Federal Health Benefits Program:

Stronger Controls Needed to Reduce Administrative Costs

GGD-92-37: Published: Feb 12, 1992. Publicly Released: Feb 12, 1992.

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Pursuant to a congressional request, GAO reviewed the Office of Personnel Management's (OPM) administrative costs for the Federal Employees Health Benefits Program (FEHBP), focusing on: (1) how FEHBP costs compared with larger employer-sponsored programs' costs, including the Department of Defense's costs for the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS); and (2) whether opportunities exist to reduce FEHBP costs.

GAO found that: (1) in 1988, the fee-for-service (FFS) portion of FEHBP cost $8.56 to administer for each $100 of paid benefits, which was 51 percent more than the reviewed large insured nonfederal programs' average cost ratio, 84 percent more than the CHAMPUS cost ratio, and 89 percent more than the reviewed self-insured nonfederal programs' average cost ratio; (2) within FEHBP, the administrative costs for the 17 largest FFS plans varied; (3) some cost differences could be attributed to conducting annual open seasons, processing enrollment changes, and other factors that GAO lacked sufficient data to measure, such as differing benefits structures, enrollee characteristics, and benefit cost activities; (4) FEHBP and the reviewed programs use contractors to pay and process their health benefits claims; (5) since OPM structured FEHBP to include certain plans regardless of their cost-effectiveness, OPM cannot use competitive procedures to select carriers that provide the most cost-effective administrative services; (6) OPM has not provided carriers with sufficient incentives to improve efficiency and reduce costs; (7) although OPM negotiated a new method for adjusting expense ceilings to limit future increases, it has not negotiated expense ceiling reductions or determined whether its expense levels are reasonable; and (8) legislation requiring OPM to select FEHBP contractors through competitive procedures could strengthen its ability to obtain administrative services at prices comparable to the other reviewed programs.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Actions to revise and reform the program have been limited to proposed changes in program financing.

    Matter: The House Committee on Post Office and Civil Service and the Subcommittee on Compensation and Employee Benefits, in considering program reform, should consider plan administrative costs, which totalled $564 million in 1988. If a reformed program would provide a more uniform benefits structure and would be self-insured, the Committee and the Subcommittee should require that claims processing services be procured through competitive, fixed-price contracts that are periodically rebid.

  2. Status: Closed - Implemented

    Comments: Actions have been limited to proposed changes in program financing.

    Matter: The House Committee on Post Office and Civil Service and the Subcommittee on Compensation and Employee Benefits, in considering program reform, should consider plan administrative costs, which totalled $564 million in 1988. If a reformed program would provide a more uniform benefits structure and would be self-insured, the Committee and the Subcommittee should require that claims processing services be procured through competitive, fixed-price contracts that are periodically rebid.

  3. Status: Closed - Implemented

    Comments: Actions have been limited to proposed changes in program financing.

    Matter: If FEHBP is reformed to have licensed insurers assume all or part of the insurance risk, the Committee and the Subcommittee may wish to consider the merits of providing for the separate negotiation of the administrative services portion of any contracts with competitively selected insurance contractors or claims processors.

  4. Status: Closed - Not Implemented

    Comments: On March 11, 1992, the Compensation and Employee Benefits Subcommittee held a hearing on the report. Since then, actions have been limited to proposed changes in program financing.

    Matter: If FEHBP is reformed to have licensed insurers assume all or part of the insurance risk, the Committee and the Subcommittee may wish to consider the merits of providing for the separate negotiation of the administrative services portion of any contracts with competitively selected insurance contractors or claims processors.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OPM has developed performance indicators to be reported by all carriers and standard quality assurance guidelines and reporting requirements related to carriers' operations. OPM is collecting this data to measure the carriers' performance and the adequacy of their internal controls. In 1994, the contract performance standards and measurements will become formal parts of the service charge negotiations.

    Recommendation: The Director, OPM, should take action to better control administrative costs of FFS carriers. Specifically, OPM should require the carriers to report expense information and work-load indicators in uniform formats and use these data to routinely analyze and compare the carriers' operational expenses, efficiency, and efforts to control expenses.

    Agency Affected: Office of Personnel Management

  2. Status: Closed - Implemented

    Comments: OPM successfully negotiated administrative cost reductions that will save $43.3 million during the 1993 to 1995 program years.

    Recommendation: The Director, OPM, should take action to better control administrative costs of FFS carriers. Specifically, OPM should require the carriers to report expense information and work-load indicators in uniform formats and use these data to negotiate baseline cost ceilings for the carriers' expenses on the basis of analyses of carriers' operations, rather than historical costs.

    Agency Affected: Office of Personnel Management

  3. Status: Closed - Implemented

    Comments: OPM negotiated adjustments to carriers' baseline administrative expenses. OPM is collecting workload data through the annual accounting statements and specific program reports.

    Recommendation: The Director, OPM, should take action to better control administrative costs of FFS carriers. Specifically, OPM should require the carriers to report expense information and work-load indicators in uniform formats and use these data to negotiate adjustments to the baseline ceilings as necessary in subsequent years for changes affecting costs, such as inflation, work load, and enrollment.

    Agency Affected: Office of Personnel Management

  4. Status: Closed - Not Implemented

    Comments: OPM's current system has incentives for cost control and it will seek to ensure that the system is applied effectively. GAO believes that the negotiation of fixed prices would be more effective in controlling costs than the improvement of the monetary incentives currently available. However, GAO is closing this recommendation since OPM intends to better ensure that its process is applied effectively.

    Recommendation: After the ceilings have been appropriately adjusted, the Director, OPM, should amend the health plan contracts to provide a monetary incentive that would encourage the carriers to reduce their operational expenses for the year. In doing so, OPM should consider paying the carriers a fixed price for their administrative services, rather than reimbursing them for their actual, allowable expenses.

    Agency Affected: Office of Personnel Management

  5. Status: Closed - Implemented

    Comments: OPM has developed standards and guidelines as part of its overall effort to implement quality assurance measures with the carriers. Incremental changes to the standards are expected as well as contractor improvements where performance is measured against the standards warrants.

    Recommendation: To ensure that a minimum acceptable level of carrier performance is maintained FEHBP-wide, the Director, OPM, should establish performance standards and measures pertaining to the accuracy and timeliness of claims payments and responsiveness to enrollees. The carriers should be required to periodically report information that can be used to measure and compare performance. The Director should also enforce these standards by penalizing carriers that fail to meet them.

    Agency Affected: Office of Personnel Management

 

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