Federal Employees Health Benefits Program: Enrollment Remains Concentrated Despite More Plan Offerings and Effects of Adding Plan Types Are Uncertain

FEHBP provides health care coverage to about 8 million federal employees, retirees, and their dependents through carriers that contract with OPM. The Federal Employees Health Benefits Act of 1959 limited the types of plans OPM could offer. OPM has reported that the program needs more competition between plans and more diverse health plan choices and has proposed that its contracting authority be expanded to allow a greater variety of types of health plans to participate in FEHBP than are currently allowed.

GAO was asked to examine FEHBP plan participation and the potential impact of OPM adding new plan types to the program. This report describes, among other things: (1) how the number of plans and market shares of carriers participating in FEHBP changed in recent years, and (2) what is known about the potential effects of allowing OPM to contract with a greater variety of types of health plans than are currently offered. GAO requested OPM plan availability and enrollment data by county for 2000 through 2015, but county-level availability data were only available for 2007 and 2009 through 2015. Therefore, plan availability and market share analysis timeframes differ. GAO also interviewed OPM officials, 11 FEHBP stakeholders, such as carriers and federal employee and retiree organizations, and reviewed relevant documentation and research, such as cost estimates of the potential effects of expanding OPM's authority.

GAO provided a draft of this product to OPM for comment. The agency did not provide any comments.

Federal Employees Health Benefits Program (FEHBP) enrollees can choose from a number of health plan offerings depending on where they live. From 2007 to 2015, the median number of plan offerings available in a county increased from 19 to 24. Of the 24 plan offerings in 2015, 19 were available nationwide and 5 were health maintenance organization plans offered in specific geographic areas. Yet despite more available plan offerings in recent years, enrollment has become more concentrated within the largest health insurance carrier in a county. Specifically, the median share of enrollment held by the largest carrier in a county increased from 58 percent in 2000 to 72 percent in 2015. Further, one carrier—the Blue Cross Blue Shield Association—was the largest carrier in 93 percent of counties in 2000 and 98 percent of counties in 2015.

The stakeholders GAO interviewed and the cost estimates GAO reviewed about the potential effects of expanding the Office of Personnel Management's (OPM) authority to contract with more plan types than currently offered in FEHBP did not offer clear consensus about the effects. Most stakeholders supported expanding OPM's authority; those opposed were primarily concerned about OPM adding regional preferred provider organization plans, saying this could cause program instability and higher premiums. Estimates by OPM and others differed significantly on whether the expansion would increase or decrease costs. This is because they used differing assumptions about premiums, enrollment, and other factors, and it is unclear whether the assumptions used in these estimates will be realized.

The Federal Employees Health Benefits Program (FEHBP) is the largest  employer-sponsored health insurance program in the country, providing  coverage to about 8.2 million federal employees, retirees, and their  dependents in 2016. The Office of Personnel Management (OPM)  administers FEHBP in part by entering into contracts with qualified health  insurance carriers, negotiating plan benefits and premiums as part of that  process. The statute that established FEHBP in 1959 authorized OPM to  contract with four specific plan types, each of which must meet different  requirements for their service areas and benefits, among other things.  Today OPM generally groups these plan types into two main categories  of plans—fee-for-service (FFS) plans and health maintenance  organization (HMO) plans. FFS plans are offered nationwide to all  participants, while HMO plans offer coverage in selected geographic  areas. Despite having a number of plans to choose from, about two- thirds of FEHBP participants in 2015 were enrolled in one of the two  options offered as part of the Blue Cross Blue Shield Association’s  (BCBSA) nationwide FFS plan.

OPM has reported that the health insurance marketplace has changed  significantly since the statute establishing FEHBP in 1959 defined the  plan types with which the agency could contract. According to OPM, this  constrains it from responding to this changed marketplace. Specifically, a  Director at OPM has testified that the program needs more competition  between plans and more diverse health plan choices. To enhance  program competition and modernize FEHBP, OPM and some  stakeholders have proposed that OPM’s contracting authority be  expanded to allow a greater variety of health plan types to participate in  FEHBP than are provided for under current law. For example, OPM has  indicated that it does not have authority under current law to allow carriers  to offer regional preferred provider organization (PPO) plans, which would  be an additional kind of FFS plan. According to OPM, unlike the existing  nationwide FFS plans, regional PPO plans would cover smaller regions  and would not have nationwide premiums. However, some stakeholders  have raised concerns with the proposal, noting, for example, that if  regional PPO plans were added to the program they might have a  competitive advantage over the nationwide plans.

With these issues in mind, you asked us to examine plan participation in  FEHBP and the potential impact of OPM adding new plan types to the  program. This report describes  1.  how plans and market shares of carriers participating in FEHBP  changed in recent years, and how FEHBP market shares compare to  other selected markets; and  2.  what is known about the potential effects of allowing OPM to contract  with a greater variety of health plan types than are currently offered in  FEHBP.

To describe how plans and market shares of insurers participating in  FEHBP have changed in recent years, and how changes to FEHBP  market shares compare to trends in other selected markets, we analyzed  OPM data on zip code-level plan availability for 2007 and 2009 through  2015. (We requested data for 2000 through 2015, but OPM was not able  to provide zip code-level plan availability data prior to 2007, or for year  2008.) Using a publicly available zip code conversion file, we converted  these data from zip codes to counties. We then cross-referenced plan  codes to other data provided by OPM to classify plans and determine, for  each year, the number of plan offerings available in each county. To  assess the reliability of the data, we reviewed relevant documentation,  interviewed OPM officials involved in compiling the data, compared the  data against FEHBP enrollment records and published plan brochures,  and conducted data checks for reasonableness, outliers, and  completeness. Based on our review of the data and discussions with  OPM, we determined that our summaries and medians accurately  reflected HMO plan availability across counties over time. Therefore, we  determined that these data were sufficiently reliable for our purposes.

To determine FEHBP carrier market share, we analyzed OPM data on  county-level enrollments for active employees and annuitants from 2000  to 2015. We used an OPM-provided crosswalk to identify a parent  company, or carrier, for each plan, allowing us to calculate enrollment  market shares for carriers at the county, state, and national levels. We  calculated county-level carrier market share in three ways: (1) the market  share held by the largest, three largest, and five largest carriers in each  county (regardless of which carriers held that position), (2) the market  share held by certain specific carriers in each county (e.g., BCBSA and  Kaiser Permanente), and (3) the combined market share held by plans  categorized as HMO or FFS plans in each county. We assessed the  reliability of the data by interviewing OPM officials who regularly use the  data, testing for missing data, and reviewing the assignment of plans to  insurance carriers. We determined these data were sufficiently reliable for  our purposes.

To compare FEHBP market shares to those in other selected markets, we  analyzed 2010 through 2014 data for the large group market and  Medicare Advantage. We selected the years of comparison based on  data available for the large group market from prior GAO reports issued in  2014 and 2016. We selected the large group market (coverage offered  by large employers) as a comparison market because it includes other  large public and private employers offering coverage from private carriers  and plans. In prior GAO reports, we analyzed data reported annually by  carriers and identified the market share held by the largest and three  largest carriers in each state. We relied on reliability testing conducted  for those prior reports and determined that they were sufficiently reliable  for our purposes. We selected the Medicare Advantage program—a  private health plan alternative to the original Medicare program—as a  comparison market because it is another federal program with nationwide  enrollees who can choose a plan from a number of options. To  determine Medicare Advantage carrier market shares, we obtained  enrollment data from the Centers for Medicare & Medicaid Services  (CMS) for each year from 2010 through 2014 that provides enrollment by  plan for each state, as of April. Using additional CMS data, we identified  the parent carrier for each plan and calculated the market share held by  the largest and the three largest Medicare Advantage carriers in each  state for each year. We conducted reliability testing of the Medicare  Advantage state level enrollment data, including tests for missing data  and comparisons to previously published information related to market  share, and determined that it was sufficiently reliable for our purposes.  While we present data from these markets as points of comparison with  FEHBP, the markets have substantive differences and do not offer perfect  comparisons. For example, in the large group market data, federal  agencies participating in FEHBP were considered large group employers  and FEHBP’s approximately 8 million enrollments were included in the  data carriers reported for the large group market. In addition, employers  participating in the large group market are providing coverage options for  many fewer employees than FEHBP, while often offering fewer plan  options. Medicare Advantage provides coverage for a larger population of  enrollees (17.6 million) compared to FEHBP. Medicare Advantage  enrollees are typically older and more likely to be on a fixed income than  federal employees and their dependents. Additionally, the 17.6 million  Medicare Advantage enrollees in 2016 represents about one-third of all  Medicare enrollees; the remaining two-thirds are enrolled in traditional  Medicare.

To describe the potential effects of allowing OPM to contract with a  greater variety of health plan types than are currently offered in FEHBP,  we interviewed OPM officials and reviewed relevant federal laws, FEHBP  policies, and other documents related to the potential effects of expanding  OPM’s contracting authority. We also interviewed 11 FEHBP  stakeholders and experts (stakeholders)—the Association of Federal  Health Organizations, two federal employee and retiree organizations, six  FEHBP carriers, and two FEHBP subject matter experts—and reviewed  supplementary documents the stakeholders provided. For additional  context on the effects of adding new plans to a health care market, we  interviewed members of the American Academy of Actuaries and officials  from the California Public Employees’ Retirement System. In addition to  the information obtained from OPM and FEHBP stakeholders, we also  reviewed available estimates of the financial effects of expanding OPM’s  contracting authority, including two studies we identified from Avalere  Health and the Center for Health and Economy on the potential effects if  OPM were to use such authority to add regional PPO plans to FEHBP.  We also reviewed relevant research related to consumer choice and  decision-making in health care.

We conducted this performance audit from April 2016 to October 2017 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.

FEHBP was established primarily to help the government compete with  private-sector employers in attracting and retaining talented and qualified  workers. As indicated by the legislative history of the original FEHBP  statute, lawmakers wanted enrollees to exercise choice among various  plan types and, by using their own judgment, select health plans that best  meet their specific needs. While participation in FEHBP is voluntary, in  2015, 85 percent of federal workers and 90 percent of federal retirees  were enrolled in the program.

Each FEHBP carrier offers one or more plans, and these plans can have  up to three options, or levels of benefits, depending on which type of plan  is being offered. Although they may differ in the specific benefits they  provide, all FEHBP plans cover basic hospital, surgical, physician,  emergency, and mental health care, as well as childhood immunizations  and certain prescription drugs. However, FEHBP plans offer different  levels of benefits, with many plans offering a choice between a more expensive plan option, which offers a higher level of coverage, and a less  expensive plan option, which offers a lower level of coverage. FEHBP  enrollees can purchase individual or family coverage. Beginning in 2016,  enrollees could also purchase coverage for themselves and one eligible  family member, referred to as “self plus one” coverage. FEHBP enrollees  can change health care plans during an annual open enrollment period or  at other times if they experience a qualifying life event, such as a change  in family status. OPM data indicates that between 2005 and 2015, the  annual percentage of FEHBP enrollees who changed their plan  enrollment by choice—rather than because of mergers or plan  terminations—ranged from 5 to 7 percent.

The FEHBP statute limits the program to four specific plan types: (1) one  service benefit plan—a government-wide plan with two levels of benefits;  (2) one government-wide indemnity benefit plan; (3) employee  organization plans; and (4) and comprehensive medical plans—also  known as HMO plans. OPM generally refers to these plan types as  either FFS plans (the service benefit plan and the employee organization  plans), or HMO plans (comprehensive medical plans). Within the  categories of FFS and HMO plans, there can be significant variation in  the plan designs and enrollee cost sharing. Most FFS plans have PPO  arrangements, which usually have lower out-of-pocket expenses (i.e., a  smaller copayment and/or a reduced or waived deductible) when  enrollees use providers within the plan’s preferred network. Compared  with HMOs, PPOs typically offer their enrollees a greater choice of  providers and have less plan management of the care that enrollees  receive. HMOs provide or arrange for comprehensive health care  services on a prepaid basis through designated plan physicians,  hospitals, and other providers in particular locations. Each HMO sets a  geographic area for which health care services will be available. Some  HMOs offer a point of service product that offers FEHBP enrollees the  choice of using a designated network of providers or using non-network  providers at an additional cost.

Additionally, in 2003 and 2005 respectively, FEHBP also began offering  consumer-driven health plan (CDHP) and high-deductible health plan  (HDHP) designs that are coupled with a tax-advantaged account to help  enrollees pay for qualified medical expenses. Any of the FEHBP plan  types may be offered with a CDHP or HDHP design, and therefore  CDHPs and HDHPs can be either FFS or HMO plans. Enrollees in  typical CDHPs have responsibility for certain up-front medical costs, an  employer-funded account that enrollees may use to pay these up-front  costs, and catastrophic coverage with a high deductible. CDHP enrollees  receive full coverage of in-network preventive care. HDHPs offer low  premiums but higher deductibles and annual out-of-pockets limits  combined with a tax-advantaged account. HDHPs can have first dollar  coverage (no deductible) for preventive care and higher out-of-pocket  copayments and coinsurance for services received from non-network  providers.

OPM is responsible for negotiating health benefits and premiums with  FFS and HMO plans. Each year, OPM sends a letter to all approved and  participating FFS and HMO plans—its annual “call letter”—to solicit  proposed benefit and premium changes for the next calendar year, which  are due by the end of May. The descriptions of both covered and  excluded benefits are incorporated into the final contracts. Each plan  subsequently prints brochures describing the benefits and costs  according to a standard format, as specified by OPM. The brochures are  binding statements of benefits and exclusions that plans must follow as  parties to FEHBP contracts. Those plans meeting the minimum  requirements specified in the statute and regulations may participate in  the program and their contracts may be automatically renewed each year.

The federal government and FEHBP enrollees generally each bear a  portion of the cost of FEHBP plan premiums. By statute, the  government generally pays 72 percent of the weighted average premium  of all health benefit plans participating in FEHBP, but no more than 75  percent of any particular plan’s premium, while enrollees pay the  balance. Premium prices vary across plans and within plans and  depend on whether an enrollee is enrolled in self-only, family, or self plus  one coverage. The premiums are intended to cover enrollees’ health care  costs, plans’ expenses, reserves, and OPM’s administrative costs.

Although there has been some minor fluctuation in the number of FEHBP  enrollees over time, total program enrollment has remained around 8  million enrollees since 2000. As the Congressional Research Service has  reported previously, FEHBP enrollment is concentrated among a small  number of carriers and BCBSA has the largest share of total program  enrollment by far. See figure 1 for the total FEHBP enrollment and  enrollment market share of the top five carriers in the program from 2000  through 2015.

The Number of Available FEHBP Plan Offerings Increased Since 2007 and Enrollment Was Increasingly Concentrated Available FEHBP Plan Offerings Generally Increased in Recent Years, although Variation Existed among Counties

The number of plan offerings available to FEHBP enrollees generally  increased from 2007 through 2015. In 99 percent of counties nationwide,  enrollees had more plan offerings in 2015 than they had in 2007. The  median number of plan offerings available in a county increased from 19  in 2007 to 24 in 2015. Most of these offerings were the nationwide FFS  plans that are available in all counties. There were 17 such plan  offerings in 2007 and 19 in 2015. The remaining plan offerings were  HMOs that were available in more limited areas. While the total number of  HMO plans that participated in FEHBP decreased from 2007 through  2015, the median number of HMO plan offerings in a county increased.  This suggests that those HMO plans in FEHBP in 2015 generally  participated in more counties than was the case in 2007. (See table 1 for  a comparison of plan offerings in 2007 and 2015.)

Despite increases in the availability of the median number of HMO plan  offerings in a county, there was wide variation in the number of HMO  offerings available to enrollees in a given county. For example, while FFS  plan offerings were available nationwide, in some counties enrollees had  no HMO plan offerings. Since 2007, however, the number of counties  without any HMO plan offerings available declined from 18 percent to less  than 2 percent in 2015. Most counties had a couple of HMO plan  offerings, and some counties had at least 10 HMO offerings. For  example, in 2015, enrollees in one county in New York had 15 HMO plan  offerings, giving enrollees a total of 34 offerings from which to select  coverage. (See fig. 2 for the range of available HMO plan offerings  among counties across all years.)

Regarding reasons for the variation in available FFS and HMO plan  offerings, OPM officials told us that plans participating in FEHBP enter  and withdraw based on internal business decisions and often in response  to changing economic conditions. For example, according to OPM  officials, some plans may enter the program with the expectation of  gaining a target market share. OPM officials also noted that decreases in  plan participation in the past may have been a response to premium  increases that impacted plans’ ability to effectively compete. In addition,  a 2012 OPM report noted that many prominent HMO plan carriers have  reduced the number of states in which they participated since 1985.

Market Share Held by the Largest FEHBP Carrier in Each County, Generally BCBSA, Increased from 2000 through 2015

FEHBP enrollment within counties generally became more concentrated  from 2000 through 2015, although most of that growth occurred prior to  2007. The share of the market held by the largest carrier increased from a  county median of 58 percent in 2000 to 70 percent in 2007, to 72 percent  in 2015. Similarly, the combined median county market share of the three  largest carriers increased from 86 to 90 percent over the same time  period. However, we observed that the median market share held by the  second and third largest carrier generally decreased over time. This  suggests that the increases in combined market share held by the three  largest carriers were generally due to increases observed in the single  largest carrier. Although there was little change in the median county  market share of the top five carriers, these carriers accounted for nearly  all enrollments in a county in each of the years we examined. (See fig. 3  for a comparison of the market share held by the three largest carriers  over time.)

We found that these increases in concentration were widespread. Overall,  from 2000 through 2015, almost 90 percent of counties experienced an  increase in the market share held by the largest carrier. Over this period,  the percentage of counties in which the largest carrier held at least half of  the market also increased—from 70 percent in 2000 to 93 percent in  2015. Additionally, the proportion of counties where at least 80 percent of  the market share was held by the top three carriers increased from about  76 percent of counties in 2000 to 94 percent of counties in 2015. (See  fig. 4 for maps showing the market share of the largest carrier in each  county in 2000 and 2015.)

Similar to the combined median county market share of the top five  carriers, nationwide FFS plans’ combined median county market share  accounted for almost all FEHBP enrollment and showed a slight increase  from 97 percent in 2000 to 99 percent in 2015, although variation existed  in some counties. Comparatively, the combined median county market  share held by HMO plans decreased from 6 percent to 2 percent. In  addition, in each year since 2000, 16 to 30 percent of counties had all of  their FEHBP enrollment in FFS plans, and, in years for which we had  HMO plan availability data, almost all of these counties offered at least  one HMO plan offering. At the same time, we observed a small number  of counties each year where HMO plans’ combined market share was at  least 50 percent.

BCBSA was the largest carrier in almost all counties nationwide and the  share of these markets held by its two nationwide FFS plan options  increased from 2000 through 2015. While BCBSA was already the largest  carrier in 93 percent of counties in 2000, by 2015 it was the largest in 98  percent of counties. Over this same time period, the median county  market share held by BCBSA also increased—from 58 percent in 2000 to  72 percent in 2015. Most of BCBSA’s 14 percent market share increase  occurred between 2000 and 2008.

Other carriers had significantly smaller median county market shares, but  they had the highest share in a certain limited number of counties.

The Government Employees Health Association, Inc. (GEHA),  another carrier offering nationwide FFS plans, had the second highest  program-wide market share in 2015, and an 8 percent median county  market share. GEHA held the second or third largest market share in  77 percent of counties in 2015, reaching as high as 65 percent of the  county market share, for example, in a county in Texas, but was the  largest carrier in less than 1 percent of counties.

Kaiser Permanente—which offers HMO plans—was the third largest  carrier program-wide in 2015 and held the largest market share  among HMOs (6 percent), though its market share decreased slightly  over time. In counties where a Kaiser Permanente plan was available  in 2015 (fewer than 200 out of more than 3,000 counties nationwide),  those plans had a median county market share of 8 percent; however,  in some counties Kaiser Permanente plans held a larger market  share, for example, reaching as high as 64 percent in one county in  California. In counties where Kaiser Permanente plans were available  in 2015, it was the largest carrier 8 percent of the time and the second  or third largest carrier in a majority of cases.  (See table 2 for a description of market share and position for the three  carriers with the largest program-wide market share within FEHBP.)

BCBSA’s increased FEHBP market share may be due to a number of  factors. For example, officials from several FEHBP carriers told us that  BCBSA’s market share performance was tied to several factors, including  brand recognition, comparably favorable plan premiums, and enrollee  population characteristics. According to an OPM report, another factor  contributing to BCBSA’s increased market share was the introduction of  the Basic option to the Service Benefit Plan in 2002. Compared to its  Standard option, this nationwide FFS plan option restricts enrollees to a  more narrowly defined provider network (with some limited exceptions)  and offers lower premiums, thereby broadening BCBSA’s ability to  compete with other lower cost plans. As shown in table 3, while  program-wide enrollments in BCBSA’s nationwide FFS plan options have  increased by 32 percent following the introduction of the Basic option,  enrollments in the Standard option decreased, suggesting that enrollees  are shifting to the Basic option or plans offered by other carriers.

In addition, a study published in 2012 noted that BCBSA market  concentration was the possible outcome of the carrier’s established  provider network and lower relative administrative costs. For examples  of BCBSA’s and other carriers’ premiums, plan offerings, and market  shares in 2015, in select counties, see appendix I.

FEHBP Market Share Concentration among the Largest Carriers Was Generally Similar to the Large Group Market and More Concentrated than Medicare Advantage

The combined market share for the three largest FEHBP carriers in a  state was generally similar to the large group market and higher than  Medicare Advantage. As shown in figure 5, in 2014, the median state  market share for FEHBP was 89 percent compared to 90 percent in the  large group market and 74 percent for Medicare Advantage. And, the  range of state market shares held by the three largest carriers in  Medicare Advantage and the large group market (69 and 62 percentage  points, respectively) was wider than in FEHBP (23 percentage points).  However, programmatic differences between the three selected markets,  such as varying enrollee demographics, market sizes, and program  designs, make it difficult to draw conclusions about these contrasting  market trends.

For each market and each year, the 50 states and the District of  Columbia were ranked from highest to lowest market share for the  combined three largest carriers in each state and then divided into four  groups based on those rankings.

FEHBP enrollment data could not be separated from the overall large  group market data used to calculate state-level market share in prior GAO  reports. In 2014, we estimated that FEHBP plans accounted for about 20  percent of the 44 million total enrollments in the large group market  nationally.

Compared to Medicare Advantage and the large group market, the state  market shares held by the largest carrier in FEHBP generally held a  larger share of the market. For example, in 2014, the median market  share held by the largest carrier in a state was higher in FEHBP (75  percent) than both Medicare Advantage (35 percent) and the large group  market (59 percent).

Stakeholder Opinions and Cost Estimates Do Not Offer Clear Consensus about the Potential Effects of Expanding OPM’s Contracting Authority

Stakeholders Generally Supported Expanding OPM’s Authority, but Said Using That Authority to Add Regional PPO Plans Could Have Negative Effects

Seven of the 10 stakeholders we interviewed, and who commented on  OPM’s contracting authority, generally supported expanding OPM’s  contracting authority to allow it to contract with a greater variety of health  plan types than are currently offered in FEHBP. Stakeholders we  interviewed that offer HMO plans generally supported this expansion.  However, the 2 stakeholders that offer nationwide FFS plans and 1  stakeholder that represents federal employees opposed it. Most of the  concerns expressed by these 3 stakeholders were related specifically to  the potential effects of OPM adding regional PPO plans to FEHBP.

Five of the seven stakeholders we interviewed who supported expanding  OPM’s contracting authority said that adding additional plan types could  result in both positive and negative effects. In terms of positive effects,  one stakeholder said the authority could potentially allow OPM to offer  different types of plans—such as value-based plan designs and  accountable care organizations—that could lead to improved benefit  options and health outcomes for enrollees. One stakeholder also told us  that OPM’s expanded authority would enable the agency to improve  transparency by allowing plans to contract with OPM as the type of plan  they actually are, rather than fitting into outdated statutorily established  categories, which the stakeholder characterized as an “antiquated  labeling system.” Another stakeholder said that participation by new plans  in FEHBP would foster competition and help keep health plan costs  down. One stakeholder also noted that if plan expansion would only be  undertaken when it is in the best interests of FEHBP and its enrollees— as OPM has indicated would be the case—there was little or no downside  to such expanded authority. Additionally, in April 2013, three FEHBP  carriers that offer HMO plans sent a letter to Congress in favor of  expanding OPM’s authority, citing that it would “ensure OPM has the tools  it needs to lower costs and provide federal workers access to innovation,  choice, and value” and would allow more competition in the program.

Some stakeholders we interviewed, however, suggested that any positive  effects of expanding OPM’s authority and adding new plan types could be  limited due to other aspects of FEHBP that affect competition and  discourage participation by carriers. In particular, these stakeholders cited  concerns related to costs associated with FEHBP enrollees who are  Medicare-eligible but who do not enroll in Medicare, and the formula that  determines the government’s contributions to enrollee premiums.  According to these stakeholders, this creates unfair competitive  advantages for the nationwide plans and BCBSA in particular. They also  cited FEHBP’s system for assessing the performance of participating  carriers, which they said discourages competition and participation by  carriers in FEHBP, particularly for certain HMO plans. OPM reported that  it was open to considering some program changes related to these  concerns; however, some proposed changes could require changes to  the FEHBP statute. For more information about stakeholder comments  regarding these other aspects of FEHBP, see appendix II.

Some of the 10 stakeholders we interviewed and who commented on  OPM’s contracting authority also identified other potential negative effects  that could occur with expanding OPM’s contracting authority. For  example, 1 stakeholder said that an increase in plan types offered could  lead to a subsequent increase in OPM’s administrative costs. In addition,  several of these stakeholders said that adding more plans to FEHBP  would exacerbate an existing problem of choice overload for enrollees.  One of the stakeholders said that FEHBP enrollees are already confused  by the number of available plan offerings, and that the current information  provided to enrollees does not allow for easy comparison of their choices.  They noted that additional expansion of offerings will only complicate  enrollees’ plan analysis.

Consistent with these concerns, studies that we reviewed related to  consumer choice and decision-making processes in health insurance  markets suggest that adding additional plans may not always yield  positive effects or improve competition. For example, a 2016 report by the  RAND Corporation found that health insurance consumers are unlikely to  change plans, even as better choices become available. Additionally, a  2009 study examining the Swiss health insurance market similarly found  that as the number of choices offered to individuals grows their  willingness to switch plans declines. The study found persistently low  rates of plan switching despite high variation in premiums between plans,  and found that more choice inhibited plan switching. It concluded that  having a large number of plans to choose from likely reduces the  effectiveness of consumer decision making, and that simplifying health  plan decision making by reducing the number of choices might result in  more price competition among insurers, and benefit consumers.

Additionally, 6 of the 10 stakeholders we interviewed and who  commented on OPM’s contracting authority said that there would  potentially be negative effects if OPM were to use the expanded authority  to add regional PPO plans to FEHBP. For example, 5 of these 6  stakeholders said there could be instability and higher premiums in  FEHBP if new regional PPO plans were able to “cherry pick” low cost  areas in which to participate. This was of particular concern to 1 of the 2  stakeholders we spoke to who offer nationwide plans. Because they offer  the same premiums nationally, they said the lower-cost areas of the  country help subsidize the premiums of the higher-cost areas. If these  nationwide plans lost customers in lower-cost areas to regional PPO  plans, then their premiums would likely rise. These 2 stakeholders and a  third said, therefore, that adding regional PPO plans could result in  nationwide carriers discontinuing their coverage due to their inability to  compete with regional plans. According to 1 stakeholder that offers a  nationwide FFS plan, if the nationwide carriers dropped out of the  program, plan offerings would be significantly reduced in certain areas of  the country and some areas could potentially be left with no offerings at  all. Additionally, in 2014 and 2015, six nationwide FEHBP carriers,  including the two we interviewed, sent letters to Congress expressing  their opposition to legislation that would add new plan types in FEHBP. In  the letters, they cited negative effects such as program destabilization,  increased premiums, and fewer consumer choices—all of which were  specifically tied to the proposal to add regional PPO plans to FEHBP.

Two of the 10 stakeholders we interviewed and who commented on  OPM’s contracting authority, however, said that adding regional PPO  plans to FEHBP would have positive effects. For example, 1 of these  stakeholders that offers HMO plans and referred to FEHBP’s plan type  labels as antiquated noted that this would enable them to promote their  existing FEHBP products—currently categorized as HMO plans—more  appropriately as regional PPO plans. This stakeholder said the current  categorization causes enrollees to erroneously believe their plans are  more restrictive than the plans listed as nationwide FFS plans.

When we shared these stakeholder concerns about expanding OPM’s  contracting authority with OPM officials, they told us that the agency has  existing strategies and is working towards implementing additional ones,  which officials said should allow it to address many of these concerns.  For example, OPM officials said in January 2017 that the agency was in  the process of building models that would allow it to simulate the impact  that adding new plan types would have on FEHBP, but that the agency is  still years away from being able to make such assessments. The officials  said that the agency would only seek to introduce new plan types that it  determines to be in the best interests of FEHBP enrollees and the federal  government. With regards to enrollee confusion over the number of plan  choices, the OPM officials said that the agency is improving the tools  enrollees can use to learn about the available plans. For open season in  2016, the agency released what it considers to be a new and improved  Plan Comparison Tool on its website that enables enrollees to gain more  knowledge about their health plan options before making a selection.  According to the officials, some of the improved functions of the tool  include more details about the plan benefits and services, clearer  definitions of the health insurance terms, and easier ability to compare the  plans. Officials also told us that they expect to make more improvements  to the tool in future years based on feedback from the FEHBP enrollees  who use it. OPM officials said the agency would continue existing plan  negotiation strategies that, among other things, would prevent plans from  “cherry picking”—that is, offering products in only the most profitable  service areas—by ensuring that new carriers provide services in  contiguous regions that include both low- and high-cost areas.  Additionally, related to the concern that nationwide plans might withdraw  from the program if regional PPO plans were introduced, OPM officials  noted that if, for example, BCBSA were to cancel its nationwide plan  options, another carrier might step up to gain the service benefit plan  designation and provide nationwide service.

Estimates of the Financial Effects of Expanding OPM’s Contracting Authority Differed on Whether Costs Will Increase or Decrease

We identified three significantly differing estimates of the financial effects  on the federal budget that expanding OPM’s FEHBP contracting authority  would have. However, these estimates are based on different  assumptions about a variety of factors such as premium changes,  administrative costs, and enrollment, and only limited information was  available about the methodologies used for each set of estimates. It is  also important to note that the assumptions used in developing these  estimates are subject to professional judgment and have inherent  uncertainty regarding whether the assumed scenarios will be realized.  The three estimates include:

The President’s Budget for fiscal year 2017 estimated that expanding  FEHBP to a greater variety of plan types would save $88 million from  2017 through 2026. According to information provided by OPM, the  estimate considered the effect of a broad expansion of OPM’s  authority to add new plan types, and OPM did not indicate whether  the agency specifically considered the effect of adding regional PPOs  to FEHBP when developing this estimate. OPM officials told us that  these savings were based on a number of assumptions, including an  estimate of the number of enrollees that will migrate to new plan types  based on previous FEHBP experience and projecting a medical loss  ratio of 90 percent for the new plan types added to FEHBP.  However, in follow-up with the agency, OPM officials were not able to  provide us with more detailed information about how these savings  were calculated. The Congressional Budget Office, in its analysis of  the budget proposal, estimated a range from $50 million in savings to  $50 million in costs over the 10-year period.

A 2014 study from the Center for Health and Economy that examined  the effects of introducing regional PPOs to FEHBP across three  scenarios estimated cost savings ranging from $1.2 to $2.1 billion  over 7 years (2015 to 2021). The study provided limited information  about the data, assumptions, and methodology the center used to  develop its estimates. The study did explain that the center modeled  the projected impact on enrollment, average premiums, and the  federal budget of adding regional PPOs to FEHBP using three  different sets of assumptions about how expensive the newly  introduced regional PPO plans would be. Under each scenario, the  center estimated shifts over time in enrollment from existing FEHBP  plan designs (FFS, HMO, CDHP, and HDHP) to the new PPO plans— and assumed that these new plans would achieve 10 percent of the  market share throughout the analysis period. The study also projected  decreases in average FEHBP premiums and a corresponding  reduction in total government contributions in each scenario.

A December 2013 study conducted by Avalere Health at BCBSA’s  request specifically examined the effect of adding regional PPOs into  FEHBP and estimated an increase in spending of $7.8 billion over 10  years (2014 to 2023). In developing its estimates, the study noted that it  assumed that the BCBSA national plans dissolve and would break into  regional plans in response to new regional plan competition. The study  stated that the $7.8 billion in increased costs was based on an  assumption that both regional PPOs and BCBSA regional plans would  have higher administrative costs as compared to BCBSA’s national plans.  The study estimated that these costs would be offset slightly by an initial  anticipated decrease in premiums resulting from new plans introducing  competition into these regions.

We provided a draft of this product to OPM for comment. The agency did  not provide any comments.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to OPM and other interested  parties. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov. If you or your staff have any questions  about this report, please contact me at (202) 512-7114 or  dickenj@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  III.

Appendix I: Federal Employees Health Benefits Program (FEHBP) Plan Attributes for Selected Counties in 2015

In table 4, we present information about a selection of counties that reflect  a range of FEHBP attributes, but which are not intended to be a  representative sample of all counties. We chose counties with a range of  total enrollments, market shares held by different plan offerings (with  different enrollee premiums), and number of health maintenance  organization (HMO) plan offerings.

Appendix II: Stakeholder Opinions about Other Federal Employees Health Benefits Program Aspects That Affect Competition

Some of the stakeholders we interviewed suggested that any positive  effects of expanding the Office of Personnel Management’s (OPM)  contracting authority and adding additional plan types to the Federal  Employees Health Benefits Program (FEHBP) could be limited because  of other aspects of the program that affect competition and discourage  carrier participation. In particular, stakeholders cited concerns related to:  Medicare-eligible enrollees, the government contribution formula for  FEHBP premiums, and FEHBP’s plan performance assessment system.

Medicare-eligible enrollees. Six of the 11 stakeholders we interviewed  suggested that problems associated with Medicare-eligible enrollees  negatively affect FEHBP premiums, and 5 of the 6 noted these problems  create an unfair competitive advantage for the nationwide FEHBP plans.  These stakeholders suggested that because certain older, Medicare- eligible FEHBP enrollees tend to incur higher health care costs, they drive  up premiums. Some stakeholders noted that plans—in particular, health  maintenance organizations (HMOs) that offer service in areas with higher  concentrations of older enrollees—experience challenges keeping  premium rates competitive with the nationwide plans like those offered by  the Blue Cross Blue Shield Association (BCBSA). Additionally, 3  stakeholders we interviewed that offer HMO plans pointed specifically to  costly retirees who opt not to enroll in in Medicare coverage of outpatient  services, known as Part B, making it difficult for them to compete. FEHBP  retirees eligible to enroll in Medicare are not required to do so, and some  maintain only their FEHBP coverage instead. While there is no penalty for choosing not to enroll in Medicare, retirees who later decide to enroll  in Part B must pay a penalty. For retirees in FEHBP who choose not to  enroll in Medicare, their FEHBP plan remains the primary payer and they  continue to receive the same level of coverage through that plan as they  did prior to becoming eligible for Medicare. Two stakeholders said that  charging the same rates to the retiree population without Part B and the  active employee population—a scenario that occurs in FEHBP—is not  typical of the private, commercial insurance market.

In a recent publication, one of the stakeholders we interviewed reported  that these types of issues have been a problem for FEHBP since its  inception, and that it is therefore in the interest of every enrollee to join  plans with the lowest proportion of high-cost retirees. The stakeholder  noted that this distorts plan selection and alters results, noting that while  the Kaiser plans on the West Coast do an outstanding job of keeping  costs low for enrollees, they have a disproportionate number of retirees  who correctly understand that they do not need to enroll in Medicare.  According to the stakeholder, this puts Kaiser at a disadvantage since it  has to cover the age-related costs of these enrollees.

Stakeholders we interviewed offered a number of potential solutions for  OPM to address these challenges. For example, two stakeholders  suggested that OPM could introduce some form of risk adjustment into  FEHBP to assist plans that have a disproportionate number of Medicare- eligible enrollees. Risk adjustment provides a way to correct for  imbalances that occur when some carriers attract a larger share of  enrollees at low risk for expensive claims and other carriers attract a  larger share of enrollees at high risk for expensive claims. One of the two  stakeholders suggested that FEHBP could introduce a budget-neutral risk  adjustment program that adjusts the amount of a plan’s premium that is  paid by the government based on a plan’s ratio of age-65 retirees with  Medicare (Parts A, B, or both) to those without. The stakeholder said that  this would greatly improve plan competition over time.

OPM officials agreed with stakeholders that providing nationwide service  is an advantage for carriers like BCBSA in high cost areas, but noted that  it is a disadvantage in low cost areas, and said that, similarly, a lack of  risk adjustment in the program works both in favor of and against BCBSA  and HMOs. OPM officials said, for example, that the BCBSA Standard  option would likely benefit from risk adjustment, while the BCBSA Basic  option would likely be negatively impacted. OPM officials also said that  risk adjustment could be a way for the agency to compensate plans that  have enrollees with higher than average risk and to improve competition  by discouraging plans from avoiding those higher risk enrollees. However,  officials noted that risk adjustment would require the agency to have  reliable claims-level data from each of the plans, which the agency does  not have. In January 2017, OPM officials said that the agency is in the  process of collecting claims data from FEHBP carriers and expects to  have a sufficiently reliable data set by July 2018. OPM officials also noted  that before implementing any form of risk adjustment in FEHBP they  would have to use that data to determine the effects on the program, and  they would also need to determine whether doing so would require any  legislative changes.

Some stakeholders we interviewed also suggested retirees could be  incentivized to enroll in Medicare Part B (for example, by waiving the  Medicare Part B late enrollment fee for FEHBP retirees, or by having  FEHBP plans subsidize Part B premiums), and two stakeholders went as  far as suggesting that Medicare enrollment should be required for those  eligible. OPM officials said that they already encourage enrollment in  Medicare Part B; in particular, they noted that in their annual call letters  they have encouraged carriers to offer benefits in their plans that  incentivize Medicare enrollment for eligible FEHBP enrollees. However,  OPM officials said that they are open to pursuing additional approaches  that would encourage FEHBP retirees to fully participate in Medicare  coverage.

The government contribution formula for FEHBP premiums. Five of  the 11 stakeholders we interviewed suggested that the government  contribution formula for FEHBP premiums negatively impacts program  competition. The FEHBP statute establishes the amount the government  contributes towards the costs of FEHBP plan premiums. By statute, the  government pays an amount equal to 72 percent of the weighted average  premium across all FEHBP plans, but no more than 75 percent of any  particular plan’s premium. Enrollees generally pay the remaining  premium. As such, enrollee contributions will generally be 25 percent for  lower-premium plans and can be higher than 28 percent if their plan’s  premiums are significantly higher than the weighted average FEHBP  plan.

Some stakeholders we interviewed noted that BCBSA has an advantage  under the contribution formula, and that the existing formula does not  incentivize enrollees to choose low cost plans. Two stakeholders noted  that BCBSA’s large program market share—66 percent of total program  enrollment in 2015—allows it significant influence over the government  contribution amount. Therefore, several stakeholders suggested that  BCBSA’s enrollees end up paying closer to the minimum of 25 to 28  percent of their premium’s costs. Conversely, other plans—particularly  HMOs operating in high cost areas—may have premiums that are higher  than BCBSA’s and the weighted program average, resulting in their  enrollees having to pay considerably more than 28 percent of their total  premium’s costs. Two stakeholders said that, as a result, carriers may  exit the program once their premiums exceed the weighted program  average. Additionally, two stakeholders we interviewed suggested that  the formula does not incentivize enrollees to choose lower cost plans  because the maximum government contribution amount is 75 percent— regardless of whether the plan’s premiums are less than the weighted  FEHBP average. See table 5 for examples of how the government  contribution formula affects the share of premiums that enrollees pay.

Some stakeholders we interviewed proposed solutions to the concerns  they identified with the government contribution formula. For example,  two stakeholders suggested that the formula be changed so that plans  that cost less than 72 percent of the weighted average would be covered  either in full or to a greater extent by the government. They noted that this  would incentivize enrollees to choose lower cost plan options and would  strengthen the competitiveness of lower-cost plans—particularly as  compared to the BCBSA options. One stakeholder also suggested that  the government contribution formula could be varied by metropolitan  regions (i.e., vary government and enrollee premium contributions based  on regional health care costs), which they suggested would lead to more  carriers introducing more plan offerings overall. While the government  contribution formula is set in statute, OPM officials said that they are open  to pursuing changes that would encourage FEHBP enrollees to select the  health plans that meet their current and expected health care needs at  affordable costs.

FEHBP plan performance assessment system. Five of the 11  stakeholders we interviewed cited concerns with OPM’s system for  assessing FEHBP plan performance, with 2 noting that it discourages  competition and participation in FEHBP. OPM announced a new  methodology for assessing plan performance in a letter to carriers in  2015, noting that the agency would use a discrete set of quantifiable  measures to examine aspects of contract performance and link this  performance assessment to the profit plans receive. OPM reported in  the letter that it implemented performance assessment to move away  from paying for procedures or services and towards paying for value and  prevention of disease. It also noted that the system was intended to  create a more objective performance standard and provide more  transparency for enrollees. Stakeholders we interviewed, however, were  particularly critical of the way in which community-rated plans are  assessed in this new system, noting that plans are penalized rather than  rewarded. Regulations specify a process by which OPM may withhold a  portion of payments to a community-rated carrier based on plan  performance thereby reducing the carrier’s profits.  Two of these  stakeholders said that the only way for a plan to not receive a financial  penalty is to get a perfect score on the assessment and said that it is  impossible to receive such a score. Therefore, one stakeholder noted that  the system is extremely discouraging to carriers, particularly to new  carriers considering joining FEHBP. Additionally, two stakeholders said  that the measures used in the assessment—Healthcare Effectiveness  Data and Information Set (HEDIS) and Consumer Assessment of  Healthcare Providers and Systems (CAHPS) measures—favor certain  types of HMOs. For example, one stakeholder noted that some carriers  can have problems meeting the HEDIS measure for breast cancer  screening rates, because they have to get patients to go to a separate  mammography center while carriers that are part of more integrated  health systems can offer mammograms in-house.

With regard to how the plan performance assessment system could be  improved, stakeholders we interviewed suggested that OPM should  switch to a reward or incentive-based system for community-rated  carriers. Several stakeholders suggested that OPM could implement a  system similar to the Medicare Advantage star ratings system. In  December 2016, OPM officials told us that they were listening to  community-rated plans’ concerns regarding the performance assessment  penalty and would consider adjustments to address these concerns. Then  in March 2017, in response to some of these concerns, OPM issued a  letter to FEHBP carriers proposing an update to the assessment of  community-rated plans that would allow carriers with high-performing  plans to avoid any financial penalties. Regarding the concern about the  use of HEDIS and CAHPS measures, OPM officials said that these  measures are well-established and commonly required by other  commercial and government payers, such as Medicare Advantage.  Nonetheless, OPM officials said that the plan performance system will  continuously be improved through the introduction of new measures and  the retirement of measures on which all FEHBP plans have achieved  satisfactory performance.

In addition to the contact named above, William Hadley (Assistant  Director), Kristi Peterson (Assistant Director), Christina Ritchie (Analyst in  Charge), Leonard Brown, William Garrard, Daniel Ries, and Said  Sariolghalam made key contributions to this report. Also contributing were  Sandra George, Emei Li, Yesook Merrill, Laurie Pachter, Vikki Porter,  Jennifer Rudisill, Frank Todisco, and Merrile Sing.

Private Health Insurance: In Most States and New Exchanges, Enrollees  Continued to be Concentrated among Few Insurers in 2014.  GAO-16-724. Washington, D.C.: September 6, 2016.

Private Health Insurance: The Range of Premiums and Plan Availability  for Individuals in 2014 and 2015. GAO-15-687. Washington, D.C.: August  10, 2015.

Private Health Insurance: Concentration of Enrollees among Individual,  Small Group, and Large Group Insurers from 2010 through 2013.  GAO-15-101R. Washington, D.C.: December 1, 2014.

Federal Employees Health Benefits Program: Oversight of Carriers’ Fraud  and Abuse Programs. GAO-14-39. Washington, D.C.: November 14,  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. Washington, D.C.: July 18, 2013.

Federal Employees Health Benefits Program: Premium Growth Has  Recently Slowed, and Varies among Participating Plans. GAO-07-141.  Washington, D.C.: December 22, 2006.

Federal Employees Health Benefits Program: First-Year Experience with  High-Deductible Health Plans and Health Savings Accounts.  GAO-06-271. Washington, D.C.: January 31, 2006.

Federal Employees Health Benefits Program: Early Experience with a  Consumer-Directed Health Plan. GAO-06-143. Washington, D.C.:  November 21, 2005.

Federal Employees Health Benefits Program: Competition and Other  Factors Linked to Wide Variation in Health Care Prices. GAO-05-856.  Washington, D.C.: August 15, 2005.

Federal Employees’ Health Plans: Premium Growth and OPM’s Role in  Negotiating Benefits. GAO-03-236. Washington, D.C.: December 31,  2002.

Federal Employees’ Health Program: Reasons Why HMOs Withdrew in  1999 and 2000. GAO/GGD-00-100. Washington, D.C.: May 2, 2000.

The Federal Employees Health Benefits Program (FEHBP) provides healthcare coverage to 8 million federal employees, retirees, and their dependents through health insurers that contract with the Office of Personnel Management.

OPM has reported that more health plan choice would benefit FEHBP. We found that, although more plan offerings have been available in recent years, enrollment has become increasingly concentrated. The median share of enrollment held by the largest FEHBP insurer in a county increased from 58% in 2000 to 72% in 2015. Blue Cross Blue Shield was the largest FEHBP insurer in 93% of counties in 2000 and 98% of counties in 2015.


KC-46 Tanker Modernization: Program Cost Is Stable, but Schedule May Be Further Delayed

The KC-46 tanker modernization program, valued at about $44 billion, is among the Air Force's highest acquisition priorities. Aerial refueling—the transfer of fuel from airborne tankers to combat and airlift forces—is critical to the U.S. military's ability to effectively operate globally. The Air Force initiated the KC-46 program to replace about a third of its aging KC-135 aerial refueling fleet. Boeing was awarded a fixed-price-incentive contract to develop the aircraft. Among other things, Boeing was contractually required to deliver 18 fully capable aircraft (KC-46 aircraft with 9 sets of wing aerial refueling pods that allow for simultaneous refueling of 2 aircraft) by August 2017. The program plans to eventually field 179 aircraft in total.

GAO was asked to monitor the KC-46 program because of problems Boeing is experiencing developing the aircraft. This is GAO's 7th report on the KC-46 program. This report assesses program progress and challenges toward achieving its cost goals and delivery schedule.

GAO analyzed cost, schedule, development, and test information contained in program documents; and discussed results with officials from the KC-46 program office, other defense offices, the Federal Aviation Administration (responsible for certifying the design of the KC-46), and Boeing.

The total acquisition cost estimate for the KC-46 refueling tanker aircraft remained stable over the last year at $44.4 billion. As shown in the table below, the estimate has decreased about $7.3 billion, or 14 percent, since the initial estimate. This decrease is due in part to stable requirements.

The program updated its delivery schedule in 2017 to allow Boeing to delay delivery of the first 18 fully capable aircraft from August 2017 to October 2018— 14 months. A schedule risk assessment, as well as GAO's analysis, however projects that deliveries could slip to May 2019, 21 months from the original schedule, if risks are not mitigated. See figure.

Boeing faces the following risks and challenges and is trying to address them:

updating test aircraft to the correct configuration to complete remaining tests;

completing flight tests at a pace that is almost double its monthly average;

updating test plans to reflect a more realistic schedule for certifying aircraft, such as F-16 fighters and C-17 cargo planes, to be refueled by a KC-46;

retrofitting production aircraft to their final configuration for delivery; and

fixing a critical deficiency to keep the boom from contacting receiver aircraft outside the refueling receptacle.

Because of the terms of the contract, Boeing, not the government, is responsible for nearly $1 billion in additional development costs already incurred. Boeing is also providing additional training for KC-46 pilots, among other things, to compensate the Air Force for delivery delays. Meanwhile, the Air Force is continuing to use KC-135 and KC-10 tankers for refueling missions.

GAO believes the Department of Defense should implement a prior recommendation to document lessons learned given the program's challenges.

The KC-46 aerial refueling tanker modernization program, valued at about  $44 billion, is one of the Air Force’s highest acquisition priorities and will  provide aerial refueling to Air Force, Navy, Marine Corps, and allied  aircraft. The program recently completed its seventh year of a 9-year  development program to convert an aircraft designed for commercial use  into an aerial refueling tanker. Aerial refueling—the transfer of fuel from  airborne tankers to combat and airlift forces—is critical to the U.S.  military’s ability to effectively operate globally. The Air Force contracted  with Boeing to develop, test, and provide initial delivery of 18 KC-46  tankers by August 2017. The program plans to eventually field 179 KC-46  aircraft in total. These aircraft are intended to replace roughly one-third of  the Air Force’s aging aerial refueling tanker fleet, comprised mostly of KC- 135 Stratotankers.

You requested that we continue monitoring the KC-46 program because  of problems Boeing is experiencing developing the aircraft. In this report,  we evaluate program progress and challenges toward (1) achieving cost  and performance goals and (2) meeting the delivery schedule. This is  GAO’s 7th report on the KC-46 program. See the Related GAO Products  page for a list of our previous KC-46 reports.

To assess progress toward achieving cost and performance goals, we  compared cost estimates established at the start of development to  current estimates. This data was contained in program documents such  as a defense acquisition executive summary report and acquisition  program baseline document. We also compared the latest estimates of  technical performance capabilities contained in program briefings to the  original goals. To assess progress toward meeting the delivery schedule,  we reviewed monthly schedule updates and compared them to the  original and current delivery schedule plans. We also tracked Boeing’s  planned and actual flight test activities and examined the risks to test  completion. We reviewed the 2017 Annual Report of the Director of  Operational Test and Evaluation. As part of our overall review, we  examined Defense Contract Management Agency quarterly assessments  of the KC-46 program and attended monthly meetings between the  program office and Boeing to obtain additional insight on program  progress. We visited two Boeing production facilities in Everett,  Washington. Finally, we interviewed officials from the Air Force’s KC-46  program office, other defense offices, the 412th test wing, the Federal  Aviation Administration (which is responsible for certifying the design of  the KC-46), and Boeing on progress made in 2017. We assessed the  reliability of cost, schedule, and test data by interviewing agency officials  knowledgeable about the data, and determined that the data were  sufficiently reliable for the purposes of this report.

We conducted this performance audit from August 2017 to April 2018 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.

In February 2011, Boeing won the competition to develop the Air Force’s  next generation aerial refueling tanker aircraft, the KC-46. The KC-46 will  allow for two types of refueling to be employed in the same mission—a  refueling boom that is integrated with a computer assisted control system  and a permanent hose and drogue refueling system. The boom is a rigid,  telescoping tube that an operator on the tanker aircraft extends and  inserts into a receptacle on the aircraft being refueled. See figure 1 for an  example of boom refueling.

The hose and drogue system is comprised of a long, flexible refueling  hose and a parachute-like metal basket that provides stability. Drogue  refueling is available via the centerline drogue system in the middle of the  aircraft, or via wing aerial refueling pods located on each wing. The pods  are used for simultaneous refueling of two aircraft.

To develop a KC-46 tanker, Boeing modified a commercial 767 aircraft in  two phases. In the first phase, Boeing modified the design of the 767 with  a cargo door and an advanced flight deck display borrowed from its 787  aircraft and is calling this modified version the 767-2C. The 767-2C is built  on Boeing’s existing production line. In the second phase, the 767-2C  was militarized and brought to a KC-46 configuration in a separate Boeing  facility. See figure 2 for a depiction of the conversion of the 767 aircraft  into the KC-46 tanker with the boom deployed and the flight certifications  needed at each stage.

The Federal Aviation Administration has previously certified the  airworthiness of Boeing’s 767 commercial passenger airplane (referred to  as a type certificate) and in December 2017, awarded the amended type  certificate for the 767-2C aircraft to Boeing. It is also responsible for  certifying the design of the KC-46 with a supplemental type certificate.  The Air Force is then responsible for certifying the airworthiness of the  KC-46 with a military certification, as well as certifying the KC-46 and  various receiver aircraft, such as F-16 fighters and C-17 cargo planes, for  refueling operations. Boeing must complete developmental testing to  support these certifications as well as to demonstrate that contract  specifications have been met. After the first 4 KC-46 aircraft are  delivered, the Air Force will complete operational testing to determine the  KC-46’s operational effectiveness and operational suitability for combat.

Boeing was awarded a fixed-price-incentive (firm target) contract for KC- 46 development, which includes the design, manufacture, and delivery of  four test aircraft. Barring any changes, the contract specifies a ceiling  price of $4.9 billion for Boeing to develop the first 4 aircraft, at which point  Boeing must assume responsibility for all additional costs. The contract  includes options to manufacture the remaining 175 aircraft with firm-fixed- price contract options for the first 2 production lots, and options with not- to-exceed fixed prices for production lots 3 through 13. For purposes of  this report, a production lot refers to a set number of aircraft that must be  built and delivered in a given time frame and procured with a specific year  of funding. For example, the first production lot includes 7 aircraft  procured with fiscal year 2015 funding that are to be built and then  delivered to the Air Force starting in 2018. The original contract also  required Boeing to deliver 18 fully capable aircraft by August 2017.

The Under Secretary for Acquisition, Technology and Logistics approved  the KC-46 program to enter low-rate initial production in August 2016.  Since then, the Air Force has exercised options for the first 3 production  lots for 34 aircraft totaling about $4.9 billion. Previously we reported that  in January 2017, Boeing and the program office updated the schedule to  reflect a 14-month delivery delay due to problems Boeing experienced  wiring the aircraft, design issues discovered with fuel system  components, a fuel contamination event, and test delays (see figure 3).

As we reported, instead of meeting the original August 2017 date, the  updated schedule shows Boeing would deliver the first 18 aircraft with  booms and centerline drogue systems between September 2017 and  February 2018. Then, the 9 wing aerial refueling pod sets would be  delivered separately by October 2018, at which point Boeing will have  delivered 18 fully capable aircraft.

Cost Estimates and Performance Capability Goals Remain Favorable, but a Critical Deficiency Has Not Yet Been Resolved

The KC-46 program’s total acquisition cost estimate remained stable over  the past year at $44.4 billion, which is about $7.3 billion less than the  original estimate. In addition, the aircraft is projected to meet all  performance capabilities. However, Boeing is currently trying to resolve a  critical deficiency it discovered in testing, which could affect performance.

Similar to last year, the Air Force estimates that the total program  acquisition cost for the KC-46, which includes development, procurement,  and military construction costs will be $44.4 billion. This is about $7.3  billion, or about 14 percent, less than the original estimate of $51.7 billion.  Average program acquisition unit costs have decreased by the same  percent because quantities have remained the same. Table 1 provides a  comparison of the initial and current quantity and cost estimates.

The Air Force decreased its cost estimate primarily because it has not  added or changed requirements and therefore there were fewer  engineering changes than expected. Program officials said the initial cost  estimate included a large amount of funding for possible requirements  changes, based on the Air Force’s experience with prior major acquisition  programs. Military construction cost estimates also decreased as the Air  Force has decided, for example, to reuse existing facilities at its operating  bases rather than build new ones.

Boeing Has Achieved Some Performance Goals and Others Are Projected to Be Met, though Additional Testing Is Needed

The program expects to meet all of its 21 performance goals. For  example, the aircraft is expected to be ready for operational use when  required at least 89 percent of the time and, once it is deployed for an  aerial refueling mission, be able to complete that mission 92 percent of  the time. In addition, the aircraft is now using less than 1,557 gallons of  fuel per flight hour, its fuel usage rate target. The program also closely  tracks the actual weight of the aircraft because weight has a direct effect  on the amount of fuel that can be carried. As of January 2018, program  officials told us that there are approximately 176 pounds of margin to the  operational empty weight target of 204,000 pounds. When we met with  them in December 2017, Boeing officials told us they do not expect the  aircraft to exceed the target weight. Appendix I provides a description of  each of the performance capabilities.

In some cases, the program will be tracking progress towards achieving  performance capabilities while the aircraft is in operation. For example,  the program set a reliability growth goal of 2.83 flight hours between  unscheduled maintenance events due to equipment failure by the time  the aircraft reaches 50,000 flight hours. As of November 2017, the  program had completed about 2,159 flight hours, achieving 1.8 hours at  that time. Program officials believe that the reliability will improve as  additional flight hours are completed and as unreliable parts are identified  and replaced.

The 2017 Annual Report by the Office of the Director of Operational Test  and Evaluation included a recommendation that the Air Force re-test the  KC-46 in an operationally representative condition to demonstrate that  aerial refueling systems could perform their required missions following  an electromagnetic pulse event. This type of testing is related to the  aircraft’s survivability performance goal, meaning the aircraft should be  capable of operating in a hostile environment, including after a nuclear  incident that delivers an electromagnetic pulse. The report stated that the  program powered down or removed critical mission systems during this  testing and that therefore, the KC-46’s capability to deliver fuel during or  immediately following an electromagnetic pulse was not fully tested.  Program officials stated that this testing was adequate to meet the initial  contract specifications. They also stated that the program is assessing  whether additional tests are needed to meet the new, more stringent  standards that were issued by the Department of Defense after the fixed- price contract was signed.

A Critical Deficiency Has Not Been Resolved

Boeing is currently working to resolve a high-priority deficiency related to  the performance of the aerial refueling boom that it discovered during  testing. According to the 2017 Annual Report by the Director of  Operational Test and Evaluation, analysis of boom aerial refueling testing  to date showed a significant number of instances where the boom nozzle  contacted the receiver aircraft outside the refueling receptacle. In many of  those instances, the aerial refueling operators were unaware that those  contacts had occurred. Boom nozzle contact outside the receptacle can  damage antennae or other nearby structures. It is especially problematic  for low-observable receiver aircraft, such as the F-22 fighter, because it  can damage radar-absorbing coatings. Program officials said that Boeing  is currently developing a software fix for the remote vision system that  would provide aerial refueling operators better visibility for refueling  operations to help avoid unintended boom contacts with receiver aircraft.  The officials also said that Boeing is responsible for the costs to develop  and retrofit the fix onto existing aircraft.

Boeing Is Likely to Experience Additional Delays in Delivering the First 18 Aircraft

Although Boeing schedule documents indicate that the company remains  committed to delivering 18 fully capable aircraft by October 2018, a  program office risk assessment, as well as our own analysis, project that  Boeing will not deliver the aircraft until around May 2019, if risks are not  mitigated. The company is taking steps to address several risks  associated with developmental testing, but challenges remain. Boeing,  not the government, is responsible for the cost of development delays  based on the terms of the fixed-price contract.

Schedule Risk Assessment Projects Additional Delays

A program office schedule risk assessment from June 2017 projects that  Boeing will not deliver the first 18 fully capable aircraft until May 2019, 7  months after the updated schedule and about 21 months later than the  original plan, if Boeing does not mitigate existing program risks. Boeing  has already missed delivery milestones in the updated schedule shown  earlier in figure 3, because it had not yet completed developmental  testing. Boeing still plans to deliver 18 fully capable aircraft by October  2018, but in a compressed time period. A comparison of the original,  updated, and schedule risk assessment delivery schedules are shown in  figure 4.

Boeing Is Taking Steps to Mitigate Schedule Risks

Boeing has efforts underway to mitigate several risks that threaten its  ability to deliver the first 18 fully capable aircraft by October 2018. These  key risks and efforts to address them are discussed below.

Test aircraft configuration: Boeing needs to update test aircraft to the  correct configuration before it can complete different types of testing  that remain. For example, according to program officials, Boeing  needs to ensure that test aircraft have up-to-date and approved  wiring, software versions, and aircraft parts prior to Federal Aviation  Administration testing for the supplemental type certificate and Air  Force testing for the required military certificate. At a more basic level,  Boeing also needs to finalize the design of the wing aerial refueling  pods to start developmental testing on that subsystem. According to  Boeing officials, the company and its wing aerial refueling pod  supplier had underestimated the level of design drawing details the  Federal Aviation Administration needed to review to certify that the  parts conformed to the approved design. Over the past 4 years, this  supplier has been negotiating with several key sub-tier suppliers for  the necessary documentation and has obtained most of it. Boeing has  co-located some of its employees with the supplier to provide  technical support to complete the remaining documentation for  certification. Boeing and the program office disagree on how long it  will take to reach that certification milestone. Boeing projects it will  have conformed wing aerial refueling pods to test in March 2018 and  program officials said there is risk to that time frame.

Flight test pace: Boeing plans to complete about 6,550 remaining  developmental flight test points by the end of June 2018 at a pace that  is nearly double its current average. For example, some test points  involve a KC-46 and receiver aircraft maintaining a specific airspeed  and altitude during refueling. On average, from February 2016  through January 2018, Boeing has completed about 689 test points  per month. It would need to almost double this pace to about 1,310  test points and sustain that pace for a 5-month period to complete  testing by June. Based on the average number of tests points that  Boeing has completed per month, as shown in figure 5, we project  Boeing would finish the remaining test points about 5 months later  than expected in early November 2018. We also project that delivery  of 18 fully capable aircraft would occur around May 2019, assuming  the same 5.5 month delivery time frame included in the updated  schedule.

Boeing recognizes that achieving its planned flight test pace is one of  the most significant program risks and has taken several actions to  address this risk. For example, last year, Boeing moved from a “test  once” approach—where testing would begin once a series of tests  was approved by the Federal Aviation Administration and Department  of Defense—towards a more incremental testing approach where a  smaller set of tests could be conducted as soon as they are approved  by a single entity. Program officials pointed out that, where possible,  Boeing is still using a single test point to satisfy more than one  requirement from both regulators. As of January 2018, Boeing also  identified about 440 test points that could be eliminated because,  according to program officials, data collected in other tests may  provide sufficient knowledge to cover the eliminated test points.  Boeing has also consolidated a large percentage of qualification  testing resources at a single location to improve efficiency.

Test planning: According to program officials, Boeing’s test plans do  not fully account for the time needed to complete receiver aircraft  certification testing. Program officials, government test officials, and  Boeing officials said that tests for certifying F-16 fighters, C-17 cargo  planes, and other aircraft to receive fuel from a KC-46 will take  between 3 and 5 weeks to complete for each aircraft. This is longer  than the 1 week for each aircraft that is currently included in Boeing’s  test plan, according to company officials. Boeing officials said the  company intends to update the test schedule in Spring 2018 to reflect  more time to complete receiver aircraft certifications. Boeing has not  yet quantified how much time will be added to the test schedule for  these certifications or determined whether it will affect the overall  delivery schedule. According to program officials, Boeing is required  to have 8 receiver aircraft certified by the first KC-46 delivery. These  officials stated that to avoid the risk of further delivery delays, the Air  Force is discussing the possibility of reducing the number of receiver  aircraft certifications needed if some, but not all, receiver aircraft are  certified prior to first KC-46 delivery. This would allow the warfighter to  start using KC-46 aircraft sooner rather than wait for all 8 receiver  aircraft to be certified. Air Force officials still maintain, however, that 8  receiver certifications are required prior to operational testing, which is  slated to begin in October 2018 and last for about 7 months.

Retrofitting already produced aircraft: Based on the updated schedule,  Boeing will be producing 49 aircraft, or about 27 percent of the total  aircraft the Air Force plans to buy, before developmental testing is  complete. Originally, the Air Force planned to buy 19 aircraft or about  11 percent of the total number concurrent with developmental testing.  In general, DOD tries to limit the amount of concurrency because  testing can reveal design or performance problems that need to be  fixed, which could lead to costly retrofits or schedule delays. For  example, Boeing already needs to retrofit 18 aircraft it has produced  with an updated wiring design and 6 aircraft with new flooring and  tires. The Under Secretary for Acquisition, Technology and Logistics  allowed 27 percent concurrency on this program to avoid a break in  production. Cost risk to the government is low because the KC-46  development contract specifies that Boeing must correct any  deficiencies and bring development and production aircraft to the final  configuration at no additional cost to the government. However, there  could be schedule delays if continued testing reveals problems that  need to be corrected on aircraft already built. As of January 2018,  Boeing estimates KC-46 development will cost about $5.9 billion or  about $1 billion over the contract ceiling price.

KC-46 Development Problems Have Resulted in Less Refueling Capacity Than Currently Anticipated

KC-46 development problems have resulted in delivery delays and kept  the Air Force from achieving a higher level of refueling capacity it  expected to achieve by this time. These problems have not resulted in  additional costs to the government. However, if delivery delays continue  past October 2018, the Air Force will need to maintain legacy aircraft  such as the KC-135 longer than planned.

The Air Force expected to have 470 tankers in January 2018—a  combination of KC-46, KC-135, and KC-10 aircraft—for refueling  missions, but only had 455 of these aircraft at that time. Since no KC-46  aircraft have been delivered, the Air Force has had to use KC-135 and  KC-10 aircraft at a higher rate than expected. Air Force officials  negotiated non-monetary considerations from Boeing to offset the lost  military tanker capacity associated with the delay, such as obtaining  additional training at no cost to the government for KC-46 pilots and  maintenance personnel and support for the aircrew training system.  According to program officials, Boeing has already provided almost all of  these considerations even though the contract modification that includes  them has not yet been signed by Boeing.

According to Air Mobility Command officials, if there are delivery delays  past October 2018, the Air Force would need to keep some KC-135  aircraft operational longer than planned. The cost of maintaining those  KC-135 aircraft is estimated to be about $10.3 million per year per  aircraft. Additionally, about $12 million per aircraft may also be needed,  according to Command officials, for depot maintenance activities that are  scheduled every 5 years. Command officials stated that the number of  depot events that are needed will depend on how quickly Boeing can  deliver expected KC-46 aircraft.

We are not making any recommendations in this report, but believe the  Under Secretary of Defense for Acquisition, Technology and Logistics  should implement a prior recommendation to closely monitor the cost,  schedule, and performance outcomes of the KC-46 program to identify  positive or negative lessons learned. As one of only a few major  acquisition programs to award a fixed-price incentive (firm target)  development contract in recent years, evaluating performance and  identifying lessons learned will be illustrative, important for informing  decision makers, and help guide and improve future defense acquisition  programs.

We provided a draft of this report to DOD for comment. DOD did not  provide any written comments, but the KC-46 program office provided  technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees; the Secretary of Defense; and the Secretary of the Air Force.  The report is also available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found   on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix II.

Appendix I: KC-46 Performance Capabilities

The program office has 21 performance goals that are critical to the KC- 46 aircraft’s military capability and track progress in meeting contract  specifications. These performance goals include nine key performance  parameters, five key system attributes, and seven technical performance  measures. Table 2 provides a description of each key performance  parameter and key system attribute and table 3 provides a description  and status of each technical performance measure.

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Cheryl Andrew, Assistant  Director; Matt Crosby; Kurt Gurka; Stephanie Gustafson; Katheryn  Hubbell; Zachary Sivo; Nate Vaught; and Robin Wilson made key  contributions to this report.

KC-46 Tanker Modernization: Delivery of First Fully Capable Aircraft Has  Been Delayed Over One Year and Additional Delays are Possible.  GAO-17-370. Washington, D.C.: March 24, 2017.

KC-46 Tanker Aircraft: Challenging Testing and Delivery Schedules Lie  Ahead. GAO-16-346. Washington, D.C.: April 8, 2016.

KC-46 Tanker Aircraft: Key Aerial Refueling Capabilities Should Be  Demonstrated Prior to the Production Decision. GAO-15-308.  Washington, D.C.: April 9, 2015.

KC-46 Tanker Aircraft: Program Generally on Track, but Upcoming  Schedule Remains Challenging. GAO-14-190. Washington, D.C.: April  10, 2014.

KC-46 Tanker Aircraft: Program Generally Stable but Improvements in  Managing Schedule Are Needed. GAO-13-258. Washington, D.C.:  February 27, 2013.

KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but  Contain Schedule Risk. GAO-12-366. Washington, D.C.: March 26, 2012.

Under the Air Force's KC-46 modernization program, commercial aircraft are being converted by Boeing into aerial refueling tankers. The program is one of the Air Force's highest acquisition priorities, and will replace a third of the aging fleet.

We found that the program, now in its seventh year, is meeting its estimated acquisition cost. However, the program office projects that Boeing will not deliver the first 18 fully capable aircraft until May 2019—21 months later than initially planned.