FEDERAL HEALTH CARE RATES CLIMB

WASHINGTON -- A federal agency is providing yet more evidence that employers' respite from big health care premium increases has ended.

Premiums for the nation's largest group health insurance plan -- a program that covers 8.7 million federal employees, dependents and retirees -- will increase by an average of 10.2% next year.

That is a substantial increase from this year's 7.2% increase and the first time in a decade that the program's premium increases have moved into double-digit territory, according to the Office of Personnel Management, the federal agency that administers the program.

The increase in the federal program, which involves 285 managed care and traditional indemnity plans offered to federal employees, mirrors the rate hikes that health maintenance organizations and other plans have been seeking and getting from other employers.

For example, earlier this year, the California Public Employees Retirement System accepted a 10.75% rate hike by Kaiser Permanente. Consultants say that HMOs, on average, have been seeking rate hikes for next year of 6% to 12%.

Federal officials and others say many of the same factors driving up premiums for private sector employers, such as soaring prescription drug costs and an aging work force, are behind the rate increases faced by the federal program.

This year, for example, prescription drug costs for the federal program are expected to rise 22% due to price increases and the introduction of new, expensive drugs. About one in five dollars expended in the federal program, whose formal name is the Federal Employees Health Benefit Program, or FEHBP, goes to pay for prescription drugs.

"There have been a lot of new treatments and greater utilization" of prescription drugs, said Jean Barber, a former OPM official and now managing director for business analysis and strategy for Blue Cross & Blue Shield's federal employee program in Washington. The Blues' PPO offered to federal employees covers about 4 million people, the largest of the plans available to federal employees.

"Many prescription drugs may be wonderful in improving outcomes, but they do make it difficult to restrain premium growth," Ms. Barber added.

In addition, an aging population is boosting costs, as older workers typically use more medical services than their younger counterparts.

At the same time, many HMOs hammered by losses from years of underpricing their plans to gain market share are boosting rates to improve their battered bottom lines.

"HMOs conceded price to gain market share. Now their shareholders want to see better returns," said John Welch, a principal with William M. Mercer Inc. in Washington.

Next year's 10.2% average premium increase in the federal program is a big change from just a few years ago, when the big shift of employees to less-expensive managed care plans from costly traditional indemnity plans, as well as market share pricing by many managed care plans, kept the lid on premiums.

For example, rates fell an average of 3.8% in 1995, 0.1% in 1996 and rose just 1.6% in 1997.

While rates are climbing again, the latest round of increases pale in comparison to the premium increases the federal program experienced during the hyperinflation era in health care in the late 1980s. In 1987, premiums increased by an average of 17.4%. That was followed by an average premium increase of 26.3% in 1988 and 20.5% in 1989.

Still, health care experts do not expect a return to the yearly 20%-plus cost increases that were the norm in the late 1980s when managed care had yet to capture a significant share of the health care market.

"In the long term, managed care plans will keep costs lower than non-managed care plans," said Bill Falk, a principal with Towers Perrin in Chicago.

Whether the projected 10.2% average premium increase for the

FEHBP holds true will depend on whether or not a significant percentage of federal employees change health care plans during the government's annual open season from Nov. 9 to Dec. 14.

The 10.2% average premium is based on the assumption that enrollees will stick with their current health care plans. However, the average percentage increase could turn out to be lower if many federal employees move into lower-cost plans compared with the plans they now are enrolled in.

Generally, the federal government pays just over 70% of the premium for employees.