Summary: GAO believes that the administrative costs of the fee-for-service portion of the Federal Employees Health Benefits Program were higher than those costs for the other large health benefits program GAO reviewed primarily because the carriers were not given enough incentive to cut their operational expenses. Although small in relation to benefit payments, the program's administrative costs--more than half a billion dollars in 1988--are significant. GAO estimates that the potential annual savings could range from at least $35 million in the short term, by improving Office of Personnel Management (OPM) controls over the operational expenses of the fee-for-service plans, to about $200 million through legislative reforms that change the way contractors are chosen and paid. Incentives can be more effectively provided through the competitive selection of contractors. If the program were restructured to have competitively selected commercial insurers assume all or part of the insurance risk, GAO believes that the cost of the program's administrative services could be better controlled. Regardless of whether the program is legislatively reformed, however, OPM needs to do more to ensure that the carriers provide quality services at reasonable prices.
