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entitled 'U.S. Postal Service: Proposed Health Plan Could Improve 
Financial Condition, but Impact on Medicare and Other Issues Should Be 
Weighed before Approval' which was released on August 19, 2013. 

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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

July 2013: 

U.S. Postal Service: 

Proposed Health Plan Could Improve Financial Condition, but Impact on 
Medicare and Other Issues Should Be Weighed before Approval: 

GAO-13-658: 

GAO Highlights: 

Highlights of GAO-13-658, a report to congressional requesters. 

Why GAO Did This Study: 

USPS has asked Congress to help restore its financial viability in 
part by enacting its proposal to create a USPS health care plan 
outside of FEHBP. This would result in the withdrawal of all postal 
employees and retirees (about 1 million people) from FEHBP. Under its 
proposal, USPS’s and postal employees’ and retirees’ share of premiums 
would first be established by USPS and then, for union-covered 
employees, in collective bargaining. USPS employee groups oppose or 
have concerns about USPS’s proposal. 

GAO was asked to review USPS’s proposed health care plan. This report 
discusses how the plan could affect 1) USPS’s financial condition, 2) 
postal employees’ and retirees’ benefits and costs, and 3) FEHBP and 
non-postal enrollees. GAO analyzed USPS and FEHBP data and interviewed 
officials from USPS, Office of Personnel Management (OPM), OMB, 
Treasury, CMS, employee groups, and FEHBP plans. See the following 
page for more discussion of the scope and methodology. 

What GAO Found: 

The U.S. Postal Service (USPS) would likely realize large financial 
gains from its proposed health care plan, primarily by increasing 
retirees’ use of Medicare. Specifically, USPS estimates that its plan 
would reduce its retiree health benefit liability by $54.6 billion, 
thereby eliminating its unfunded retiree health benefit liability. The 
plan would also reduce USPS’s required total annual health care 
payments by an estimated $7.8 billion in the first year of 
implementation and by $33.2 billion over the first 5 years of 
implementation. USPS also projects that relative to the total annual 
health care payments it would expect to make (reflecting its stated 
inability to make prefunding payments to fund retiree health 
benefits), its new plan would reduce its payments by $2.1 billion in 
the first year of implementation and $12.4 billion over 5 years. USPS 
also projects that its plan would increase the more than $550 billion 
that the federal government spends annually for Medicare by $1.0 
billion in the first year and an average of about $1.3 billion 
annually in the first 5 years of its health plan—about 0.2 percent of 
Medicare’s annual costs. GAO has previously reported that Medicare is 
on a fiscally unsustainable path over the long term. Additional costs 
resulting from USPS’s proposed plan would also have to be weighed 
alongside the fiscal pressure already faced by Medicare, but these 
costs have not been evaluated by the Office of Management and Budget 
(OMB) or the Centers for Medicare and Medicaid Services (CMS).
Some elements of USPS’s proposal would add uncertainties that could 
reduce funds available for its employees’ and retirees’ future health 
care. 

* Investment of Health Plan Assets: One of USPS’s proposed options for 
investing health plan assets would increase the risk exposure of these 
assets by allowing investments in assets other than Treasury 
securities, such as stocks, as well as commodities, foreign currency, 
and other investments. If fund assets were invested in non-Treasury 
securities (including $46 billion that would be transferred under this 
option from the current Postal Service Retiree Health Benefits Fund), 
the fund may experience losses in a market downturn and would thus 
have reduced assets available for health care. The presence of non-
Treasury securities in the portfolio would also raise issues as to the 
appropriate discount rate for determining prefunding targets for 
retiree health benefits. 

* Transfer of Surplus Funds: USPS’s proposed option to transfer health 
fund assets to use for purposes other than health benefits, when 
assets supporting the USPS health plan exceed liabilities, is not 
fiscally prudent. If USPS were to consistently exercise this option to 
help maintain its financial solvency, it could result in an unfunded 
liability for retiree health benefits. 

* Selection of Assumptions: Liability measurements are very sensitive 
to assumptions, and there can be professional disagreements over 
assumptions. USPS’s proposal could potentially allow for the use of 
overly optimistic assumptions, which could lead to inadequate funding 
for the health plan over time. This potential could be reduced by 
having assumptions selected by an independent third party. 

What GAO Recommends: 

As Congress considers USPS’s health care plan, it should weigh the 
plan’s impact on Medicare and other issues, including establishing 
safeguards for USPS health plan assets and ensuring FEHBP-comparable 
protections for USPS health plan participants. In a letter commenting 
on this report, USPS took no position on GAO’s recommendations. OPM 
and Treasury had no formal comments. USPS and Treasury provided 
technical comments that were incorporated where appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-13-658]. For more 
information, contact John E. Dicken at (202) 512-7114 or 
dickenj@gao.gov, Lorelei St. James at (202)-512-2834 or 
stjamesl@gao.gov, and Frank Todisco at todiscof@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

USPS Would Likely Realize Large Financial Benefits from Its Health 
Plan, Mainly by Increasing Retirees' Use of Medicare, but Some Plan 
Elements Could Decrease Funds Available for Retiree Health Benefits in 
the Future: 

Compared to FEHBP, Postal Employees and Retirees Would Have Coverage 
for Similar Services, but Elements of the Proposed Plan's Design Could 
Lead to Higher Costs for Some Enrollees: 

A USPS Withdrawal from FEHBP Would Significantly Reduce Program 
Enrollment but Is Not Expected to Adversely Affect Most Nonpostal 
Enrollees: 

Conclusions: 

Matters for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Appendix I: The Proposed Health Care Plan of the U.S. Postal Service: 

Appendix II: U.S. Postal Service Proposals for Health Plan Financing: 

Appendix III: Comments from the U.S. Postal Service: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: USPS Health Benefits Payments, Fiscal Years 2007 through 2012: 

Table 2: Key Elements of the Proposed USPS Health Care Plan: 

Table 3: USPS-Projected Liabilities and Assets for Retiree Health Care 
under FEHBP and the USPS Proposed Health Plan, Projected to September 
30, 2014: 

Table 4: USPS-Projected Reduction in Its Liability for Retiree Health 
Benefits, Projected to September 30, 2014: 

Table 5: Projected USPS Payments from the Postal Service Fund for 
Health Benefits under FEHBP and USPS's Proposed Health Plan: 

Table 6: Examples of Services for Which the USPS Proposed Plan Offers 
Levels of Coverage for In-Network Care within the Range of Coverage 
Offered by Selected FEHBP Plans: 

Table 7: Comparison of Proposed USPS Annual Plan Deductibles and Out-
of-Pocket Maximums to Those of Selected FEHBP Plans: 

Table 8: Illustrations of Estimated Differences in Employees' Annual 
Costs under the Proposed USPS Plan and the FEHBP Plan with the Largest 
Number of Postal Enrollees: 

Table 9: Comparison of FEHBP Enrollment in 2011 and under a USPS 
Withdrawal from FEHBP: 

Table 10: Comparison of Age Distribution of FEHBP Enrollment in 2011 
and Estimated Distribution under a USPS Withdrawal from FEHBP: 

Table 11: Number of FEHBP Plans at Various Levels of Postal Enrollment 
and the Number of Postal and Nonpostal Enrollees in Those Plans as of 
2011: 

Figure: 

Figure 1: Percentage of Postal Employees and Retirees from Selected 
FEHBP Plans Who Could Obtain Similar or Lower Premiums under the 
Proposed USPS Health Plan, 2013: 

Abbreviations: 

CMS: Centers for Medicare & Medicaid Services: 

EGWP: Employer Group Waiver Plan: 

ERISA: Employee Retirement Income Security Act of 1974: 

FEHBP: Federal Employees Health Benefits Program: 

HBF: Health Benefits Fund: 

HMO: health maintenance organization: 

OMB: Office of Management and Budget: 

OPM: Office of Personnel Management: 

PAEA: Postal Accountability and Enhancement Act: 

PHSA: Public Health Service Act: 

PSRHBF: Postal Service Retiree Health Benefits Fund: 

TIPS: Treasury Inflation-Protected Securities: 

USPS: U.S. Postal Service: 

USPS OIG: U.S. Postal Service Office of the Inspector General: 

[End of section] 

July 18, 2013: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable Tom Coburn, M.D. 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Susan M. Collins: 
United States Senate: 

The U.S. Postal Service (USPS) has insufficient revenues to cover its 
expenses, has reached its statutory borrowing limit of $15 billion, 
lacks liquidity to maintain its financial solvency, and has projected 
unsustainable losses. We and the Postmaster General have called on 
Congress to enact legislation for comprehensive postal reform to 
address these issues.[Footnote 1] We have recently testified that USPS 
needs to reduce its expenses while continuing to fund its retirement 
obligations.[Footnote 2] Compensation and benefits continue to 
comprise roughly 80 percent of postal costs, with benefit costs 
comprising close to half of this. Employee and retiree health care 
benefits are USPS's single most costly benefit. In fiscal year 2012, 
USPS reported that health benefit payments were $7.8 billion for 
current postal employees and retirees,[Footnote 3] not including $11.1 
billion in statutorily required payments--that USPS did not make--to 
prefund retiree health benefits.[Footnote 4] USPS's reported unfunded 
liabilities for retiree health benefits combined with its other 
liabilities totaled $96 billion at the end of fiscal year 2012. 

To improve its finances, USPS has proposed establishing its own health 
care plan that would provide coverage for the approximately 1 million 
postal employees and retirees who are currently enrolled in the 
Federal Employees Health Benefits Program (FEHBP). USPS's plan is 
designed to increase postal retirees' enrollment in Medicare and take 
advantage of Medicare subsidies for employer-based prescription drug 
plans.[Footnote 5] To help finance its plan, USPS has proposed as one 
option a new fund that would inherit all assets (reported at 
approximately $46 billion at the end of fiscal year 2012) of the 
Postal Service Retiree Health Benefits Fund (PSRHBF). The postal 
unions and management associations and an organization representing 
federal employees and retirees have raised concerns about or are 
opposed to USPS's proposed health care plan.[Footnote 6] Some of these 
groups have suggested that USPS should explore options for reducing 
costs within FEHBP. However, USPS has stated that it cannot sustain 
the current approach to providing health benefits and, unless its 
proposed health plan is implemented, will be unable to pay FEHBP 
premiums for current postal employees and retirees in future years. 

With these issues in mind, you asked us to examine USPS's proposed 
health care plan. This report addresses (1) the potential effects of 
the proposed plan on USPS's financial condition; (2) the potential 
effects of the proposed plan on postal employees' and retirees' 
benefits and costs; and (3) the potential effects of a USPS withdrawal 
on FEHBP and on nonpostal FEHBP enrollees. 

To describe the potential financial effects of USPS's proposed plan, 
we reviewed USPS documents detailing key elements of the plan and 
estimated cost savings. We obtained USPS's projections of its cash 
expenses, liability, and unfunded liability for health benefits, both 
under current law and its proposed health plan, as well as USPS's 
projections of the effect of its proposal on Medicare's total cash 
expenses. We obtained documentation regarding USPS's assumptions, 
methodology, calculations, underlying data, and projections. This 
documentation included reports and memorandums authored by the Hay 
Group (the actuarial contractor that USPS hired to prepare its 
projections), as well as responses to our questions on data 
reliability, including the systems used to compile the data, audits of 
those systems, and system controls to ensure data accuracy. According 
to USPS, the Hay Group's updated projections were prepared using 
valuation software that has been audited by other actuarial firms, and 
there were no material findings from such audits. USPS also stated 
that input data and actuarial assumptions used by the Hay Group came 
from the Office of Personnel Management's (OPM) Office of the Actuary. 
In addition, the USPS Office of Inspector General (USPS OIG) reported 
last year that previous USPS projections of the effect of its proposed 
health plan on its liability for retiree health care were reasonable. 
[Footnote 7] As part of this review, the USPS OIG hired the Nyhart 
Company to review USPS's actuarial assumptions and projections; this 
company also performed independent actuarial valuations to compare to 
the Hay Group results. The Nyhart Company also concluded that the Hay 
Group's estimate of reduction in USPS's liability from USPS's proposed 
health plan was reasonable. While we did not independently validate 
the cost estimates, we reviewed these sources for internal consistency 
and consistency with our prior work and for overall reasonableness, 
and discussed them with officials of USPS and the Hay Group. Based on 
these procedures, and using our actuarial, economic, and health care 
expertise and judgment, we determined that the assumptions and 
projections were sufficiently reliable for purposes of our review. In 
addition, we reviewed relevant statutes, proposed legislation, and 
sections of the President's budget request for fiscal year 2014 
pertaining to USPS's health care costs and the requirement for USPS to 
prefund its retiree health benefits. We interviewed officials from 
USPS, USPS OIG, the U.S. Treasury Department, OPM, postal unions, 
postal management associations, and an organization representing 
federal employees and retirees about USPS's proposal. We also 
interviewed the Centers for Medicare & Medicaid Services (CMS), and 
the Office of Management and Budget (OMB) to discuss the effect of 
USPS's proposal on Medicare, among other topics. 

To determine the effect that USPS's proposal could have on postal 
employees' and retirees' benefits, we compared the package of services 
that USPS proposed to cover in the first year of implementation with 
the services covered in 2013 by seven selected FEHBP plans that 
collectively had more than 75 percent of the total postal enrollment 
in FEHBP.[Footnote 8] We also compared the coverage levels--the 
proportion of the cost for the service that the plan will pay--under 
the USPS plan and the selected FEHBP plans for 29 services, including 
a range of inpatient, outpatient, and prescription drug services. 
[Footnote 9] To determine the effect of the proposal on postal 
employees' and retirees' costs, we performed a number of analyses. 
First, we compared USPS's projected 2013 premiums for the three 
options under its proposed plan--the high, middle, and value options--
with the 2013 premiums for the selected FEHBP plans and estimated the 
percentage of enrollees in the selected plans who would pay similar or 
lower premiums under USPS's proposed plan.[Footnote 10] Second, we 
assessed the effect on employees' and retirees' total costs--premiums 
plus any out-of-pocket costs for the use of care--of moving from FEHBP 
to the proposed postal plan. To do so, we compared other elements of 
USPS's proposed plan that could influence out-of-pocket costs, 
including deductibles and out-of-pocket maximums, with the selected 
FEHBP plans.[Footnote 11] We also estimated what employees and 
retirees would pay at different levels of total annual cost, that is, 
the total cost claimed by providers, under USPS's proposed high and 
middle options and under the FEHBP plan with the largest number of 
postal enrollees.[Footnote 12] To determine the extent to which 
employees and retirees would have the same legal protections related 
to employees' and retirees' benefits and costs under USPS's proposed 
plan as they have within FEHBP, we reviewed draft legislation proposed 
by USPS, federal laws, regulations, and OPM guidance that apply to 
FEHBP plans. We supplemented our review by interviewing officials from 
USPS and OPM, as well as representatives from postal unions and 
management associations about the potential effects of the USPS 
proposal on employees and retirees. 

To describe the effects of a USPS withdrawal on FEHBP and on nonpostal 
FEHBP enrollees, we used OPM data on postal and nonpostal enrollment 
in FEHBP in 2011 to estimate the change in total program enrollment 
and the age distribution of enrollees. We also used the data to 
estimate the effect on enrollment in each of the more than 140 FEHBP 
plans. Using OPM data on the plans offered in each state and the 
premiums charged for those plans in 2013, we determined choices that 
nonpostal enrollees would have in the event that a USPS withdrawal led 
a health plan to leave FEHBP. To supplement this analysis, we 
interviewed OPM officials and representatives from 10 selected FEHBP 
plans to discuss how a USPS withdrawal would affect nonpostal 
enrollees, plan participation in FEHBP, and premium rates.[Footnote 
13] We took a number of steps to assess the reliability of the OPM 
data including interviewing OPM officials on the limitations of the 
data and checking the data for inconsistencies and anomalies. We 
determined the data to be sufficiently reliable for the purposes of 
estimating changes in enrollment and illustrating the choice in plans 
that nonpostal enrollees would have if their plan withdrew from FEHBP; 
where relevant we stated the limitations of the data in the findings. 

We conducted this performance audit from September 2012 to July 2013 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Current USPS Health Benefits Provided Through FEHBP: 

USPS currently participates in FEHBP, a program administered by OPM 
that offers a choice of health plan options to all postal and 
nonpostal federal employees and retirees.[Footnote 14] More than 140 
health plans participate in FEHBP; these include fee-for-service plans 
and health maintenance organizations (HMO). The specific options 
available to enrollees depend on where one lives since fee-for-service 
plans are generally offered nationally while HMOs offer coverage in 
selected areas.[Footnote 15] FEHBP plans generally cover a 
comprehensive array of medical services, including inpatient and 
outpatient services and prescription drugs. However, plans offer 
different levels of benefits, with many plans offering a choice 
between a more expensive option, which offers a higher level of 
coverage and a less expensive option, which offers a lower level of 
coverage. Premium prices also vary across plans and within plans and 
depend on whether one is enrolled in self-only coverage or family 
coverage. FEHBP enrollees can change health care plans during an 
annual open enrollment period or when they experience a qualifying 
life event, such as a change in family status. According to OPM 
officials, an average of 5 percent of enrollees changed plans annually 
from 2003 through 2010. 

Postal employees also pay Medicare taxes and therefore may become 
eligible for Medicare coverage generally at age 65. For retirees 
enrolled in Medicare and FEHBP, including postal retirees, Medicare is 
the primary insurer, and the FEHBP plans generally cover any expenses 
that Medicare does not cover. Eligible retirees are not required to 
enroll in Medicare. According to FEHBP data, in 2011, about 22 percent 
of eligible postal retirees in FEHBP were not enrolled in Medicare 
coverage of outpatient services, known as Part B, and 8 percent were 
not enrolled in Medicare coverage for hospital services (Part A). 
[Footnote 16] According to an OPM actuary, most eligible FEHBP 
retirees do not enroll in prescription drug coverage under Medicare 
(Part D). FEHBP plans provide prescription drug coverage that is as 
good or better than Medicare.[Footnote 17] There is no penalty for 
choosing not to enroll in Medicare; however, retirees who later decide 
to enroll in Part B must pay a penalty.[Footnote 18] For retirees in 
FEHBP who choose not to enroll in Medicare, their FEHBP plan remains 
the primary payer and they would continue to receive the same level of 
coverage through that plan as they did prior to becoming eligible for 
Medicare. 

USPS and its employees and retirees share the cost of health care 
benefit premiums.[Footnote 19] For fiscal year 2012, USPS reported 
paying $5.2 billion toward employee premiums, an amount that 
represented 78 percent of the premium cost (see table 1). USPS's share 
of the premium cost for employees is established through collective 
bargaining with its four major postal unions and in consultation with 
its three management associations. If USPS and its unions cannot agree 
on the share of premium costs, the share is determined in binding 
arbitration. The law requires USPS's employee benefits to be at least 
as favorable as those in effect when the Postal Reorganization Act of 
1970 was enacted.[Footnote 20] USPS's contribution rates for employees 
have historically been higher compared to the rates paid by other 
federal agencies for federal employees,[Footnote 21] but USPS's 
contribution rates will be decreasing in the coming years under 
current agreements with its unions and management associations. 
[Footnote 22] USPS's share of premium costs for postal retirees is set 
according to a statutory formula and is not subject to negotiation 
with its unions. In fiscal year 2012, USPS reported it paid $2.6 
billion toward the costs of current retirees' health benefit premiums. 
In addition to paying a portion of retiree premiums, USPS has been 
required since 2007 to make annual payments to prefund retiree health 
benefits.[Footnote 23] However, USPS failed to make those payments in 
fiscal years 2011 and 2012.[Footnote 24] USPS's failure to make its 
prefunding payments notwithstanding, health care expenses represent a 
significant portion of total USPS expenses. 

Table 1: USPS Health Benefits Payments, Fiscal Years 2007 through 2012: 

Fiscal year: 2007; 
Premium payments for employee health benefits: $5.4 billion; 
Premium payments for retiree health benefits: $1.7 billion; 
Prefunding payments made for retiree health benefits: $5.4 billion; 
Total USPS payments for health benefits: $12.5 billion. 

Fiscal year: 2008; 
Premium payments for employee health benefits: $5.4 billion; 
Premium payments for retiree health benefits: $1.8 billion; 
Prefunding payments made for retiree health benefits: $5.6 billion; 
Total USPS payments for health benefits: $12.8 billion. 

Fiscal year: 2009; 
Premium payments for employee health benefits: $5.3 billion; 
Premium payments for retiree health benefits: $2.0 billion; 
Prefunding payments made for retiree health benefits: $1.4 billion; 
Total USPS payments for health benefits: $8.7 billion. 

Fiscal year: 2010; 
Premium payments for employee health benefits: $5.1 billion; 
Premium payments for retiree health benefits: $2.2 billion; 
Prefunding payments made for retiree health benefits: $5.5 billion; 
Total USPS payments for health benefits: $12.9 billion. 

Fiscal year: 2011; 
Premium payments for employee health benefits: $5.2 billion; 
Premium payments for retiree health benefits: $2.4 billion; 
Prefunding payments made for retiree health benefits: $0.0; 
Total USPS payments for health benefits: $7.7 billion. 

Fiscal year: 2012; 
Premium payments for employee health benefits: $5. billion2; 
Premium payments for retiree health benefits: $2.6 billion; 
Prefunding payments made for retiree health benefits: $0.0; 
Total USPS payments for health benefits: $7.8 billion. 

Source: USPS. 

Note: Numbers may not add to total due to rounding. Health benefit 
premium payments were made by USPS to the OPM-managed Employee Health 
Benefits Fund that finances the FEHBP. Retiree premium payments were 
for postal retirees and survivors participating in FEHBP. Prefunding 
payments were statutorily required payments from USPS to the OPM-
managed PSRHBF. 5 U.S.C. § 8909a. A looming USPS cash shortfall 
necessitated last-minute congressional action to defer costs by 
reducing the 2009 prefunding payment from $5.4 billion to $1.4 
billion. Pub. L. No. 111-68, div. B, § 164(a), 123 Stat. 2023 (Oct. 1, 
2009). Due to subsequent cash shortfalls, USPS did not make its $5.5 
billion and $5.6 billion retiree health benefit prefunding payments 
that were due in fiscal year 2012 ($5.5 billion of which had been 
statutorily delayed from fiscal year 2011 to fiscal year 2012). Under 
accounting standards, these required prefunding contributions are 
included in USPS's expenses for financial reporting purposes, 
regardless of whether the payments are actually made; missed payments 
are reported as a liability on USPS's balance sheet. Thus, USPS's 
expenses exceeded its payments for health benefits in fiscal year 2012 
by the $11.1 billion required prefunding contributions that were due 
but not paid--so that USPS's reported expenses for health care in 
fiscal year 2012 were $18.9 billion, whereas its actual health care 
payments were only $7.8 billion. 

[End of table] 

In December 2012, we reported that USPS's deteriorating financial 
outlook will make it difficult to continue the current schedule for 
prefunding postal retiree health benefits in the short term, and 
possibly to fully fund the remaining $48 billion unfunded liability 
over the remaining decades of the statutorily required actuarial 
funding schedule.[Footnote 25] However, we also reported that 
deferring funding could increase costs for future ratepayers and 
increase the possibility that USPS may not be able to pay for some or 
all of its liability. Our 2012 report discussed various funding 
approaches, the related short-and long-term effects, and key factors 
for Congress to consider in restructuring USPS's current retiree 
health benefit prefunding requirements. We continue to believe that it 
is important for USPS to prefund these benefits to the maximum extent 
that its finances permit, recognizing that multiple options exist to 
prefund benefits and amortize unfunded liability. 

USPS's Proposed Health Care Plan Elements and Legislative Changes: 

USPS's health care proposal to withdraw from FEHBP and administer its 
own health plan includes a number of key elements that are designed to 
reduce USPS's cost of providing health care benefits (see table 2). 
The USPS plan would be available to about 498,000 current employees 
and about 477,000 retirees and would have benefits of comparable 
aggregate "actuarial value" to the largest FEHBP plan in the first 
year of implementation.[Footnote 26] After the first year, benefits 
for current retirees must continue to meet that standard, and while 
the standard will no longer apply for employees, any changes to 
employee benefits would be subject to collective bargaining.[Footnote 
27] 

The USPS plan would include high, middle, and value options that would 
range in price. USPS would self-insure the benefits--that is, USPS 
would set aside funds to pay for benefits rather than purchasing 
insurance from an insurance company. USPS plans to hire a health 
insurance company to administer its proposed plan, a plan that would 
include processing claims, negotiating payment rates with health care 
providers, and providing wellness and disease management programs. 
[Footnote 28] (See appendix I for more information on the USPS 
proposed health plan.) 

Under one financing option (which USPS refers to as "Scenario 2"), 
USPS would pay for health benefits out of a newly created Postal 
Service Health Benefits Fund (HBF), which would include some portion 
of reserve funds currently set aside for FEHBP and all funds from the 
PSRHBF, which would be abolished upon its transfer to the HBF. Under 
Scenario 2, USPS proposes that it be allowed to invest the HBF in non-
Treasury securities, such as investments in stocks and private sector 
bonds, under the oversight of a USPS-appointed committee. According to 
USPS, assets of this fund would not be federally guaranteed, except 
for those invested in federally guaranteed securities. USPS has also 
proposed another option for financing its health plan (which USPS 
refers to as "Scenario 1") under which the Congress could leave the 
funds in the PSRHBF, so that retiree health benefits under the 
proposed USPS plan would continue to be financed out of the PSRHBF. 
See appendix II for more detail on these aspects of the USPS proposal, 
which are discussed further in the next section of this report. 

Table 2: Key Elements of the Proposed USPS Health Care Plan: 

Element: 100% participation of eligible retirees in Medicare Parts A 
and B; 
Description: USPS's plan is designed so that all Medicare-eligible 
retirees would enroll in Medicare Parts A and B. Those who do not 
enroll would have their benefits reduced by the amount Medicare would 
have paid had the individual enrolled. As is the case under FEHBP, 
Medicare would serve as the primary payer of health care costs, and 
for existing retirees, the USPS plan would cover 100 percent of any 
costs above the amounts covered by Medicare Parts A and B. 

Element: Prescription drug benefits that qualify the plan for federal 
subsidies and drug discounts; 
Description: USPS would design the prescription drug benefits under 
its plan to qualify as an Employer Group Waiver Plan (EGWP) under 
Medicare Part D. This would qualify USPS to receive--for those 
eligible for Medicare--a federal subsidy from the Medicare program for 
drug costs, a discount from pharmaceutical companies for brand name 
drugs, and federal coverage for drug costs above a catastrophic limit. 

Element: Introduction of two new tiers of coverage; 
Description: The proposed plan would include four coverage tiers: self 
only, self and spouse, self and children, and self and family. 
Premiums for each tier would be set according to the claims experience 
of the group. USPS's proposed addition of two tiers (self and spouse 
and self and children) to the options available under FEHBP would be 
to reflect the various stages of family status that participants may 
experience over the course of their career and retirement. 

Element: Purchasing plan administration services from a single vendor 
through a competitive bidding process; 
Description: USPS would contract with a single vendor to administer 
its plan; that vendor would negotiate with providers for payment 
rates, process claims, and provide wellness and disease management 
programs. 

Element: Requirement that future retirees be subject to plan 
deductibles and cost-sharing upon enrolling in Medicare; 
Description: For employees retiring a year or more after the USPS plan 
becomes effective (i.e., "future retirees"), Medicare would be the 
primary insurer once the enrollee becomes eligible, and the USPS plan 
would cover costs above what Medicare pays. However, future retirees 
would be required to meet the USPS plan deductible and pay coinsurance. 

Element: USPS Health Benefits Fund; 
Description: Under one option of USPS's proposal (which USPS refers to 
as "Scenario 2"),[A] its health plan would be financed by a newly 
created fund called the HBF that would include: (1) the entire Postal 
Service Retiree Health Benefits Fund that would be abolished upon its 
transfer to the HBF; (2) the balance of the fund that finances FEHBP 
allocable to contributions by USPS, postal employees and retirees, 
including any reserve fund amounts; (3) USPS contributions under its 
health plan; (4) contributions of postal employees and retirees under 
the USPS health plan; (5) any interest on HBF investments; (6) any 
other USPS receipts allocable to the USPS health benefits plan; 
and (7) appropriations based on the service of officers and employees 
of the former U.S. Post Office Department. 
Under its proposal, USPS would be authorized to invest HBF assets 
without the approval of the Secretary of the Treasury in non-Treasury 
securities, such as stocks and bonds, as well as commodities, foreign 
currency, and real property. Also, USPS indicates that HBF assets 
could not be used for (1) loans to USPS, such as to enable it to 
remain solvent; (2) USPS payments to the federal government, such as 
for pensions and workers' compensation; or (3) to finance USPS 
investments or USPS nonpostal initiatives to generate revenue. 
In any year when the amount of HBF assets exceeds USPS's estimated 
actuarial liability for retiree health benefits, USPS could authorize 
the surplus amount to be transferred to the Postal Service Fund that 
finances most USPS expenses, provided that such authorization is made 
pursuant to a recommendation by a majority of the Committee overseeing 
the HBF. 

Element: USPS funding of retiree health benefits; 
Description: USPS would continue to prefund retiree health benefits, 
but under a purely actuarial approach, without the fixed (non-
actuarial) payments required under current law through 2016. Payments 
to the HBF would be based on the "normal cost" and amortization of any 
unfunded liability or surplus of its retiree health care liabilities 
over an amortization period ending at the later of 40 years after 
implementation or 15 years from the then-current year. 

Source: GAO analysis of USPS information. 

[A] USPS has also proposed another option for financing its health 
plan (which USPS refers to as "Scenario 1") under which retiree health 
benefits would continue to be financed from the PSRHBF. 

[End of table] 

According to USPS officials:[Footnote 29] 

* USPS cannot implement its proposed health plan without changes to 
federal law. Although USPS already has limited authority to move 
current employees from FEHBP into a USPS-run plan, it would need 
additional statutory authority to allow the USPS Board of Governors to 
establish initial health benefits and premiums for this plan.[Footnote 
30] 

* Legislation would be needed to move postal retirees out of FEHBP and 
into a USPS plan. With regard to the portions of its plan that 
interact with Medicare, if given the authority to move retirees into a 
USPS plan, USPS already has the authority to design the program in 
such a way to reach 100 percent participation in Medicare and to allow 
USPS to participate in an Employer Group Waiver Plan (EGWP).[Footnote 
31] 

* USPS would need legislation to create a special enrollment period 
for those Medicare-eligible retirees who previously chose not to 
enroll in Parts A and B--similar to the special enrollment periods 
currently available--and to exempt these enrollees from the financial 
penalty for late enrollment in Medicare Part B. 

* Finally, USPS would need legislation to access assets in the PSRHBF, 
eliminate statutorily fixed prefunding payments for retiree health 
benefits, and restructure statutory requirements for amortizing any 
unfunded liabilities for retiree health benefits. 

Some elements of USPS's proposed health care plan are being explored 
on a smaller scale within FEHBP. For example, OPM currently has a 
pilot under way to try to increase enrollment in Medicare by providing 
the incentive that the FEHBP plan would pay the Part B premium on 
behalf of the enrollee. In 2013, the second year of implementation, 
only one FEHBP plan and 2,400 enrollees were participating in the 
pilot, and there were no measurable effects on cost. In addition, as 
of March 2013, OPM officials said that the agency was in discussions 
with several plans about restructuring plans' drug benefits to receive 
federal subsidies under Medicare Part D, as USPS is planning to do 
under its proposal. However, OPM officials said that the agency does 
not have the authority to introduce some of the measures that USPS is 
proposing. For example, FEHBP plans cannot achieve 100 percent 
participation in Medicare using the approach that USPS has proposed. 
According to officials, the agency also does not have the authority to 
introduce additional tiers of coverage, such as the self-and-spouse 
and self-and-children tiers included in the proposed USPS plan. In 
April 2013 testimony, OPM proposed that it be provided with more 
flexibility to take additional measures to contain drug costs, 
increase competition, and introduce a new tier of coverage in FEHBP. 
[Footnote 32] 

USPS Would Likely Realize Large Financial Benefits from Its Health 
Plan, Mainly by Increasing Retirees' Use of Medicare, but Some Plan 
Elements Could Decrease Funds Available for Retiree Health Benefits in 
the Future: 

USPS would likely realize large financial benefits from its proposed 
health plan, with USPS estimating that it would: (1) reduce its 
retiree health benefit liability by $54.6 billion, thereby eliminating 
its unfunded retiree health benefit liability; (2) reduce its required 
payments by $7.8 billion in the first year of implementation; and (3) 
reduce its required payments by $33.2 billion over the first 5 years 
of implementation. Most of the financial benefits from the proposed 
plan would result from increasing postal retirees' use of Medicare, 
thereby increasing Medicare costs. In addition, some elements of 
USPS's proposal could lead to decreased funds available for retiree 
health care in the future. First, one proposed option for investing 
health plan assets could leave plan assets exposed to risk of loss. 
Second, the ability to transfer surplus funds to use for purposes 
other than health benefits could result in unfunded liabilities. 
Third, the process for selecting economic and demographic assumptions 
could create risks of excessive surplus transfers or inadequately 
funded retiree benefits. Lastly, the collective bargaining process 
could result in binding arbitration that is not required to consider 
USPS's financial condition--which could result in higher costs and 
thus unfunded liabilities. 

USPS Projects Large Financial Gains from Its Health Plan and Improved 
Liquidity, Largely by Increasing Medicare Use: 

USPS would likely realize large financial gains from reducing its 
liabilities for retiree health care through implementation of its 
proposed health plan. USPS projects its health plan assets would 
slightly exceed its liability for retiree health care. It estimates a 
liability reduction of $54.6 billion--resulting in a $3.7 billion 
surplus instead of a $50.9 billion unfunded liability if the plan were 
implemented on January 1, 2014 (see table 3).[Footnote 33] USPS 
projects that its plan would immediately eliminate its existing 
unfunded liability for retiree health care, which was $47.8 billion at 
the end of fiscal year 2012.[Footnote 34] Consistent with this 
projection, USPS has proposed that Congress eliminate its statutorily 
fixed prefunding payments. However, it is important to recognize that 
elimination of an existing unfunded liability does not necessarily 
eliminate the need for continued prefunding payments. The existing 
workforce would continue to earn future retirement benefits that must 
be funded, as USPS proposes to do. In addition, liability measures of 
this type are subject to significant revision or fluctuation, and are 
likely to change, as underlying economic and demographic experience 
and estimates change. USPS's proposal calls for additional payments, 
on an actuarial basis, as needed, to pay for ongoing benefit accruals 
for its workforce[Footnote 35] and to amortize any unfunded liability 
for retiree health benefits. 

Table 3: USPS-Projected Liabilities and Assets for Retiree Health Care 
under FEHBP and the USPS Proposed Health Plan, Projected to September 
30, 2014: 

Liability for retiree health care under FEHBP: $100.0 billion. 

Assets for retiree health care under FEHBP[A]: $49.1 billion. 

Unfunded liability under FEHBP: $50.9 billion. 

Change in liability from FEHBP to USPS's health plan: ($54.6 billion); 

Remaining liability under USPS's health plan: $45.4 billion. 

Assets for retiree health care under USPS health plan: $49.1 billion. 

Unfunded liability (surplus) under USPS health plan: ($3.7 billion). 

[End of table] 

Note: For purposes of these projections, USPS's health plan would 
begin on Jan. 1, 2014. 

[A] For purposes of these projections, assets supporting the USPS 
health plan were assumed to continue to be invested in special-issue 
Treasury securities. These assets were assumed to initially consist of 
the assets of the PSRHBF that would be transferred into a newly-
created HBF supporting the USPS health plan. The assets of this new 
fund did not include a portion of the FEHBP reserve fund that USPS is 
proposing to be transferred into the new fund. 

Source: USPS. 

Increased use of Medicare under USPS's proposed plan would account for 
most of the projected reduction in USPS's liability for retiree health 
costs (i.e., reduction in future USPS health costs) and increase the 
federal government's future Medicare net spending. First, USPS's 
proposal would lead to greater enrollment of eligible postal retirees 
in Medicare Parts A and B,[Footnote 36] with Medicare acting as the 
primary insurer for those enrollees and the USPS plan paying costs 
above what Medicare would cover for current retirees.[Footnote 37] 
Second, USPS would receive a Medicare subsidy from participating in a 
Medicare Part D Employer Group Waiver Plan (EGWP), as well as benefits 
from discounts from drug suppliers on brand-name drugs. According to 
USPS, these two elements of the plan are responsible for $48.8 
billion, or 89 percent, of the $54.6 billion projected reduction in 
USPS's liability for retiree health benefits, assuming the plan is 
implemented on January 1, 2014 (see table 4). 

Table 4: USPS-Projected Reduction in Its Liability for Retiree Health 
Benefits, Projected to September 30, 2014: 

Aspect of proposed plan: 

All eligible postal retirees enroll in Medicare Parts A & B: ($23.1 
billion). 

USPS participates in Medicare Part D EGWP: ($25.7 billion). 

Subtotal: Medicare-related elements: ($48.8 billion). 

Other elements of USPS health plan[A]: ($1.8 billion). 

Use different assumptions to estimate USPS liability[B]: ($4.1 
billion). 

Total: ($54.6 billion). 

Source: USPS. 

Note: Numbers may not add to total due to rounding. For purposes of 
these projections, USPS's health plan would begin on Jan. 1, 2014. 

[A] USPS projected a $3.6 billion liability reduction from adding cost 
exposure for future retirees and a $1.6 billion liability reduction 
that USPS projects it would achieve from contracting with a single 
vendor to administer its health plan, including processing claims, 
negotiating payment rates with health care providers, and providing 
wellness and disease management programs; these projected reductions 
were partially offset by a $3.4 billion projected liability increase 
from the four-tier structure of the proposed USPS health plan. 

[B] USPS estimated its liability for retiree health benefits using 
assumptions consistent with those that OPM uses to determine USPS's 
funding requirements for federal pension programs. These assumptions 
are not the same as those used by OPM to estimate USPS's liability for 
retiree health benefits. Current law requires OPM to determine the 
value of USPS's retiree health benefit liability based on actuarial 
assumptions that are consistent with those used by OPM for its 
financial reporting of liabilities for federal employee benefits. 

[End of table] 

Turning to the projected impact of USPS's proposed health plan on 
USPS's liquidity, the implementation of USPS's proposed health plan 
for current postal employees as well as retirees is projected by USPS 
to result in lower costs and thus greater liquidity for the Postal 
Service Fund, which is used to finance most USPS expenses.[Footnote 
38] Under current law, USPS projects that its required payments for 
health care will total $61.8 billion for the 5-year period of 2014 
through 2018. Whereas under its proposed plan, it projects those 
payments would be reduced by $33.2 billion over this period, with the 
first-year reduction being $7.8 billion (see table 5).[Footnote 39] 
About half of this $33.2 billion difference ($17.2 billion) would 
result from eliminating required fixed payments to prefund retiree 
health benefits from 2014 to 2016. 

Table 5: Projected USPS Payments from the Postal Service Fund for 
Health Benefits under FEHBP and USPS's Proposed Health Plan: 

USPS payment requirements from the Postal Service Fund under FEHBP 
under current law: 
2014: $13.6 billion; 
2015: $13.7 billion; 
2016: $14.0 billion; 
2017: $10.2 billion; 
2018: $10.3 billion; 
Total: $61.8 billion. 

USPS payments from the Postal Service Fund under proposed USPS health 
care plan: 
2014: $5.8 billion; 
2015: $5.8 billion; 
2016: $5.7 billion; 
2017: $5.7 billion; 
2018: $5.6 billion; 
Total: $28.6 billion. 

Difference: 
2014: $7.8 billion; 
2015: $7.9 billion; 
2016: $8.3 billion; 
2017: $4.5 billion; 
2018: $4.7 billion; 
Total: $33.2 billion. 

Source: USPS. 

Note: Years are calendar years. 

[End of table] 

USPS made a separate calculation of the expected effect of its 
proposed plan on its short-term liquidity. Under this calculation, 
USPS assumed that it would continue to not make prefunding payments 
required by current law, but that it would pay for its share of 
premium payments for workers and retirees. It compared these expected 
payments to its expected payments under its proposed new health care 
plan. Under this calculation, USPS would reduce its payments by $2.1 
billion in 2014 and by $12.4 billion over the 2014 to 2018 period. 
Close to half of the estimated first-year savings of $2.1 billion 
would result from reducing USPS's premium costs for retirees, largely 
due to the Medicare-related elements of the USPS health plan. In 
addition, USPS projects that about $0.5 billion of the $2.1 billion 
would result from lower costs for employees.[Footnote 40] 

The estimated liquidity improvement reflects the lower costs expected 
from moving out of FEHBP, where enrollee premiums reflect a large 
minority of Medicare-eligible retirees who do not enroll, to a USPS 
plan where all Medicare-eligible retirees are presumed to enroll. USPS 
also estimates that some of the liquidity improvement would result 
from efficiencies gained in contracting with a single vendor to 
administer its health plan. Some postal employee organizations have 
objected to having postal employees and retirees withdrawn from FEHBP, 
with one union official testifying that there is potential for some 
cost savings for USPS within FEHBP.[Footnote 41] 

Neither CMS nor OMB has estimated the potential short-or long-term 
effects of the USPS proposal on Medicare costs or the net effects on 
the federal budget. However, as to the short-term effect, USPS 
projected that its plan would increase the more than $550 billion 
spent annually for Medicare by $1.0 billion in the first year of its 
proposed health plan and an average of roughly $1.3 billion annually 
in the first 5 years of its health plan--about 0.2 percent of 
Medicare's annual costs.[Footnote 42] We have previously reported that 
Medicare is on a path that is fiscally unsustainable over the long 
term.[Footnote 43] Spending for Medicare Part A already exceeds 
dedicated revenue, and the Part A trust fund is currently expected to 
be exhausted by 2026. Total Medicare spending is expected to increase 
as a share of GDP in coming decades, putting greater pressure on the 
rest of the federal budget. While there are significant uncertainties 
about the future growth of health care spending, particularly related 
to the sustainability of cost containment mechanisms over the long 
term, additional costs from USPS's proposed plan would also have to be 
weighed alongside the fiscal pressure already faced by Medicare. 

Some Elements of Proposed Plan Could Reduce Funds Available for 
Retiree Health Care in the Future: 

Some elements of USPS's proposal could reduce funds available for 
health care in the future, including one proposed option for managing 
health plan assets; the disposition of health plan assets deemed 
"surplus;" and the assumptions used to calculate liabilities. 

Potential Decrease in Future USPS Health Plan Assets: 

Under one option of USPS's legislative proposal (which USPS refers to 
as "Scenario 2"), assets supporting its health plan could be invested 
in stocks, private sector bonds, and other non-Treasury securities 
exposed to risk of loss.[Footnote 44] Currently, as with the Postal 
Service Fund that USPS uses to pay most of its expenses, all assets of 
the PSRHBF are invested solely in special-issue Treasury securities 
backed by the full faith and credit of the federal government. In 
contrast, USPS has stated that it would seek increased investment 
returns on assets of a newly created HBF. Under Scenario 2, the HBF 
would inherit all of the assets of the existing PSRHBF (reported at 
$45.7 billion at the end of fiscal year 2012).[Footnote 45] Other 
assets of the HBF would include a portion of the current OPM-managed 
Employee Health Benefits Fund that supports FEHBP[Footnote 46] that 
would be transferred to USPS, as well as ongoing contributions from 
USPS and from employees and retirees participating in the plan. 

Under Scenario 2, USPS's investment policy for the HBF would be 
managed by a Committee subject to specified provisions of the Employee 
Retirement Income Security Act of 1974 (ERISA)[Footnote 47] pertaining 
to certain fiduciary duties and responsibilities. ERISA requires that 
plan assets be managed solely in the interest of plan participants and 
their beneficiaries for the exclusive purpose of providing benefits 
and defraying plan expense; with the care, skill, prudence and 
diligence of a prudent man acting in a like capacity; and to generally 
diversify the assets so as to minimize the risk of large losses. 

Large private sector pension plans typically invest substantial 
portions of plan assets in asset classes such as stocks, often 
including some allocation to "alternative" asset classes such as 
private equity or hedge funds.[Footnote 48] While such types of 
investments can offer the potential for returns significantly in 
excess of those on Treasury securities, and thus the potential for 
significantly lower long-term funding costs, they also have a 
significant risk of loss relative to investments in Treasury 
securities. Private sector companies and state and local governments 
that prefund retiree health benefits are permitted to, and do, invest 
plan assets in non-Treasury securities, typically in a mix that 
includes significant allocations to stocks and private sector bonds, 
among other asset classes. The National Association of Letter 
Carriers, noting the low interest rates on Treasury securities, has 
suggested that USPS remain in FEHBP, but with the PSRHBF invested in 
index funds of the federal Thrift Savings Plan. These proposals would 
allow USPS to seek higher investment returns, but there would be 
additional risk. 

The U.S. Treasury Department's standard position and policy is that 
federal investment funds should be invested only in Treasury 
securities to minimize risk of loss.[Footnote 49] According to 
Treasury officials, the position of the U.S. Treasury Department is 
that no USPS funds--including any funds of a USPS health plan--should 
be invested outside of the Treasury and should instead remain invested 
in special-issue Treasury securities to ensure their safety.[Footnote 
50] 

If USPS health plan fund assets were invested in non-Treasury 
securities that have more risk than Treasury securities and a market 
downturn caused severe losses in asset value, health benefits to 
postal employees and retirees could potentially decline or be 
jeopardized, such as through changes in plan provisions in reaction to 
unfunded liabilities or eventual inability to pay some benefits 
because of lack of funds. According to USPS, under its proposed health 
plan, there would be no explicit federal guarantee of USPS health 
benefits for postal employees, annuitants, or survivors, including any 
participants in the USPS health plan. If a market downturn caused 
losses in the value of fund assets, this would reduce funds available 
for postal health care. The impact of such losses could be magnified 
because a market downturn that negatively affected the value of plan 
assets could be associated with a more general economic downturn that 
negatively affected USPS mail volume and revenues. A simultaneous 
decline in plan assets and USPS revenue could be a potential threat to 
USPS's financial viability or to workers' and retirees' benefit 
security should plan assets be invested in risky non-Treasury 
securities. 

USPS is currently not well positioned to face a potentially 
significant decline in the value of plan assets, as it continues to 
incur significant operating losses and experience a continuing decline 
in mail volume, particularly in First-Class Mail. USPS could have 
great difficulty earning profits on its postal business to eventually 
make up investment losses it might incur on its over $45 billion of 
health plan assets. Due to its financial difficulties, USPS has missed 
$11.1 billion in prefunding payments for retiree health benefits and 
has recently reported that, given its low levels of liquidity, it will 
likely be forced to miss future prefunding payments.[Footnote 51] 

One other asset class that could be an option as part of a portfolio 
for prefunding USPS's retiree health care benefits would be inflation-
indexed Treasury securities (known as TIPS). Since the amount of 
future retiree health care expenditures can be expected to vary with 
levels of future medical inflation, which in turn can be expected to 
vary somewhat with general inflation, inflation-indexed securities 
would provide a partial hedge against the risk of future medical 
inflation and retiree health expenditures. According to the U.S. 
Treasury Department, both TIPS and nominal (non-inflation-indexed) 
Treasury securities are safe and secure, backed by the full faith and 
credit of the United States government.[Footnote 52] 

In response to concerns that have been expressed about the investment 
of assets for retiree health care in other than Treasury securities, 
USPS developed an alternative option for financing its health plan 
(which it refers to as "Scenario 1"). As previously discussed, under 
Scenario 1, the PSRHBF would be continued and used to finance retiree 
health benefits under USPS's health plan, though without continued OPM 
management since the plan would be administered by USPS. All future 
funding of USPS's retiree health benefits liability would be deposited 
into the PSRHBF. According to USPS, the current and future assets of 
the PSRHBF would continue to be invested as now, in special-issue 
Treasury securities or otherwise as might be directed by Congress. 
USPS would prefer to have some input on the structure of the asset 
holdings so that the PSHRBF's investments would be matched by duration 
to the expected benefit payments. According to USPS, this could be 
accommodated with the use of Treasury securities and is a sounder way 
of matching assets and liabilities than is currently in place. USPS 
officials stated that Congress's adoption of either scenario would be 
acceptable to USPS. 

If USPS is permitted to, and does, invest plan assets in non-Treasury 
securities such as stocks, an important issue that would have to be 
resolved would be the appropriate method for determining the "discount 
rate" used in calculating USPS's liability for prefunding purposes. 
The discount rate is a key assumption in estimating the value of 
retirement liabilities, and there is significant disagreement among 
actuaries, economists, and other professionals regarding the 
appropriate approach to determining it.[Footnote 53] One school of 
thought calls for basing the discount rate on an expected long-term 
rate of return based on the allocation of plan assets. This is the 
model generally used, for example, for determining funding targets for 
state and local government pension plans.[Footnote 54] Since stocks 
have a higher expected return, on average, than bonds, a greater 
allocation of plan assets to stocks increases the discount rate, which 
in turn lowers the estimated liability and the needed amount of 
prefunding payments. This can also create an incentive to invest a 
greater proportion of plan assets in investments such as stocks. A 
different school of thought calls for basing the discount rate on bond 
yields, which produces a discount rate that is independent of the 
allocation of plan assets. A variation of this approach is used for 
private sector single-employer pension plans under the Pension 
Protection Act of 2006.[Footnote 55] There are many possible 
variations on the bond-yield approach, but these types of approaches 
generally produce a more conservative discount rate than the expected-
return-on-plan-assets approach. Hybrid approaches are also feasible. 
Factors to consider in establishing the discount rate model that would 
be used for a USPS-sponsored plan include the fragile state of USPS's 
finances, the mature age profile of USPS's workforce, and the large 
number of USPS retirees. These circumstances would point to a more 
conservative approach to setting USPS's prefunding discount rate. 

USPS's Proposal for Transferring Surplus Assets Could Create Future 
Unfunded Liability: 

We are concerned with USPS's proposal to allow the transfer of surplus 
assets because if surpluses are consistently transferred, then an 
unfunded liability--the difference between the liability and plan 
assets--for retiree health benefits could result. Under Scenario 2 of 
USPS's proposal, in any year that assets supporting the USPS health 
plan exceeded USPS's liability for retiree health benefits, the 
Committee appointed by USPS to oversee its health plan could transfer 
the estimated surplus to the Postal Service Fund that USPS uses to pay 
most of its expenses, including its general operating expenses. 
According to USPS, a transfer could not occur unless the Committee 
concluded, after receiving an actuarial report, that the transfer 
would not violate the requirement that the assets in the HBF 
supporting the USPS health plan exceed its estimated actuarial 
liability. USPS officials told us that their principal concern is that 
they would prefer to have the question of the potential disposition of 
excess assets set aside for retirees addressed in legislation, to 
avoid uncertainties they told us have arisen with respect to this 
issue in funding the Civil Service Retirement System and the Federal 
Employees Retirement System. They noted that it is possible to 
envision some circumstances in which a surplus could be quite large, 
and as a result, some guidance from Congress as to the potential 
disposition of a surplus, under whatever strictures Congress would see 
fit to impose, would be appropriate. They told us that while they made 
an initial proposal in their August 2011 legislative language, they 
are open to any reasonable resolution of this issue. 

In our view, except in special circumstances, transferring surpluses 
creates risk because liability measurements for retirement benefits 
are inherently uncertain and subject to significant revision and 
fluctuation as more information becomes available and as economic and 
demographic conditions change.[Footnote 56] In addition, under 
Scenario 2, the more than $45 billion saved to prefund retiree health 
benefits would no longer be restricted to that purpose but could be 
used to pay for employee health benefit costs and plan administration. 
OPM officials noted that USPS could face health claims costs that 
exceed what it is expecting, and as a self-insured plan, USPS would be 
fully responsible for financing those costs. Given USPS's financial 
condition, using the funds previously set aside to finance retiree 
health benefits may be necessary for financing unexpected increases in 
health plan costs. In this regard, USPS officials told us that at 
least in Scenario 1 and possibly in either scenario, USPS would expect 
to segregate and not commingle assets designated for retiree health 
benefits from those that might be maintained in the management of the 
health benefits funds required for active employees. 

In 2011, we reported on considerations and options regarding the 
disposition of any surplus assets in USPS's Federal Employees 
Retirement System subaccount.[Footnote 57] Similar considerations are 
relevant to any surplus assets relative to USPS's liability for 
retiree health benefits. A transfer of surplus assets would raise the 
risk of a future unfunded liability--a risk that would increase 
significantly if there were automatic, recurring transfers. A one-time 
transfer can sometimes be justified by special circumstances. A 
significantly safer and more prudent approach is to amortize any 
surplus over an extended period--for example, to match the 
amortization period to that required to address any unfunded 
liability, which has an element of fairness in that it would treat 
surpluses and unfunded liabilities symmetrically. The amortization 
amount would be an offset to the normal cost (the annual prefunding 
cost for the future benefits being earned by current workers), 
reducing USPS's prefunding payment somewhat. Another approach would be 
to use the surplus to offset the entire normal cost, thereby reducing 
the prefunding payments to zero (for as many years until the surplus 
is used up). This approach would be more risky than the amortization 
approach in that it would essentially return the surplus more quickly, 
but significantly less risky than transferring the entire surplus all 
at once. This approach would be similar to that allowed for private 
sector pension plans. 

Use of Overly Optimistic Assumptions Could Decrease Funds: 

Under USPS's proposal, there can be some risk of overly optimistic 
assumptions in valuing the funded status of USPS's health plan--
resulting, for example, in actual investment returns that are less 
than the assumptions, or liabilities that are larger than anticipated 
by the assumptions--potentially leading to inadequate funding of 
benefits. Although USPS has proposed some safeguards over the 
selection of assumptions, an additional safeguard would be to have 
assumptions selected by an independent third party. 

Selecting long-term assumptions for asset returns, medical inflation, 
and other economic and demographic variables involves judgment, with 
room for professional disagreement and differing estimates, which can 
have a very large impact on the estimated size of the retiree health 
liability and on the amount of prefunding payments. For example, in 
recent years the USPS OIG has had disagreements over certain 
assumptions selected by OPM's actuaries.[Footnote 58] 

Under USPS's proposal, the current oversight function provided by OPM, 
including its staff of actuaries, would no longer apply. USPS has 
stated that it is important to establish a solid structure for 
governance and oversight of its proposed plan. USPS has also said it 
would adopt a best practices approach for governance and oversight 
based on models in the private sector. Oversight of the plan would 
include the formation of a Health Benefits Plan Management Committee, 
which would include members selected by USPS, including members 
recommended by the unions, management associations, and the U.S. 
Treasury Department. Specifically, USPS would retain the services of 
an independent actuary qualified under the U.S. Qualifications 
Standard and subject to the U.S. Code of Professional Conduct and 
Actuarial Standards of Practice to perform an annual actuarial 
valuation of the USPS health benefit plan and fund. 

While these safeguards are important, they do not provide for 
selection or oversight of assumptions that would be independent of 
USPS or its chosen contractors. Given the tens of billions of dollars 
involved, the sensitivity of results to assumptions, USPS's financial 
condition, and potential pressures from different constituencies, 
assumptions could be selected by an independent actuarial body. 
Potential models could include the Board of Actuaries for the federal 
civilian pension program and the Boards of Actuaries for the military 
retirement programs. 

Expanded Collective Bargaining over Health Benefits and Premiums Could 
Increase Costs without Regard to USPS's Financial Condition: 

USPS health benefit costs and liabilities could increase over time 
because, under USPS's proposal, the scope of the collective bargaining 
process would be expanded to cover health benefits and premiums. In 
this regard, the collective bargaining process, which could result in 
binding arbitration, does not require the consideration of USPS's 
financial condition. Although the collective bargaining process could 
potentially result in appropriate modifications to the USPS health 
plan over time, it also could result in changes that increase USPS's 
health benefits costs, such as expanded benefits, an increase in the 
percentage of claims costs that the USPS health plan covers, or 
decreases in employee and retiree premiums. It is important to note 
that even if USPS does not agree to such changes in collective 
bargaining, the changes could result from binding arbitration. In this 
regard, arbitrators also are not required to consider USPS's financial 
condition during binding arbitration. In 2010, when we found USPS's 
business model was not viable, we recommended Congress consider 
multiple actions, including changing the statutory framework for 
collective bargaining to ensure that binding arbitration takes USPS's 
financial condition into account.[Footnote 59] We recently reaffirmed 
this recommendation in testimony in early 2013 before the Senate and 
House postal oversight committees.[Footnote 60] USPS supports this 
recommendation, but according to USPS officials, even without such a 
requirement for arbitrators, any future arbitration would be 
exceedingly unlikely to dramatically escalate the cost of health 
benefits beyond those contemplated by its health plan. 

Compared to FEHBP, Postal Employees and Retirees Would Have Coverage 
for Similar Services, but Elements of the Proposed Plan's Design Could 
Lead to Higher Costs for Some Enrollees: 

Under the proposed USPS plan, as designed for the first year, postal 
employees and retirees would have coverage for a similar package of 
services as those covered by selected FEHBP plans that we reviewed, 
and the level of coverage would be similar for many services, with 
some exceptions.[Footnote 61] We estimate that, had the proposed USPS 
plan been implemented in 2013, most employees and retirees would have 
had similar or lower premiums compared to the selected FEHBP plans; 
but total costs--premiums and costs for the use of care--could be 
higher for some, due in part to higher deductibles and out-of-pocket 
maximums under the USPS plan. In addition, employees and retirees 
would have many but not all of the same protections relating to 
coverage and costs under the USPS plan that they have in FEHBP. 

Under the Proposal, Postal Employees and Retirees Would Have Coverage 
for Similar Services at Similar Coverage Levels when Compared with 
FEHBP, with Some Exceptions: 

Under the USPS plan as designed for the first year of implementation, 
employees and retirees would generally have a similar set of services 
covered, including inpatient and outpatient services and prescription 
drugs, as they have under selected FEHBP plans.[Footnote 62] For 
example, like the selected seven FEHBP plans that we reviewed, the 
proposed USPS plan would cover inpatient hospital room and board, 
surgery, visits to primary care and specialist physicians, 
chemotherapy, laboratory tests, and prescription drugs. The proposed 
USPS plan also would cover some services that were not covered by all 
selected FEHBP plans, such as routine hearing tests. However, USPS had 
not determined as of February 2013 whether the USPS plan would provide 
coverage for three services--acupuncture, family planning and 
contraceptive care, and infertility diagnostic services--covered by 
all selected FEHBP plans.[Footnote 63] 

When comparing coverage levels--the portion of service costs paid by 
the insurer for covered services--we found employees and retirees in 
the selected FEHBP plans that we reviewed would have similar or higher 
levels of coverage for many services under the USPS plan.[Footnote 64] 
Compared to the selected FEHBP plans we reviewed, the USPS high and 
middle options would provide employees and current retirees not 
eligible for Medicare with levels of coverage within or above the 
range of coverage offered by selected FEHBP plans for more than half 
the in-network services we reviewed (23 of 29 for the proposed USPS 
high option and 21 of 29 for the middle option). For example, the 
proposed USPS middle option would cover 85 percent of in-network 
surgery costs and the high option would cover 90 percent; the selected 
FEHBP plans we reviewed would cover from 85 percent to 90 percent (see 
table 6).[Footnote 65] For current USPS retirees who are eligible for 
Medicare, coverage for inpatient and outpatient services would 
generally be the same under the proposed USPS plan as under the 
selected FEHBP plans, with the USPS plan covering 100 percent of the 
cost beyond what Medicare covers. 

Table 6: Examples of Services for Which the USPS Proposed Plan Offers 
Levels of Coverage for In-Network Care within the Range of Coverage 
Offered by Selected FEHBP Plans: 

Service: Chemotherapy and radiation therapy; 
In-network coverage levels for USPS plan: 
Middle option: 85%; 
High option: 90%; 
Range of in-network coverage levels for selected FEHBP plans: 85% to 
90%. 

Service: Outpatient diagnostic laboratory services; 
In-network coverage levels for USPS plan: 
Middle option: 85%; 
High option: 90%; 
Range of in-network coverage levels for selected FEHBP plans: 85% to 
100%. 

Service: Inpatient hospital admission[A]; 
In-network coverage levels for USPS plan: 
Middle option: 85%; 
High option: 90%; 
Range of in-network coverage levels for selected FEHBP plans: 85% 
after $200 copayment to 100% after $100 copayment. 

Service: Routine physical exam (adults and children); 
In-network coverage levels for USPS plan: 
Middle option: 100%; 
High option: 100%; 
Range of in-network coverage levels for selected FEHBP plans: 100%. 

Service: Surgery (outpatient and inpatient); 
In-network coverage levels for USPS plan: 
Middle option: 85%; 
High option: 90%; 
Range of in-network coverage levels for selected FEHBP plans: 85% to 
90%. 

Source: GAO analysis of USPS proposal and 2013 FEHBP plan brochures. 

Note: The selected FEHBP plans included: the standard option of the 
Blue Cross and Blue Shield Service Benefit Plan, the NALC Health 
Benefit Plan (sponsored by the National Association of Letter 
Carriers), the American Postal Workers Union Health Plan, the 
Government Employees Health Association, Inc. Benefit Plan (which 
included both the high and standard options), the Mail Handlers 
Benefit Plan, and the Rural Carrier Benefit Plan. These plans are all 
national, fee-for-service plans, as the proposed USPS plan would be, 
and do not include high-deductible or consumer-driven plans. 

[A] This includes room and board and other hospital services and 
supplies related to inpatient admission. 

[End of table] 

While the proposed USPS plan would provide similar levels of coverage 
for many services, we found some exceptions where employees and 
retirees would have lower levels of coverage or where it was unclear 
how the level of coverage would compare for a service. For example, 
employees and non-Medicare-eligible retirees would have lower coverage 
under USPS's high option for 2 of the 29 in-network services (primary 
care office visits due to illness and outpatient mental health or 
substance abuse treatment).[Footnote 66] In addition, USPS's middle 
option would provide lower levels of coverage than the selected FEHBP 
plans we reviewed for those and 2 other services (visits to specialist 
physicians and maternity care services).[Footnote 67] For several 
other in-network services, whether the USPS plan would provide higher, 
comparable, or lower levels of coverage would depend on the cost of 
the service.[Footnote 68] Finally, we could not compare the coverage 
levels for one service (ambulance ground transport) because USPS had 
not determined at what level the plan would cover the services. 

We found a few other instances where employees and retirees would have 
lower levels of coverage under the USPS plan. Specifically, levels of 
coverage would generally be lower for out-of-network services, for 
those insured under USPS's value option, and for future retirees when 
they become eligible for Medicare. 

* Services received out-of-network. Employees and non-Medicare-
eligible retirees generally would have lower coverage levels for out-
of-network services under the proposed USPS plan than under the 
selected FEHBP plans we reviewed. For example, for surgical services 
from out-of-network providers, the selected FEHBP plans would cover 
from 65 to 75 percent of allowable charges; the proposed USPS high 
option would cover 60 percent, and the proposed USPS middle option 
would cover 50 percent.[Footnote 69] Representatives from one selected 
FEHBP plan noted that generally 10 percent to 20 percent of enrollee 
charges are for services received out of network. USPS officials 
reported that their discussions with health insurance carriers 
indicated that out-of-network claims represented 2.5 percent to 10 
percent of total claim costs. 

* USPS's value option. USPS's value option would generally have lower 
levels of in-network and out-of-network coverage than the selected 
FEHBP plans we reviewed for employees and non-Medicare-eligible 
retirees. However, USPS officials expected a smaller proportion of 
employees and retirees to select this option as compared to the high 
and middle options. 

* Future retirees when they become eligible for Medicare. Those who 
retire after the first year of implementation would be subject to the 
USPS plan's annual plan deductibles and cost-sharing for covered 
services even after enrolling in Medicare. The selected FEHBP plans we 
reviewed waive the annual plan deductible and do not require 
copayments for inpatient and outpatient services for retirees who 
enroll in Medicare. 

In addition, while covered services and coverage levels may be similar 
under the USPS plan and the selected FEHBP plans, some postal 
employees and retirees may have to find new providers in order to 
avoid paying the higher out-of-network charges. Further, the more than 
20 percent of Medicare-eligible postal retirees who are not enrolled 
in Medicare Part B, but are assumed to do so under the postal plan, 
will need to select Medicare participating providers in order to 
receive full coverage of care. 

At Least 63 Percent of Employees and Retirees in Selected FEHBP Plans 
Would Pay Similar or Lower Premiums, but Elements of the Proposed USPS 
Plan Could Lead to Higher Total Costs for Some: 

Our estimates indicate that under USPS's proposed plan most postal 
employees and retirees would have had similar or lower premiums than 
under the seven selected FEHBP plans in 2013. Depending on which USPS 
option was chosen, we estimated that from 63 percent to 97 percent of 
employees and retirees would have premiums that are similar (within 10 
percent) or lower (more than 10 percent less) than the premiums they 
would have paid under FEHBP.[Footnote 70] For example, if all postal 
employees and retirees in the selected FEHBP plans chose USPS's middle 
option, 94 percent of them would pay similar or lower premiums, which 
for employees with self-only coverage, would mean paying anywhere from 
about $100 more to $1,000 less in premiums annually under the USPS 
middle option than under their current FEHBP plan (see figure 1). 
[Footnote 71] 

Figure 1: Percentage of Postal Employees and Retirees from Selected 
FEHBP Plans Who Could Obtain Similar or Lower Premiums under the 
Proposed USPS Health Plan, 2013: 

[Refer to PDF for image: horizontal bar graph] 

Estimated percentage of employees and retirees: 

If all chose high option: 63%; 
If all chose middle option: 94%; 
If all chose value option: 97%. 

Sources: GAO analysis of USPS estimates of 2013 premiums, 2013 
premiums for seven selected FEHBP plans, and OPM data on
FEHBP enrollment in 2011. 

Note: For these estimates, we defined "similar" premiums as those 
within 10 percent of the premium the employee or retiree would have 
paid in 2013 for their FEHBP plan and "lower" premiums as those more 
than 10 percent less than the FEHBP premium. The estimates assume that 
enrollment in the selected FEHBP plans did not change from 2011 to 
2013. Estimates also use USPS's assumptions of the distribution of 
those with family coverage under FEHBP across the three levels of 
family coverage offered under the USPS proposed plan. The estimates 
account for Medicare Part B premiums that Medicare-eligible retirees 
are assumed to pay under USPS's proposed plan. 

The selected FEHBP plans included: the standard and basic options of 
the Blue Cross and Blue Shield Service Benefit Plan, the NALC Health 
Benefit Plan (sponsored by the National Association of Letter 
Carriers), the American Postal Workers Union Health Plan, the 
Government Employees Health Association, Inc. Benefit Plan (which 
included both the high and standard options), the Mail Handlers 
Benefit Plan, and the Rural Carrier Benefit Plan. These plans are all 
national, fee-for-service plans, as the proposed USPS plan would be, 
and do not include high-deductible or consumer-driven plans. 

[End of figure] 

However, certain elements of the proposed USPS plan in combination 
with lower levels of coverage for some services could lead to higher 
total costs--premiums and out-of-pocket costs--for some employees and 
retirees than under the selected FEHBP plans we reviewed. 
Specifically, though deductibles and out-of-pocket maximums for in-
network care under the USPS proposed high option would be similar to 
or lower than the selected FEHBP plans we reviewed, total deductibles 
and maximums for in-network and out-of-network care would generally be 
higher.[Footnote 72] For example, total out-of-pocket maximum amounts 
for family coverage for in-network and out-of-network services would 
be at least $8,000 more under the proposed high option and at least 
$14,000 more under the proposed middle option than under any selected 
FEHBP plan (see table 7). The proposed USPS plan also includes a 
separate $1,500 out-of-pocket maximum for prescription drugs, which 
would provide more cost protection for prescription drug spending than 
most of the selected plans but less than the FEHBP plan with the 
greatest number of postal enrollees. The differences in deductibles 
and out-of-pocket maximums under the USPS plan--on their own, or in 
combination with lower coverage levels for some services--could lead 
to higher total costs for some postal employees and non-Medicare-
eligible retirees, including those who would have lower premiums under 
the USPS plan. 

Table 7: Comparison of Proposed USPS Annual Plan Deductibles and Out-
of-Pocket Maximums to Those of Selected FEHBP Plans: 

Annual deductible for in-network services: 

Self-only; 
Range for selected FEHBP plans: $275 to $400; 
USPS plan: High option: $250; 
USPS plan: Middle option: $500. 

Self and family; 
Range for selected FEHBP plans: $550 to $800; 
USPS plan: High option: $500; 
USPS plan: Middle option: $1,000. 

Total annual deductible for in-network and out-of-network services[A]: 

Self-only; 
Range for selected FEHBP plans: $300 to $660; 
USPS plan: High option: $750; 
USPS plan: Middle option: $1,500. 

Self and family; 
Range for selected FEHBP plans: $600 to $1,500; 
USPS plan: High option: $1,500; 
USPS plan: Middle option: $3,000. 

Annual out-of-pocket maximum for in-network services; 
Range for selected FEHBP plans: [Empty]; 
USPS plan: High option: [Empty]; 
USPS plan: Middle option: [Empty]. 

Self-only; 
Range for selected FEHBP plans: $4,000 to $6,000; 
USPS plan: High option: $3,000; 
USPS plan: Middle option: $4,000. 

Self and family; 
Range for selected FEHBP plans: $4,000 to $6,000; 
USPS plan: High option: $6,000; 
USPS plan: Middle option: $8,000. 

Total annual out-of-pocket maximum for in-network and out-of-network 
services[B]: 

Self-only; 
Range for selected FEHBP plans: $4,500 to $10,000; 
USPS plan: High option: $9,000; 
USPS plan: Middle option: $12,000. 

Self and family; 
Range for selected FEHBP plans: $5,000 to $10,000; 
USPS plan: High option: $18,000; 
USPS plan: Middle option: $24,000. 

Source: GAO analysis of USPS proposal and 2013 FEHBP plan brochures. 

Note: Separate deductibles and out-of-pocket maximums for prescription 
drug services are not included. The selected FEHBP plans included: the 
standard option of the Blue Cross and Blue Shield Service Benefit 
Plan, the NALC Health Benefit Plan (sponsored by the National 
Association of Letter Carriers), the American Postal Workers Union 
Health Plan, the Government Employees Health Association, Inc. Benefit 
Plan (which included both the high and standard options), the Mail 
Handlers Benefit Plan, and the Rural Carrier Benefit Plan. These plans 
are all national, fee-for-service plans, as the proposed USPS plan 
would be, and do not include high-deductible or consumer-driven plans. 

[A] Unlike the selected FEHBP plans, the proposed USPS plan would have 
a separate annual deductible for out-of-network services. The total in-
network and out-of-network annual deductible reflects the sum of the 
separate in-network and out-of-network deductibles. 

[B] Unlike the selected FEHBP plans, the proposed USPS plan would have 
a separate out-of-pocket maximum for out-of-network services. The 
total in-network and out-of-network out-of-pocket maximum reflects the 
sum of the separate maximum limits for in-network and out-of-network 
care. 

[End of table] 

Employees and non-Medicare-eligible retirees could be at greater risk 
for higher costs due to these plan elements depending on: the amount 
and the cost of care they use, their use of out-of-network providers, 
and whether they have family coverage. 

* Employees and non-Medicare eligible retirees who use relatively high 
amounts of care and have family coverage risk having higher costs 
under USPS's plan. For example, employees with family coverage who 
used $50,000 worth of in-network health care would have spent an 
estimated $2,116 more with the proposed USPS high option and about 
$3,474 more with the proposed middle option than with the FEHBP plan 
with the largest number of postal enrollees.[Footnote 73] By 
comparison, an employee with family coverage who used $2,500 worth of 
health care costs from in-network providers would have faced lower out-
of-pocket costs under either the proposed USPS high option or middle 
option than under the FEHBP plan (see table 8). We found that 
employees and non-Medicare-eligible retirees who choose the new self-
and-spouse and self-and-children coverage tiers offered in the USPS 
proposal could face higher costs than under the FEHBP plan's self-and-
family option if their total health care costs are $50,000.[Footnote 
74] 

* Employees and non-Medicare eligible retirees who use out-of-network 
care also could face higher total costs under the proposed USPS plan. 
For example, compared to the FEHBP plan with the largest number of 
postal enrollees, we estimated that employees with self-only and 
family coverage would have higher out-of-pocket costs under many 
scenarios. An employee with family coverage using $50,000 worth of 
health care with 30 percent of outpatient care received out of network 
would have spent an estimated $3,195 more under the proposed USPS high 
option and about $5,193 more under the proposed USPS middle option 
than under the FEHBP plan with the largest number of postal enrollees 
(see table 8).[Footnote 75] When we assumed a lower: 

* proportion of outpatient care from out-of-network providers, we 
found similar results.[Footnote 76] 

Table 8: Illustrations of Estimated Differences in Employees' Annual 
Costs under the Proposed USPS Plan and the FEHBP Plan with the Largest 
Number of Postal Enrollees: 

All care received from network providers: 

Self-and-family coverage: USPS high option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$300; 
$10,000 in total health care costs: -$35; 
$17,000 in total health care costs: $191; 
$50,000 in total health care costs: $2,116. 

Self-and-family coverage: USPS middle option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$1,350; 
$10,000 in total health care costs: -$704; 
$17,000 in total health care costs: -$169; 
$50,000 in total health care costs: $3,474. 

Self-only coverage: USPS high option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$479; 
$10,000 in total health care costs: -$215; 
$17,000 in total health care costs: $12; 
$50,000 in total health care costs: $26. 

Self-only coverage: USPS middle option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$772; 
$10,000 in total health care costs: -$125; 
$17,000 in total health care costs: $410; 
$50,000 in total health care costs: $724. 

Combination of care from network and non-network providers[A]: 

Self-and-family coverage: USPS high option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$51; 
$10,000 in total health care costs: $582; 
$17,000 in total health care costs: $941; 
$50,000 in total health care costs: $3,195. 

Self-and-family coverage: USPS middle option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$1,119; 
$10,000 in total health care costs: -$130; 
$17,000 in total health care costs: $806; 
$50,000 in total health care costs: $5,193. 

Self-only coverage: USPS high option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$231; 
$10,000 in total health care costs: -$121; 
$17,000 in total health care costs: $462; 
$50,000 in total health care costs: $1,284. 

Self-only coverage: USPS middle option; 
Difference in employees' annual costs compared to the FEHBP plan with 
the largest number of postal enrollees under different scenarios of 
total health care costs: 
$2,500 in total health care costs: -$541; 
$10,000 in total health care costs: $154; 
$17,000 in total health care costs: $1,135; 
$50,000 in total health care costs: $2,662. 

Source: GAO. 

Notes: Estimates of the difference in employees' annual costs account 
for both health insurance premiums and out-of-pocket costs for the use 
of health care services. The estimates assume different distributions 
of costs across three categories of services--inpatient and outpatient 
services and prescription drugs--at the four different total health 
cost amounts. The estimates reflect cost sharing for each category of 
service and apply the plan's deductibles and out-of-pocket maximums. 

[A] Estimates assume that 30 percent of outpatient care is from out-of-
network providers, but all inpatient care and prescription drug 
purchases are from in-network providers. Out-of-network outpatient 
care ranged from 8.8 percent of total health care costs under the 
$50,000 scenario to 14.2 percent in the $2,500 scenario. Outpatient 
care includes such items as diagnostic imaging tests and surgeries for 
those who have not been admitted to a hospital. 

[End of table] 

Employees and Retirees Would Have Many but Not All of the Same 
Protections under the USPS Plan That They Have under FEHBP: 

USPS included provisions in its legislative proposal to ensure that 
its proposed plan would be required to meet many of the standards 
protecting FEHBP enrollees. USPS's legislative proposal requires that 
the health plan provide continuation of coverage benefits consistent 
with, and other benefits that comply with, specified standards for 
employer-sponsored group health plans.[Footnote 77] These include 
limits on excluding coverage for preexisting conditions and standards 
for benefits for mothers and newborns.[Footnote 78] There are other 
standards that the USPS proposal applies to the USPS plan by 
incorporating a general reference to the Public Health Service Act 
(PHSA) in one of the proposal's provisions.[Footnote 79] USPS 
officials stated that inclusion of this provision ensures that the 
USPS plan would be required to meet the referenced group health plan 
standards in the PHSA and noted that it is ambiguous whether the PHSA 
standards would apply to the proposed plan without such a provision. 
[Footnote 80] 

However, the USPS contribution to the cost of retirees' health 
benefits would no longer be tied to the statutory formula for federal 
contribution pertaining to all federal employees and retirees in 
FEHBP, which could leave postal retirees more vulnerable to increases 
in their contribution rates. Though USPS officials have indicated the 
agency's intention to keep contribution rates for current retirees 
consistent with those of retirees within FEHBP, the proposed 
legislative language does not require USPS to do so. Under FEHBP, 
postal retiree contribution rates depend on the government 
contribution rate to premiums for federal employees and retirees, a 
rate that is established by federal law.[Footnote 81] Under USPS's 
proposal, initial contribution rates for employees and retirees would 
be set by USPS and there are no standards provided for this initial 
determination. USPS may also subsequently change contribution rates, 
and, because the employee unions do not represent retirees, those 
changes would not be subject to the collective bargaining process. 
Officials from the association for federal retirees raised concerns 
about retirees' lack of representation within the context of the USPS 
proposal. 

A USPS Withdrawal from FEHBP Would Significantly Reduce Program 
Enrollment but Is Not Expected to Adversely Affect Most Nonpostal 
Enrollees: 

If USPS withdraws its employees and retirees from FEHBP, enrollment in 
FEHBP would decline by an estimated 25 percent, which is about 1 
million of the 4 million employees and retirees enrolled in the 
program. The percentages of enrollees who are employees and retirees 
would likely remain about the same (see table 9).[Footnote 82] 

Table 9: Comparison of FEHBP Enrollment in 2011 and under a USPS 
Withdrawal from FEHBP: 

FEHBP enrollment as of 2011; 
Employees: 2,236,059 (56%); 
Retirees: 1,791,419 (44%); 
Total: 4,027,478. 

USPS enrollment; 
Employees: 512,216 (51%); 
Retirees: 482,587 (49%); 
Total: 994,803. 

Estimated FEHBP enrollment if USPS withdraws from FEHBP; 
Employees: 1,723,843 (57%); 
Retirees: 1,308,832 (43%); 
Total: 3,032,675. 

Source: GAO analysis of OPM data. 

Note: Numbers represent FEHBP contracts, not the number of covered 
lives. OPM officials estimated that total covered lives in FEHBP was 
about 8 million in 2011. 

[End of table] 

In addition, the remaining FEHBP enrollee population would likely be 
somewhat younger, with increases in the proportion of enrollees who 
are ages 23 through 44 (see table 10). 

Table 10: Comparison of Age Distribution of FEHBP Enrollment in 2011 
and Estimated Distribution under a USPS Withdrawal from FEHBP: 

Enrollment as of 2011: 
Percentage of enrollment in age range: 
Under 23: 0.2%; 
23-34: 9.3%; 
35-44: 11.9%; 
45-54: 19.6%; 
55-64: 25.3%; 
65 and older: 33.8%. 

Estimated enrollment if USPS withdraws from FEHBP: 
Percentage of enrollment in age range: 
Under 23: 0.2%; 
23-34: 11.3%; 
35-44: 12.6%; 
45-54: 18.6%; 
55-64: 24.3%; 
65 and older: 32.9%. 

Source: GAO analysis of OPM data. 

Note: Numbers may not add due to rounding. The age-based 2011 
enrollment data represents FEHBP contracts, not the number of covered 
lives. The data did not break retirees down into postal and nonpostal 
categories, so our estimates assume that the age distribution of 
postal and nonpostal retirees was similar. We tested that assumption 
by reviewing other OPM data on the age distribution of postal and 
nonpostal retirees. 

[End of table] 

Despite the significant reduction in FEHBP enrollment, it is unlikely 
that most nonpostal enrollees would be affected beyond small increases 
or decreases in premiums. Interviews with OPM officials and 
representatives from selected FEHBP plans indicated that most 
nonpostal enrollees' plans would likely continue to participate in 
FEHBP despite a USPS withdrawal, even if plans lost up to 50 percent 
of enrollment. For example, representatives from a postal union that 
offers three plans in FEHBP--all with postal enrollment of less than 
25 percent--told us that the association plans to remain in the 
program regardless of USPS's participation, because the plans would 
remain profitable. Representatives from the selected plans that had 
postal enrollment of less than 50 percent expected that a USPS 
withdrawal would have some small effect on nonpostal enrollees' 
premiums. For example, representatives from the plan with the largest 
enrollment expected that a USPS withdrawal might lead to a small 
increase or decrease in premiums depending on the claims experience of 
those withdrawing compared with remaining enrollees. Representatives 
from another large plan estimated a slight decrease (1 to 2 percent) 
in premiums for the remaining enrolled population. Some plan 
representatives noted that administrative costs would be spread over a 
smaller number of people, which could magnify any increases or 
partially offset any reductions in premiums, as premiums account for 
those costs. However, OPM officials noted that plan administrative 
costs are generally a percentage of total claims costs, about 5 
percent, and that the percentage would likely remain the same under a 
USPS withdrawal. 

A USPS withdrawal could result in some nonpostal enrollees needing to 
select new FEHBP plans. OPM officials told us that the small number of 
FEHBP plans where enrollment is primarily postal employees and 
retirees would likely withdraw from the program, because the plans 
would no longer have enrollees or the plans would not be able to 
remain competitive with other FEHBP plans without postal enrollees. Of 
the 147 FEHBP plans offered in 2011, enrollment was primarily composed 
of postal employees and retirees (70 percent or more) in 4 plans--2 
national fee-for-service plans run by postal unions and 2 HMOs with 
enrollment of around 1,000 (see table 11). If USPS were to withdraw 
its employees and retirees from FEHBP, one of the 2 affected postal 
union sponsored plans would lose its entire enrollment, and the other 
would lose 76 percent of its enrollment.[Footnote 83] If the 4 plans 
with 70 percent or more postal enrollment discontinue participation in 
the program under a USPS withdrawal, an estimated 1 percent (about 
29,000) of the approximately 3 million nonpostal enrollees in FEHBP 
would need to select a new health plan. Another roughly 62,000 
nonpostal enrollees would be affected if plans with 50 percent to 69 
percent postal enrollment decided to leave FEHBP. 

Table 11: Number of FEHBP Plans at Various Levels of Postal Enrollment 
and the Number of Postal and Nonpostal Enrollees in Those Plans as of 
2011: 

Percentage of enrollment that postal enrollees represent: 70% or more; 
Total number of plans: 4; 
Postal enrollment: 123,383; 
Nonpostal enrollment: 28,940. 

Percentage of enrollment that postal enrollees represent: 50 to 69%; 
Total number of plans: 20; 
Postal enrollment: 108,478; 
Nonpostal enrollment: 62,266. 

Percentage of enrollment that postal enrollees represent: 30 to 49%; 
Total number of plans: 40; 
Postal enrollment: 95,096; 
Nonpostal enrollment: 167,774. 

Percentage of enrollment that postal enrollees represent: 20 to 29%; 
Total number of plans: 30; 
Postal enrollment: 584,738; 
Nonpostal enrollment: 2,181,778. 

Percentage of enrollment that postal enrollees represent: 19% or less; 
Total number of plans: 53; 
Postal enrollment: 83,108; 
Nonpostal enrollment: 591,917. 

Source: GAO analysis of OPM data. 

Note: The enrollment numbers represent FEHBP contracts, not the number 
of covered lives. OPM officials estimated that total covered lives in 
FEHBP was about 8 million in 2011. 

[End of table] 

Nonpostal enrollees who have to select new plans would have multiple 
options, but changing plans may have adverse effects for some. Plans 
leaving FEHBP and enrollees needing to select a new plan are a common 
occurrence. From 2008 through 2012, more than 100 plans left FEHBP, 
affecting about 100,000 enrollees.[Footnote 84] In all states, 
nonpostal enrollees in the 4 plans that may choose to depart the 
program as a result of a USPS withdrawal would have at least 10 fee- 
for-service plan options from which to choose and may also have one or 
more HMO options.[Footnote 85] Most of the 29,000 enrollees most 
likely to be affected would also be able to choose a plan with a 
similar premium to the enrollee's departing plan. However, as was 
previously discussed, enrollees choosing a new plan with a similar or 
lower premium could face higher total costs because of differences in 
coverage levels and cost-sharing requirements. Some nonpostal 
enrollees who would have to select a new plan may also have to find 
new providers. Having to identify new providers could cause 
disruptions in health care for some enrollees, which representatives 
from one postal union and the association for federal retirees raised 
as a concern. 

OPM officials told us that they do not expect that a USPS withdrawal 
would have more extensive effects than a small number of plans exiting 
the program. However, they also noted that any time a large change 
occurs in the program there can be unintended and unforeseen issues 
that arise. FEHBP has not experienced a reduction in enrollment of 
this size in the past. The program's experience with groups of 
employees leaving includes those that left in the 1980's when six 
federal agencies introduced their own health plans to provide an 
alternative to FEHBP for employees.[Footnote 86] These agencies had 
relatively small numbers of employees (from about 150 to 8,500) and, 
therefore, their employees' leaving FEHBP had a much smaller effect on 
enrollment than would a USPS withdrawal.[Footnote 87] OPM officials 
stated that these agencies, like USPS, have the legal authority to 
provide an alternative health care plan to employees. Officials noted 
that other federal agencies do not have that authority. Other agencies 
also do not have the direct financial incentive that USPS has to 
control and manage health care costs, because those agencies are not 
responsible for retiree health benefit liabilities. 

Conclusions: 

USPS would likely realize large financial gains from reducing its 
liabilities for retiree health care by implementing its own health 
plan, thereby significantly reducing the need for future prefunding 
payments. Most of USPS's financial gains are achieved by increasing 
the use of Medicare, both by increasing enrollment in Parts A and B 
and gaining Medicare subsidies for prescription drug coverage under 
Part D, thereby increasing Medicare spending. Thus, the primary policy 
decision for Congress to make with respect to USPS's proposed health 
care plan is whether to increase postal retirees' use of Medicare, 
thereby decreasing USPS costs and increasing Medicare costs. 

If Congress does not act on USPS's proposal for a new USPS health care 
plan, we continue to believe that Congress and USPS need to reach 
agreement on a comprehensive package of actions to improve USPS's 
financial viability. In previous reports, we have provided strategies 
and options, to both reduce costs and enhance revenues, that Congress 
could consider to better align USPS costs with revenues and address 
constraints and legal restrictions that limit USPS's ability to reduce 
costs and improve efficiency. We also continue to believe that 
Congress would need to modify the current statutory schedule for 
prefunding USPS's retiree health benefits payments in a fiscally 
responsible manner. In this regard, as we have reported, USPS should 
continue to prefund any unfunded retiree health benefits liabilities 
to the maximum extent that its finances permit. 

If Congress decides to move forward with USPS's proposed health plan 
as part of a broader reform package, other important policy issues 
remain to be addressed to reduce the risks of the proposed plan. 

* First, under one alternative USPS's proposal would allow its health 
plan assets to be invested in stocks, private sector bonds, and other 
non-Treasury securities exposed to risk of losses. We agree with the 
U.S. Treasury Department that it is important to ensure the safety of 
fund assets supporting USPS health benefits for both current postal 
employees and retirees by restricting these assets to investments in 
federally guaranteed Treasury securities. However, we would suggest 
broadening the investment options beyond the special-issue Treasury 
securities currently used for PSRHBF and federal pension funds to 
include inflation-indexed Treasury securities, to allow for partial 
protection against future inflation. Also, if Congress were to permit 
USPS to invest retiree health funds in non-Treasury securities, we 
would suggest that because of USPS's uncertain financial prospects and 
mature plan population, USPS not be permitted to use a discount rate, 
for prefunding purposes, that anticipates average long-term returns on 
such assets in excess of such long-term returns expected on Treasury 
securities before such returns have actually been achieved. 

* Second, we conclude that the USPS proposal for allowing health fund 
assets to be transferred to unrelated postal funds in any year that 
assets supporting the USPS health plan exceeded the liabilities is not 
fiscally prudent. If USPS were to consistently exercise this option to 
help maintain its financial solvency, this could result in an unfunded 
liability for retiree health benefits. 

* Third, under USPS's proposal, there can be some risk of overly 
optimistic assumptions in valuing the funded status of USPS's health 
plan, potentially leading to inadequate funding of benefits, because 
USPS's proposal does not provide for independent selection or 
oversight of assumptions, despite other safeguards USPS has proposed 
in this area. This risk could be reduced by having assumptions 
selected by an independent third party, such as an independent board 
of actuaries. 

* Fourth, the USPS proposal ensures that postal employees and retirees 
in the USPS health plan will receive many but not all of the 
protections that FEHBP provides. Unlike FEHBP, there would be no 
statutory formula to establish USPS's share of the costs of retiree 
health benefits. This lack of a statutory formula means that there 
would be no limits on the share of costs that retirees may be required 
to contribute. The USPS proposal would require the plan to comply with 
other standards that protect enrollees in FEHBP and in nearly all 
other private health insurance plans, e.g., standards prohibiting 
plans from setting lifetime limits on the value of coverage and 
relating to the review of appeals of benefit denials. However, without 
an express statutory requirement, it is unclear whether these 
standards would apply to a USPS plan. 

Finally, in previous reports, we have stated--and continue to believe--
that Congress should require arbitrators to consider the financial 
condition of USPS in any binding arbitration of collective bargaining 
over wages and benefits. Such a requirement would be even more 
important if USPS establishes its own health plan and its health 
benefits and contribution levels become subject to collective 
bargaining. 

Matters for Congressional Consideration: 

A key matter for Congress to consider is whether or not to move 
forward with a USPS health plan that would result in an increase in 
retirees' use of Medicare. If Congress decides to approve this 
proposal, then Congress should also weigh the impact on other issues, 
including: 

1. safeguards for all USPS health plan fund assets by placing 
appropriate constraints on their asset allocations, such as limiting 
investments to Treasury securities and inflation-indexed Treasury 
securities or, if Congress chooses to permit investments in non-
Treasury securities, constraints on the discount rate for prefunding 
purposes so as not to anticipate returns on risk-bearing assets in 
excess of those on Treasury securities before such returns have 
actually been achieved; 

2. standards for the disposition of any surplus health plan assets 
that reduce the risk of a new unfunded liability emerging in the 
future, standards such as amortizing any surplus to mirror the 
amortization of any unfunded liability, or using any surplus to offset 
normal cost payments; 

3. designation or creation of an independent entity responsible for 
the selection of actuarial assumptions used to annually determine the 
funded status of USPS's health plan for purposes of determining 
prefunding payments; and: 

4. protections for postal employees and retirees that are comparable 
to those under FEHBP, including a formula for USPS retirees' 
contribution to the costs of their health coverage. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to USPS, the U.S. Treasury 
Department, and OPM for review and comment. USPS provided comments by 
letter, which are reprinted in Appendix III; the U.S. Treasury 
Department and OPM did not provide comments by letter. USPS also 
provided technical comments, as did the U.S. Treasury Department, 
which we incorporated as appropriate. USPS commented that it 
appreciated our thorough and rigorous analysis and took no position on 
our Matters for Congressional Consideration. 

In its comments, USPS emphasized that its proposed restructuring of 
health care benefits is a key element of USPS business plans that it 
stated provide a path to solvency and fiscal sustainability for USPS. 
USPS also emphasized a number of other points related to its proposed 
health care plan: the potential effects of its proposed plan on 
Medicare finances; the investments of assets to finance retiree health 
benefits; and the effects on plan participants, including employees 
and retirees. 

First, USPS noted that with regard to the effect of the proposed plan 
on Medicare's finances, Congress should consider that USPS and postal 
employees have been contributing to Medicare for almost 30 years and 
would be able to fully benefit from those contributions under the 
proposed plan. USPS stated that the annual savings to USPS and 
participants from the increased use of Medicare represents less than 
one day's claims under Medicare, but are a lifeline to USPS and vital 
to its business plans. As our report stated, USPS projected that its 
plan would increase the more than $550 billion spent annually for 
Medicare by an average of roughly $1.3 billion a year in the first 5 
years of its health plan, which accounts for offsetting increases in 
Medicare premiums and drug discounts. However, the additional costs 
from USPS's proposed plan would have to be weighed alongside the 
fiscal pressures already faced by Medicare. 

Second, USPS indicated that our report accurately reflected that USPS 
has proposed two alternative methods of investing USPS health plan 
assets and that either approach--investing solely in Treasury 
securities or in a mix that could include other types of assets--would 
be satisfactory to USPS. 

Third, USPS stated that it had reviewed the graphs, tables and text we 
prepared to illustrate the potential effect on enrollees if the 
proposed USPS plan is adopted and found the material to be accurate. 
USPS agreed that our report was accurate in concluding that total 
costs for some postal employees and retirees could be higher under the 
proposed plan, but stated that the majority of enrollees would benefit 
economically from the proposed plan and provided information 
elaborating on this point. Our report states that while the majority 
of enrollees--between 63 and 97 percent--would likely pay similar or 
lower premiums under the proposed plan; some enrollees could be at 
risk for higher costs depending on the amount and cost of care they 
use, their use of out-of-network providers, and whether they have 
family coverage. USPS also stated in its comments that our report did 
not discuss the positive effects of USPS's proposed plan on retirees. 
We disagree with this assessment. The report presents the changes in 
benefits and costs that retirees would face under the proposed plan, 
including those that expand coverage and others that could result in 
higher costs for retirees. 

As we agreed with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this letter. At that time, we will send 
copies of this report to the appropriate congressional committees, the 
Postmaster General, OPM, the U.S. Treasury Department, CMS, OMB, and 
other interested parties. In addition, the report will be available at 
no charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions on this report, please 
contact John E. Dicken at dickenj@gao.gov or call (206) 512-7114; 
Lorelei St. James at stjamesl@gao.gov or Frank Todisco at 
todiscof@gao.gov or call (202) 512-2834. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Contact information and key contributors 
to the report are listed in appendix IV. 

Signed by: 

John E. Dicken: 
Director: 
Health Care: 

Lorelei St. James: 
Director: 
Physical Infrastructure Issues: 

Frank Todisco: 
Chief Actuary: 
Applied Research and Methods: 

The undersigned meets the qualification standards of the American 
Academy of Actuaries to render the actuarial findings contained in 
this report regarding the measurement issues, funding issues, and 
risks associated with retiree health care obligations. 

Frank Todisco, FSA, MAAA, EA: 
Chief Actuary: 

[End of section] 

Appendix I: The Proposed Health Care Plan of the U.S. Postal Service: 

The U.S. Postal Service's (USPS) health plan would provide coverage 
for the approximately 1 million postal employees and retirees who are 
currently enrolled in the Federal Employees Health Benefits Program 
(FEHBP). It is designed to increase postal retirees' enrollment in 
Medicare and take advantage of Medicare subsidies for employer-based 
prescription drug plans. Aspects of the proposed plan would include: 

Eligibility: All active employees, including bargaining unit and non-
bargaining unit employees, would be eligible to participate in USPS's 
proposed plan. Further, all current retirees and survivors would be 
eligible. Employees would be eligible for coverage in retirement under 
the same circumstances that they are currently eligible for coverage 
under FEHBP--5 years of continuous coverage in the plan before 
retirement and eligibility for an immediate annuity. Under the USPS 
proposal, USPS employees and retirees would no longer be eligible to 
participate in FEHBP. 

Benefits: Under the USPS proposal, for the first year of the health 
plan, the type and the average level and value of benefits for current 
retirees (including those who retire within one year of the date of 
enactment of the proposed legislation) and employees would be 
comparable to the most highly enrolled FEHBP plan.[Footnote 88] After 
the first year, benefits for current retirees must continue to meet 
that standard. For employees, benefits would no longer have to meet 
that standard after the first year; however, any changes to benefits 
for employees would be subject to collective bargaining. Benefits for 
employees who retire a year or more after the effective date (i.e., 
future retirees) would also not be subject to the standard of 
comparable value to the most highly enrolled FEHBP plan. 

Plan options: USPS would offer three plan options within a national 
preferred provider organization plan that would provide varying levels 
of coverage--referred to as the high, middle, and value options. USPS 
estimates that the value of benefits under the high option would be 
slightly higher than the value of benefits of the most highly enrolled 
FEHBP plan. The value of the benefits of the middle option would be 
slightly lower; and the value of the benefits under the value option--
designed to provide a more limited benefit--would be significantly 
lower. USPS would offer an HMO option in geographic areas where large 
numbers of postal employees are currently enrolled in HMOs--
specifically, staff or facility-model HMOs--within FEHBP. As of April 
2013, USPS had not determined in which geographic areas HMOs would be 
offered or what services would be covered and at what levels. 

Premiums: Premium rates would vary across the plan options and 
depending upon which of the four tiers of coverage the employee or 
retiree needs: self-only, self-and-spouse, self-and-children, or self-
and-family. USPS estimates that employee contributions in the first 
year would equal 26 percent of the cost of the high option, 18 percent 
of the middle option, and 17 percent of the value option. Retiree 
contributions are estimated at 32 percent of the cost of the high 
option and 25 percent of the middle and value options. As with 
benefits, initial premium contribution rates would be set by the 
governance board. Any changes to employee contribution rates would be 
subject to the collective bargaining process. 

Plan administration: The USPS plan would be self-insured, which means 
that USPS would set aside its own funds to pay for benefits rather 
than purchasing insurance from an insurance company. USPS would 
administer enrollment, which it currently does for employees 
participating in FEHBP, but would contract with one or more outside 
entities to administer benefits. USPS plans to use a competitive 
bidding process to hire one or more plan administrators, which would 
be responsible for providing a national provider network, offering 
care management and patient assistance, processing and reviewing 
claims, and paying providers. 

[End of section] 

Appendix II: U.S. Postal Service Proposals for Health Plan Financing: 

All material in this appendix was summarized from information provided 
by USPS on the aspects of its proposed health plan financing.[Footnote 
89] GAO did not independently verify the legal accuracy of any of the 
statements or material contained in the appendix. 

Funding the USPS Health Plan, Including Financing of Any Unfunded 
Liabilities and Repeal of Current Statutory Prefunding and 
Amortization Payments: 

The USPS proposal would establish advance funding of its health plan 
based on payment of a normal cost and amortization of any unfunded 
liability or surplus of its retiree health care liabilities over an 
amortization period ending at the later of 40 years after the new plan 
is implemented, or 15 years from the then-current year, beginning with 
the fiscal year ending after the implementation date (e.g., September 
30, 2014, if the implementation date is January 1, 2014).[Footnote 90] 
The USPS proposal seeks a repeal of all PAEA scheduled and deferred 
payments to prefund retiree health benefits that have statutorily 
fixed payments through 2016 and then amortize remaining unfunded 
retiree health benefit liabilities starting in 2017. In addition, USPS 
stated that under its proposed health plan, there would be no explicit 
federal guarantee of USPS health benefits for USPS employees, 
annuitants, or survivors, including any participants in the USPS 
health plan. 

USPS Has Proposed Two Options to Finance Its Proposed Health Plan for 
Congress to Consider: 

Under one option of USPS's legislative proposal (which USPS refers to 
as "Scenario 2"), the existing Postal Service Retiree Health Benefits 
Fund (PSRHBF) would be transferred into a newly created Postal Service 
Health Benefits Fund (HBF). Assets of this new fund could be invested 
in stocks, private sector bonds, and other non-Treasury securities 
exposed to risk. According to USPS, in response to concerns that have 
been expressed about the investment of assets for retiree health care 
in other than Treasury securities under Scenario 2, it developed a 
different option for financing its health plan (which it refers to as 
"Scenario 1"). Under Scenario 1, the PSRHBF would be continued and 
used to finance retiree health benefits under USPS's health plan. USPS 
officials have stated that Congress's adoption of either scenario is 
acceptable to USPS and they are open to any reasonable resolution of 
issues of asset management by Congress. 

Scenario One: PSRHBF Used to Finance Retiree Health Benefits under 
USPS's Health Plan: 

Under one option for financing the proposed USPS health plan (which 
USPS refers to as "Scenario 1") the PSRHBF would be continued and used 
to finance retiree health benefits under USPS's health plan, though 
without continued OPM management since the health plan would be 
administered by USPS. All future funding of USPS's retiree health 
benefits liability would be deposited into the PSRHBF. According to 
USPS, if Scenario 1 summarized above is adopted by the Congress, USPS 
would expect that all funds set aside for retiree health care benefits 
would be retained in the PSRHBF, and would not be commingled with the 
funds USPS would use (including any reserve funds such as for incurred 
but not reported claims and for margin for claims fluctuation) that 
might be maintained in the financing of the active employee health 
benefit plan. 

Under Scenario 1, USPS stated that the current and future assets of 
the PSRHBF would continue to be invested as now, in special-issue 
Treasury securities or otherwise as might be directed by the Congress. 
USPS also stated that it would prefer to have some input on the 
structure of the asset holdings so that the PSHRBF's investments were 
matched by duration to the expected benefit payments. USPS said that 
could be accommodated with the use of Treasury securities and is a 
sounder way of matching assets and liabilities than is currently in 
place. 

Scenario Two: New HBF to Finance USPS Health Plan: 

Under one option of USPS's legislative proposal (which USPS refers to 
as "Scenario 2"), the USPS health plan would be financed by the newly 
created HBF, which would be established by law.[Footnote 91] The HBF 
would be a revolving fund within the U.S. Treasury, available to USPS 
without fiscal-year limitation to pay benefits claims and 
administrative expenses incurred under the USPS health plan. The HBF 
would contain deposits that include: 

* The balance of the PSRHBF transferred to the HBF no later than 30 
days after enactment with the PSRHBF abolished upon such transfer. 
USPS would make no further contributions to the PSRHBF. 

* The balance of the OPM-managed Employee Health Benefits Fund (i.e., 
the fund that finances FEHBP) that is allocable to contributions by 
USPS, its officers and employees, and its annuitants, including any 
amounts held by OPM in any reserve fund. (USPS would bear no further 
liability for contributions to the Employee Health Benefits Fund.) 

* USPS contributions under its health plan. 

* Contributions of USPS employees, officers, and annuitants, and the 
dependents of such persons, under the USPS health plan. 

* Interest that may be earned on investments of the HBF. 

* Any other receipts of USPS that are allocable to the USPS health 
benefits plan. 

* U.S. Treasury Department payments for service of officers and 
employees of the former U.S. Post Office Department that are allocable 
to the Treasury under section 8906(g)(2) of title 5 (i.e., the federal 
government picks up the portion of costs attributable to pre-1971 
service). 

After PSRHBF assets are transferred into the HBF, these transferred 
assets would be comingled with the HBF assets and could be used for 
any purpose that the HBF could be used. This would permit (but not 
require) PSRHBF assets to be used after their transfer into the HBF 
for purposes other than USPS retiree health benefits, such as for USPS 
health benefits for current employees. However, USPS has stated that 
if it is able to form its own health care plan outside of FEHBP and 
thereby reduce its remaining retiree health benefit liability to zero, 
the funds it has already set aside in the PSRHBF would be dedicated 
solely to the payment of retiree health benefits. USPS has further 
asserted that the HBF would be fully insulated from creditors so that, 
even in the event of USPS insolvency, retiree health benefits would 
continue to be paid. 

In this regard, USPS indicates that federal law would not allow assets 
of the HBF to be used to (1) loan monies to the Postal Service Fund, 
such as to enable it to remain solvent; (2) cover other required USPS 
payments to the federal government, such as for pensions and workers' 
compensation, if USPS did not have sufficient funds to make such 
payments; and (3) finance USPS investments in property for post 
offices or other USPS operations, in delivery vehicles or technology 
for postal operations, or in nonpostal initiatives to generate revenue. 

Investment of Assets of HBF: 

Under Scenario 2, USPS would be authorized to invest sums in the HBF 
in instruments or obligations selected by one or more qualified 
professional asset managers. For purposes of such investments, 
"qualified professional asset manager" would have the meaning under 
section 8438(a)(8) of title 5. Through these investments, USPS would 
seek to increase investment returns on more than $40 billion in assets 
of the HBF. Investment decisions for HBF assets would not require the 
approval of the Secretary of the Treasury, or for the Secretary to be 
advised before the purchase or sale of any instrument or obligation of 
the HBF. 

Under Scenario 2, HBF assets could be invested in non-Treasury 
securities, such as stocks and bonds, as well as commodities, foreign 
currency, and real property. In this regard, USPS stated that federal 
law would allow the HBF to acquire a controlling interest in stock of 
a private company, if such an action was consistent with the 
Committee's fiduciary responsibilities (including the responsibility 
to diversify where the assets in the HBF are invested). 

USPS-Appointed Committee to Oversee the HBF: 

The USPS Governors would be required to appoint a 7-member Committee 
(the Committee) to oversee the investment and management of the assets 
of the HBF. Members of the Committee would be required to have 
substantial experience, training, and expertise in the management of 
financial investments and health benefit plans. 

The Committee would be required to have, at all times, members that 
include at least 1 person recommended by the Secretary of the 
Treasury, at least 1 person recommended by the labor organizations 
recognized under chapter 12 of title 39, and at least 1 person 
recommended by the supervisors' and postmasters' organizations 
specified in section 1004(i) of title 39. Each member of the Committee 
would be appointed for a term of 4 years, subject to a one-time 
reappointment, except that of the members first appointed, 3 members 
shall be appointed for terms of 4 years; 2 members shall be appointed 
for terms of 3 years; and the remaining members shall be appointed for 
terms of 2 years. In addition, Committee members would be subject to 
the following provisions applicable to fiduciaries under Employee 
Retirement Income Security Act (ERISA): sections 1104 through 1106, 
1108, and 1110 of title 29, notwithstanding section 1021(e) of title 
39 and section 1003(b)(1) of title 29, and with the provisions of 
sections 1131 and 1132 of title 29 applying only to the extent those 
provisions concern the performance of fiduciary responsibilities. 

Transfer of Any Surplus Health Plan Assets to Postal Service Fund: 

USPS officials told us that their principal concern is that they would 
prefer to have the question of the potential disposition of excess 
assets set aside for retirees addressed in the legislation, to avoid 
the uncertainties they told us have arisen with respect to that 
question in the funding of the Civil Service Retirement System and the 
Federal Employees Retirement System. They noted that it is possible to 
envision some circumstances in which the surplus could be quite large, 
and as a result, some guidance from Congress as to the potential 
disposition of surplus, under whatever strictures Congress would see 
fit to impose, would be appropriate. They told us that while they made 
an initial proposal in their August 2011 legislative language, they 
are open to any reasonable resolution of this issue. 

Under Scenario 2, in any year when the amount of assets in the HBF 
exceeds this fund's estimated actuarial liability, USPS could 
authorize the surplus amount to be transferred to the Postal Service 
Fund, provided that such authorization is made pursuant to a 
recommendation by a majority of the Committee. Before approving such a 
recommendation, the Committee would be required to obtain an opinion 
and report by an actuary--who would be required to hold membership in 
the American Academy of Actuaries and be qualified in the evaluation 
of healthcare insurance obligations--in accordance with generally 
accepted actuarial practices and principles, with a certification that 
a decision to transfer funds would not violate the statutory criteria 
that the amount of assets in the HBF exceeds this fund's estimated 
actuarial liability. 

[End of section] 

Appendix III: Comments from the U.S. Postal Service: 

Jeffrey C. Wiiliamson: 
Chief Human Resources Office And Executive Vice President: 
United States Postal Service: 
475 L'Enfant PLAZA SW:
Washington, DC 20260-4000: 
[hyperlink, http://www.usps.com] 

Ms. Lorelei St. James: 
Director, Physical Infrastructure: 
United States Government Accountability Office: 
Washington, DC 20548-0001: 

Dear Ms. St James: 

We appreciate the opportunity to review the Draft Report on the USPS 
Proposed Health Plan provided us by the GAO. Below are the agency 
comments. In a separate document are suggested edits where we point 
out areas where we believe the GAO should make changes to the Report 
Draft, to correct errors (some of which are quite minor) and to 
provide a more accurate description of USPS's positions on certain 
matters, especially on the protections for participants that we have 
proposed to the Congress. 

We want to express our appreciation to the GAO for the thorough and 
rigorous analysis they have conducted of the legislative proposal USPS 
has made to the Congress for restructuring health care benefits 
provided USPS employees, retirees, and their families. 

As the Postmaster General has testified before the Congress, the 
proposed restructuring of health care benefits is a key element of 
USPS business plans that provides a path to solvency and fiscal 
sustainability for the Postal Service. 

We believe that the GAO report will be of great assistance to the 
Congress as it considers this proposal in the context of more 
comprehensive postal reform legislation. It is in that spirit that we 
offer as requested by GAO USPS comments on the GAO Report, so that the 
Congress will have a complete record before it as it undertakes the 
important task of crafting the legislation that will be necessary to 
effect that result. 

In summary we believe the following to be the most important points 
the Congress should consider in reviewing the GAO Report: 

* Integration of the USPS proposed health care plan with Medicare and 
the effect of the plan on Medicare finances. 

USPS and postal employees have been contributing to Medicare for 
almost thirty years. Our proposal would permit USPS and participants 
to benefit fully from those contributions after retirement, by 
assuring that Medicare would be primary and the USPS plan secondary 
for the purpose of claims payments for expenses covered under Parts A 
and B of Medicare, and by providing prescription drug benefits under 
an Employer Group Waiver Plan (EGWP), As the GAO Report points out, 
the EGWP plan will allow USPS to take advantage of the substantial 
discounts available for prescription drugs under the provisions of the 
Patient Protection and Affordable Care Act Those discounts are 
available in no other way. 

The GAO has reported on the effect on Medicare finances. There are two 
important points to emphasize, however: 

- The savings to USPS and participants are offset significantly by 
additional participant contributions to Part B of Medicare from new 
participants, and by the discounts offered by Pharma in the drug 
pricing arrangements under the PPACA; and 

- The annual savings to USPS and participants represents less than one 
days claims under Medicare. Those savings on the other hand are a 
lifeline to USPS, and vital to our business plans. And these savings 
do not come at the expense of a single job or require the closing of 
any post office or postal facility. 

* Investment of assets set aside to fund retiree health benefits
GAO has correctly noted that USPS has proposed two alternative methods 
of funding for retiree health benefits: 

- Continuation of the Postal Service Retiree Health Benefits Fund, 
with all assets (current assets plus future contributions) retained in 
that fund and invested in Treasury instruments; or; 

- Investing assets in a manner more consistent with the investment of 
retirement plan assets generally in the U.S. economy, with a mix of 
investments designed to recognize the lengthy time horizon associated 
with retirement plan commitments and to seek investment returns that 
will better the returns likely to be available under the current 
investment policy for the PSRHBF. 

Either approach would be satisfactory to USPS. We will abide by the 
instructions of the Congress with respect to the investment of plan 
assets. 

* Benefits and costs to participants: 

USPS has provided extensive information to the Congress and the 
Administration on the potential effects of the proposed health care 
plan on both USPS finances and on participants. We believe that the 
data we have provided the Congress and the Administration show 
conclusively that the great majority of participants will have 
comparable or superior health benefits, at a lower cost to 
participants. We respectfully provide more extensive comments on these 
issues for the consideration of the Congress. We would be pleased to 
provide further information on these subjects as required as the 
Congress considers action on USPS's proposal. 

Comments on the Effects of the USPS Health Care Proposal on Plan 
Participants: 

We offer the following comments and observations to provide additional 
context for the Congress and for USPS stakeholders on the subjects 
discussed in the GAO Report under the heading "Compared To FEHBP, 
Postal Employees And Retirees Would Have Coverage For Similar Services 
But Elements Of The Proposed Plan's Design Could Lead To Higher Costs 
For Some Enrollees" beginning at page 26 of the GAO Report. [Now on p. 
30] 

We have reviewed the graphs, tables and text prepared by GAO to 
illustrate the potential effect on enrollees if the proposed USPS plan 
is adopted and find the material to be accurate. It is also accurate 
to state, as GAO does at page 26 of the Report that "total costs—
premiums and costs for the use of care—could be higher for some, due 
in part to higher deductibles and out-of-pocket maximums under the 
USPS plan.' However, the great majority of participants will benefit 
economically from the proposed plan, and substantially. In that regard 
some additional context is important. [Now on p. 30] 

* A careful review of the data presented in table 7 at page 32 of the 
GAO Report shows that where health care services are secured in-
network, the USPS High Option Plan has deductibles at or below the 
range shown for the six large FEHB plans with which the data is 
compared; and the deductible for the USPS Middle Option Plan is only 
slightly higher than the range presented for the six FEHB plans. [Now 
on p. 37] 

* The same sort of observation can be made with respect to the out-of-
pocket maximum exposure under the respective plans illustrated. For 
the USPS High Option plan, the self-only out-of-pocket maximum is 
below the range depicted for the six FEHB plans for in-network 
services. And for families the out-of-pocket maximum in-network is at 
the high end of the range depicted in the table for the six FEHB 
plans, but still within that range. 

* In presenting the data in Table 7 for annual deductibles and out-of-
pocket maximum exposure for out-of-network services, GAO has not 
presented data in a way that readily shows the amounts of the out-of-
network deductibles and out-of-pocket maximums. Rather, it has summed 
the in-network and out-of-network deductibles and the in-network and 
out-of-network maximums assuming that in a given year a participant 
would be exposed to both. As GAO has pointed out, however, out-of-
network care is not only uncommon but is relatively rare (see page 29, 
Services received out-of-network) And, of course, the percentage of 
individuals who receive services both in-network and out-of-network in 
a given year would represent only a subset of that already small 
population. [Now on pp. 33-34] 

* Moreover, officials of the largest FEHB plan by population reported 
to us that in that plan, out-of-network usage is less than 2% of total 
claims. 

* While GAO has included the seven largest FEHB plans for some 
purposes, one was excluded from the comparison of the deductibles and 
out-of-pocket maximum exposure. It is the second largest FEHBP plan by 
population, and it is an Exclusive Provider Only Plan (EPO). While we 
would agree that that makes the structure of that plan more like an 
HMO and that it perhaps should be excluded from the Table 7 for that 
reason, we should still point out that in such plans there is no 
benefit at all where services are provided out-of-network. Thus, the 
out-of-network exposure is unlimited and there are zero out-of-network 
claims eligible for payment. 

* Finally, as we pointed out in our earlier submissions to GAO, USPS 
established in its market research with major health care vendors that 
all of the major vendors have robust networks that assure that almost 
all participants will have ready access to network providers. And 
where that is not the case, the proposed USPS plans will provide that 
the vendor must pay benefits subject to the in-network provisions with 
respect to deductibles, copays, coinsurance and out-of-pocket maximums. 

Aggregate Effects on Premiums and Savings to Plan Participants: 

We believe it will be useful to the Congress and to stakeholders 
(including employees and retirees) to understand that while there will 
indeed be instances where a particular participant in a particular 
year may be exposed to somewhat higher costs, there are many more 
situations where the costs to participants will be lower, as the GAO 
Report shows and the graph in Figure 1 at page 31 illustrates to some 
degree. [Now on pp. 33-34] 

Premiums-—or premium equivalents, which is the correct term for self-
insured plans such as the USPS proposed plan—-are projected to be 
lower by some 16% than premiums under the FEHB plans on average. That 
reduction is primarily driven by the savings achieved through 
integrating the plan for retirees with Medicare Parts A and B in the 
way that is almost universally done in the private sector and in state 
and local government health care plans that continue to provide health 
care coverage for retirees: and by introducing the EGWP plan for 
prescription drug benefits for Medicare eligible retirees, to take 
advantage of the savings available under Medicare Part D and the 
provisions of the PPACA which GAO has described in the Report. 

That reduction in premiums is achieved while retaining plan designs 
that are simpler and easier for participants to understand than the 
multitude of choices available under FEHBP. And the range of plan 
value—from the most generous High Option Plan to the least generous 
Value Plan—will be comparable to the range in value available in the 
FEHB offerings. But there will be some key differences, which we 
explain briefly below. 

This premiums savings will be shared with all plan participants. In 
the aggregate participants are projected to pay in the first year $659 
million less in premium contributions than they are currently paying 
for FEHB plans. That will represent a savings of approximately $700 
annually on average for each employee and annuitant who participates 
in the plan. 

Here are some of the other key differences compared with FEHBP: 

* GAO has correctly pointed out in the Report that plan costs are not 
always consistently aligned with plan value. That is especially true 
in the array of plans within FEHB, where the costs are determined 
almost entirely by the demographics (and the claims) that have emerged 
within the plans over time. Some plans with less generous benefits are 
costly; and some with more generous benefits are inexpensive. There is 
essentially no correlation between the value of the plans and the cost 
of the plans in the FEHB system. 

* In the simpler array of choices that USPS proposes (which reflects 
the common approach in employer sponsored plans in the U.S.) there 
will be a transparent, consistent, and completely understandable 
relationship between the value of the plan a participant selects and 
the cost of that plan among the PPO options that are the backbone of 
the proposed plan structure. The High Option plan will be the most 
generous and most expensive; the Value plan will be the least generous 
and least expensive; and the Middle Option plan will be in between. 

* This structure will allow participants to make better choices, 
consistently aligned with their current health care needs and 
tolerance for risk. 

* The reduction in the premiums that the savings makes available also 
is a factor in USPS's decision to move to a four-tier structure for 
participant contributions. The four-tier structure is more common in 
the private sector and in state and local government plans than the 
two tier approach (self and family choices only) still in use within 
FEHB. Usually such a change is a zero sum game, requiring that those 
who need full family coverage pay higher premiums to finance the 
savings available for those who need to cover only a spouse, or 
dependent children. The premium savings under USPS's proposal permit 
the contributions to stay approximately the same as now under FEHBP 
for those who must cover both a spouse and a child or children (i.e. 
those who would enroll in the family option under the new USPS plan), 
for comparable coverage. Those who do not require full family 
coverage, however, will see a further and significant reduction in 
their contributions. This could offer savings to virtually all 
participants over the course of a career with USPS and in their 
retirement years, as a participant's family status changes over time. 

The Effect of the Proposal on Current and Future Retirees: 

The positive effects of the proposed USPS plan on retirees is not 
discussed in the GAO Report. To illuminate those effects, it is 
important to break down the retiree participant population into 
categories, as follows: 

* Current Retirees under Age 65; 

* Current Retirees Age 65 and over who participate in Medicare; 

* Current Retirees Age 65 and over who do not participate in Medicare; 

* Future Retirees. 

Current Retirees under Age 65: 

Retirees under age 65 will be in the same position as active 
employees. Many will benefit by the lower premium structure overall. 
And all will have the benefit of comprehensive prescription drug 
coverage, regardless of whether they select the High, Middle or Value 
Option Plan. A key feature of the proposed USPS plan design is that 
the drug benefits will be uniform across all medical plan options. 
That will encourage all participants to maintain drug regimens, which 
is important for their health and to assist in avoiding potentially 
greater medical costs if regimens are not maintained. And the drug 
benefits under the USPS proposed plans as a general rule are better 
than those provided under the FEHB plans, especially for those with 
substantial drug expenses who will exceed the out-of-pocket maximum of 
$1,500 annually. Finally, many retirees (whether under age 65 or not) 
will no longer have dependent children under the plan and will benefit 
significantly from the USPS plan's four-tier structure, as they will 
be able to select enrollment options with lower premium contributions 
than those required for self and family coverage. 

Current Retirees Age 65 and over who participate in Medicare: 

This cohort is the great majority of Medicare eligible retirees, 
approaching 80% of all retirees over age 65. This group will benefit 
greatly by the changes USPS has proposed. 

As GAO has pointed out in the Report, for medical expenses covered by 
Parts A and B of Medicare, where Medicare is primary, the combination 
of Medicare and the supplemental benefits paid by the USPS plan will 
cover 100% of the expense for virtually all claims. 

Moreover, that 100% protection will be available whether the 
participant elects the High Option Plan or the Middle Option Plan, 
since either provides sufficiently generous benefits so that, in 
combination with Medicare as primary, 100% of charges will be paid. 
Thus, we expect that many current retirees now in more costly FEHB 
plans will select the Middle Option Plan and benefit from the lower 
premium cost of that plan compared with their current selection in 
FEHB, while retaining the same or (when prescription drugs are 
considered) superior benefits. As we pointed out above, prescription 
drug benefits are the same regardless of the medical plan option 
elected, so there is comprehensive drug coverage as well. 

USPS intends to communicate these facts aggressively to our retiree 
population. The opportunity to move to the less expensive Middle 
Option Plan (or even the Value Plan), coupled with the overall premium 
savings and the fact that the great majority of those needing 
dependent's coverage in this cohort will have only a dependent spouse, 
will provide significant savings to this group of USPS retirees. 

Current Retirees Age 65 and over who do not participate in Medicare: 

As GAO has pointed out in the Report, this cohort of retirees will be 
required for the first time to pay for Part B of Medicare (currently 
at the rate of $104.90 monthly for most Part B participants). However, 
they will also benefit from all of the savings available to those 
retirees who do currently participate in Medicare: 

* They can select the less costly Middle Option Plan and still retain 
100% coverage for those expenses covered under Parts A and B of 
Medicare; 

* They will have excellent drug coverage; 

* They will benefit from the lower overall premium structure; and; 

* Many who now insure self and family will be able to move to self-and-
spouse coverage, creating additional savings. 

For most such participants, the combination of these savings will 
compensate or more than compensate for the Part B premiums. Moreover, 
if they do not have Medicare coverage now, they are currently exposed 
to the costs associated with the deductibles, copays, and coinsurance 
features of the FEHB plan in which they participate. Our analysis 
which we have presented to staff of the key committees in the Congress 
has shown that particularly those participants in this cohort who have 
significant medical expenses—with concomitantly high out-of-pocket 
costs in their FEHB plan—will benefit by many thousands of dollars 
more than the additional cost of Part B coverage. 

Future Retirees: 

As GAO has pointed out, USPS's proposal does contemplate that for 
retirees who retiree one year or more after the effective date of the 
new plan, their coverage for Medicare A and B expenses will not be at 
the 100% level provided retirees now. Their supplemental coverage will 
be paid on a basis that will leave them with the same deductibles, 
copays, and out-of-pocket maximums that applied during active 
employment and during their retirement years before age 65. 

As GAO also pointed out in the Report, "[GAO] and other researchers 
have previously reported that this so-called 'first-dollar coverage' 
can lead to increased utilization and higher total expenditures in the 
absence of other cost-control measures." That is one of the principal 
reasons why the USPS proposal contemplates the elimination of the 
first-dollar coverage for future retirees. While the same criticism 
could apply to first dollar coverage for current retirees and for 
those who elect to retire within the first year after the proposed 
plan takes effect, USPS would nevertheless continue to provide first 
dollar coverage to those populations in the interest of avoiding undue 
disruption to their expected benefits. 

This approach is consistent with typical plan design for Medicare 
eligible retirees in the private sector and in state and local 
government plans, and it is a necessary element to eliminate the 
current unfunded liability for retiree health care benefits for USPS.
Comments on Figure 1, Page 31: Percentage of Postal Employees and 
Retirees from Selected FEHBP Plans Who Could Obtain Similar or Lower 
Premiums under the Proposed USPS Health Plan. 2013: 

Figure 1: Percentage of Postal Employees and Retirees from Selected 
FEHBP Plans Who Could Obtain Similar or Lower Premiums Under the 
Proposed USPS Health Plan, 2013: 

[Refer to PDF for image: horizontal bar graph] 

Estimated percentage of employees and retirees who would have paid 
similar or lower premiums under USPS plan in 2013: 

If all chose high option: 63%; 
If all chose middle option: 94%; 
If all chose value option: 97%. 

Sources: GAO analysis of USPS estimates of 2013 premiums, 2013 
premiums for seven selected FEHBP plans, and OPM data on
FEHBP enrollment in 2011. 

Note: For these estimates, we defined "similar" premiums as those 
within 10 percent of the premium the employee or retiree would have 
paid in 2013 for their FEHBP plan and "lower" premiums as those more 
than 10 percent less than the FEHBP premium. The estimates assume that 
enrollment in the selected FEHBP plans did not change from 2011 to 
2013. Estimates also use USPS's assumptions of the distribution of 
those with family coverage under FEHBP across the three levels of 
family coverage offered under the USPS proposed plan. The estimates 
account for Medicare Part B premiums that Medicare-eligible retirees 
are assumed to pay under USPS's proposed plan. 

[End of figure] 

The graph in Figure 1 at page 31 significantly understates the actual 
percentage of postal employees and retirees who will benefit from 
lower premiums under the plan, in the depiction presented in the first 
bar in the graph on the left. [Now on pp. 35-36] 
                
While the explanatory text below Figure 1 indicates that the 
distribution of family coverage GAO has assumed across the three tiers 
reflects the assumptions that USPS has made with respect to that 
distribution, it is simply not possible that all participants will 
choose the high option plan, just as participants do not all choose 
the highest cost plans among the array of plans offered within FEHB. 

Moreover, the first bar in the graph fails to capture the essential 
points that we raise immediately above in the discussion of the effect 
of the new plan offerings on retirees. Especially among the retirees, 
there will be a substantial migration to the lower cost plans (both 
the Middle Option and Value Option plans) from high cost FEHB plans, 
resulting in substantially lower costs for retirees. That reflects the 
factors cited above: 

* A much higher percentage of retirees than active employees will no 
longer require coverage for dependent children; 

* Medicare eligible retirees will benefit from 100% of coverage for 
those medical expenses covered
both by Medicare Parts A and B and by the USPS plans regardless of the 
plan they select; 

* There is no difference in prescription drug benefits regardless of 
the plan they select; 

* The simpler plan structure will help employees and retirees make 
better plan choices, aligning their choices with their health care 
needs; and; 

* The aggressive communications that USPS will undertake to explain 
the new plan, and the interaction with Medicare benefits to Medicare 
eligible retirees, will assure that migration. 

The result will be that, on an overall basis — that is, when one 
accounts for various cost-saving factors and the likelihood that 
enrollees will sort themselves according to what is financially 
beneficial for them —the percentage of participants who wit realize a 
reduction in their premium contributions will be much higher than the 
63% of participants illustrated in the first bar in the graph in 
Figure 1. 

Thank you for this opportunity to provide recommended corrections and 
comments on this important report to the Congress. 

Sincerely, 

Signed by: 

Jeffrey C. Williamson: 

Attachment: 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

John E. Dicken, (202) 512-7114 or dickenj@gao.gov: 

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov: 

Frank Todisco, (202) 512-2834 or todiscof@gao.gov: 

Staff Acknowledgments: 

In addition to the individuals named above, Robert F. Dacey, Chief 
Accountant; Beryl H. Davis, Director, Financial Management and 
Assurance; Gary T. Engel, Director, Financial Management and 
Assurance; Susan J. Irving, Director for Federal Budget Analysis, 
Strategic Issues; Thomas J. McCool, Director, Center for Economics, 
Applied Research and Methods; Susan E. Offutt, Chief Economist; 
Phyllis Anderson; Teresa Anderson; Susan Barnidge; George Bogart; Russ 
Burnett; Colin Fallon; Krister Friday; Kenneth John; Gene Kuehneman; 
Michael Kendix; Hannah Laufe; Kristi Peterson; Steve Robblee; Friendly 
Vang-Johnson; and Crystal Wesco made key contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, U.S. Postal Service: Strategies and Options to Facilitate 
Progress toward Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12, 
2010); Patrick R. Donahoe, Postmaster General and Chief Executive 
Officer, USPS, Solutions to the Crisis Facing the Postal Service, 
testimony before a hearing of the Committee on Homeland Security and 
Governmental Affairs, United States Senate, 113th Cong., 1ST Sess., 
Feb. 13, 2013. 

[2] GAO, U.S. Postal Service: Urgent Action Needed to Achieve 
Financial Sustainability, [hyperlink, 
http://www.gao.gov/products/GAO-13-562T] (Washington, D.C.: Apr. 17, 
2013); U.S. Postal Service: Urgent Action Needed to Achieve Financial 
Sustainability, [hyperlink, http://www.gao.gov/products/GAO-13-347T] 
(Washington, D.C.: Feb. 13, 2013). 

[3] In this report, we use the term "retirees" to refer to postal 
annuitants or any survivors of postal retirees who receive health 
benefits. 

[4] The Postal Accountability and Enhancement Act (PAEA) established 
the Postal Service Retiree Health Benefits Fund (PSRHBF) and required 
USPS to begin prefunding the health benefits for its current and 
future postal retirees. Under the prefunding mechanism established by 
PAEA, as implemented by the Office of Personnel Management (OPM), USPS 
payments to OPM would be projected to fund the liability over a period 
in excess of 50 years, from fiscal years 2007 through 2056 and beyond 
(with rolling 15-year amortization periods after 2041). PAEA 
established "fixed" prepayment amounts--meaning that the amounts were 
set by statute and did not vary with actuarial measurements of the 
cost of the benefits--in the first 10 years, from fiscal years 2007 
through 2016, with actuarially determined payments thereafter. 
However, the payments required by PAEA were significantly 
"frontloaded," with the fixed payment amounts in the first 10 years 
exceeding what actuarially determined amounts would have been using a 
50-year amortization schedule. USPS has made a total of $17.9 billion 
in prefunding payments, and a total of $33.9 billion in required 
prefunding payments remain from the 10 years of fixed payments. 
Originally due at the end of fiscal year 2011, USPS's $5.5 billion 
retiree health benefit payment requirement was delayed until August 1, 
2012. Pub. L. No. 112-74, § 632, 125 Stat. 786, 928 (Dec. 23, 2011). 
USPS missed that payment, as well as the $5.6 billion that was due by 
September 30, 2012. 

[5] Medicare is the federally financed health insurance program for 
persons age 65 or over, certain individuals with disabilities, and 
individuals with end-stage renal disease. Medicare Parts A and B are 
known as Medicare fee-for-service. Medicare Part A covers hospital and 
other inpatient stays. Medicare Part B covers hospital outpatient, 
physician, and other services. Medicare beneficiaries have the option 
of obtaining coverage for Medicare services from private health plans 
that participate in Medicare Advantage--Medicare's managed care 
program--also known as Part C. All Medicare beneficiaries may purchase 
coverage for outpatient prescription drugs under Part D, either as a 
stand-alone benefit or as part of a Medicare Advantage plan. 

[6] Joseph A. Beaudoin, President, National Active and Retired Federal 
Employees Association, Solutions to the Crisis Facing the U.S. Postal 
Service, a hearing of the Committee on Homeland Security and 
Governmental Affairs, United States Senate, 113th Cong., 1ST Sess., 
Feb. 13, 2013. 

[7] USPS OIG, U.S. Postal Service Alternative Health Care Plan 
Proposal: Management Advisory Report, FI-MA-12-014 (Arlington, VA: 
Aug. 22, 2012). 

[8] The seven FEHBP plans we selected had the highest numbers of 
postal enrollees of all FEHBP plans and together represented over 75 
percent of postal enrollment in FEHBP in 2011, the most recent year of 
enrollment data available. All seven of the FEHBP plans that we 
selected were offered nationally. The selected plans included: the 
standard and basic options of the Blue Cross and Blue Shield Service 
Benefit Plan (which count as two plans using OPM's definition of 
plan), the NALC Health Benefit Plan (sponsored by the National 
Association of Letter Carriers), the American Postal Workers Union 
Health Plan, the Government Employees Health Association, Inc. Benefit 
Plan (which included both the high and standard options), the Mail 
Handlers Benefit Plan, and the Rural Carrier Benefit Plan. 

[9] We selected services for which the USPS plan and all selected 
FEHBP plans provided some level of coverage. We compared coverage 
levels for services received in the plans' approved network of 
providers, i.e., "in-network services," and services received outside 
of the approved provider network, i.e., "out-of-network services." Our 
comparison of coverage levels accounted for the interaction of the 
different plans with Medicare. We excluded one of the selected FEHBP 
plans from this comparison because the structure of benefits for the 
plan was not comparable to that under the proposed USPS plan. 

[10] For 2013 FEHBP premiums, we used publicly available data from 
OPM. We defined "similar" premiums as those within 10 percent of the 
premium the employee or retiree would have paid in 2013 for their 
FEHBP plan and "lower" premiums as those more than 10 percent less 
than the FEHBP premium. Our analysis accounted for the Medicare Part B 
premiums for those Medicare-eligible retirees who were in selected 
FEHBP plans who were not enrolled in Medicare Part B, since all 
Medicare-eligible retirees would be assumed to enroll in Medicare Part 
B under the proposed USPS plan. 

[11] We excluded one of the selected FEHBP plans from this comparison 
because the structure of the deductibles and out-of-pocket maximums 
was not comparable to those under the proposed USPS plan. 

[12] We estimated enrollee costs if total annual costs of health care 
were $2,500, $10,000, $17,000, and $50,000. For each cost scenario, we 
assumed a distribution of costs across inpatient and outpatient 
services and prescription drugs. For example, at $2,500 in total 
annual costs, we assumed that about 47 percent of costs were for 
outpatient services and the rest of costs were for prescription drugs; 
and, at $50,000 in total annual costs, we assumed 67 percent was for 
inpatient care, 32 percent for outpatient care, and 1 percent for 
prescription drugs. We based our assumptions on those used by USPS's 
contracted actuaries in estimates that they performed, because we did 
not have data on the distribution of costs in FEHBP across these 
categories; and we conducted a sensitivity analysis to ensure that our 
results were not overly sensitive to the assumptions. We applied the 
cost-sharing requirements of each plan to the costs in each service 
category and then added premium costs to estimate total enrollee costs. 

[13] The selected plans together comprised over 70 percent of FEHBP 
enrollment and ranged in the percentage of enrollment that postal 
employees and retirees represented from over 90 percent to less than 
10 percent. Several of the selected plans were offered by the same 
carrier. In total, we spoke to officials from six carriers. 

[14] Additionally, OPM oversees FEHBP, including contracting with 
participating plans, reviewing proposed benefits and premiums, issuing 
guidance, and responding to enrollees' appeals of benefit denials. 
FEHBP is unique in that OPM plays the role of employer sponsor as well 
as having responsibility for oversight. 

[15] In 2011, the most recent year of data available, 80 percent of 
FEHBP participants were enrolled in fee-for-service plans and 20 
percent in HMOs, and the distribution among postal enrollees was about 
the same. 

[16] For most people, Medicare Part A is premium-free unless the 
beneficiary or spouse has worked fewer than 40 quarters in his or her 
lifetime, but the beneficiary is responsible for required deductibles, 
coinsurance, and copayment amounts. Beneficiaries must pay a premium 
for Part B coverage, which generally was $99.90 per month in 2012. 
Beneficiaries are also responsible for Part B deductibles, 
coinsurance, and copayments. 

[17] When private coverage for prescription drugs is at least as good 
as the coverage under Part D, then retirees do not need to enroll in 
Part D. If retirees later chose to cancel their private health 
insurance, Medicare would permit them to enroll in Part D without 
penalty, subject to some restrictions. For example, there are 
limitations on how much time can elapse between canceling private 
insurance coverage and enrolling in Part D. 

[18] Medicare beneficiaries generally would be billed an extra 10 
percent of their monthly premium for each full 12-month period that 
they were eligible for Part B coverage but did not sign up for it. 

[19] The federal government also absorbs some costs for those 
employees whom also had service with the United States Post Office 
Department (predecessor to USPS) which is prorated to reflect the 
number of years of such service by postal retirees. 5 U.S.C. § 8906(g). 

[20] 39 U.S.C. § 1005(f). 

[21] As set by statute, for current nonpostal employees as well as 
both postal and nonpostal retirees and survivors, the government pays 
72 percent of the average premium across all FEHBP plans but no more 
than 75 percent of any particular plan's premium. 5 U.S.C. § 8906(b). 

[22] More than 85 percent of USPS career employees are covered by 
collective bargaining. Under the current collective bargaining 
agreements and arbitration awards, USPS's contribution for health care 
premiums for these employees will decrease to approximately 76 percent 
in 2016. Managers are not covered by collective bargaining agreements 
and are compensated under a pay-for-performance program. Under the 
current pay packages, USPS's contributions for these employees will 
decrease to approximately 72 percent in 2015. 

[23] 5 U.S.C. § 8909a(d)(3)(A). 

[24] Originally due at the end of fiscal year 2011, USPS's $5.5 
billion retiree health benefit payment was delayed until August 1, 
2012. Pub. L. No. 112-74, § 632. USPS missed that payment as well as 
the $5.6 billion payment that was due by September 30, 2012, resulting 
in $11.1 billion of missed payments in 2012. 

[25] GAO, U.S. Postal Service: Status, Financial Outlook, and 
Alternative Approaches to Fund Retiree Health Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-13-112] (Washington, D.C.: Dec. 4, 
2012). 

[26] The USPS legislative proposal specifically indicates that the 
type and the average level and value of a plan's benefits will be 
benchmarked against the type and level of benefits provided under 
FEHBP and that the "aggregate actuarial value of benefits shall be at 
least equivalent to that of the FEHBP plan with the highest 
enrollment." For those eligible for Medicare, the aggregate actuarial 
value will include the value of Medicare benefits. The actuarial value 
of the benchmarked coverage would be documented in an actuarial 
opinion that meets actuarial standards of practice. Note that 
"actuarial value," as used in this context, is a limited concept that 
measures the estimated value of benefit coverage, but does not take 
into account premium costs, and so does not capture estimated total 
out-of-pocket costs for a typical participant. Two different health 
insurance plans could have the same actuarial value but very different 
participant premiums. 

[27] Under USPS's plan, benefits for employees who retire after the 
USPS plan is implemented, i.e., "future retirees," do not have to meet 
the comparability standard described in the preceding footnote. 

[28] USPS officials also anticipate contracting to administer pharmacy 
benefits. In addition, USPS officials said they also may contract with 
HMO plans in certain geographic locations. 

[29] GAO did not independently verify USPS's statements regarding its 
current authority or the need for additional authority as provided 
herein. 

[30] According to USPS officials, USPS has the authority under current 
law to move employees from FEHBP to a USPS plan, subject to reaching a 
collective bargaining agreement for those employees represented by 
collective bargaining. However, negotiating for this change through 
the collective bargaining process also would subject the initial 
benefit package and contribution rates to collective bargaining. Thus, 
a statutory change is needed to allow the initial benefit package and 
premium amounts to be set by the Board of Governors. 

[31] According to USPS officials, USPS would contract with a 
prescription drug plan sponsor to implement the EGWP. 

[32] Jonathan Foley, Director, Planning and Policy Analysis, OPM, The 
Federal Employees Health Benefits Program, testimony before the 
Subcommittee on Federal Workforce, U.S. Postal Service, and the 
Census, Committee on Oversight and Government Reform, United States 
House of Representatives, 113th Cong., 1ST Sess. (Apr. 11, 2013). 

[33] The estimates in this section address the implications of USPS's 
proposal for prefunding and for USPS's cash flow and liquidity. USPS's 
proposal would have different implications for its financial reporting 
(its accounting costs). USPS currently accounts for the costs of its 
participation in FEHBP using a "multiemployer" plan basis under the 
accounting standards, under which accounting costs are set to match 
USPS's required payments. Under USPS's proposed plan, its accounting 
would switch to a "single employer" plan basis under the accounting 
standards. On a single employer plan basis, USPS would recognize any 
unfunded liability (or overfunded asset) for retiree health care 
benefits on its balance sheet based on the accounting standards (which 
measure the unfunded liability differently than the measure used for 
funding purposes discussed in the report), would accrue expense on an 
actuarial basis rather than a current-required-payments basis, and 
would use a different basis for setting assumptions for estimating the 
cost of future retiree benefits. 

[34] USPS has no unfunded liability for health benefits provided to 
current employees, which are financed by USPS on a pay-as-you-go basis. 

[35] The cost of these future retirement benefits attributable to a 
year of employees' service is called the "normal cost." 

[36] As of the end of 2011, about 8 percent of Medicare-eligible 
postal retirees were not enrolled in Medicare Part A and 22 percent 
were not enrolled in Medicare Part B--slightly lower than the 
nonpostal FEHBP population, of which 11 percent and 25 percent did not 
enroll in Parts A and B, respectively. 

[37] Future retirees would not receive 100 percent coverage from the 
combination of Medicare and the proposed USPS plan, since the USPS 
plan proposes requiring that future retirees pay all costs up to the 
plan deductible and a portion of additional costs for care. 

[38] The Postal Service Fund is a revolving fund established in the 
U.S. Treasury for the deposit of all revenues, interest, 
appropriations, proceeds from borrowing, or any other receipts from 
USPS's operations. The fund is available to USPS to carry out the 
purposes, functions, and powers of USPS. 39 U.S.C. § 2003. 

[39] While USPS projects that its required payments for health care 
will total $61.8 billion over 2014 through 2018 under current law, 
USPS officials also have stated that USPS would not be able to make 
this level of required payments. The required payments for health care 
under current law consist of USPS's share of premium payments for its 
workers, plus retiree health prefunding payments, plus, through fiscal 
year 2016 only, USPS's share of premium payments for retirees. In 
addition, USPS's proposal would eliminate the existing $11.1 billion 
owed for missed prefunding payments in 2012, plus another $5.6 billion 
assuming the 2013 required prefunding payment is missed as well. 
Adding in the elimination of this $16.7 billion would increase the 5-
year savings from $33.2 billion to $49.9 billion. 

[40] The remaining portion of the reduction in payments under this 
alternative calculation by USPS would result from making actuarial 
prepayments instead of pay-as-you-go premium payments for retiree 
benefits. 

[41] Fredric V. Rolando, President, National Association of Letter 
Carriers, Solutions to the Crisis Facing the U.S. Postal Service, 
testimony before a hearing of the Committee on Homeland Security and 
Governmental Affairs, United States Senate, 113th Cong., 1ST Sess. 
(Feb. 13, 2013). 

[42] These projections factor in additional Medicare spending for 
Parts A and B and drug subsidies under the EGWP, offsetting Part B 
contributions from additional postal retirees enrolling in Part B, and 
offsetting drug discounts under the EGWP. USPS projected that the 
total cost to the federal government would be less than the $1 billion 
increase in Medicare spending in the first year of implementation, 
because USPS's plan would reduce health care premiums for postal 
retirees some of which is financed by the federal government. USPS 
estimates that the proposal would reduce the federal share of postal 
retiree premiums by about $300 million annually. As previously noted, 
the federal government also absorbs some costs for those employees who 
also had service with the United States Post Office Department, which 
is prorated to reflect the number of years of such service by postal 
retirees. 5 U.S.C. § 8906(g). 

[43] See GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-13-283] (Washington, D.C.: February, 
2013); Medicare: Program Remains High Risk Because of Continuing 
Management Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-11-430T] (Washington, D.C.: Mar. 2, 
2011); and The Federal Government's Long-Term Fiscal Outlook: Spring 
2013 Update, [hyperlink, http://www.gao.gov/products/GAO-13-481SP] 
(Washington, D.C.: Apr. 11, 2013). 

[44] For example, plan assets could be invested in commodities, 
foreign currency, and real property. The plan also could acquire a 
controlling interest in stock of a private company, subject to certain 
limitations. USPS investment of plan assets would not require approval 
of the Secretary of the Treasury. See app. II for more detail. 

[45] Under Scenario 2, the PSRHBF would be abolished upon transfer of 
its assets to the new HBF. Under a separate option (which USPS refers 
to as "Scenario 1") the PSRHBF would be continued and used to finance 
retiree health benefits under USPS's health plan. See app. II for more 
detail. 

[46] See appendix II for more detail. 

[47] ERISA governs most private sector benefit plans. The USPS 
proposal would provide that Committee members are subject to the 
provisions applicable to fiduciaries under sections 1104-1106, 1108, 
and 1110 of title 29, U.S. Code, and, to sections 1131 and 1132 of 
title 29, U.S. Code, only to the extent they concern the performance 
of fiduciary responsibilities. Since the USPS proposal provides that 
the plan established by the USPS is a "governmental plan" under ERISA, 
the provisions of Title I of ERISA generally would not apply to the 
plan. See 29 U.S.C. § 1003(b)(1). Therefore, oversight and enforcement 
provisions of Title I of ERISA not specifically made applicable in the 
proposal would not apply to the plan and the extent of the Department 
of Labor's role in ensuring compliance remains unclear. 

[48] See GAO, Defined Benefit Pension Plans: Recent Developments 
Highlight Challenges of Hedge Fund and Private Equity Investing, 
[hyperlink, http://www.gao.gov/products/GAO-12-324] (Washington, D.C.: 
Feb. 16, 2012); Randy Diamond, "Volatility plays starring role in 
allocation shifts," Pensions & Investments, vol. 38, no. 3 (2010); 
Arleen Jacobius, "Funds still carrying torch for alternatives: Private 
equity, real estate asset classes show double-digit increases in 
2011," Pensions & Investments, vol. 40 no. 3 (2012); Christine 
Williamson, "Top pension funds put 20.3% more into hedge fund 
strategies," Pensions & Investments, vol. 41 no. 3 (2013); and S&P Dow 
Jones Indices LLC, S&P 500® 2011: Pensions and Other Post-Employment 
Benefits (OPEB) (New York, NY: July 2012). 

[49] According to Treasury officials, there would be no protection of 
the value of the assets of the HBF, with the exception of any 
investments in special-issue Treasury securities. 

[50] Treasury officials also cited other advantages of Treasury 
securities, such as minimizing investment and administrative costs. 

[51] USPS, Quarter II, 2013 Report on Form 10-Q, p. 16. 

[52] Treasury officials told us that while the U.S. Treasury 
Department has issued both marketable Treasury securities to the 
public and special-issue Treasury securities for various federal 
programs, it has not to date issued any special-issue TIPS. Special-
issue Treasury securities are protected by the U.S. Treasury 
Department against fluctuations in market value. While payments of 
interest and principal on Treasury securities are backed by the full 
faith and credit of the United States government, if marketable 
Treasury securities are sold prior to maturity, the market value could 
be less than the principal amount, depending upon prevailing interest 
rates, so such securities could be sold at a loss. 

[53] The "discount rate" is used to convert projected payments in the 
future into present values. We have a separate ongoing review 
examining the discount rate controversies for pension plans. See 
[hyperlink, http://www.gao.gov/products/GAO-13-112] for additional 
discussion of the discount rate used for USPS's current participation 
in FEHBP. There are different types of liabilities calculated for 
different purposes, including liabilities for financial reporting 
purposes and liabilities for determining prefunding targets and 
payments. The discount rate for financial reporting purposes is 
governed by relevant accounting standards. The discussion here is 
about the discount rate for prefunding purposes. 

[54] This model is also used for multiemployer pension plans and for 
prefunding retiree medical benefits in the private and state and local 
government sectors, when these are funded. 

[55] Pub. L. No. 109-280, § 112(a), 120 Stat. 780, 798 (Aug. 17, 
2006), codified at 26 U.S.C. § 430(h)(2). 

[56] In addition, if the plan assets were also subject to significant 
risk and fluctuation in value, such as through investments in the 
stock market, it could make the unfunded liability even more unstable, 
so that transferring surplus for other uses would be even riskier. 

[57] GAO, U.S. Postal Service: Allocation of Responsibility for 
Pension Benefits between the Postal Service and the Federal 
Government, [hyperlink, http://www.gao.gov/products/GAO-12-146], 
Appendix II (Washington, D.C.: Oct. 13, 2011). 

[58] USPS OIG, Estimates of Postal Service Liability for Retiree 
Health Care Benefits, ESS-MA-09-001(R) (Arlington, VA: July 22, 2009). 

[59] [hyperlink, http://www.gao.gov/products/GAO-10-455]. 

[60] [hyperlink, http://www.gao.gov/products/GAO-13-562T] and 
[hyperlink, http://www.gao.gov/products/GAO-13-347T]. 

[61] Services cannot be compared beyond the first year, because USPS's 
benefits could change. Under USPS's proposal, the requirement that 
benefits be similar in type and value to that of the most popular 
FEHBP plan is limited to the first year for employees. For current 
retirees, the standard extends beyond the first year. For those who 
retire after the first year, the USPS proposal offers no benchmark for 
comparability with FEHBP plan benefits. 

[62] Our review includes the seven plans with the highest enrollment 
of postal employees and retirees, which comprised about 78 percent of 
total FEHBP enrollment from postal employees and retirees. The 
remaining 22 percent of postal employee and retiree enrollment was 
spread across 140 other FEHBP plans, which we did not review. 

[63] USPS officials said they would determine coverage when procuring 
a contract with a vendor to administer the health plan. Family 
planning/contraceptive care can include coverage for contraceptive 
counseling and medical goods such as implantable contraceptives. Not 
all plans cover all of the same procedures or items within a category 
of goods or services. 

[64] We excluded one of the seven selected FEHBP plans that we 
reviewed from this comparison of coverage levels because the structure 
of benefits for the plan was not comparable to that under the proposed 
USPS plan. 

[65] An example of a service for which coverage under the USPS plan is 
above the range of the selected FEHBP plans is brand-name prescription 
drugs listed on a plan formulary and purchased through a retail 
pharmacy. However, levels of prescription drug coverage are also 
affected by which specific drugs are included on the plan formulary, 
and the composition of formularies is at the discretion of individual 
plans or their pharmacy-benefits vendors. 

[66] For visits to in-network primary care doctors due to illness, the 
proposed USPS high option would cover $5 to $15 less per visit than 
the selected FEHBP plans we reviewed, and the proposed middle option 
would cover $15 to $25 less per visit. For outpatient mental health or 
substance abuse services from in-network providers, the proposed high 
option would cover $20 to $30 less per visit, and the proposed middle 
option would cover $30 to $40 less per visit. 

[67] Under the proposed USPS middle option, coverage for visits to in-
network specialists would be between $10 and $32 less than selected 
FEBHP plans. Coverage for maternity care from in-network providers 
would be between 5 percent and 15 percent less than selected FEHBP 
plans. 

[68] For example, the proposed USPS plan would provide lower coverage 
than the selected FEHBP plans for generic drugs from a mail-order 
pharmacy that cost more than $150. USPS's plan would provide coverage 
within the range of selected FEHBP plans for drugs costing between $50 
and $150 and greater coverage for drugs costing less than $50. 

[69] "Allowable charges" are set by each plan and reflect the amount 
that a plan considers reasonable or customary for a specific service. 
A plan's allowable charges sometimes can vary based on geographic 
area. In general, in network providers negotiate with health plans to 
determine the allowable charge for various services. 

[70] As previously noted, we defined "similar" premiums as those 
within 10 percent of the projected premium for the proposed USPS plan 
and "lower" as those more than 10 percent less. Those that would not 
pay similar or lower premiums would pay premiums more than 10 percent 
higher under the USPS proposed plan than under their FEHBP plan. 

[71] Those with self-only coverage would be more likely than those 
needing family coverage to have similar or lower premiums under the 
proposed USPS plan. For example, we estimated that 70 percent of 
employees and retirees with self-only coverage would have similar or 
lower premiums under the proposed USPS high option than under their 
FEHBP plan. By comparison, we estimated that 58 percent of those with 
self-and-family coverage would have similar or lower premiums under 
the USPS high option. Medicare-eligible retirees who were not enrolled 
in Part B in FEHBP but would be enrolling under the USPS plan would be 
more likely than other enrollees to have higher premium costs under 
the USPS proposal because of the addition of the Part B premium. 

[72] For our analysis of annual plan deductibles and out-of-pocket 
maximums, we excluded one of the seven selected FEHB plans because the 
structure of the deductibles and out-of-pocket maximums was not 
comparable to that under the proposed plan. 

[73] These higher costs would be attributable almost entirely to the 
plan elements since the 2013 premiums for family coverage under the 
largest FEHBP plan were higher than USPS's middle option and almost 
the same as the high option. 

[74] For example, at $50,000 of total health care costs using all 
network providers, we estimated that employees enrolling in self-and-
children coverage would pay about $900 more under the USPS high option 
and $2,700 more under the middle option than under the FEHBP plan. The 
estimated total cost difference under the $50,000 scenario for non-
Medicare-eligible retirees enrolling in self-and-spouse would be 
similar. 

[75] In this example, out-of-network outpatient care ranged from 8.8 
percent of total health care costs under the $50,000 scenario to 14.2 
percent in the $2,500 scenario. We assumed all costs for inpatient 
care and prescription drugs came from in-network sources. 

[76] For example, when we assumed 10 percent of outpatient care was 
received from non-network providers, we estimated that employees in 
self-only or family coverage would face higher total costs under the 
USPS high and middle options than under the FEHBP plan if their total 
annual health care costs were $17,000 or $50,000. Estimated employee 
costs under the $17,000 scenario ranged from $150 to $980 higher under 
the USPS plan and under the $50,000 scenario from $650 to $4,700 
higher. (Out-of-network care made up 2.9 percent of total health care 
costs under the $17,000 scenario and 3.2 percent of total health care 
costs under the $50,000 scenario, since we assumed all inpatient care 
and prescription drug costs were from in-network providers.) 

[77] According to USPS's legislative proposal, benefits provided by 
the USPS health plan shall be consistent with provisions of ERISA 
relating to continuation of coverage requirements (29 U.S.C. §§ 1161-
1169) and shall comply with other provisions relating to additional 
standards (29 U.S.C. §§ 1181-1191c). 

[78] See 29 U.S.C. § 1181 (increased portability through limitations 
on preexisting condition exclusions) and 29 U.S.C. § 1185 (standards 
relating to benefits for mothers and newborns). 

[79] 29 U.S.C. § 1185d, which is among the provisions applied to the 
USPS plan by the proposal, applies the provisions of PHSA, title 
XXVII, part A (42 U.S.C. §§ 300gg et seq.) to group health plans and 
health insurance issuers providing health insurance coverage in 
connection with group health plans. PHSA standards that may be applied 
through this reference include a prohibition on setting life time 
limits on the value of coverage and standards for appeals of benefit 
denials to the health plan and an independent, external reviewer. 42 
U.S.C. §§ 300gg-11 (no lifetime or annual limits) and 300gg-19 
(appeals process) (PHSA §§ 2711 and 2714, as added by Pub. L. No. 111-
148, §§ 1001, 10101, 124 Stat. 130, 884) (Mar. 23, 2010)). 

[80] Officials stated that it is ambiguous whether the group health 
plan provisions of the PHSA would apply by their own force to a self-
insured federal governmental plan, which is how the USPS plan would be 
defined. Officials noted, however, that if USPS offers an HMO option, 
the HMO would be subject to the PHSA requirements as an insured plan. 

[81] 5 U.S.C. § 8906(b). 

[82] According to 2013 data from USPS, postal retirees enrolled in 
FEHBP now outnumber employees enrolled in the program. 

[83] OPM officials noted that under current federal law new employee 
association sponsored health plans cannot join FEHBP. 

[84] The most significant year of plan departures was 2009 when 35 
plans withdrew requiring about 70,000 enrollees to select a new plan. 

[85] Though HMOs may be offered in all states, they may not be offered 
in all counties of those states. 

[86] The six federal agencies that provided health plans included: the 
Federal Deposit Insurance Corporation, Office of the Comptroller of 
the Currency, Farm Credit Administration, Overseas Private Investment 
Corporation, Federal Reserve Board, and Federal Home Loan Bank Board. 
Employees selecting the agency plan could return to FEHBP 5 years 
before retirement to qualify for FEHBP coverage as an annuitant. See 
GAO, U.S. Employees Health Benefits: Independent Agencies Offering 
Their Own Health Plans, [hyperlink, 
http://www.gao.gov/products/GAO/HRD-89-49] (Washington, D.C.: Mar. 2, 
1989). 

[87] According to OPM officials, all agencies returned their employees 
to FEHBP in the 1990s. According to OPM officials, when the agencies 
returned to FEHBP, the requirement for 5 years of continuous coverage 
in FEHBP prior to retirement to be eligible for FEHBP as an annuitant 
had to be waived for some retirees. 

[88] The proposal provides that the "aggregate actuarial value of 
benefits shall be at least equivalent to that of the FEHB plan with 
the highest enrollment." For those eligible for Medicare, the 
aggregate actuarial value will include the value of Medicare benefits. 
The actuarial value of the benchmarked coverage would be documented in 
an actuarial opinion that meets actuarial standards of practice. 

[89] All references to titles below are to titles of the United States 
Code. 

[90] This schedule would approximately parallel timeframes currently 
applicable to the Postal Service Retiree Health Benefits Fund in 
subsection (d)(2)(B) of section 8909a of title 5. 

[91] All provisions summarized for Scenario 2 would be specified by 
federal law under USPS's legislative proposal for its health care plan. 

[End of section] 

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