Federal employees and retirees will see an average premium increases in the Federal Employees Health Benefits Program (FEHBP) of 7.9 percent next year. This single-digit increase in health care costs is a stunning exception to what normally prevails in conventional employment-based health insurance and traditional government health programs.

Superior Performance

Compared with private employment-based health insurance, the FEHBP has historically achieved superior performance in cost control. According to staff at the Office of Personnel Management (OPM), the agency that runs it, FEHBP's average cost increase is projected at 7.9 percent; employers in the private sector expect higher cost increases, with projections ranging from 10 to 16 percent for next year.

In 2005, Medicare premiums are projected to increase 17 percent. FEHBP premium increases reflect real conditions of supply and demand in a serious consumer-driven market. Medicare premium increases, however, are set by a government formula.

Fundamental Principles

While the Bush Administration deserves ample credit for its solid management of the FEHBP, the superior achievement of the program cannot be solely attributed to the managerial skills of the OPM staff. Rather, the fundamental market principles underlying the program account for both its historic record of success and its popularity as a model for serious reform of the Medicare program. These principles include:

• Real Consumer Choice
  Federal Workers and retirees can choose from a wide variety of health care plans, including fee-for-service and preferred-provider options (PPOs), health maintenance organizations (HMOs), and new consumer-driven options. Indeed, for 2005, the program will have 18 high-deductible, consumer-driven health plans, including new Health Savings Account (HSA) and Health Reimbursement Account (HRA) plans. Two such plans will be offered to federal workers and retirees across the country. And for the very first time in the history of the program, a faith-based, high-deductible/HSA plan will be available: the OSF Health Plans in Illinois.
   
• Genuine Competition
  Health plans compete directly with each other for consumers' dollars. The number of health plans and options is expanding. For 2005, 19 fee-for-service/PPO options will be available nationwide. Altogether, a total of 249 health plans will compete for consumers' dollars. This is up from 205 plans in 2004, continuing a reversal of the decline in plan participation that accompanied the Clinton Administration's heavy regulation of the program.[1]
   
• Light and Rational Regulation
  Unlike Medicare and unlike the heavy regulatory regime that governs employment-based health insurance in the several states, the private plans that compete in the FEHBP are governed by a light and rational regulatory regime. There is no comprehensive standard benefits package in the FEHBP; instead, there are a variety of benefit offerings. There are no price controls or premium caps; rather, prices reflect the conditions of supply and demand in the market. In creating the FEHBP in 1959, Congress also preempted both state benefit mandates and premium taxes. The small body of rules that governs the program is sharply focused on fiscal solvency, marketing, and consumer protection.

A Model for Medicare Reform?

The FEHBP shows how consumer choice, competition, and light and reasonable regulation can deliver high quality health care and high levels of consumer satisfaction.

State-level policymakers can learn crucial lessons from the FEHBP's experience. Most basically, states would do well to replace heavy-handed regulation and mandates with less onerous rules designed to level the playing field and encourage personal choice of health plans, including consumer-driven options.

The FEHBP also holds valuable lessons for the next round of Medicare reform. In the House version of the Medicare Modernization Act of 2003, there was a provision, Section 241, that would have created a Medicare system modeled directly after the FEHBP, but the provision was killed in the House-Senate conference on the bill. Instead, the Congress adopted a limited "demonstration" program that would not begin until 2010. If many Members of Congress have their way, even this weakened "demonstration project" will never happen at all.

Further Reading

For an analysis of the FEHBP as a model for Medicare Reform, see Walton Francis, "Using the Federal Employees Model: Nine Tests for Rational Medicare Reform," Heritage Foundation Backgrounder No. 1675, August 7, 2003, available at www.heritage.org/research/healthcare/bg1675.cfm; see Walton Francis, "The FEHBP as a Model for Medicare Reform: Separating Fact from Fiction," Heritage Foundation Backgrounder, No. 1674, August 7, 2003, available at www.heritage.org/research/healthcare/bg1674.cfm; and see, Robert E. Moffit, "A Road Map to Medicare Reform: Building on the Experience of The FEHBP", testimony before the Senate Special Committee on Aging, May 6, 2003, available at http://www.heritage.org/Research/HealthCare/test050603.cfm.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.