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?

The Robert Wood Johnson Foundation
The Synthesis Project
May 2003
Tax subsidies for private health insurance: who currently benefits and what
are the implications for new policies?

Policy-makers are considering a variety of new tax credit proposals to expand health insurance coverage. Understanding how current tax subsidies work and their role in supporting employer-sponsored insurance (ESI) is important when designing such policies.

Higher-income workers benefit far more from the current ESI tax subsidy than lower-income workers.

First of all, they are in higher tax brackets. A worker in the 28 percent tax bracket saves 28 percent of the premium cost, while a worker in the 15 percent bracket saves only 15 percent.

They also are more likely to have ESI. Almost 90 percent of workers with income three times the poverty level or higher have ESI, compared to less than one-third of workers with income below the poverty level.

In addition, employers of higher income workers pay a larger percentage of the premium on average, translating into a larger tax exemption for those employees.

Finally, higher-income workers tend to have more coverage-multiple policies, richer benefits, and family rather than individual coverage- increasing premiums and the value of the tax exemption.

Lower-income workers benefit only slightly from the income tax exemption and the Medicare payroll tax exemption. They benefit in the short run from the Social Security payroll tax exemption, but it hurts them in the long run by reducing their retirement income.

The overall impact of the upside down subsidy is striking.

Many economists argue that employers pass on the costs of their contributions for health insurance to workers in the form of lower wages. Under that assumption, the tax subsidy is worth one-third of the premium for families with income above $200,000. These families pay only two percent of their income for health coverage.

In contrast, the subsidy is worth about 10 percent of the premium for families with ESI making less than $10,000. These families pay about 40 percent of their income (including what their employers pay in premiums) for health coverage.

http://www.rwjf.org/publications/synthesis/reports_and_briefs/pdf/no3_policyprimer.pdf

Comment: This report demonstrates that current tax policies designed to support our existing system of employer-sponsored insurance result in profound inequities, disproportionately benefiting the wealthy.

Can modifying tax policy alone correct these inequities? Each adjustment can have an impact on employer participation, employee participation, shifting between individual and employer-sponsored coverage, comprehensiveness of benefit packages, variations in the level of public funding, extent of patient cost-sharing, and endless other potential policies. As each adjustment is made to improve equity, the model will move closer to universal, comprehensive coverage with progressive public funding, and elimination of the link to employment.

Try manipulating the single payer model to include private health plans while preserving the same level of equity that a single payer system would provide. Bet you can’t do it. So why do we keep insisting that we begin with private health plans as we reform health care?

The Journal of the American Board of Family Practice
May-June 2003
Health Policy

Why Incremental Reforms Will Not Solve the Health Care Crisis

By Don McCanne, MD

Incremental models of reform perpetuate our flawed, fragmented system of funding health care. They perpetuate inequities both in the funding of health care and in the allocation of our health care resources. They limit choice of health care providers. None assures continuity of coverage and care. Many incremental proposals barely have an effect on the numbers of uninsured, and none of them ensure truly universal coverage. All incremental approaches substantially increase health care costs, and most current proposals assure neither financial security nor health security.

In contrast, a single payer program would provide affordable, equitable, comprehensive care for everyone.

Whether through tax policy, public programs, regulatory oversight, mandated coverage, or a combination of these and other interventions, the government will be intimately involved in our health care funding. We can no longer afford to dismiss any valid option because it is a government solution, especially in that all proposals are government solutions. We must decide how we can best use our government resources to be sure that we are receiving the greatest value for our health care investment. Limiting our consideration to various incremental solutions closes the door on the health care reform goals of equity, affordability, and efficiency, and it threatens the goals of universality, provider choice, access, and comprehensiveness. When all are readily achievable, why accept less?

For the full article: http://www.jabfp.org/cgi/content/full/16/3/257

California Senate Office of Research
May 2003
Growing Gaps in California’s Emergency Room Backup System
Prepared by Peter Hansel

In October 1998, a patient was brought by ambulance to a California hospital emergency room with symptoms of abdominal distress and shortness of breath. The ER physician suspected an abdominal condition requiring surgery. As the patient continued to deteriorate, the physician twice phoned an on-call surgeon asking that he come in immediately to examine the patient. The surgeon repeatedly refused to come in, advising that the patient be admitted for him to see in the morning. As the patient’s blood pressure and pulse rate dropped to life-threatening levels, the ER physician contacted hospital administrators in an apparent effort to compel the surgeon to come in. The patient suffered a cardiac arrhythmia and died despite a resuscitation attempt. The surgeon arrived during the resuscitation attempt.

On a Saturday night in January 2000, a middle-age man came into a California hospital emergency room with an upper gastrointestinal bleed. The ER physician on duty treated the patient, but did not have the expertise to stop the bleeding. A gastroenterologist was asked to come in and perform an emergency endoscopy. Then another, and another, and another, and another. After three hours and six refusals, no GI specialist would come to the ER and the patient was at risk of bleeding to death. Finally, the ER medical director called a GI specialist he personally knew and told him he would pay him $500 in cash if he came in. The specialist accepted, came to the ER, performed the procedure, and stopped the bleeding.

These cases, while isolated, illustrate the growing problems that are occurring with the state’s system of ensuring “on-call” emergency services – backup services provided by specialists to hospital emergency departments.

Problems with access to on-call services are primarily the result of problems with reimbursement of physician specialists who provide on-call services.

http://www.sen.ca.gov/sor/reports/REPORTS_BY_SUBJ/HEALTH/Ab2611.pdf

Comment: With all of the negative news about the deterioration of our health care system, we finally have a report that indicates that health care access improved (in this one instance). And it seems fitting that the policy implication is consistent with other current private solutions to our health care crisis. Without government intervention, emergency services can be obtained through the simple intervention of payment of a bribe. Ah, the magic of the marketplace!

Single payer insurance, anyone?

Modern Physician
May 30, 2003
Most Americans would prefer more health coverage to a tax cut, poll shows
By Leigh Page

Almost two-thirds of Americans think the federal government should extend health coverage to the uninsured, while only one-quarter would want the recently passed tax cut, according to a new poll by researchers at Stony Brook University in New York.

Among those who want an extension of coverage, more of them prefer a major effort involving a tax increase to a more moderate effort that would not, says the study, released Tuesday.

Specifically, the study of 810 adults nationwide finds that 36% of all respondents support a tax increase to expand healthcare.

The poll also finds support for an expansion across the political spectrum. It says 72% of Democrats, 65% of independents and 53% of Republicans prefer action on health insurance to a tax cut. And even 27% of Republicans are willing to pay higher taxes for it.

The study also finds that 71% favor government requiring businesses to offer health insurance to all of their employees, a proposal that died in the healthcare debate in the Clinton administration. This “employer mandate” is favored by 69% of Republican, 77% of Democrat and 72% of independent respondents, it says.

http://www.modernphysician.com/news.cms?newsId=866

Comment: It appears that Americans have accepted the rhetoric that we don’t need a “tax cut for the rich” when we have unmet social needs such as inadequate health care coverage. When framed as a “tax increase,” support declines, although it does not vanish.

Rather than discussing the need for tax increases to fund health care, we should be discussing the impact of reform on total health care spending, public and private combined. Converting public and private spending into a ratio would emphasize that we don’t want to know only the public part of health care costs; we want to know the total health care costs and the respective components. Dismissing private spending from the debate while discussing the change in taxes makes no more sense than if we were to dismiss taxes from the debate and discuss exclusively the changes in private spending. If we want to know what health care is going to cost, we need to know both.

This concept has an important application to the finding that there is very strong support for an employer mandate. Even though many proposals include tax policy, the general misperception is that employer-sponsored insurance is funded predominantly by the employer and does not impact taxes. In fact, not only do tax benefits support employer-sponsored plans, but almost all economists agree that employees also fund health coverage through implicit salary concessions. The public needs to understand that they are not avoiding “tax increases” by receiving “free” health care coverage from their employers. Between taxes and salary concessions, they are paying the full tab collectively. Even worse, both the tax benefit and the salary “reductions” of employer-sponsored plans are regressive methods of funding health care. Lower-income individuals pay a disproportionately higher percentage of their income for health care than do higher-income individuals.

But a properly designed tax component (public) would tend to be more equitably funded since it would be progressive, whereas the salary component (private) would remain a regressive method of funding health care. In fact, all private health care spending is regressive since the percentage of income spent has an inverse relationship to total income. Thus a high ratio of public to private health care spending would represent a more equitable method of funding care, whereas a low ratio would represent a less equitable system.

We really do need to convert the debate into terms of total health care costs and a ratio that represents how equitable the funding really is. There will certainly still be some who believe that government and taxes must be minimized at all costs. Since it is now firmly established that the administrative excesses of our current fragmented system of private plans and public programs create more costs than a single payer system would, we can legitimately ask advocates of private funding (low ratio) whether they would prefer to pay less through an equitable system of funding health care, or pay more merely for the dubious benefit of saying that they are paying into a private system, even though to egregiously wasteful private health plan bureaucracies.

Let’s change the focus of the debate from merely concentrating on taxes to a more informative debate that identifies total costs with a ratio that represents how equitable funding would be. That debate would still include tax policy, but it would place it in a more meaningful perspective.

Modern Physician
May 30, 2003
Most Americans would prefer more health coverage to a tax cut, poll shows
By Leigh Page

Almost two-thirds of Americans think the federal government should extend health coverage to the uninsured, while only one-quarter would want the recently passed tax cut, according to a new poll by researchers at Stony Brook University in New York.

Among those who want an extension of coverage, more of them prefer a major effort involving a tax increase to a more moderate effort that would not, says the study, released Tuesday.

Specifically, the study of 810 adults nationwide finds that 36% of all respondents support a tax increase to expand healthcare.

The poll also finds support for an expansion across the political spectrum. It says 72% of Democrats, 65% of independents and 53% of Republicans prefer action on health insurance to a tax cut. And even 27% of Republicans are willing to pay higher taxes for it.

The study also finds that 71% favor government requiring businesses to offer health insurance to all of their employees, a proposal that died in the healthcare debate in the Clinton administration. This “employer mandate” is favored by 69% of Republican, 77% of Democrat and 72% of independent respondents, it says.

http://www.modernphysician.com/news.cms?newsId=866

Comment: It appears that Americans have accepted the rhetoric that we don’t need a “tax cut for the rich” when we have unmet social needs such as inadequate health care coverage. When framed as a “tax increase,” support declines, although it does not vanish.

Rather than discussing the need for tax increases to fund health care, we should be discussing the impact of reform on total health care spending, public and private combined. Converting public and private spending into a ratio would emphasize that we don’t want to know only the public part of health care costs; we want to know the total health care costs and the respective components. Dismissing private spending from the debate while discussing the change in taxes makes no more sense than if we were to dismiss taxes from the debate and discuss exclusively the changes in private spending. If we want to know what health care is going to cost, we need to know both.

This concept has an important application to the finding that there is very strong support for an employer mandate. Even though many proposals include tax policy, the general misperception is that employer-sponsored insurance is funded predominantly by the employer and does not impact taxes. In fact, not only do tax benefits support employer-sponsored plans, but almost all economists agree that employees also fund health coverage through implicit salary concessions. The public needs to understand that they are not avoiding “tax increases” by receiving “free” health care coverage from their employers. Between taxes and salary concessions, they are paying the full tab collectively. Even worse, both the tax benefit and the salary “reductions” of employer-sponsored plans are regressive methods of funding health care. Lower-income individuals pay a disproportionately higher percentage of their income for health care than do higher-income individuals.

But a properly designed tax component (public) would tend to be more equitably funded since it would be progressive, whereas the salary component (private) would remain a regressive method of funding health care. In fact, all private health care spending is regressive since the percentage of income spent has an inverse relationship to total income. Thus a high ratio of public to private health care spending would represent a more equitable method of funding care, whereas a low ratio would represent a less equitable system.

We really do need to convert the debate into terms of total health care costs and a ratio that represents how equitable the funding really is. There will certainly still be some who believe that government and taxes must be minimized at all costs. Since it is now firmly established that the administrative excesses of our current fragmented system of private plans and public programs create more costs than a single payer system would, we can legitimately ask advocates of private funding (low ratio) whether they would prefer to pay less through an equitable system of funding health care, or pay more merely for the dubious benefit of saying that they are paying into a private system, even though to egregiously wasteful private health plan bureaucracies.

Let’s change the focus of the debate from merely concentrating on taxes to a more informative debate that identifies total costs with a ratio that represents how equitable funding would be. That debate would still include tax policy, but it would place it in a more meaningful perspective.

The Harris Poll
May 28, 2003

Supermarkets and packaged food companies top the list of industries which get the best marks for serving their customers.

At the bottom of the list, only 30% think tobacco companies and managed care companies do a good job, and only 40% think health insurance companies do so.

http://www.harrisinteractive.com/harris_poll/printerfriend/index.asp?PID=379

Comment: We are paying an outrageous amount for poor service from the health insurance companies. Why do so many politicians insist that tax policies be expanded to favor this superfluous and wasteful industry?

The New York Times
May 28, 2003
WHO Vows to Overhaul Health Regulations
By The Associated Press

Voicing its alarm at the spread of the SARS virus, the World Health Organization vowed to overhaul outdated international health regulations to deal more effectively with epidemics and the threat of bioterrorism.

“The current regulations are obviously insufficient in view of today’s rapid, high-volume migration, emerging infections and the threats of bio-terrorism,” said U.S. delegate David Hohman. But he stressed that the new rules should represent a “careful balance among disease containment efforts, respect for individual liberties, and a nation’s right to engage in international commerce.”

The debate on intellectual property was the most divisive of WHO’s 10-day assembly, which ends Wednesday. It pitted the United States, which insists that patent protection is paramount in encouraging innovation and new drugs, against developing countries led by Brazil, which argued that health should be given priority over trade.

http://www.nytimes.com/aponline/international/AP-UN-Health.html

Comment: Is the quest for mega-wealth the only motivating factor that drives innovation and new drug development? Maybe we should ask the tens of thousands of dedicated employees and grantees of the National Institutes of Health.

It is instructive to see what the mission statement of NIH says about health and about trade:

The NIH mission is to uncover new knowledge that will lead to better health for everyone. NIH works toward that mission by: * conducting research in its own laboratories; * supporting the research of non-Federal scientists in universities, medical schools, hospitals, and research institutions throughout the country and abroad; * helping in the training of research investigators; and * fostering communication of medical information.

http://www.nih.gov/about/NIHoverview.html

Should our national and international health care policies be guided predominantly by intellectual property and trade issues, or by priorities of health? The NIH and the Bush administration seem to have a disconnect on these priorities.