[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 Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250 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 ---------- 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:] [GRAPHIC] [TIFF OMITTED] T1983.001 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:] [GRAPHIC] [TIFF OMITTED] T1983.002 [GRAPHIC] [TIFF OMITTED] T1983.003 [GRAPHIC] [TIFF OMITTED] T1983.004 [GRAPHIC] [TIFF OMITTED] T1983.005 [GRAPHIC] [TIFF OMITTED] T1983.006 [GRAPHIC] [TIFF OMITTED] T1983.007 [GRAPHIC] [TIFF OMITTED] T1983.008 [GRAPHIC] [TIFF OMITTED] T1983.009 [GRAPHIC] [TIFF OMITTED] T1983.010 [GRAPHIC] [TIFF OMITTED] T1983.011 [GRAPHIC] [TIFF OMITTED] T1983.012 [GRAPHIC] [TIFF OMITTED] T1983.013 [GRAPHIC] [TIFF OMITTED] T1983.014 [GRAPHIC] [TIFF OMITTED] T1983.015 [GRAPHIC] [TIFF OMITTED] T1983.016 [GRAPHIC] [TIFF OMITTED] T1983.017 [GRAPHIC] [TIFF OMITTED] T1983.018 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:] [GRAPHIC] [TIFF OMITTED] T1983.021 [GRAPHIC] [TIFF OMITTED] T1983.022 [GRAPHIC] [TIFF OMITTED] T1983.023 [GRAPHIC] [TIFF OMITTED] T1983.024 [GRAPHIC] [TIFF OMITTED] T1983.025 [GRAPHIC] [TIFF OMITTED] T1983.026 [GRAPHIC] [TIFF OMITTED] T1983.027 [GRAPHIC] [TIFF OMITTED] T1983.028 [GRAPHIC] [TIFF OMITTED] T1983.029 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:] [GRAPHIC] [TIFF OMITTED] T1983.030 [GRAPHIC] [TIFF OMITTED] T1983.031 [GRAPHIC] [TIFF OMITTED] T1983.032 [GRAPHIC] [TIFF OMITTED] T1983.033 [GRAPHIC] [TIFF OMITTED] T1983.034 [GRAPHIC] [TIFF OMITTED] T1983.035 [GRAPHIC] [TIFF OMITTED] T1983.036 [GRAPHIC] [TIFF OMITTED] T1983.037 [GRAPHIC] [TIFF OMITTED] T1983.038 [GRAPHIC] [TIFF OMITTED] T1983.039 [GRAPHIC] [TIFF OMITTED] T1983.040 [GRAPHIC] [TIFF OMITTED] T1983.041 [GRAPHIC] [TIFF OMITTED] T1983.042 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:] [GRAPHIC] [TIFF OMITTED] T1983.043 [GRAPHIC] [TIFF OMITTED] T1983.044 [GRAPHIC] [TIFF OMITTED] T1983.045 [GRAPHIC] [TIFF OMITTED] T1983.046 [GRAPHIC] [TIFF OMITTED] T1983.047 [GRAPHIC] [TIFF OMITTED] T1983.048 [GRAPHIC] [TIFF OMITTED] T1983.049 [GRAPHIC] [TIFF OMITTED] T1983.050 [GRAPHIC] [TIFF OMITTED] T1983.051 [GRAPHIC] [TIFF OMITTED] T1983.052 [GRAPHIC] [TIFF OMITTED] T1983.053 [GRAPHIC] [TIFF OMITTED] T1983.054 [GRAPHIC] [TIFF OMITTED] T1983.055 [GRAPHIC] [TIFF OMITTED] T1983.056 [GRAPHIC] [TIFF OMITTED] T1983.057 [GRAPHIC] [TIFF OMITTED] T1983.058 [GRAPHIC] [TIFF OMITTED] T1983.059 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:] [GRAPHIC] [TIFF OMITTED] T1983.060 [GRAPHIC] [TIFF OMITTED] T1983.061 [GRAPHIC] [TIFF OMITTED] T1983.062 [GRAPHIC] [TIFF OMITTED] T1983.063 [GRAPHIC] [TIFF OMITTED] T1983.064 [GRAPHIC] [TIFF OMITTED] T1983.065 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. 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