as more free riders on the
overall system of the pharmaceutical industry.
And, as such, there are differences in price for all kinds
of different reasons, and there have been a few studies on
this, some done more methodologically rigorous than others. But
Mexico, which has a lower per capita income, they don't have
the income to purchase at the prices that U.S. consumers might
be willing to pay because of the value of the drug. They have
weaker patent protections in some of these countries, Mexico
being one, at least before 1992 and NAFTA. They also have--
consumers are probably a little more price sensitive outside of
the income issue. So there are different reasons why prices are
different in different countries, and I think it is extremely
complex and I wouldn't begin to talk about it in this forum
without spending a lot more time looking at it.
You asked about policies of the Federal Government
raising--artificially raising the cost of drugs. There are two
policies that contribute a good deal to the cost of drugs. One
is the FDA approval process which is very time-consuming and
very costly. The other is probably the patent protections that
are offered to companies. Now there are reasons why the
government offers patent protections to companies that innovate
drugs. It is because they want companies to have the financial
and economic incentive to go out and discover new drugs.
Without patent protections, you don't have the incentive that
you need if you want new drugs. Were those the two questions
that you asked?
Mrs. Morella. Yes. Mr. Gammarino, do you want to make any
final comment?
Mr. Gammarino. No. I appreciate you listening and will
enjoy working with you in the future.
Mrs. Morella. Thank you. Mr. Harnage, any final comments?
Mr. Harnage. I appreciate this committee's interest in this
issue, and in particular yours. But today there was a question
about CAS, the cost accounting standards from the
representative of OPM. One important thing was not said, and
that was that OPM opposes the waiver of the CAS standard. Why
that wasn't said this morning puzzles me, since I have had
conversations with the administration and with the Director of
OPM about how this has happened in the past. It caught us all
by surprise when it was put in last year. When I asked how it
happened they said, we were not aware of it, it snuck by us. I
said, let's don't let it happen again in 1999. It happened
again in 1999, although they got a letter over on the Hill at
the 11th hour that they were opposed to it.
This year I asked them to get the word on the Hill earlier
and more strongly that they were opposed, and I have been
assured that they would do that.
For the representative of OPM today to not quickly and
emphatically state to you that they are opposed to the waiver
of the CAS standard is puzzling to me, and I am going to find
out the answer to that and I hope you will, too.
Mrs. Morella. We will, and we still have some OPM
representatives here.
Dr. Nystrom, any final comments?
Mr. Nystrom. No. It is very gratifying to be here and
especially to appear before my own Congresswoman, and I hope
that I have been of some assistance.
Mrs. Morella. I didn't realize you were a constituent.
Indeed, I should have realized from how brilliant you are.
I do want to thank you for being here for this panel and
ask you if it is OK for some questions to be forwarded to you.
There are a number of questions that we didn't get to, and we
would like the benefit of your responses; and OPM knows that we
traditionally do that also.
And so on behalf of the entire subcommittee, I thank you.
The hearing is adjourned.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
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