The Office of Personnel Management: A Power Player in...

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The Office of Personnel Management: A Power Player in America’s Health Insurance Markets? The Honorable Linda Springer, The Honorable Donald J. Devine, The Honorable Dan G. Blair, and Robert E. Moffit, Ph.D. Abstract: On Christmas Eve 2009, the U.S. Senate passed a mammoth health care bill that would dramati- cally expand the role of the U.S. Office of Personnel Man- agement (OPM). Why should Americans care about this? OPM is the government agency that runs the federal civil service and also administers the Federal Employees Health Benefits Program—and does a decent job at both. But with its new powers, OPM would no longer merely act as referee in the annual competition among private health plans trying to attract federal workers. OPM would become the official sponsor of at least two national health plans (read: public option) that would compete against private plans in every state in the country. The possibility of OPM’s new role opens up a near-endless array of ques- tions and concerns. In a panel discussion on January 20, 2010, hosted by The Heritage Foundation, four health policy experts, including three former OPM directors, address some of them. ROBERT E. MOFFIT: Contrary to media reports on the 2,700-page Senate health bill, the prospect of a “public option” or a government-run health plan to compete against private health insurance is very much alive. The massive Senate health bill that passed on Christmas Eve ostensibly does away with the public option. In fact, it doesn’t. It substitutes the traditional “public option” with something only apparently dif- ferent: a new role for the U.S. Office of Personnel Man- agement (OPM) as a power player in America’s health insurance markets. As you all know, OPM is the feder- No. 1145 Delivered January 20, 2010 February 19, 2010 This paper, in its entirety, can be found at: Produced by the Center for Health Policy Studies Published by The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002–4999 (202) 546-4400 Nothing written here is to be construed as necessarily reflect- ing the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. Talking Points As an employer, the Office of Personnel Man- agement (OPM), the government agency that runs the civil service, has enormous authority over rates and benefits for health plans in the Federal Employees Health Benefits Program. Applied to the federally re-designed private health insurance markets under the massive Senate health bill now before Congress, that authority would expand. OPM’s current role would change to that of official sponsor of at least two national health plans that would compete directly against pri- vate health insurance across the country. These government-sponsored health plans would become, in effect, the “public option” that sponsors of the Senate bill claim to have rejected. OPM’s new external role as a major player in the nation’s health insurance markets would compromise OPM’s current role as the fed- eral agency tasked with administering inter- nal federal programs. This duality of OPM functions has not been subjected to the normal vetting of legislative hearings and debate, despite its enormous impact on Americans.

Transcript of The Office of Personnel Management: A Power Player in...

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The Office of Personnel Management: A Power Player in America’s Health Insurance Markets?

The Honorable Linda Springer, The Honorable Donald J. Devine, The Honorable Dan G. Blair, and Robert E. Moffit, Ph.D.

Abstract: On Christmas Eve 2009, the U.S. Senatepassed a mammoth health care bill that would dramati-cally expand the role of the U.S. Office of Personnel Man-agement (OPM). Why should Americans care about this?OPM is the government agency that runs the federal civilservice and also administers the Federal EmployeesHealth Benefits Program—and does a decent job at both.But with its new powers, OPM would no longer merely actas referee in the annual competition among private healthplans trying to attract federal workers. OPM wouldbecome the official sponsor of at least two national healthplans (read: public option) that would compete againstprivate plans in every state in the country. The possibilityof OPM’s new role opens up a near-endless array of ques-tions and concerns. In a panel discussion on January 20,2010, hosted by The Heritage Foundation, four healthpolicy experts, including three former OPM directors,address some of them.

ROBERT E. MOFFIT: Contrary to media reportson the 2,700-page Senate health bill, the prospect of a“public option” or a government-run health plan tocompete against private health insurance is very muchalive. The massive Senate health bill that passed onChristmas Eve ostensibly does away with the publicoption. In fact, it doesn’t. It substitutes the traditional“public option” with something only apparently dif-ferent: a new role for the U.S. Office of Personnel Man-agement (OPM) as a power player in America’s healthinsurance markets. As you all know, OPM is the feder-

No. 1145Delivered January 20, 2010 February 19, 2010

This paper, in its entirety, can be found at:

Produced by the Center for Health Policy Studies

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 •

Nothing written here is to be construed as necessarily reflect-ing the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress.

Talking Points

• As an employer, the Office of Personnel Man-agement (OPM), the government agency thatruns the civil service, has enormous authorityover rates and benefits for health plans in theFederal Employees Health Benefits Program.Applied to the federally re-designed privatehealth insurance markets under the massiveSenate health bill now before Congress, thatauthority would expand.

• OPM’s current role would change to that ofofficial sponsor of at least two national healthplans that would compete directly against pri-vate health insurance across the country.These government-sponsored health planswould become, in effect, the “public option”that sponsors of the Senate bill claim to haverejected.

• OPM’s new external role as a major player inthe nation’s health insurance markets wouldcompromise OPM’s current role as the fed-eral agency tasked with administering inter-nal federal programs.

• This duality of OPM functions has not beensubjected to the normal vetting of legislativehearings and debate, despite its enormousimpact on Americans.

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al agency that runs the federal civil service; it enforc-es the civil service laws and the rules andregulations. It also administers the Federal Employ-ees Health Benefits Program (FEHBP), the largestgroup health insurance plan in the world.

The Senate bill includes a provision, Section1334, which would give the OPM a very new andexpansive role in the health care sector of the Amer-ican economy. Right now, in administering theFEHBP, broadly speaking a defined contributionprogram of health insurance financing for federalworkers and retirees, the OPM basically sets therules of the game and serves as an umpire amongprivate competing health plans. It enforces a com-mon set of rules and oversees the administration ofthe payment in FEHBP, particularly on behalf ofretirees.

The Senate bill gives the U.S. Office of PersonnelManagement a new responsibility: to sponsor atleast two health plans that would compete againstprivate health insurance in the state-based healthinsurance exchanges, potentially in every state ofthe Union. OPM has never done anything quite likethis before.

Today, we have three former OPM directors totalk with us about this development in the Senate—this new health policy provision and the future roleof OPM. Linda Springer, our first speaker, served asthe eighth director of OPM from June 2005 toAugust 2008. Before becoming director of OPM,Linda held the position of controller at the Office ofManagement and Budget (OMB). She was also headof the Office of Federal Financial Management.Before her career in public service, Linda spent morethan 25 years in the financial services industry inexecutive roles responsible for general and financialmanagement and strategic planning. Linda receivedher Bachelor of Science degree, cum laude, from Urs-inus College, and attended Columbia BusinessSchool. She is a fellow of the Society of Actuaries anda member of the American Academy of Actuaries.

Our second speaker is Dan Blair. Dan served asthe first chairman of the Independent Postal Regula-tory Commission. He held that position fromDecember 2006 through August 2009. The UnitedStates Senate unanimously confirmed Dan as com-

missioner of the Postal Rate Commission; he wasdesignated chairman by President George W. Bush inDecember 2006. His current term as a commissionerexpires in October 2012. Before coming to the com-mission, Dan served as deputy director of OPM. Hewas nominated by President Bush in December2001 and confirmed by the U.S. Senate in February2002. In addition to serving as deputy director, Danwas acting director of OPM for five months.

Finally, we have Dr. Donald Devine, formerdirector of the OPM under President RonaldReagan. Don is currently the senior scholar at theBellevue University Center for American Vision andValues. Don was director of OPM from 1981through 1985. He had advised President Reagan onpolitical matters as early as 1976. He was also asenior advisor to Senator Robert Dole, and also toSteve Forbes, in their presidential campaigns. For14 years, Don Devine was an associate professor ofgovernment and politics at the University of Mary-land. He is the author of seven books on politics andpolitical science.

—Robert E. Moffit, Ph.D., is the director of the Centerfor Health Policy Studies at The Heritage Foundation.

LINDA SPRINGER: Thanks to The HeritageFoundation for a very timely forum. Some peopleasked me last night if Heritage was still going tohave this panel today in light of the election of ScottBrown, the new senator-elect from Massachusetts.It’s easy to answer that question. The Senate billtakes on even more prominence in light of thatelection result.

The other thing that’s interesting is that today, ifyou have not already realized, is January 20.Think about what you were doing one year agotoday. Not too far from here many of us were wait-ing on Pennsylvania Avenue for the parade, or fol-lowing the swearing in of the 44th President. So, alot has happened in one year. And the Office ofPersonnel Management—it is always important,by the way, to mention that name in full, becausesome people think OPM means “other people’smoney”—will potentially take on a new role.OPM is not just an office; it is a full-fledged federalagency with many roles.

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I’d like to talk a little bit about those roles; give alittle bit of a primer for a few minutes about OPM. Alot has happened in this year and it has certainlythrust OPM into a position that I don’t think anyonecould have envisioned.

Let me name a few very important things to set thestage for understanding what OPM is, how it got intothis particular position, and what the impact on thefederal workforce will be if the Senate bill, or some-thing close to it, becomes law. OPM is really a collec-tion of a number of enterprises, businesses, andfunctions. Bob Moffit mentioned a few of them. Obvi-ously the Federal Employees Health Benefits Program(FEHBP) falls under the purview of OPM. But that isjust one of many benefit plans that OPM administers.I am sure there are people here who are covered bythose plans, either as current employees of the federalgovernment or as former employees, possibly retirees.

More than 8 million people are served by theFederal Employees Health Benefits plan—I shouldsay program, because it is a collection of plans:somewhere between 250 and 300 each year—where OPM as an employer negotiates to get healthcoverage for its employees or its coverage group,meaning the federal workforce and dependents andretirees and others. OPM does many of the exactsame things that any other employer does: due dili-gence over the health plans, issuing a call letter tothe plans each year outlining what the employer, inthis case OPM, wants in health benefits packages;making sure the plans meet certain requirements;undertaking negotiation of rates with those plans;and then ultimately having the annual “open sea-son” just like any other big company does so thatemployees have the ability to understand theiroptions and their health plan choices.

OPM’s role is unique only because the FEHBP isso large. But other than that, it doesn’t really do any-thing much different than any other employer. It isimportant to understand what OPM does not do. Itis not in the insurance business; it does not under-write the risks of the competing plans; it does notdo the things that an insurer does. It certainly isn’trunning a public plan; it’s just providing coveragethe way any other large employer would, exceptthat in this case its employees are employees of thefederal government. It does a good job at that. The

men and women who administer that program, justlike the others at OPM, are dedicated to what theydo, they take great pride in what they do, and theydo it well.

OPM has other roles. For example, OPM doesbackground investigations for 90 percent of thosewho require those investigations or renewals of theinvestigations. That includes contractors, currentemployees; altogether, more than 2 million back-ground investigations are done by OPM. A majorpart, in fact, I would say roughly half of the OPMemployee staffing, is dedicated to that backgroundinvestigation function.

OPM is in the higher education business. It runsan Eastern and a Western Management Develop-ment Center, training those in the upper GS levelsfor their roles; it also runs the Management Devel-opment Center down near Charlottesville. There areroughly 10,000 to 13,000 people from the federalcommunity each year who go through that system.

OPM obviously has a very strong role in the hir-ing process. USA Jobs is run by OPM. While OPM isnot a central hiring agency, OPM obviously is inte-grally involved in the policies and procedures of hir-ing; it works with the federal agencies onrequirements as they do their hiring. That is obvi-ously an area that needs continued attention.

OPM is involved in oversight of agencies in com-pliance with personnel policies that are issued byOPM or that may have been enacted by Congress orthe other parts of the executive branch. OPM is acompliance agency; it makes sure, for example, thatthe federal workforce is operating in an environ-ment that adheres to merit systems principles.

OPM has many, many roles, and there are othersthat I haven’t mentioned. That is the OPM of today.The question now becomes, what is the OPM oftomorrow if a bill like the Christmas Eve Senate billpasses? Clearly, I think we can say that that is stillvery much at play.

So, we need to look at some of the roles thatOPM would have, what would they be, how wouldOPM be affected, and more importantly, how wouldthe workforce be affected should the Congress putOPM into that position. Clearly, it would be verydifferent than what it is today. Now, there are others

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here who will go into more detail into what some ofthe requirements are. But suffice it to say that OPMwas chosen—why?—to leverage the FederalEmployees Health Benefits Program experience andknowledge that it has today.

So think about that. What does that mean? Whatare you leveraging? You are leveraging the knowl-edge of the people who run that program, ostensi-bly. You didn’t pick the Interior Department, youdidn’t pick the Department of Defense, you pickedOPM. Why? To leverage that knowledge. Wheredoes it come from? The people. That is where itresides. So, to get that knowledge into some newprogram, administering new plans in a health insur-ance exchange, would require that those peopledevote at least some measure of their time to thatnew task. Whatever time they spend on theexchange program, they are not spending on theFederal Employees Health Benefits plan and theirexisting work today. So, to say that there would beno impact on the FEHBP, or to say that there aregoing to be additional resources so that the FEHBPis going to be left untouched, I think is at odds withthe fact that you are leveraging the knowledge andexperience of the very staff that is already theremanaging the FEHBP.

That is one type of impact. You look at otherparts of the organization—this is not just about theFEHBP staff, it is also about the Inspector General(IG) staff. Who is going out to examine today theplans and providers that participate through thoseplans, providing the coverage under the existingfederal plan? It is the IG’s office of OPM. I can tellyou from my time at the agency, and I doubt that ithas changed, that the Inspector General office issubject to the same budget pressures as every otherpart of OPM. OPM is like other domestic agencies,and those budget pressures have had a downwardimpact. Staff groups come during each budget sea-son each year and say: Could we have more moneyto do what we do? And the reality was that in manycases they get less.

Adding this new responsibility to oversee OPM’smanagement role in a new federal health insuranceexchange program onto the Inspector General cre-ates a tremendous workload that I have not heardanywhere addressed. There are the other offices, the

Office of General Counsel, the Office of Congres-sional Affairs; I would venture to say that there isvery little, including the director’s time, that will notbe impacted in some way. It is a zero-sum game.There are only so many hours in the day. The timethat OPM staff is spending on the important initia-tives for the workforce today to some degree will bediverted to this new health insurance exchange pro-gram embodied in the Senate health bill. Is thatgood or is that bad? That is the question that has tobe answered. But clearly one group that has toanswer that question is the federal workforce andthe retirees and all the other groups that OPM cur-rently serves—millions of people.

The question I would put to those of you who arefollowing this issue is this: Is the federal workforcebest served by having an OPM that is dedicated toits mission of ensuring that the federal workforce iseffective and has all its needs met? Or do we want anOPM that not only has that responsibility, but alsohas this additional big thing on the side—adminis-tering a program to cover the uninsured of thecountry? These are two very, very different things;and an unusual combination. Were it not for theOPM administration of FEHBP, one would nevereven think they go together. But really, is the federalworkforce best served (A) as it stands, or (B) underthis Senate scenario?

DAN BLAIR: I served as the deputy director ofOPM from 2002 to 2006, and was also acting direc-tor for five months. Before that, I worked on Capi-tol Hill for 17 years. I worked four years in the U.S.Senate on what was then the Governmental AffairsCommittee doing OPM oversight for then chair-man and Senator Fred Thompson (R–TN). Prior tothat, I worked on the House Government Reformand Oversight Committee as well, and on the oldHouse Post Office and Civil Service Committee. So,I am very familiar with OPM and its strengths andweaknesses.

We are here today to talk about the Senate’s pro-posed role for OPM in its health insurance exchangeprogram and the Federal Employees Health BenefitsProgram. Many questions have been raised abouthow an OPM-directed health exchange programcould or would work. I wanted to touch on four keypoints. Director Springer mentioned the impact on

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OPM as an organization, and that is very, veryimportant: how this new role will fit within theorganization. Should Congress pass this version ofthe health care legislation and it be signed into law,it clearly will be an Administration priority; and as apriority, I would expect it to be funded fully and tohave funding meet all of its resources needs.

If that is the case, what happens to the other pro-grams at OPM? This question dovetails with how theSenate’s new role for OPM fits into the mission ofOPM. OPM’s mission is to ensure an effective andefficient federal workforce, but this newly proposedfederal health insurance program does not have any-thing to do with the federal workforce. OPM wouldbe running a government-sponsored program in afederally mandated health insurance exchange forthe uninsured, and to me, the two objectives do notseem to mesh very well. I am concerned what theimpact will be on OPM’s other programs.

Director Springer mentioned the security back-ground checks, and Congress has frankly been quitecritical of OPM over the years for not making surethat background and security clearance checks gomore quickly. I know that has been a priority for thepast Administrations and I presume it continues tobe a priority for this Administration. How will thatbe impacted?

We have seen pay-for-performance systemskilled at the Defense Department and also theDepartment of Homeland Security, and the Admin-istration has talked about coming forward with newreforms for the civil service. How will these meshand how will the resources be devoted for enactingand implementing new legislation when, in fact,OPM would also be tasked with a new and signifi-cant role in pushing forward this government-runprogram for the uninsured?

That comes back to a very basic question: Whatkind of federal health care program is this? I see thisSenate program as nothing but a placeholder for thepublic option; and, as time goes on, I think that wewill see the program evolve more into the publichealth insurance option that was originally pro-posed. But to me it is nothing but a placeholder forthe public option. It raises questions of missioncreep for the organization. Right now, OPM’s mis-sion is very broad, but it is limited to the manage-

ment of the federal government. This Senate billbroadens it even more, and is it something that canwork within its framework? I think these are ques-tions that haven't been answered yet.

This provision creating a new role for OPM wasput into the Senate bill after it passed the SenateFinance Committee. There have been no hearingson this; there have been no public testimonies onthis. A number of serious questions have beenraised: What will be the cost of this new federal pro-gram? More important, who bears the insurancerisk in this program? What happens if health insur-ance premiums are set that do not cover the costs?Who will pick up the change? Will the taxpayers beat risk here? There are a number of unansweredquestions which I believe need to be answeredbefore we go forward with this kind of proposal.

So, there are many more questions being raisedand thus far very few answers with this proposal. Itseems to me that ladling this new responsibilityonto OPM is going to be putting a very, very toughjob on an organization that is already commandedto do many things throughout government. I wouldraise those questions and I would like to seeanswers to those before it moves forward.

I think that OPM has performed an exemplaryrole in managing the FEHB program, but that suc-cess does not necessarily translate to success in run-ning a public option.

DONALD DEVINE: The Washington Post used torun stories on me all the time. One time there was abig picture of me on the front of the Sunday maga-zine with the title, “The Boss,” and then, under it,“Reagan’s Terrible Swift Sword of the Civil Service.”President Reagan called me up and said, “Don, I gota job for you.” I said, “What is it?” He said, “OPM.”I said, “Opium?” “No, OPM.” I said, “Well, what doyou want me to do with it?” He said, “Well, I wantyou to reduce the number of non-defense civilianemployees by a hundred thousand; I want you tocut back on bloated benefits; and I want you tomake them work better; some kind of pay-for-per-formance system.” I said, “Thanks a lot. I’m going tomake a lot of friends in this job.”

But I always remember what Harry Truman usedto say about doing a tough job in Washington: “Ifyou need a friend in Washington, buy a dog.” So I

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bought two to be on the safe side. And actually, atOPM we did what President Reagan wanted. We cutback non-defense civilian employment by a hun-dred thousand and saved about $6 billion—whichused to be real money—on the benefits program,and we did introduce pay-for-performance, which Igive President Carter the real credit for setting up,but we were allowed to implement it. I actually thinkthe thing worked pretty well for awhile.

As far as the Federal Employees Health Benefitsprogram, one of the first things that happened whenI walked in was that they told me: “You have a short-fall of $440 million. There was an election year lastyear and the Democrats didn’t want to increase thepremiums enough to alienate one of their key con-stituencies, mainly the unions, so we’ve got to makeit up this year.” I said, “Well, what are the conse-quences?” The career staff at OPM briefed me on theproblem, and added, “There’s a thing called theAnti-Deficiency Act that you can go to jail for thisdeficit if you don’t settle this.”

That was kind of my introduction to this thingcalled the FEHBP. The staff at OPM said, “You haveto do something about this,” and I said, “Okay, tellme about my authority here.” They said, “You cando anything you want. You negotiate the contracts.”I said, “What? I can do anything I want on this?”They said, “Yeah! You can go out and bargain anykind of contracts you want.” You know, I used to bea health insurance claims examiner way back in mynefarious youth, which is one of the reasons whythey considered me qualified for the job, and I said,“You know, most of these plans don’t have anydeductibles or co-insurance; that’s not insurance.”

So, I said, “The first thing we’re going to do ishave mandatory deductibles and co-insurance.”Boy, that got a hot reception, especially from theunion plans and Blue Cross Blue Shield. They wentcrazy about this. I checked back with the staff, andsaid, “You sure I got the authority?” So, I did it.

The next thing I did—I got rid of abortion cov-erage in the FEHBP. Why should the taxpayers haveto pay 75 percent of the abortion coverage on thisthing? I also wanted to get more plans in the pro-gram. Of course, I ran into some stiff opposition.The plans already in did not like a lot of competi-tion; they liked as many as were in the program, but

they did not want any more. So I let additionalhealth plans in and I set a policy that they must allhave uniform rules for everybody, including theunion plans. They did not like that very much eitherbecause they thought they were bargaining theseplans, just like they do in the private sector.

That is what I did with this program. It was con-troversial. It went all the way up to the SupremeCourt. The Court said I had the power to do whatI did.

Now, let’s look at the Senate health bill. WhenBob Moffit first asked me about this, he said, “Takea look at this.” I said, “What does this say?” Well,Section 1334 subsection A instructs the director ofOPM to contract with insurers to offer “multi-stateplans through each exchange in each state and tonegotiate with each plan a medical loss ratio” (Thatmeans you decide how much goes in and out.), “aprofit margin” (That’s even better than the power ofthe old OPM.), and “profit margin premiums andother such terms and conditions of coverage as arein the interest of enrollees in such plans” (That’sopen-ended. You can do anything.). By the way, inSection E, notwithstanding paragraphs one and twoof subsection B, the director is given even broaderauthority in managing the government-sponsoredhealth plans—so most of the restrictions that applyto all the other exchanges, the local ones, do notreally apply to the director of OPM.

This is incredible power to give somebody overthe health care of the people of the United States.As Dan Blair said, this is clearly the substitute forthe public option under another name. This is whatthe Senate sponsors really want, and of course itwill disrupt the normal operations of OPM. I willput it this way, especially for those of you whoknow me and were around during my tenure: Doyou really want to put me in charge of your medicalprogram and potentially for everybody in the coun-try? Now, maybe some people liked what I did, buta lot of people did not, and a lot of people wouldnot. But this is an awful lot of power in the hands ofone official.

Let’s face it. Most of the time there will be nicepeople like Linda Springer and Dan Blair in the jobof running OPM. But occasionally a President isgoing to come in and say to the OPM director, “Do

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these things; and we don’t have any money to foolaround.” When government budgets get tight,health benefits can get cut. Do you really wantto give that kind of authority to anybody? That ismy question.

BOB MOFFIT: That is a very interesting point ofdeparture. We keep forgetting an obvious fact: Thisprovision in the Senate bill has never been subjectedto a hearing; champions of this proposal have neverbeen subjected to the kind of tough cross-examina-tion in House or Senate committees; none of theauthorities with any expertise whatsoever in thefunctioning of the Federal Employees Health Bene-fits Program or the functioning of OPM have evertestified on Section 1334. This was something thatwas made up on the fly, with little or no serious dis-cussion, and yet may very well become a central fea-ture of the health care system of the United States.

I agree with my colleagues at Heritage that, infact, this OPM provision in the Senate bill is the pub-lic plan in disguise. The contracting power of thedirector of OPM over FEHBP plans is enormous, andthis provision would expand that power. When DonDevine was director, I was OPM’s congressional rela-tions director, and I can assure you that going up toCapitol Hill to deliver controversial news was, to putit diplomatically, an exciting and challenging experi-ence. If something like this Senate provision is enact-ed, giving OPM such power in the health insurancemarkets, most of the time a future OPM congres-sional relations director would have to deal with a lotmore than the House Government Operations Com-mittee or the Senate Governmental Affairs Commit-tee, or the House and Senate subcommittees thatdeal with Treasury-Postal Appropriations.

The new job of the OPM congressional relationsdirector would cover a vast amount of new territo-ry: the Senate Finance Committee, the SenateHealth, Education, Labor, and Pensions Commit-tee, as well as the House Energy and CommerceCommittee, the House Ways and Means Commit-tee, and the House Education and Labor Commit-tee. That is what we are talking about on theground, on the Hill, in the real world. We are nottalking about the little old OPM of the past. This issomething very big, and very different. Federal

workforce issues will take a seat in the back of theproverbial bus. Bet on it.

The OPM is an agency of the White House; theDirector of OPM reports to the President of theUnited States. In the Senate health bill, there areclearly regulatory differences between OPM and theDepartment of Health and Human Services (HHS),whether they are intentional or simply a draftingerror is, at this point, anybody’s guess. But remem-ber one thing: If there is any conflict over howhealth insurance is to be treated between OPM andthe HHS, all of those conflicts and issues will bedecided in the West Wing of the White House. So,we are also talking about a tremendous transfer ofauthority to the President of the U.S. in terms ofhealth care. We cannot overlook this direct line ofauthority, or forget who the director of OPM is. It isvitally important that Americans understand theimportance of this powerful agency. It is a powerfulagency within its own sphere, as many of us havecome to learn. We are giving it new power andexpanding its reach in a very dramatic way.

Questions & AnswersQUESTION: In the early 1990s, the National

Social Insurance Retirement System, also known asSocial Security, got into financial trouble. State andfederal employees were made eligible for SocialSecurity to help with the financing; thus was bornthe Federal Employees Retirement System (FERS),in which we lowered the defined benefit piece,expanded the thrift fund and integrated it withSocial Security. If this is indeed a public plan thatyou see evolving in OPM, what prevents the samething from happening if it gets into financial prob-lems 10 years or so down the line?

DAN BLAIR: Well, I think you bring up a verygood question, and that is: Who bears the risk inthis? If premiums are set too low and costs are toohigh, who’s going to make up that difference? Andwhat’s the impact going to be on the FEHBP? Now,the Senate enacted what I called “hold harmless” lan-guage; it said it’s supposed to be operating as a sepa-rate program. But I don’t see how you separate thetwo. They wanted to leverage the expertise for man-aging the FEHBP into this program. So, I think youbring up a very good point of how you actually keep

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these programs separate. More importantly, whobears the risk in this program? And if it’s not pricedappropriately, who’s going to have to bail it out?

DON DEVINE: Nice little language in the bill.Consider also that in Section 1334, the Senateauthorized OPM to spend “such sums as may be nec-essary to carry out the obligations of this section.”So it’s open-ended. The concern is that taxpayerswill have to pick up the cost of any of the problems.

BOB MOFFIT: Some folks have said that thelanguage Dr. Devine refers to simply refers to thecosts of the administration of this new program. Buthere’s the problem: If you look at the original Housebill (the so-called “Tri-Committee” bill) creating apublic plan, there was specific language dealingwith a level playing field and limitations on fundingstreams. That language gave the original House billa patina of fiscal responsibility. When I testifiedbefore the Education and Labor Committee lastJune, I got into a spirited exchange with Congress-man Robert Andrews of New Jersey on precisely thispoint of the level playing field and taxpayer liability,the point that Dan Blair raises. In the original Househealth bill, the sponsors specified that there wouldbe a level playing field between the public optionand private health plans. But in Section 221 of theoriginal House bill, there is a provision that says theSecretary of HHS may contract with private entitiesto carry out the administration of the public plan.Now, that clearly means, in my view, something likethe Medicare private contractors. You all know thatthe Medicare bureaucracy doesn’t actually deliverMedicare benefits; Medicare officials enter a con-tract with private health insurance companies likethe Blues or Anthem to deliver Medicare benefits inevery part of the country.

But in entering into such contracts with privateentities, Section 221 of the original House bill spec-ified that in any contractual arrangement, the HHSSecretary may not transfer insurance risk to the car-rier, which means that the taxpayers assume therisk. That, I thought, was a key point in the hearingbefore the Education and Labor Committee aboutwho is ultimately stuck with the bill.

Now, in this Section 1334, there is absolutely nolanguage at all on the crucial question of insurancerisk or who’s ultimately responsible for bailing out

the multi-state plans if they run short. That’s verytroubling. It could be an oversight. But I doubt it.

QUESTION: I assume that if you undertake therole of negotiation explicitly determining the profitmargin for one of your vendors, i.e., carriers, wouldyou not then be bound to that same ratio and profitmargin across all of your vendors? Or could youdiscriminate based on who you liked and who youdidn’t like?

BOB MOFFIT: The rules that govern all privatehealth plans in both the House and Senate bill arebasically set by the Secretary of HHS. In this partic-ular case, in Section 1334 of the Senate bill, the lan-guage provides OPM independent authority overnot only profit margins, but also medical loss ratioand premiums. Because it appears to provide sepa-rate regulatory authority for OPM, that means rightaway you don’t have exactly the same statutoryplaying field where the other private plans are levelwith the OPM-sponsored multi-state plans. So, it’s atroubling statutory situation.

LINDA SPRINGER: And one other thing: Youget into that issue of whether a director of OPMtakes on a role of arbitrarily saying you’re going tomake this money, Company A; and Company B,you can make this much money. Is that the OPM’srole? Should that be OPM’s role? This isn’t some-thing that even the state regulatory entities wouldtake on in that way. So I don’t recall seeing anythingin Section 1334 that directly addresses that, orwould prohibit it. It’s a very fair question.

What’s telling is that we’re asking this question ina Heritage Foundation forum. I don’t recall ever see-ing that question asked in any other hearing or set-ting or any other discussion of this—certainly not inany other public forum, or in the legislative arena.

You’ve pointed out a prime example of why thisdiscussion is so important. Is that really what theSenators would want OPM to do? Is OPM evenqualified to do that? Does OPM become the regula-tor de facto? There are so many other things relatedto these questions. I came out of the life insurancebusiness years ago. Bob Moffit mentioned that I’man actuary. The whole notion of loss ratio, howmuch revenue goes to benefit payouts and howmuch for administration and other costs, gets to the

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heart of the viability of those companies. Is OPMgoing to be in that driver’s seat of having that muchinfluence over the viability of these insurers? It’s afair question.

QUESTION: What does OPM currently negoti-ate with health plans in FEHBP, and how would thatbe different under the Senate multi-state plan?

LINDA SPRINGER: OPM negotiates the samething that any other employer would. They’re nego-tiating premium rates first and foremost and negoti-ating over certain benefit provisions and the pricingof those new provisions. For example, if you wouldlike to include hearing aid coverage, what wouldthat cost? Deductibles, co-pays; all of the things thatany of us in a health insurance plan looks at eachyear. During “open season,” you as a consumer getthat notice about what has changed. We’ve addedthis feature, we’ve taken out this feature, we’veexpanded something, we’ve raised a price, we’velowered the price. Those are the things that are thesubject of negotiation each year.

One thing I want to add, referencing Bob’s com-ment about the White House role during our ten-ure: We were never directed by any White Houseoffice to influence us to do anything with respect tothose negotiations. They would say, “We’re interest-ed in promoting health information technology, forexample, so include that in your discussion and letus know if any of the carriers can make someinroads there.” But they were never involved in anyOPM negotiation, they never directed our negotia-tion, they never influenced our negotiation. Theycould have, but they never did. A fair question iswould that change in this new model?

But to answer your question very directly: It’sthings like the premiums, the coverage levels,deductibles, co-pays, things like that, as well as newprovisions.

DAN BLAIR: I also want to make another pointclear: We don’t negotiate payments to the providers,doctors, and hospitals. That’s all done by the privatecarriers. Linda hit on a strong point. I had the priv-ilege of working under two directors, Kay ColesJames and Linda Springer, and both were very ada-mant in making sure that this program was runwell. Now, every director has had his or her priori-

ties, and those priorities are influenced and directedto a large degree by the White House. But there areconcepts such as Linda mentioned: health informa-tion technology, health savings accounts; in theClinton Administration there was the inclusion ofmental health care parity. But I don’t know what thisnew provision in the Senate health bill is going tohold for OPM’s relationship with the White House.I don’t know what the level of influence will be.

The FEHB program is set up under Title 5 of theU.S. Code and provides certain levels of benefitsand a great deal of discretion to the director. Thisnew plan to me seems to leave it very, very, veryopen-ended as to what the OPM-sponsored planswill look like. I also have a question about cross-subsidies between the health plans. Although theyare mandated to operate separately, what does sep-arately mean, and what does it mean if you have aparticipating plan in the insurance exchange and aparticipating plan in the FEHB? Will there be pres-sure put on one to raise rates higher in one plan inorder to bring in more enrollees under the other?Given the high level of political attention given tothis new insurance exchange, that’s not an unfairquestion.

To answer your question about the negotiations,we have a set schedule for the program every year.You have the carrier conference, the call letter, thecarriers submit their plans, you go through negotia-tions, and then in September the premiums areannounced and you have open season at the end ofthe year. I don’t know what this new program isgoing to look like, and we’re on the precipice of itbeing enacted. If you are going to be this close toenactment, there are a lot of questions that need tobe answered. After all, the American people aregoing to be subject to this new insurance programthat will be nationwide.

DON DEVINE: It says in the legislation that oneof the health plans has to be nonprofit, which itselfis very interesting. Sounds like Blue Cross’s lobbyistdid a good job there. And one plan can’t cover abor-tion, which presumably means one or more otherscan. It is interesting. It clearly implies much moreinvolvement in running the plan than current OPMpolicy. When we set general rules, even though I’vemade some very definite policy decisions, there

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were across-the-board requirements and everybodyhad to offer deductibles or co-insurance andnobody could cover abortion. So there were generalrules. This one looks like you can do a lot of pickingand choosing.

I also thought it was interesting that one of thethings not under the control of the director is thatplans have to offer the three-to-one age rating sys-tem. This means that health insurance premiumscould be varied by age, but by no more than a three-to-one ratio. Some say that this is “getting rid ofcommunity rating.” Community rating means thatpersons pay the same premium regardless of age.What they do is apply this three-to-one age ratio,which applies to everybody else, but what aboutfederal employees themselves: What if this ratio isapplied to them, and what would that do to the fed-eral employees program? Would it not increase pre-miums for many of them substantially?

In any event, Bob Moffit suggests that the omis-sions in this thing might be purposeful. I wouldsuggest they also may through omission be left wideopen. Remember, this thing was thrown in the Sen-ate bill at the last minute. I don’t think it’s wellthought through, period. But that is, in some ways,worse than having bad effects because it leaves all ofthe questions up to whoever is administering theprogram. Depending on who you are, if it’s Linda, itmay be good; if it’s me, maybe not.

QUESTION: Under the FEHBP, one of OPM’sauthorities is interpreting the contracts, includingmedical terminology. If a health plan turns downsomebody, ultimately OPM interprets the contractto agree with the plan—something like experimen-tal treatment. That’s led to a tremendous amount oflitigation that ultimately involves OPM. Could youcomment on, politically and legally, where you seeOPM ultimately as the one making what are goingto be interpreted as medical decisions?

LINDA SPRINGER: I think that’s an importantquestion: What is OPM’s role not only in respect tosetting up the plans and negotiations and thosetypes of things, but the actual administration underthose plans with respect to claims and things likethat? I don’t think it’s clear what it is. Is this some-thing that’s just going to solely be left to the insurersand their claims administration, or is there a role for

OPM? It’s of a significant magnitude greater than thesize of the FEHB now, if it were for the whole unin-sured population.

And then there is the issue of whether it could besubject to political pressures; you know as well as Ithat at OPM there were times when, for example,Members of Congress would weigh in and say, “Ihave a constituent who was just turned down forthis type of coverage.” If that happened in thenational federal program, you can only imaginewhat would happen for all the uninsured.

But again, this comes back to the point that we’veall mentioned in one way or another: There has notbeen a full vetting of this proposed arrangement. IfI were the director of OPM, I’d be scared to death. Iwouldn’t want this role. Aside from how I might feelphilosophically about whether this is OPM’s role ornot, it wouldn’t be clear to me what my role actuallyis, and am I going to be expected to make thosekinds of decisions and chart this territory? I don’tthink it’s been vetted.

There are Members of Congress who had over-sight of OPM who would come and say to me, “Lin-da, does this agency have what it needs to besuccessful? Are you getting the funding? I want theGovernment Accountability Office to come overand do a capacity study.” And they’ve done it. Youcan look it up and see what OPM’s mission is today.Regardless of how many dollars they throw at it orresources or people they might transfer from theCenters for Medicare and Medicaid Services over atHHS or whatever, the reality is it impacts OPM. Ihad occasion to talk to a senior political appointeeat OPM a few months back in the current Adminis-tration. She said, “I never realized OPM did so manythings.” And that’s the way it is right now. What’sgoing to happen, what would she say about takingon this new role?

Could some of the things that are unchartedbecome political issues? What is OPM’s role withrespect to insurance claims? That’s an open ques-tion, and that’s scary.

DAN BLAIR: OPM’s role since September 11,2001, has changed dramatically. Anyone who was atOPM back then knows how much that eventchanged the agency. One of those new roles was

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ensuring that the federal workforce could respondto these types of emergencies, and that was a prior-ity. But how is that mission going to mesh with thisnew role of ensuring that the uninsured now have anew viable program of insurance, and that this is theright agency for those types of programs?

What I fear is that the attention paid to this newrole will do short shrift to other important roles thatOPM is playing—security checks, merit systemoversight, hiring, compensation—a whole host ofother programs.

For instance, in 2002, OPM implemented a newlaw mandating the establishment of a long-termcare program. Part of the attractiveness to enrolleesof that new long-term program was that we said toenrollees, “If you enroll today, your premiums willnever increase.” Well, because costs have gone up,because of other issues, OPM has proposed and isimplementing a price increase—my premiums aregoing up 25 percent. And I’m upset by that. I waspromised, I was among those who made that prom-ise to enrollees that their premiums aren’t going togo up.

If this kind of limited program has seen thesekinds of problems, what kind of problems will thisnew nationwide program have? It’s not directed atthe federal workforce; it’s directed at citizens at large.

QUESTION: The GAO reports that Medicareand Medicaid have an improper payments rate of 10percent. Do we have any idea what the federal plan’simproper payment rate is? Do we monitor it? Andwhat would happen to that improper payment rateif you took on this whole new responsibility?

LINDA SPRINGER: The federal plan rate isvery, very low. It’s less than 1 percent. It’s very tinyrelative to the total dollars. That actually is one ofthe good points of that program from a fiscal stand-point. One wouldn’t expect that that would changeexcept to the extent that the oversight of the pro-grams, partially by the IG’s office, if its attention isdiverted or its resources are taken away from theirnormal cycle of review, to now have to review what’sgoing on in this proposed health insuranceexchange arrangement. Then maybe that vigilanceand that attention that they paid that led to that lowrate could be diluted in some way.

But I think you’re on to something, becauseit’s not the same as the federal plan. It’s going to bea different type of scenario. So, will the fiscal atten-tion be provided for the improper payment?That’s another fair question. There is a whole list offair questions.

BOB MOFFIT: With regard to improper pay-ments and the FEHBP, Linda’s absolutely correct,and outside experts agree: They’re very low. Butremember this: When you’re talking about improp-er payments or waste, fraud, and abuse in the FEH-BP, you’re talking about waste, fraud, and abuse atthe expense of private health insurance plans thatlose market share if they have too much waste,fraud, and abuse. So the private plans themselveshave a direct and powerful economic incentive—unlike traditional Medicare—to police waste, fraud,and abuse in the FEHBP. My personal experience atOPM and studying the program is that it’s a refresh-ing exception to the general experience of govern-ment health care programs.

QUESTION: You’ve all explained why there’s agood chance that OPM’s current functions will beaffected, but what about the supposed firewall thatthe Senate language is supposed to have betweenthis program and FEHBP? Do you believe that thatfirewall would be maintained, that all functionswould be entirely separate? You made the point thatthe institutional knowledge of the staff in runningthe FEHBP is the reasoning behind the Senate pro-posal, but could you speak to the firewall in terms ofthe actual functioning of the two programs?

DON DEVINE: I find it impossible to believethat this modified community rating wouldn’t beapplied. I mean, how are they going to say every-body else in the world is covered by it and not thefeds? I think inevitably what is done in the publicplan or this OPM-administered exchange willprobably seep over into the government employ-ees’ plans. Or if it doesn’t, it becomes an even moreimpossible political situation for anybody who triesto defend it.

QUESTION: This is on the excise tax in the Sen-ate health bill. If the current plan goes forward,there will be an excise tax on certain health insur-ance plans. Certainly some of those could be FEHBplans, and that will give OPM a new role of some-

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how collecting and reporting those certain plans—hundreds of plans, millions of employees, many,many agencies—how will OPM administer thatexcise tax vis-à-vis the IRS, the insurers, and theemployee? And how will you do the auditing, and apaper and reporting trail, to make sure everybodyknows the proper level of taxation and whose plansmight be subject to that?

DON DEVINE: I guarantee you nobody’s thoughtof it.

LINDA SPRINGER: You hear nobody jumpingto the microphone to answer that question. Thereason is that it’s not a question that has beenaddressed or really thought through. I think to thecredit of the federal workforce, and those that arecovered, and retirees and organizations that repre-sent them—they’re raising this issue. It’s an admin-istrative issue. Even if the only thing were theexcise tax, and there was no public option orexchange or whatever you want to call it, that is anadditional administrative burden for OPM. It is alsoan additional risk of payment or charge or increasein cost for the federal workers and retirees. It’s animportant thing to highlight.

DAN BLAIR: To add to the complexity of this,the Postal Service pays a higher percentage of theemployer’s share of the premium than regular feder-al employees in other federal agencies, so how doyou go about factoring all of that in? The complexissues that you raise haven’t been addressed yet, andthat’s precisely why we’re up here raising them.Because we don’t have answers.

LINDA SPRINGER: And it’s not one plan. A lotof people will say, well, there’s the federal plan (andeven I once in awhile will slip into that), it’s a pro-gram; it’s a collection of plans. If you think about it,it’s around 270 plans. Multiply what you have withone plan by 270. As you know, there are federalemployees worldwide and they have to be able tohave some sort of health coverage. That’s why thereare so many plans that are negotiated. And we alsoprovide some range of choice so that someone inthe far reaches as opposed to the national capitalregion has a health care option available to them.The excise tax will impose an enormous adminis-trative burden.

There’s one other way to look at this. I don’tknow how many of you had a chemistry coursewhen you were in school, but I remember one ofthem. Teachers were trying to teach you that a sol-vent could only hold so much. And you kept put-ting things in and putting things in, and eachsolvent was a little different, but eventually you getto that point where you put one more grain of what-ever that item is and everything falls out. It’s not thatthe one just falls out, but everything comes out. Sat-uration point.

Are we getting to that saturation point withOPM? Senator George Voinovich said to me, “Doyou have the capacity? Do you have what youneed?” And I used to say, “Yes, but not a dime tospare.” Is this that last grain that goes in that reallydisrupts everything, and everything starts to fallout? And is that good for federal workers? It’s not aquestion for us even to answer. It’s a question for the8-plus million Americans covered by the federalplan, the 2.5 million retirees, the almost 2 millionmembers of the federal workforce, and it’s the Mem-bers and congressional staff. Because ultimately, thatstill is going to be OPM’s mission. Even if you boltthese other things on, it’s not losing its original Title5 mission: to serve the federal workforce. Is thatmission well served? Are those people, those con-stituents, well served if this Senate bill is enacted?Or is that the last item that goes into the solvent thatmakes everything start to be compromised?

DAN BLAIR: Or it’s the other side of that coin.Does it cannibalize other programs and resources inorder to make this one program, which is going tobe the highest political priority, successful? Andthat’s the biggest issue.

BOB MOFFIT: There’s yet another way to lookat this. The White House may decide for its ownreasons—some future White House may decide—look, there’s an institutional cultural problem atOPM. OPM is very, very friendly with private healthcare plans. They have these cordial and cooperativeand sensitive negotiations every summer when abunch of guys sit around the table and decide whatthe rates and benefits are going to be for the comingyear. And then they have the open season in the falland most of the time people are pretty happy.

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But there’s another possibility. Right now, Medi-care does contract with private health plans. Medi-care is a single-payer system, right? But how is itadministered? It’s administered through contractswith private health plans. So private plans basicallybecome third-party administrators for the Medicarebureaucracy. What’s to prevent the Administration,some future Administration, from saying, “Look, weneed some serious, tough-minded guys over atOPM who are really going to drive things the rightway in these health insurance markets. Let’s deploystaff from the Center for Medicare Services (CMS) toOPM on a detail to manage the public plans, orwhat in fact would be a public plan, and undercutthese profiteering private health plans?”

In fact, for Medicare Advantage, like MedicarePart D, which is a system of private competitiveplans delivering prescription drug benefits, the

Bush Administration wanted to make sure that thegovernance was compatible with that vision. Thereason: CMS was not used to running a truly com-petitive type of system where you had private planscompeting. So, they actually imported staff fromOPM over into CMS to help administer the pro-gram, Medicare Advantage.

With the enactment of anything that looks likethe Senate bill, you can forget the traditional waythings have been done with the FEHBP. My view isthat the powers given to OPM to promote a levelplaying field for competition among private healthplans are substantively different from the kind ofthing we’re talking about with the Senate provi-sions. This is the sponsorship of health insurance byOPM in a competition against private health plans.That’s a different animal.