A Note on the Federal Employee Health Benefits Program – A Model for Medicare?

Often the Federal Employee Health Benefits Program ("FEHBP") is pointed to as a model for how health care insurance should be provided to everyone. In fact, Paul Ryan's plan claims to be modeled on the FEHBP, though as many commenters have noted, the federal government's portion of the payment would be less generous over time than that provided by the FEHBP. The FEHBP, it should be noted, is not only provided to members of Congress, but to all federal employees and to federal retirees who opted to be covered by FEHBP when they were working for the federal government.

I am not going to dissect the Ryan proposal here, and I am not a health care expert. I will, though, make some comments about the FEHBP as someone who has participated in it for many years. While I am happy to be covered by it, the plan has had some problems, which I believe are instructive as consideration is given to modification of Medicare and the U.S. health care system generally.

FEHBP has an open season once a year when all who are covered or are eligible to be covered can choose the particular insurance company plan they want for the coming year. Free market proponents like this feature, since it makes for competition among plans. However, it also can serve to divide the large population covered by the FEHBP into separate risk pools, with different characteristics.

Open season causes the problem of adverse selection. For example, those who are older or tend to have higher medical expenses because of existing conditions will opt for more expensive plans that provide better benefits. Also, people who know that they will have a particular medical procedure in the coming year will gravitate to the plan that covers that procedure the best.

In the 1980s, Blue Cross offered a high and low option plan under the FEHBP. Over time, the risk profile of the group covered by the high option plan became much worse than those in the low option plan. Blue Cross had to increase the premiums for the high option plan rather dramatically at times because of this. The increase in premiums caused a further migration from the high to the low option plan, thus exacerbating the difference in the risk characteristics of the two populations. Eventually, the risk profile of the high option plan became so bad and costs escalated so much that Blue Cross dropped it and renamed the low option plan its standard option.

Also, there have been instances were a significant number of employees with a particular medical need all went to a particular plan that provided the best coverage. This often resulted in the sponsor of the plan to modify its coverage the following year in order to fend off the adverse selection problem

In addition, the particular market structure created by the FEHBP provides an incentive to the companies to be somehow as attractive as possible to relatively health government workers so that they have to pay less in benefits. They do this by providing add-on features to their plans that are not mandated by the Office of Personnel Management.

My impression is that these problems are not currently as bad as they have been in the past, but that is only an impression. The main competition currently appears to be between HMOs and more traditional plans. The majority of people who are covered by traditional plans are covered by Blue Cross, though there are some other significant players such as GEHA, and Cigna offers a plan sponsored by a federal union that is open to all.

The main problem currently with the FEHBP and, I believe, health insurance plans provided to private employees, is that many primary care doctors are dropping out of the insurance networks, thus increasing health costs to the patients who opt to stay with them nevertheless. In Washington, DC, this problem appears particularly acute. It is difficult to find a primary care physician with a downtown office who is willing to accept new patients covered by Blue Cross. Primary care physicians do not believe they are adequately compensated by Blue Cross, and, in general, they hate the associated paperwork.

Another issue is that costs have escalated. When I first began working for the federal government, the premiums were quite modest, even to someone at the bottom of the professional ranks. The premiums are no longer negligible to any but independently wealthy government employees, though still a very good deal given the alternatives. Escalating costs going forward, though, will probably be a problem.

FEHBP does provide good coverage, and OPM's oversight and regulations has generally been effective. But the FEHBP experience shows there are limits to "the magic of the marketplace" when it comes to providing health insurance. The point of insurance is to pool the risks. Creating dramatically different risk pools goes counter to this, as Blue Cross learned. The adverse selection problem also means that over time different plans will provide similar, though not necessarily identical, benefits. Having different plans with somewhat different benefit structures though adds to administrative costs as it makes billing and claim review complex.

These points should be kept in mind as we further restructure our health care system and perhaps make changes to Medicare, which covers a group more likely to have expensive health care needs. As has often been pointed out, the U.S. devotes more of its GDP to health care than other industrial countries, while not, at least not yet, providing universal coverage nor achieving better health care results.

(For those interested in a comparative study of health care systems, I recommend T.R. Reid's book, The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care.)