The Henry J. Kaiser Family Foundation
The Federal Employees Health Benefits Program: Program Design, Recent
Performance, and Implications for Medicare Reform
May 2003
Prepared by Mark Merlis
Conclusions
FEHBP (Federal Employees Health Benefits Program) has often been an attractive model for policymakers who wish to increase the roles of competition and private plans in the Medicare program. FEHBP has succeeded in offering varying degrees of health plan choice to a large and diverse population of employees and annuitants, at costs comparable to those for other large employer plans. The program is more flexible and less bureaucratic than Medicare and relies chiefly on the market, rather than regulation, to control costs and assure quality.
Still, the program is not without its shortcomings, some of which have been notable for many years. FEHBP has faced many of the same problems as the Medicare+Choice program:
* FEHBP per capita costs have risen faster than Medicare costs in recent years, though somewhat less rapidly than spending by other employer plans. Only part of the FEHBP spending growth is attributable to rising drug expenditures, and costs would have risen even faster if plans had not reduced benefits. As the OPM Director has acknowledged: “Despite its size, the FEHB Program is not immune to the inflationary pressures that have driven up costs in the health-care industry in recent years.”
* Competition under FEHBP, as under the Medicare+Choice program, has been distorted by pricing problems. Because government contributions to FEHBP plans are not adjusted for demographic factors, health risk, or geography, the net prices offered to participants may reflect enrollee characteristics or plan location, rather than the value of benefits or plan efficiency.
* While many Medicare beneficiaries have no access to Medicare+Choice plans, FEHBP nominally offers enrollees multiple health plan choices everywhere in the country. However, participants in less populous areas may have access only to the national PPO plans, and some of these plans may not always provide meaningful choices among providers. PPOs generally achieve savings by negotiating discounted rates with providers; providers in isolated areas who face limited competition may have little incentive to grant these discounts.
* FEHBP administrative costs, including OPM, agency, and plan costs, can only be estimated, but are probably in the range of 7 to 15 percent of claims, depending on the type of plan. Medicare administrative costs for the fee-for-service program are only about 2 percent of claims. Costs for the Medicare+Choice program are probably comparable to those for similar FEHBP plans.
FEHBP is a model that policymakers are examining as they consider ways of introducing more choice under Medicare or of developing new mechanisms for extending coverage to the uninsured. The FEHBP experience highlights the difficulties in developing a competitive system that operates efficiently and equitably for a nationwide program. And FEHBP’s recent performance suggests that competition alone may not resolve the ongoing dilemma of maintaining comprehensive benefits while controlling spending growth.
http://www.kff.org/content/2003/6081/6081v1.pdf
Comment: Although this report discusses the FEHBP program as a model for Medicare reform, FEHBP is also being proposed by many politicians and other advocates as a model for expanding health care coverage through employer or individual mandates.
FEHBP, “the health care coverage that members of Congress have,” has been touted by many as the ideal model of reform. Although it is the largest and most effective of existing programs that use private insurers, it is also a program with wasteful administrative excesses and with inequities that are inevitable when depending on a variety of plans with variable benefits, pricing and availability. In contrast, an equitable program of social insurance would significantly reduce administrative costs thereby making affordable truly comprehensive benefits for everyone.
Why do we continue to support extreme models of reform, such as the FEHBP proposals, when our own simple program of social insurance would provide affordable, equitable and comprehensive coverage for everyone?
