GAO Questions Administration's Decision to Decline Drug Subsidy

Sen. Daniel K. Akaka plans to hold hearings on a recommendation the Bush administration shift funds to lower retirees' Medicare premiums. (By Dennis Brack -- Bloomberg News)

Federal employee groups favored the subsidy. The U.S. Postal Service wanted the subsidy. But the Bush administration said no.

The pull-and-tug is over a 2003 law that allows employers to receive subsidies for prescription drug coverage on the condition that they provide a benefit for their Medicare-eligible retirees that is at least as good as the Medicare drug plan. The government, of course, is an employer, operating a medical-insurance program, but Bush officials decided it made little sense for the government, in effect, to pay a subsidy to itself.

That decision has been questioned in a report from the Government Accountability Office, the congressional auditing agency. GAO analysts think that allowing Uncle Sam to move money from one pocket to another would probably lower premiums in the Federal Employees Health Benefits Program, which provides medical coverage to about 8 million people.

Taking the subsidy from the Medicare program would have lowered the average 2006 premium in the federal health benefits program by 2.6 percentage points, the GAO calculated. Those premiums rose by 6.4 percent last year, meaning the increase would have been nearly 4 percent with the subsidy.

The GAO said that insurance companies in the federal program differed over how much the Medicare subsidy would have mitigated premium increases. Officials from two large federal health insurance plans with higher-than-average numbers of retirees told the GAO the subsidy would have helped lower premiums, with officials at one company claiming the subsidy would have led to a reduction of up to 4 percentage points for their plan.

The Office of Personnel Management, which runs the federal employee health program, has ruled out applying for the Medicare subsidy. OPM officials say the law was written to encourage employers to continue offering prescription drug coverage to their retirees, which the employees health benefits program does. The OPM says it has no intention of dropping retiree drug coverage.

The National Active and Retired Federal Employees Association has criticized the OPM for refusing to seek the Medicare subsidy, contending that the OPM is missing out on $1 billion annually. The retired employees group helped lead the effort on Capitol Hill to make the federal government eligible for the subsidy along with other employers, including state and local governments.

Margaret L. Baptiste, president of retired employees group, said yesterday that the White House budget office and the OPM "should explain to federal workers, retirees and survivor annuitants, who often struggle to pay their steadily increasing premiums, why the federal government failed to do what a multitude of other employers have done to reduce this burden."

One agency, the U.S. Postal Service, petitioned Medicare in 2005 to provide the subsidy but was rejected on the grounds that postal workers are covered by the health benefits program. Postal officials sought the subsidy because it would save the agency about $250 million annually. Agency officials said the subsidy would have helped rein in operating expenses, which are financed through postage rates.

Sen. Daniel K. Akaka (D-Hawaii), new chairman for the Senate's federal workforce subcommittee, said he plans to hold a hearing on the GAO report in the spring.

"I will take a closer look at how OPM decisions affect health care premiums," Akaka said in a statement. "Although OPM did a good job in keeping premium increases down in 2006, the GAO report clearly shows that if OPM had applied for and used the subsidy, premium growth would be reduced by 2.6 percent."

As Akaka noted, the GAO report shows that the OPM has been slowing the growth in the average federal health insurance premium since 2002, when premiums jumped by 12.9 percent. Federal Employees Health Benefit premiums, on average, are going up only 1.8 percent this year.

The rise in average premiums has slowed, the GAO said, because the costs of medical services and prescription drugs have risen at a slower pace in recent years. The GAO pointed out that the OPM has used the program's financial reserves to curb premium growth last year and this year, by 2 percent and 5 percent respectively.

The GAO also noted that the Federal Employees Health Benefits Program has done a better job of controlling premiums than many private-sector employers and the California Public Employees' Retirement System, known as Calpers and second in size to the federal program.

Over the past five years, the GAO said, the average annual growth in the federal health benefits premiums was 7.3 percent, compared with 14.2 percent for Calpers and 10.5 percent for companies surveyed by the GAO.