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June 13, 2000, Tuesday

SECTION: CAPITOL HILL HEARING

LENGTH: 15280 words

HEADLINE: HEARING OF THE CIVIL SERVICE SUBCOMMITTEE OF THE HOUSE GOVERNMENT REFORM COMMITTEE

SUBJECT: THE FEDERAL EMPLOYEE HEALTH BENEFITS PROGRAM

CHAIRED BY: REPRESENTATIVE JOSEPH SCARBOROUGH (R-FL)

LOCATION: 2154 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 10:00 AM. EDT DATE: TUESDAY, JUNE 13, 2000

BODY:
REP. JOE SCARBOROUGH (R-FL): I want to call this hearing to order, and I want to welcome everybody and thank you for your interest in the Federal Employees Health Benefits Program. I believe one of the most important duties for this subcommittee is to oversee this critical program. Approximately 9 million federal employees, retirees and their families all rely on the 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 affordable premiums and consumer choices that result from hundreds of health benefit plans competing for the business of individual employees and retirees. And although it's an excellent program, the FEHBP like all health care plans today faces some serious, serious challenges.

Premiums have risen dramatically over the past three years, and another substantial increase seems imminent for 2001. The purpose of today's hearing is to examine the OPM's administration of this critically important program. We're going to examine the policies established by OPM's call letter for 2001 as well 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've been warned that mandates are responsible for driving up premiums. Though each mandate looks reasonable when considered in isolation, the cumulative effect is to increase program costs and deprive consumers and carriers of the flexibility needed to meet their needs at the same time while we try to control costs.

And once again it appears that drug costs are major contributors to rising health care costs. As anybody reads the newspapers know, Congress is very concerned by rising drug costs, and this subcommittee is no less concerned. But before either this committee or Congress decide to rush in to propose or approve a solution, I strongly believe that we first have to develop a complete understanding of the causes of the 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 healthcare coverage under the FEHBP. And that's my cue to pass it over to my ranking member, Mr. Cummings.

REP. ELIJAH CUMMINGS (D-MD): Thank you very much, Mr. Chairman. Mr. Chairman, last year as we have done for the last several years, 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's Bill of Rights and among other things, the application of costs 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 Employee 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, copays, and day and visit limitations.

To reduce medical errors and improve the quality of health care, FEHB plans are required to report to OPM on their patients' safety initiatives, to educate and inform enrollees about patient safety, and to work with other health care providers and organizations to improve patient safety programs.

I look forward to hearing testimony on both of these initiative. Rising premium and prescription drug costs are of ongoing concern to the subcommittee. Last session I called for hearings on this increasingly troubling issue. Federal employees have endured dramatic increases in their health care premiums for three straight years. The 9.3 percent FEHBP premium increase for 2000 was preceded by 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 non-postal FEHBP enrollees are over the age of 61. Given the aging federal workforce and the fact that older Americans are the largest consumer 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 with 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 perform under negotiated cost-based pricing arrangements with the federal government in order to ensure that costs are properly allocated.

Blue Cross/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 on 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.

REP. SCARBOROUGH: Thank you, Mr. Cummings. We've got two votes, but I think we have time to hear Mr. Flynn's testimony, so let me ask you, Mr. Flynn, if you will to come up. Mr. Flynn was appointed as associated director for Retirement and Insurance at the Office of Personnel Management in 1994. He directs the Federal Retirement Systems, the Federal Employees Health Benefits Program, and the Federal Employees Group Life Insurance Program; and in 1999 President Clinton recognized Mr. Flynn with a Distinguished Senior Executive Award. He's been a frequent witness before this subcommittee, and we certainly welcome him back here today.

Welcome back. Let me ask you to rise so we can administer the oath. Do you solemnly swear that the testimony that you give before this subcommittee today is the truth, the whole truth, and nothing but the truth?

MR. FLYNN: I do.

REP. SCARBOROUGH: Thank you. All right, Mr. Flynn. You can begin your statement.

MR. FLYNN: Good morning, Mr. Chairman, Mr. Cummings. I want to thank you very much for your invitation to be here today to discuss our policy guidance to help plans participating in the Federal Employees Health Benefits Program. We're 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 care coverage for federal employees, 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'd 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 Employee 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 delivery 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 Employee Health Benefits Program assume that parity might increase costs somewhere between 1 and 3 percent of the total premium. We'll know that with certainty when our negotiations are concluded later this summer, but all the evidence suggests that we'll 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 five years. We believe patient safety is a vital issue demanding priority attention from all of us. We're 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'll 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've asked plans to designate a person or an office to manage their patient safety initiatives. We're 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'll require all plans to begin seeking accreditation from a nationally recognized organization that's incorporated patient safety standard into its accreditation requirements.

Now the call letter also provided guidance on several other issues. It included sections on prescription drug benefits and coverage for high-dose chemotherapy and autologous bone-marrow transplant. The statement I've submitted for the record covers each of these topics and several others, and I'd 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 really not be known until our negotiations have been completed at the end of the summer. I should note, however that the trends 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'm not optimistic about the trends we continue to see.

Last fall, Director LaChance said these premium increases were unacceptable. She continues to believe 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 healthcare 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, this concludes my statement. I'd be happy to answer any questions you may have for me.

REP. SCARBOROUGH: Thank you, Mr. Flynn. And we will get back to you on those questions after our two votes. We'll stand in recess for approximately 15 minutes.

(Recess)

REP. SCARBOROUGH: All right. While we're waiting for Mr. Cummings to come back, Mr. Flynn, I'll just ask a few questions and then we'll certainly give him 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's the status of SAMBA's access to the federal supply schedule 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 sort of a framework of agreement under which SAMBA will be available to access the federal supply schedule for prescription drugs for their mail order program. The details of that are being worked out, but it will be a two-year pilot effort and we look forward to seeing the results of that and whether or not the savings that were generated might be applicable to other areas of the FEHB.

REP. SCARBOROUGH: Okay. So what's OPM's position regarding the 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. r REP. SCARBOROUGH: How much does the FEHBP program spend per year on prescription drugs?

MR. FLYNN: In round numbers, Mr. Chairman, it's a dollar out of every four. We have about a $20 billion-a-year program which means that $5 a each year go toward prescription drugs.

REP. SCARBOROUGH: Okay. You know, for the past two consecutive years the law has exempted carrier contracts into FEHBP from the application of cost accounting standards, and I was wondering-- is the OPM currently devoting any resources or conducting any activities aimed at implementing these standards?

MR. FLYNN: Well, Mr. Chairman, what we-- the activities that we have been engaged in within OPM and with representatives of the carriers and with members of the cost accounting 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 how they might be adapted for use in the Federal Employee Health Benefits Program. That's been the focus of our effort, Mr. Chairman.

REP. SCARBOROUGH: Just for the record, I was talking to your good friend Mr. Mica on the way over to the vote. He sends his best.

MR. FLYNN: Thank you.

(laughter)

REP. SCARBOROUGH: I actually invited him over here. I don't know if he'll be here or not, but he was complaining about the continued rise every year in the cost of the plan. And again, he blamed the mandates for the increase. And what did you say the increase was this year? You say 8.7 percent?

MR. FLYNN: 8.7 was what was included in the budget projection, president's budget for Fiscal Year 2001.

REP. SCARBOROUGH: Okay. And what was it last year and the year before that?

MR. FLYNN: If I remember correctly, Mr. Chairman, last year it was 9.3 percent and I believe 9.5 the year before that, but we'll check that and make sure that we have it correct for the record.

REP. SCARBOROUGH: So over the past three years that cost has actually skyrocketed over 25 percent, close to 30 percent. Now, Mr.

Mica and I think myself and others might say that the mandates that have been added add to that. What's your best explanation for this committee why you believe that the cost of this plan has skyrocketed close to 30 percent over just the past three years? -- because that certainly is a burden on obviously the working men and women that take part in the program.

MR. FLYNN: Mr. Chairman, just as you and Mr. Mica and others find it unacceptable, we do as well, emphatically so. Let me also say to you however that mandates, though I would tend to characterize them as objectives of ours as a purchaser of health benefits for unemployed an retired population have done very, very little to impact those increases over the past three years.

In fact, the increases have come about primarily from three areas. One, the ageing of the federal population that's covered, and you'll see that made reference to in testimony today from the Blue Cross and Blue Shield plan. Secondly, the impact, the sort of combined double-whammy impact of medical technology and utilization, and I include in that increases in the cost of prescription drugs. They've been running probably on average 20 percent a year for the past three or four years, and as I mentioned a minute ago now account for one dollar in every four of the program. And thirdly, medical inflation in general.

What we are experiencing in this program, Mr. Chairman, while I don't want to characterize it as an excuse, is what other employers are facing as well. That's why we thought, believe it is so important to undertake some initiatives to get some handle on these premium increases so that we can at least mitigate the rise and maintain an affordable program for the almost 9 million people who participate in it.

REP. SCARBOROUGH: Would you, and I'm certainly not being combative here; I'm just, again, curious, and I know everybody else here probably is too. I mean, would you-- and obviously you guys should know this. I mean, you should be looking into it. But have costs for private insurance programs across the industry shot up by 30 percent over the past three years?

MR. FLYNN: Mr. Chairman, costs for private employer-sponsored programs are shooting up dramatically. It's very difficult because you've got a lot of apples and oranges and pomegranate and pears out there to try and compare that to the Federal Employee Health Benefits Program and its statutory structure, but as a general rule--and I think you'll hear it from testimony from others this morning--yes, they are.

REP. SCARBOROUGH: And are they going up at that rate?

MR. FLYNN: They're going up at similar rates, Mr. Chairman.

REP. SCARBOROUGH: All right. Mr. Cummings? Thank you, Mr. Flynn. I appreciate it.

REP. CUMMINGS: Mr. Flynn, I just want to go back to the chairman's question with regard to the prescriptions, the drugs. I think you said now one out of every $4.00? Is that what you said? Is that correct?

MR. FLYNN: That's correct, Mr. Cummings.

REP. CUMMINGS: Now, has that percentage changed? In other words, when we were back three or four years were we still spending one out of four dollars?

MR. FLYNN: Mr. Cummings, it's a very perceptive question. 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 costs of the program. They now account for 25 percent.

REP. CUMMINGS: How long ago was that?

MR. FLYNN: In the early 1980s, if I'm correct. We'll check that for the record, but to be sure. But I believe that's pretty close.

Now, costs have increased for a lot of reasons, and I think it's 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've increased in terms of cost and in terms of their proportion to the total in the program, but they've also had a very, a good impact in terms of the health of the population that's covered. Nonetheless, these kinds of increases-- it's the fastest growing component of the healthcare cost equation today--really challenge us to look for ways in which we can do appropriate things to mitigate those rises because they are making premiums unaffordable for some people.

REP. CUMMINGS: It seems to me that we do have a major, major problem because when you look at the fact that you've got-- retirees get basically the same benefits, right?

MR. FLYNN: Yes, sir.

REP. CUMMINGS: So in other words the government pays a certain percentage? Is it the same percentage?

MR. FLYNN: Retirees participate fully in the Federal Employee Health Benefit Program.

REP. CUMMINGS: Right.

MR. FLYNN: When they turn 65 Medicare becomes their primary insurer, and the FEHB becomes the secondary, but the package of benefits is the same.

REP. CUMMINGS: Right. So you've got a situation where people are, like you said a little bit earlier, are retiring, getting older, and it makes sense for them to stay in the program-- I mean, with the way medical costs are these days I don't see--

I guess you have, what, about 99 percent people stay in FEHBP program?

MR. FLYNN: Not quite that high, Mr. Cummings-- about 85 percent.

REP. CUMMINGS: Well, that's still high. So you've got an older population. You've got a population that also probably need prescription drugs more. Have you looked at what point-- is there a line where, say, if a person, if people, you know, when they get, say, like over 55 or something like that where you see--

Have you ever done any analysis like that where you kind of see where, you know, a large chunk of that prescription drug money is spent at a certain age? Or is it sort of spread throughout? I would guess it would be-- you would spend even more for older people?

MR. FLYNN: You're correct, Mr. Cummings We have seen presentations from our health plans. We've 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, and it's just a natural function of the aging process. Yes, sir. Now where that line is particularly I couldn't say, but I'd certainly be glad to come back with some information that might shed some light on that.

REP. CUMMINGS: I was sitting there talking to Mr. Mica too. And he loves you to life, 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's not the mandated benefits?

MR. FLYNN: No, sir.

REP. CUMMINGS: So when I add up everything that we've talked about in the last four minutes, how do you bring the premiums down? I mean, it seems like it's like a rocket going up, and to try to push it back down is going to be kind of difficult because it seems like it's something that's already in motion.

MR. FLYNN: Well, I don't think, Mr. Cummings, that you bring premiums down.

REP. CUMMINGS: Okay.

MR. FLYNN: I just absolutely, I don't think that's the case.

REP. CUMMINGS: Okay.

MR. FLYNN: I think what we have to find a way to do is make the rate of increase in premiums a more moderate, through the use of things that other private employer-sponsors have done. Let's get high quality health plans into the program because it's been demonstrated that plans that offer high quality do so cost-effectively. Let's look for ways in which we can 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 retirees that are participants. Those are real tools that can bring the rate of increase down.

But remember, we're a very large health plan. We have 9 million people. But if you figure there are 250 million people in the United States, it's only 3 to 4 percent of the total, and health care goes to that total. So we're a part of the equation, but we're not the driving part of the equation.

REP. CUMMINGS: I want to ask two more questions, Mr. Chairman. I have quite a few but I'm limited to these two.

You know, Mr. Harnage, the president of the American Federation of Government Employees, he's going to get up here in a few minutes, and he's going to be concerned about the role that the union folks have played in this process, and since the last hearing-- I mean if you'll recall the last hearing we talked about the role of the unions, and if I remember correctly you said you welcome their participation because you thought it was important.

And I'm just wondering what steps has OPM taken to include employee organizations into 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, NTEU, some of the other unions that represent employees that participate in this program and 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 think I will let Mr. Harnage speak for himself. He's certainly more than capable of doing so. 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.

REP. CUMMINGS: Do you think they've had any impact on what you've done at all? And I'm just curious. I'm not trying to--

MR. FLYNN: I think that in our discussions over the course of the past year, they and others have done two things that I think are very 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's 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'll 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 $262 into the pocket of every federal employee who participates in the Federal Employee Health Benefit Program. That came to us from those organizations and will have that kind of an impact. So, yes, they have been very helpful.

REP. CUMMINGS: This is the last thing. You know, 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, and sounds like you're having some good discussions. So I'm going to do a little facilitating here.

Is there anything that they can do that would help you? I mean, because it's in their interest to help you help their employees. Is there anything they can do that you can think of that they're not doing that could help you in trying to accomplish all the things that you just talked about?

MR. FLYNN: I think that-- I certainly can't speak for the organization. The point that I want to make is, and I appreciate your efforts at facilitation is, 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 on them, agree that they make sense, and can have a beneficial impact on this program. I will pledge to you, we'll continue that, but I don't have anything specific in mind right now.

REP. CUMMINGS: I just wanted to make sure that they were doing their piece. It's one thing for Mr. Harnage to come up here and say that, you know, maybe things aren't working out and-- but I want to make sure that if you've got something to say about him since he's sitting right behind you, you might as well say it, you know, while you're a few feet apart. (laughs) I wouldn't want you to be you, leave and -- (laughs)

MR. FLYNN: Believe me, we appreciate not only in this area but in all areas the advice, the suggestions, the thoughts that he brings to the table and others.

REP. CUMMINGS: Thank you.

REP. SCARBOROUGH: Thank you, Mr. Cummings. Mr. Cummings is available for marriage counseling and mediation for any legal cases in the District of Columbia and Maryland after hours.

(Laughter.)

REP. SCARBOROUGH: Miss Morella's going to open up. If you could, Connie, if you could give us an opening statement, and also I'd like to ask unanimous consent that the statement of Colleen Kelly, president of the National Treasury Employees Union, be included as part of the record. Without objection, it's included.

Ms. Morella.

REP. CONSTANCE A. MORELLA (R-MD): Thank you, Mr. Chairman. I really appreciate your holding this oversight hearing to discuss the administration of that very important plan, 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 OMP 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, SAMSA, the AMA, NIMH, the American Psychological Association, and OPM--and of course 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 that 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 show 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 healthcare providers.

There are two areas though that I'm concerned about I'm pleased that this subcommittee will address. The first one was brought up last year involving the premium increases the in 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; while we all want to make sure that our federal employees are not paying unnecessarily high premiums. And I note, Mr. Flynn, you said that it is about the same. I think it's maybe a little higher.

Also I want to ensure that the autologous bone marrow transplants known as ABMT 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 I wanted to bring out. In the line of questioning if I could have permission to ask a couple of questions. One has to do with the prescription drug that 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 drugs. And we look to the federal government for being a real model. What I have heard from people and have been curious about myself is, has OPM looked into doing some of that hard negotiating that's being done through the Veterans Administration for the very best price of prescription drugs and some of our other federal entities? Would that help, and are we doing anything in that regard, Mr. Flynn?

MR. FLYNN: Ms. Morella, I mentioned just before you came in that in fact 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 that or something like it would make sense for the balance of the plans that participate in the Federal Employee Health Benefits Program.

There are a number of other things that we and our participating health plans are doing to try and attack, confront directly the issue of the rising costs of prescription drugs. We've undertaken a number of those initiatives in past years. The Institution of Pharmacy Benefit Management Programs, the encouragement to use generic drugs when they're therapeutically equivalent to brand names and things like that are all 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 Blue Cross/Blue Shield 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, that as we seek to control these costs that we don't do so in ways that simply move or shift costs on to participants in the plan who have no other real alternative.

So it is a balancing that takes place here. But these are the kinds of things that have been done. They're the kinds of things that are underway now, and we're looking at ways in which we can use the purchasing power of this program to get the best discounts and prices possible.

REP. CUMMINGS: Excellent. I hope you will share that with us because, again, I think it's very important that we're all focusing on this. And again the federal government is always considered to be exemplary in this regard. I am also curious about whatever statistics you discerned with that 25 percent increase, whether it's people living longer and taking more drugs and maybe having more prescribed, maybe more money going into research. I think it's kind of an interesting area for us to pursue as much as we can.

My final question at this point 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 database which would be confidential, which the information would not be subject to subpoena or discovery in any administrative or civil proceeding. And in your letter you discuss with 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: Ms. Morella, we don't want to do anything that would be perceived to be 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. It's a very important area when you think of medical errors and how to deal with them.

It's not an area that is something that we mandate or control in the Federal Employee Health Benefits Program, and if I could 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 healthcare system, and that if we were to do things that are unique or are that 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-- enabling them to choose health plans, and that that information then could be made available.

But we didn't want to duplicate or 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 the leapfrog group of the Business Roundtable looking at 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. These are all things that we think make sense and that people ought to know as they make choices about their health care.

The one thing that we did require, and it's a requirement that will go into effect in 2002, is that beginning in that year all health plans need to seek accreditation from a national organization that incorporates patient safety standards into their accreditation process. And that's where some of that accountability comes in. We think that makes a lot of sense.

REP. 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'm glad that you are proceeding in that particular regard. And I know there are a lot of companies that are coming up with remedies. I saw one recently, a machine to help with signatures, and, you know, prescriptions and again, I'm glad we're focusing on this. I think it's an important issue.

I thank you, Mr. Chairman. Thank you, Mr. Flynn.

MR. FLYNN: Thank you.

REP. SCARBOROUGH: Thank you, Mr. Flynn. We certainly appreciate your patience in answering the questions and look forward to seeing you again soon.

MR. FLYNN: Thank you, Mr. Chairman.

(Panel II prepares to testify.)

REP. SCARBOROUGH: I'd like to call up the second panel right now. We have Stephen Gammarino, Bobby Harnage, and Scott Nystrom. Mr. Gammarino is senior vice for the Federal Employees Program in Integrated Health Resources of Blue Cross and Blue Shield Association. He has extensive experience in the Health Care Administration and is responsible for the planning and direction of the Federal Employees Program, serving almost 4 million enrollees with a premium income of over $8 billion. Mr. Gammarino has been a frequent witness before this subcommittee on FEHBP issues, and we certainly appreciate his efforts.

Bobby Harnage is currently 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 certainly 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 advisor to the bipartisan Commission on Entitlement and Tax Reform chaired by Senators Bob Kerry and John Danforth. He's also worked on the Hill as budget associate senior legislative assistant in the House of Representatives and at the Office of Management and Budget analyzing health issues, among others. This is Dr. Nystrom's first appearance before the subcommittee, and we certainly welcome him also.

So if you all could stand, and I'll administer the oath. Do you swear that the testimony you give before the subcommittee will be the truth, the whole truth, and nothing but the truth?

WITNESSES: (not audible)

REP. SCARBOROUGH: Thank you. Be seated. And we'll begin with you, Mr. Gammarino.

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'd like to do is summarize my written testimony. Therefore, 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 OPM's call letter would affect the cost and quality of health care coverage offered through the FEHBP and other issues that are important to Blue Cross/Blue Shield service benefit plan. In addition, you requested that I discuss efforts by Blue Cross/Blue Shield to restrain specifically prescription drug cost.

As a general rule, Blue Cross/Blue Shield 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 upon 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 substance abuse parity and the second, improving the quality of health care by reducing medical errors and increasing patient safety.

Blue Cross/Blue Shield has worked closely with OPM to develop and enhance the mental health substance abuse benefits better known as MHSA. We've appreciated OPM's ongoing involvement of the carriers and leaders in the managed behavioral healthcare field to better understand the implication 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. Service benefit plan intends to build upon existing local Blue Cross/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 new benefit for probably three to five 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 in 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 healthcare settings.

However, it is important to understand that it is the physician and the hospital community, not the local health plan, who must devise the clinical strategies to address patient safety concerns. The primary role of the local plan like the FEHBP, Blue Cross/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, accrediting agencies and others to implement patient safety programs.

Blue Cross/Blue Shield service benefit plan has developed and shared with OPM a number of initiatives that focus on improving quality and patient safety.

In the letter of invitation, the subcommittee also asked Blue Cross/Blue Shield to focus on prescription drug cost trends and how prescription drugs have contributed to the overall cost 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 often substitute for less- expensive existing therapies, rising prices for the existing drugs and heightened demand and utilization of prescription drugs fueled by the ever-expanding direct-to-consumer advertising.

In addition 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/Blue Shield standard option is 60. Data has shown that the quantity of medical resources and specifically prescription drug increases as individuals age.

It's also important to understand that these trends are not dissimilar to those experienced industry-wide.

In addition to the service benefit plans' numerous initiatives, we are also focusing on a number of other areas from the association's perspective. As part of this effort to constrain prescription drug cost, the association--that is, Blue Cross/Blue Shield--is a founding member of the Rx Health Value Coalition, a coalition of more than 30 consumer groups, private employers, purchasers, providers, labor unions and others that seek to ensure that credible analysis is done to ensure that these drugs provide value to the community.

In addition, we've 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 in-depth reviews and cost benefit analyses of new and existing drugs.

Additionally, your letter of invitation asked that we address any other issues that are important to the service benefit plan. We remain concerned about the administration's continued efforts to impose the cost accounting standards all in the FEHBP.

Blue Cross/Blue Shield Association has actively sought the exemption for the past two years after an exhaustive analysis determined that the cost accounting standards are fundamentally incompatible with and inappropriate for our health insurance system.

Despite the clear will of Congress and overwhelming strength of the arguments against imposing these standards, the administration continues to oppose this exemption. Applying CAS (sp) would not only not add value to the program; it would degrade the commercial capabilities on which our plan's core business depend. Therefore, as I've testified before, Blue Cross/Blue Shield cannot sign any contract with the agency that contains the CAS clause or otherwise seeks to implement these standards that have been exempted by law.

In conclusion, the Federal Employees Health Benefits Program is widely admired throughout the program as a model of efficiency and effectiveness due to the private sector competition and consumer choice. Blue Cross/Blue Shield is very proud of the role of the Blue Cross/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.

REP. SCARBOROUGH: Thank you, Mr. Gammarino. Mr. Harnage, welcome back. And we certainly look forward to hearing your testimony now.

MR. HARNAGE: Well, sir, it's good to be back. Mr. Chairman and subcommittee members, I've 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 two-year run-up in Federal Employee Health Benefit Program premiums that infuriated our members and many members of this committee. Here we are again one year later and many millions of dollars poorer as premiums in the Health Benefit Program 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 the Health Benefit Program, but this dialog has fallen far short of the relationship that we want. We still pay roughly a third of the $20 billion annual cost of the Health Benefit Program not counting the out-of-pocket copayments and the 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 to $7 billion of financial responsibility should come with a voice in how the money is spent. There is no good reason why $6 to $7 billion out of the 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 and negotiations with health insurance companies.

On behalf of the more than 600,000 federal and District of Columbia workers AFGE represents and for whom HBP is the only reasonable choice of health insurance, I ask the subcommittee to affirm that workers' voice 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 slow-down in premium inflation. The insurance companies are increasingly embold to press for less scrutiny of their contracts, fewer restrictions on benefit design, no restraint on how they obtain and what they charge for prescription drugs, and of course a blank check at the premium setting.

Following the tradition, OPM again refers to the insurance companies as "its partners" in this year's call letter and congratulates them for their cooperation and collaboration on many policy issues. If OPM describes its own relationship to the insurers as one of partnership where does that leave us?

Federal employees are tired of a situation where OPM in its own words collaborates with the insurers and passed the astronomical cost of such a cozy arrangement on to us and our fellow taxpayers. Time restraints preclude me from raising all the issues that AFTE has addressed in our written statement, but I would like to touch on a few.

The first is, OPM's proposal to carve out our contract directly for certain health insurance benefits such as dental, vision and possibly 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 graciously step in to use its previously 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 economics policies of the past 20 years, but it is in direct contract to the values AFGE upholds and we want no part of it.

The second is the problem of 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 Program 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 over the last two years insurance companies and HBP have been exempt from the government cost accounting standards. The federal government imposes cost accounting standard on contractors as a public safeguard. The standard for which health benefit program carriers have sought and won exemption in each of the past two years prohibits health insurers from passing on to the government illegitimate expenses.

In conclusions, it's 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 workforce and the challenge of recruiting, training and retaining their eventual 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 in salaries and health insurance that are seriously inferior to what is offered in both 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 in order t make sure that every health care dollar devoted to the Federal Employee Health Benefit 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, accessible and comprehensive health insurance program for federal workers. That partnership should be federal workers themselves. 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 program's payers or the beneficiaries, the taxpayers or the federal workers, retirees and their families.

Mr. Chairman, that concludes my remarks, and I'll be glad to answer any questions.

REP. MORELLA: Thank you, Mr. Harnage. I'd now like to recognize Dr. Scott Nystrom for his comments.

DR. NYSTROM: Thank you. Mr. Chairman, Ms. Morella, Mr. Cummings, thank you for asking me to testify on potential economic effects of allowing the Federal Employee 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 the FSS for prescription drugs this morning. The first potential consequence would be to increase prices for non-FEHBP purchasers of certain prescription drugs.

The second potential consequence be to increase prices of certain prescription drugs for agencies currently receiving discounts of prescription drug prices from the FSS.

The market provides incentive for companies to generate enough aggregate revenue from the existing drug portfolio so they can fund promising new 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 to pharmaceutical companies facing some sort of public policy change. One of the greatest misconceptions is that there's one way to go about prescription drug pricing. For example, many believe that all pharmaceutical companies price their products based on how much they already have 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 cost" 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. Still another may be the level of promotion among competing products. It's in the above context that prescription drug prices are related to future investment of undiscovered drugs. In simple language, pharmaceutical companies want to invest in new drugs to meet consumer 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, aggregate revenue for a company is reduced as one segment of the drug purchasing market receives larger discounts than the previous year, the company then has incentive to raise enough revenue to raise the next promising new drug research idea from other segments of the market.

The above scenario is more than a theoretical concern. We have considerable evidence based on the Medicaid prescription drug rebate program OBRA (sp) 1990 established a system for pharmaceutical manufactures, 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 state formularies. The legislation significantly altered the best price discounts offered by manufacturers in the first three years of 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 profitability.

The average best price Medicaid discount was reduced from roughly 33 percent in 1991 to about 23, 24 percent by the second quarter of 1994. And 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 consumers such as hospitals and HMOs instead of lowering the prices to state Medicaid programs. CRS cites the experience of the Department of Veterans Affairs as evidence of government-induced shifting of the cost of the rebates to other purchasers. Until 1991 the VA enjoyed deep discounts for certain drugs. Beginning in 1991 VA reported significant price increases due they believed to the implementation of OBRA (s) 1990 best price regulations.

In conclusion, I want to again say, whether or not it's a good or bad idea to extend the federal supply schedules 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 federal supply schedule for FEHBP prescription drug purchases is likely to lead to higher prices for certain yet undetermined prescription drugs for the non-FEHBP purchasers.

Three groups that immediately come to mind are retail purchasers are potentially facing higher out-of-pocket costs due to rising prices. That group would include about a third of all Medicare beneficiaries. Current FSS purchasers, Department of Veterans Affairs, Department of Defense, 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 to note is that the FEHBP's program drug expenditures of about $5 billion dwarfs the federal supply schedule that has an estimated pharmaceutical sales of $1.6 billion in 1999. In short, the FEHB has the potential to become the major pharmaceutical purchaser from the FSS if allowed to participate. If the SAMBA (sp) pilot were extended to FEHBP carriers for all drug purchases, there's considerable uncertainty however about the extent of the price increases and which non-FEHBP purchasers would be more likely to experience price increases. However, history suggests that price increases for certain prescription drugs for non-FEHBP purchasers are likely to occur if the SAMBA pilot were expanded.

I thank you very much, and I'm prepared to take questions.

REP. MORELLA: Splendid. I thank you very much, Dr. Nystrom, and all of the panelists for their testimony.

I'll start the questioning off maybe with a question to each of you, and maybe I'll start right at the center 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 negotiations with the carriers. I guess I would ask you, what do you think should be done? First of all, what expertise would AFGE bring to the negotiations? Secondly, would you recommend that other parties be included in the negotiations? And I also wonder why maybe you might sponsor a plan, an FEHB plan like some unions might do. Maybe you'd like to address all of that, Mr. Harnage, to give us direction so that we can, working with OPM, make sure that you are included.

MR. HARNAGE: Well, first of all, I haven't given any thought to 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, so to speak, we found it much better just to get out of the business and try to make the Federal Employee Health Benefit Program better.

And what I mean by that is, I can give you an example of one year we looked at Blue Cross/Blue Shield, Aetna and AFGE's plan and came up with a Cadillac plan that would provide the best benefits available to federal employees. And although our cost went from something like $12 to $16 premium at that time, and we'd love to see those premiums again, it was considered inflationary because it was a 25 percent increase in cost. That same year, Blue Cross/Blue Shield with less insurance was $18 premium.

We wasn't allowed to be competitive in the excuse that Mr. Devine gave us, and we all remember Mr. Devine, was that he had to maintain the competitive edge. So it wasn't looking for the best deal for the government or for the taxpayers. It was looking for the deal of the insurers.

So we got out of the business. So I'm not too sure I want to get back into that. But we have seen an improvement in our opportunity to talk with OPM concerning the Health Benefit Program. Our problem is, is we're not really getting to the substance of the issues, and we're not in a way of 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 staff and committees and subcommittees and their staff.

I have work groups working at the Pentagon, work groups working at 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 for them to consider, not that we're always right, but it's good food for thought.

And given the opportunity, if I don't have the expertise that they feel like we need I will certainly get it. But there's no need for me to get that expertise now and not have an opportunity to use it. So the excuse that we're not qualified is not a real justification for not letting us be at the table.

REP. MORELLA: What do you do now? I mean, you're just not at the table but you can offer suggestions and --

MR. HARNAGE: Exactly.

REP. MORELLA: Do they share with you?

MR. HARNAGE: We have some discussion in what's considered, referred to as a "work group" but we're really not getting down to the nuts and bolts.

REP. MORELLA: Would you include other parties?

MR. HARNAGE: Why sure. I have no objections to other employee representatives. We think we're the best, but we'll allow them to be in the room with us.

REP. MORELLA: At another point probably with later question I want to ask you about those employees you said who could not afford the premiums, whether that's 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 is for something called Imitrix (sp), and each prescription includes six doses and can be refilled three times a year 18 doses per year. These migraines plague her about 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 FEHB program, prescription drug costs are controlled by limiting the number of doses. Clearly, he plan is trying to hold down cost, 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 schedules discount prices for those covered by other FEHBP plans. Would you comment on that?

MR. GAMMARINO: I heard two questions. One was associated with this particular case and the quality assurance program that this health plan has associated with insuring that the medication is dispensed according to the guidelines, not knowing the particular case. So that's one issue. The health plan is involved in screening for this.

I would say, one, as a program that also has these prior approval programs, the goal is not necessarily cost-containment. It is part of the patient safety initiative that this administration has. 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 with the physician is to go beyond those guidelines. So not knowing that particular case-- but 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'm opposed to it. One is, from my layperson's reading of the statutory requirements to obtain these types of discounts I think is inappropriate for any FEHBP carrier to receive them. Secondly, this is not a government program. It's not Medicare. It's not Medicaid. This is a program that the government has chosen to use the private insure competitive model to provide the type of care and health care coverage that enrollees would like. I think a couple questions should be asked. I don't know the specifics of what SAMBA is actually requesting or what they're 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 types of restrictions associated with that? I don't know the answer.

Secondly, 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? I mean, would the enrollees next expect to instead of having the selection of health care providers like Georgetown and John Hopkins, would they be able to get access to the VA facilities? That's an object-- if price is sole objective of these types of initiatives. So I think from an enrollee point of view, I would be a little concerned and have some questions about where the government is going when they seek to go this route.

REP. MORELLA: I thank you. In the next round of questioning I would ask, also I would ask Dr. Nystrom also about his opinion on the federal supply schedule concept. But my time is outside. You can think about it. I'm pleased to recognize Mr. Cummings.

REP. CUMMINGS: Thank you very much, Madam Chairlady. 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's what you're talking about, right?

MR. GAMMARINO: That's one of the primary vehicles they use. They also use print campaigns, newspapers.

REP. CUMMINGS: So you all can see-- I mean, if I understood your testimony correctly, 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. I think studies have been done. For example, the top 10 drugs today that are advertised that are used-- Claritons (sp), etcetera, that you see heavily advertised-- they make up 20 percent of the prescription dollar today. So there's-- I think there's been enough studies already to show a direct correlation.

You have, if you just go back five years in terms of how information was dispensed, primarily drugs were under control of the doctor. They were heavily detailed by drug manufacturers. They had all the information. The information age has changed all that, and 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. And that's the real world, and I think studies have shown that doctors feel considerable pressure to meet that demand.

REP. CUMMINGS: It's interesting. As you were talking I was just thinking, the way it used to be. I mean, if you did that it was only because somebody, one of your neighbors or one of your friends said, guess what, we got the same problem, and I'm using so and so drug. And that's probably about the only way it would have come up.

MR. GAMMARINO: Right. And so the informed consumer is driving some demand, and that's not all bad. I mean, we really support and are going to continue to provide ways to allow our members to receive information. I think one of the things 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 are exposed to the fine print, that shows how drugs if they're misused you can have adverse reactions and wind up in the emergency room.

REP. CUMMINGS: Do you think one of the facts is what the greater use of drugs is the, this whole movement-- well, it's kind of old now-- to ambulatory care as opposed to people spending time in hospitals? I know hospitals use drugs, but I'm just saying-- do you think that's had any impact at all? In other words, people are more or less taking care of themselves outside the hospital. Has any of that had effect on the drug fees going up like Mr.-- the gentleman from OPM? I can't remember his name.

MR. GAMMARINO: It's Mr. Flynn.

REP. CUMMINGS: Yes. Saying that at one time it's 3 percent and now it's 1 out of 4 dollars spent for drugs?

MR. GAMMARINO: I'm sure that's a piece of it. There's so many components, and one thing I would want everybody to reflect in terms of when they talk about the changes.

Everybody seems to focus on price, and I'll be the first to tell you, I would like better discounts, and we'll try to achieve them. But the reality is, Mr. Cummings and Ms. Morella, that if we got the VA pricing schedule 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 healthcare costs are where they are today. The milieu has changed. Drugs are a benefit for enrollees. They're used very differently today.

My father had a heart attack at 53. That's the first time he was identified of having that condition. No prior use of drugs. Today an individual probably is on blood pressure medicine at 30. And he's on it for the rest of his life. And the reality is, it costs money. The reality is, that Blue Cross/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.

REP. CUMMINGS: My last question. What are your suggestions as to how to at least prevent the cost, premium cost of going up? I'm trying to stabilize them to some degree. Seeing this 30 percent, a little less than 30 percent over the last three years, and now it looks like we've got another 8.7 possibly coming up. I know you all must think about this all the time and try to figure out what things you can do. And is there anything that we can do as a Congress to help out?

MR. GAMMARINO: Well, there's three was to effect change in this area. One is benefit design. Two is the price we pay for the services-- the discounts we get from the providers and drug manufactures. And the third is, ensuring that it's used where it's appropriate. I think we're going to need a combination of all those. I know we're 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's 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 that probably if you had a panel of physicians up here many of them would tell you, they've lost control over how things are used.

And so a lot of our efforts are going to be on the enrollee. We feel that this particular population would adapt very well to information and education. They're smart, they're educated, they have information tools through the internet, et cetera, that if we make a big push with the support of the agency, AFGE, other groups, we think we can make an impact that way.

But we're not going to do it in restricting care. We're not going to do it in saying no. And with that I'll respond to any other questions.

REP. CUMMINGS: Thank you.

REP. MORELLA: I'm pleased now to recognize the gentlewoman from the District of Columbia, Ms. Norton.

REP. ELEANOR HOLMES-NORTON (D-DC): Thank you very much, Ms. Morella. I apologize and regret very much that I could not be here, particularly to hear OPM's testimony, but I had to be in the Senate where the District budget has come up for its first hearing. 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 the federal workers have had to absorb. During the time when 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 universal health care, look at what the federal government does for its employees and for 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 costs, that costs were kept down for some years. And I now cynically believe that the reason 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 asked that question in prior hearings. I must tell you, I no longer believe that because the costs keep going up, and another reason I no longer believe it is because OPM appears to be moving backwards. I want to say in no uncertain terms, at a time when we've got what, 60 million people without health care, at a time when we are in this Congress only incrementally, child by child perhaps, trying to get people who are uncovered, the whole notion that OPM would come forward with an employee-pay-all notion is preposterous and outrageous.

I mean, the federal government isn't going to be able to doodely- 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 number of retirees, because we've already downsized the number and because, very frankly, where it's at today is in the private sector. That's where all the sex appeal is, that's where all the tech jobs are. So the model workforce that we've had we would have a hard time getting it if we paid 100 percent of healthcare the way many private companies do.

And now we're going in the opposite direction? You expect somebody want to work for the federal government? I think this is so outrageous when in fact 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 years ago when you consider that we're taking the head off of 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 haven't yet gotten their careers started don't even want to talk to federal recruiters. And now what is OPM come? "Well, tell you what we're going to do."

At a time when everybody else understands health care is the way to recruit people? This is what Uncle Sam is going to do for you. He's going to carve out some stuff that you can pay for yourself and say "maybe we'll help you out a little bit and come in and referee things a little bit when you do that." This is crazy! It is going to hurt the federal service. It's going to hurt every member of Congress when we run a government that cannot be run, especially with the first-class people we've been able to attract in no small part because of retirement and health benefits.

Now 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. It must be in the middle, lower, and going down every day with respect to the kind of healthcare provided as an employer, and there's no excuse for it.

The reason there's no excuse for it is, when you have the largest workforce in the country you got something to work with. You have got market, you have got market strength. You can make things happen, not only for federal workers, you can make things happen for everybody else by leading the way. The way we finally are in long-term health care but thank you very much with federal employees paying 100 percent of it so that I fear very many will say, oh, wow. These folks are already making it hard for me to keep within my basic health plan. How in the world am I going to go into long-term health care?

We are not using the economy of scale that is ours simply because we have the largest workforce in the country. We are diddling and acting a though we were some corporate employer trying to save money, trying to carve out until he finds out that his competitors are stealing all of his workers. Well, our competitors have been doing that now for at least a couple of decades, and we are asleep at the wheel. The way to go sound asleep and become complete 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 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 1940s federal government approach to employee benefits, especially health benefits, and into the need of the federal government to retain and recruit workers.

Thank you, Madam Chair.

REP. MORELLA: Thank you. Thank you, Miss Norton. Now back to some further questioning. I think it's a very interesting statement that everybody is heeding.

Again, I promised that I would ask you, Dr. Nystrom, about the federal supply schedule, your opinion of it and any implications it may have.

DR. NYSTROM: I guess for the most part 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 pretty well the direction that is prices in other markets, other segments of the market, will probably go up. But it's 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 FHBP.

REP. MORELLA: I noted also, switching around, Mr. Gammarino, I know that you have to leave by 12:30. I'm going to ask you one question. You have permission to leave at any time, and we appreciate you being here. I'm interested in your response to the medical errors concept that we talked about and the fact that I have legislation-- there is legislation and the bill I've been pushing was crafted with the U.S. Pharmacopeia in terms of this database and the voluntary reporting of errors in order to share solutions. I wonder if you might comment on that.

MR. GAMMARINO: Well, what I'd like to comment on is how we can participate in this activity.

REP. MORELLA: Yes.

MR. GAMMARINO: And 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 a history of the drugs that they've received and the medical care that they're getting today. And we have a number of things that we want to look at. We have one pilot that we talk to OPM about, and we're both excited about exploring it.

It would take an initiative that's in the private sector of Blue Cross/Blue Shield specifically at the Empire Blue Cross/Blue Shield Plan, and allow 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've 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 be also 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 follow-up care he or she may be receiving. So we hope to have this pilot going later this summer, and we hope next year to have various forms of this pilot out there at other Blue Cross/Blue Shield plans. So we are excited about the ability to support this initiative, particularly with the unique role that we can play.

REP. MORELLA: Excellent. Excellent. I'm glad to hear that. So you may-- I don't know whether-- Ms. Norton, did you have a question you wanted to ask of Mr. Gammarino before he leaves? And I'd ask Mr. Cummings. So we look forward to your continuing to apprise us of what is happening.

I'm going to ask Mr. Harnage-- I don't know whether you want to hear his answer-- 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 statement about the fact that we can't keep having medical costs go up year after year?

MR. HARNAGE: Well, 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 a health care as much smaller employers do? And why aren't we looking at what's 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. But why aren't we looking at those employers that are much smaller than the United States government that has better plans at a lower cost and seeing what they're 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'm inclined to agree to that, although the government's 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's the programs we want to provide for our employers; providers, what do you charge us for them?

Instead of taking the opportunity for volume dealing, we're letting the insurers tell us what they want and what it costs and then letting the individual federal employee do the shopping for us. I think that's got things back asswards. I think we can do a much better job in that area.

Those are the simple questions that you ask yourself. When we talk about the federal supply on the prescription drugs that it's going to increase the cost for those currently participating in it, I think that's missing the mark. We are looking at everything as if we had 50 different governments in the United States, and although I often think we might have we really have one. So if you reduce the cost of the Federal Employee Health Benefit Program by a dollar but you increase the cost of the other participants by a dime, it doesn't take a rocket scientist to figure out you've made-- you're 90 cents better off overall.

And to compare the federal government to the private sector, to the entire population of the country, you got to be talking about socialized medicine to make that kind of comparison. We have to compare the federal government as an employer, not to the population at mass.

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's 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 we're saving everybody-- when you save the government money you're saving the taxpayer money. And that's what we're looking at.

The federal employees is the highest single group, largest single group of taxpayers in this country. We've got an interest in what taxes are the same as we have an interest in our jobs. If we can reduce the cost of government we can reduce the cost of our taxes as well.

REP. 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, and you have-- 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 cost of drugs? And if so, what are these policies? Some of the points you've touched on. Just before you left I wanted to get your opinion on the prescription drug a bit more.

DR. NYSTROM: I guess I would not use language like the word "gauge." I would say the market, on the contrary-- for example you talked about 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 more as free riders on the overall system of pharmaceutical industry.

And as such, there are differences in price for all kinds of different reasons, and there have a few studies on this-- some done more methodologically rigorous than others. But you look at a place like Mexico which has a lower per capita income-- that is, they don't have the income to purchase at the prices that the 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. And 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's extremely complex, and I wouldn't begin to even talk about it in this form without spending a lot more time looking at it.

You asked about policies in the federal government artificially raising the cost of drugs? There are two policies probably that contribute a good deal to the cost of drugs, and 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's because they want companies to have the financial and economic incentive to go out and discover new drugs. And without patent protections, you don't have the incentive that you need if you want new drugs.

Those are the two questions that you asked? Okay. Thank you.

REP. MORELLA: Mr. Gammarino, do you want to make any final comment?

MR. GAMMARINO: No. And I appreciate you listening and enjoy working with you in the future. Thank you.

REP. MORELLA: Thank you for being here. Mr. Harnage, any final comments you'd like to make?

MR. HARNAGE: I'd just make one comment. 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've 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, and when I asked, how did it happen, they said we was not aware of it, it was snuck by. When I said, let's don't let it happen again in '99, it happened again in 1999 although they've got a letter over on the Hill at the 11th hour very weakly that they would oppose to it.

This year I asked them to get the word on the Hill early and more strongly that they was opposed to that. And I had been assured that they would do that.

For the representative of OPM here today to not quickly and emphatically state to you that they are opposed to the waiver of the CAS standards is puzzling to me, and I'm going to find the answer to that, and I hope you do too.

REP. MORELLA: We'll explore it further. We still have some OPM people who are here.

Dr. Nystrom, any final comments from you, sir?

DR. NYSTROM: No thank you. I just want to tell you how gratifying it is to appear before this committee, especially before my own congresswoman. So I'm very pleased to be here, and I hope I've been of some assistance in helping you understand this issue.

REP. MORELLA: You have indeed. I didn't even realize you were a constituent. I should have realized how brilliant you are that that would fit into that.

(Laughter.)

REP. MORELLA: I do want to thank you for being here for this panel, and ask you if it is okay for some questions to be forwarded to you. There are a number of questions we didn't get to, and we'd very much like the benefit of your responses, and OPM knows we traditionally do that also. And so I thank you on behalf of the entire subcommittee, and the hearing is adjourned.

END

LOAD-DATE: June 15, 2000

Document 9 of 103.


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