Our Government Run Health Services – Part 5 – FEHBP

The Federal Employees Health Benefits Program (FEHBP) allows insurance companies and employee associations, such as labor unions to develop health, dental, and allied plans and market them to governmental employees. The employee health benefits are provided to full-time, permanent, civilian government employees and qualified retirees of the United States Government, including members of Congress. The US Office of Personnel Management (OPM) oversees the program.

The FEHBP is different from most of the other government run health services we’ve discussed so far in that it is much closer to the idea of an open exchange than the other programs, where the government guarantees certain benefits and makes sure that they are provided effectively. As such, it is close to the proposed public or co-operative exchanges that have appeared in some drafts of the proposed health care reform bill. In this article we’ll look at the background to FEHBP and its strengths and weaknesses.

A Heritage Foundation Report¹ on the FEHBP said – “The OPM does not impose price controls or fee schedules, or issue detailed guidelines to doctors or hospitals on standardized benefits. Private plans within the FEHBP must meet “reasonable minimal” standards regarding benefits, but the law creating the FEHBP does not specify a comprehensive set of standardized benefits. Congress merely defines the “types” of benefits that “may be” provided.”

Background
Bureaucrats began looking at creating a health plan for federal employees in the late 1950s. Initial drafts looked a lot like the original Medicare plan. There would have been both hospital and outpatient parts. Medicare didn’t have catastrophic coverage, although Medicaid now provides that for the needy, whereas FEHBP has had it since its inception. It also had prescription drug coverage long before Medicare. However, employees who already had insurance would have had to leave their plans to join the FEHBP. Instead, their plans were grandfathered into the new scheme that Congress drafted, with coverage and services provided by private insurers, rather than a government body.

The FEHBP began covering employees on July 1, 1960. It contracts with over 250 plans to provide benefits to around 9 million enrollees and dependents. The government employer pays an amount equal to 72 percent of the average plan premium for self-only or family coverage and the employee pays the rest. Some groups have negotiated slightly higher percentages. The FEHBP is administered by fewer than 200 government employees, making it a very efficient program. FEHBP had a budget of just over $9.5 billion in FY 2009. The overall administrative cost was probably under $40 million in 2008.

FEHBP was used in a gambit by Sen. Charles Grassley during the current health care reform debate. He introduced a health care amendment that would eliminate the program and require federal employees and retirees to purchase insurance through state-based exchanges, just as average civilians would. A modified version of the amendment weakened the language, allowing federal workers the option of leaving the FEHBP and enrolling in state exchanges, if they come to fruition. Sen. Grassley’s reasoning was that federal employees, including members of Congress, shouldn’t be allowed to participate in a program that was better than the options offered to average taxpayers.

Strengths
One of the great strengths of FEHBP is its flexibility. Beneficiaries are free to choose a plan that suits their purposes and to change plans once a year. However, the flexibility that is a boon to beneficiaries is an anathema to providers, as they have to be very careful to ensure that services they provided last year are still available to a particular patient. Other highlights of FEHBP include:

• FEHBP is not experiencing the severe financial problems faced by Medicare.
• It is run by a very small bureaucracy that, unlike Medicare’s, does not try to set prices for doctors and hospitals.
• It offers choices of modern benefits and private plans that are unavailable in Medicare.
• The variety of plans tends to make better services available in rural areas than other plans, such as Medicare.
• In contrast to Medicare, fraud is almost nonexistent in the FEHBP because private plans tend to be far more effective than government bureaucracies at preventing and eliminating fraud.
• FEHBP uses a completely different payment system that achieves a high level of efficiency.
• FEHBP uses a model that is closer to the HMO “Payment by Results” model than the Medicare Fee For Service (FFS) model.

The process that FEHBP uses for negotiating prices is interesting. For HMO and point-of-service (POS) plans, the OPM typically starts its negotiations based on the local market for these plans, rather than applying a formula based on the local fee-for service market (which is what Medicare does). In the case of FFS and preferred provider organization (PPO) plans, the OPM negotiates a fixed profit per subscriber, usually between 0.5 percent and 0.75 percent of premium. So plans make money through negotiated service contracts rather than traditional profits. They have to accept market risk, but they lodge revenue surpluses in special reserve accounts that enable them to bid more competitively in future years.

Weaknesses
A major criticism of the FEHBP is that the purchasing power of the Federal Government is not utilized to draw down premiums and expand coverage. The bidding process results in making numerous competing insurance plans available to federal employees. However, they generally vary only marginally in price and coverage, making it difficult to choose a plan. This tends to favor the larger, more well-known plans because uninformed consumers will tend to opt for them. The government has proposed drastically reducing the number of plans, which further reduce administration plans, but the insurance industry generally opposes that idea citing potential loss of profits. It would also penalize the small companies that wish to participate. Let’s not forget, though, that the insurance cartel is in an almost unique position of being able to avoid anti-trust laws. The offerings and premium prices are all remarkably similar because the insurance companies collaborate in establishing them.

Perhaps as a result of the loose control of premiums, the price of FEHBP coverage has risen in line with other health insurance policies, rather than at the rate of inflation. FEHBP policy holders are facing an average 9% increase in premiums for next year and that’s in a flat economy. Inflation is expected to be -1.3% this year, so the premiums should be going down, not up. [Editor: Please note the comment below from Walton Francis, an expert in this field, regarding potential premium costs and the new tax situation.]

There are no official figures on the number of federal workers who can’t afford health insurance through FEHBP. The American Federation of Government Employees estimates that 250,000 federal workers cannot afford coverage. Information from the Office of Personnel Management indicates that 11 percent of the workforce does not participate in the program. Some of those nonparticipants may have insurance through a spouse. Others have had to resort to Medicaid.

Conclusions
FEHBP is an efficient program that provides flexible and comprehensive health care coverage to the beneficiaries that can afford the premiums. FEHBP leverages an open market approach and the providers have a financial incentive to favor preventive care over fees for services provided. The OPM could probably reduce both FEHBP premiums and prescription drug prices if it were able to set tighter constraints, but the health insurance cartel is currently legally permitted to avoid such controls.

Sources:
 ¹  “Congresses Own Health Plan As a Model For Medicare Reform” – Stuart Butler, Ph.D. and Robert E. Moffit, Ph.D. – Heritage Foundation – 06/12/1997.

Related Posts: Part 1 – Indian Health Service. | Part 2 – CHIP. | Part 3 – Medicaid.| Part 4 – Medicare. | Part 6 – Military Health System. | Part 7 – VHA. | Part 8 – Summary.