What the GAO Says About the Best Model for Medicare Reform

Report Health Care Reform

What the GAO Says About the Best Model for Medicare Reform

February 21, 2003 15 min read
Senior Fellow
Robert E. Moffit is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

In his State of the Union address, President George W. Bush indicated that his model for Medicare reform would be the Federal Employees Health Benefits Program (FEHBP),1 the unique government health insurance program that covers the White House, Members of Congress, congressional staff, and 8.3 million federal workers and retirees and their dependents. Senate Majority Leader Bill Frist (R-TN) has indicated a desire to have Congress act on major Medicare reform this year.

The high profile of the FEHBP is a welcome addition to the emerging national debate on Medicare reform, for it gives ordinary Americans, and current and future senior citizens in particular, an excellent opportunity to focus on the program that covers their own elected representatives and the millions of public servants whose work ranges from biomedical science at the National Institutes of Health (NIH) to the delivery of mail at their local post office.

A Working Model
The U.S. General Accounting Office (GAO), the fiscal investigative agency of Congress, recently conducted a comprehensive analysis of the FEHBP. The resulting report, Federal Employees' Health Plans: Premium Growth and OPM's Role in Negotiating Benefits,2 details how the program works, not only in delivering health benefits and medical services to millions of Americans, but also in controlling rising health care costs. In its report, the GAO also compares and contrasts the functioning and performance of the FEHBP with those of other comparable purchasers of health insurance, both large public-sector and private-sector health insurance programs.3

When the President finally unveils the details of his Medicare reform plan, ordinary Americans will have an opportunity to see how precisely the details of that plan comport with those of the FEHBP, a working model of reform.


The Federal Employees Health Benefits Program is the world's largest group health insurance program. It is 43 years old: older than Medicare, Medicaid, and most private-sector managed care arrangements. It covers 2.2 million active federal workers, 1.9 million federal retirees, and roughly 4.2 million spouses and dependents; 86 percent of all eligible employees and retirees voluntarily participate in the program.4

If the FEHBP is indeed the President's model for Medicare reform, it is crucial for ordinary Americans, and senior citizens in particular, to understand how this model functions and why it works the way it does. Moreover, a solid understanding of this model can help Americans discern the reality behind the flood of congressional rhetoric on the subject.

To this end, the following are among the key GAO findings.

  • The overwhelming majority of federal employees and retirees routinely choose to enroll in fee-for-service plans
    and enjoy personal choice of different health plans and doctors. The Office of Personnel Management (OPM) is statutorily authorized to enter into contracts with fee-for-service plans and employee organization and union plans, which are often fee-for-service plans. About 70 percent of all of those enrolled in the FEHBP are enrolled in fee-for-service plans.5

    According to the GAO, "Enrollees in these plans can choose their own physicians and hospitals and the plan reimburses the provider or the enrollee for the cost of each covered service provided up to stated limit."6 In 2002, 13 fee-for-service plans participated in the FEHBP; 7 of these plans were available to every employee and retiree in the country, regardless of where they lived,7 and 11 included preferred provider organization (PPO) networks. Employees and retirees who choose the PPOs can "spend less in cost-sharing requirements compared to non-PPO providers."8

    OPM is also authorized to contract with "comprehensive health plans" or health maintenance organizations (HMOs). If employees or retirees choose an HMO, they generally are required to "use the plan's provider network to obtain medical services."9 In the FEHBP, 39 states have HMO networks, and approximately 30 percent of all enrollees in the FEHBP choose to enroll in HMOs.10 Among federal retirees, OPM reports that 15.6 percent of all federal retirees choose to enroll in HMOs.

  • A variety of benefit options are available to federal employees and retirees
    Unlike most public and private health care arrangements, the FEHBP is designed to maximize the personal choice of enrollees and allow them to pick and choose the plans and benefits and medical procedures and treatments that they want. The law governing the FEHBP does not define a "specific benefit package" that must be offered to all enrollees in the program, but rather specifies what core medical services health plans must cover in order to be approved for participation.

    OPM issues a call letter to health insurance carriers in the spring of each year, indicating what health insurance goals it would like to meet on behalf of employees and retirees for the following year; in response to that call letter, the competing health plans propose "their own benefit packages."11 As the GAO reports, "To maximize enrollee choice, OPM allows plans that meet minimum standards to participate in the FEHBP."12

    The FEHBP's traditional respect for consumer choice is very different from that of other large-scale public and private health insurance purchasers. As the GAO observes, this includes requiring individuals and families to enroll in plans with a "standardized benefits package," excluding plans that do not meet the purchaser's "standardized benefit" requirements, and enticing enrollees into plans that the purchasers consider the "best value" by paying a higher portion of the premiums to favored health plans.13

  • In the FEHBP, health plans' prescription drug coverage is universal and generous
    In recent years, greater usage of prescription drugs and increased hospitalization on an outpatient basis have been the main drivers of costs in the FEHBP. According to the GAO, "Increasing plan payments per drug dispensed accounted for most of the increase in expenditures for drugs, while increasing utilization accounted for the increase in hospital outpatient care expenditures."14 The GAO's analysis of claims expenditures for drugs and hospitalization found that these two insurance costs accounted for 70 percent of the "overall increase" in health plan expenditures during the period 1998 to 2000; 47 percent of that overall increase during this period was attributable to rapidly rising prescription drug costs.15
  • In coping with rising drug and other health care costs, OPM relies on negotiation and persuasion, and consumer choice and competition, rather than coercion or regulation
    In its annual call letters to insurance carriers, OPM typically outlines its goals and objectives for the year before entering into negotiations with carriers, and makes suggestions and proposals for cost containment. These suggested strategies and recommendations then become the basis for confidential and sensitive negotiations between OPM officials and the insurance carriers. In coping with rising drug costs over the past two years, says the GAO, OPM encouraged plans to consider using formularies or preferred drug lists; encouraging lower cost sharing for drugs, either generic or brand name, on a plan's drug formulary; and encouraging the use of care management for enrollees with chronic medical conditions.16

    In a separate analysis of the patterns of FEHBP drug coverage, GAO investigators found that most federal employees and retirees choose to enroll in health plans with Pharmacy Benefit Managers (PBMs). They further found that

Enrollees in the plans reviewed had wide access to retail pharmacies, coverage of most drugs, and benefited from cost savings generated by the PBM's. Enrollees typically paid lower out of pocket costs for prescriptions filled through mail order pharmacies and benefited from other savings that reduced plans' costs and therefore helped to lessen rising premiums.17
  • The GAO concluded that these FEHBP enrollees typically secure purchases of brand-name drugs at a cost that is about 18 percent below the "average price" paid for these products by persons without such third-party payment.18

    The administration of the FEHBP is thus flexible and constantly adjusting to changes in the health care system. While OPM negotiates rates and benefits with competing private plans and encourages different combinations of benefits, payments, co-payments, and deductibles to meet the objective of providing high-quality care and controlling health care costs, it is historically solicitous of the wants and needs of federal workers and retirees.

  • The federal government's contribution to employees' and retirees' health plans, as well as health plan offerings, reflects consumer demand and real changes in the health care market
    In 2001, FEHBP health insurance premiums, paid both by the government and by enrollees, amounted to $22 billion.19 According to a congressionally determined formula, the federal government payment is set at 72 percent of the "weighted average premiums" of all of the private plans competing in the program. For any given enrollee, however, there is a cap of 75 percent on the amount of the government contribution to a health plan. This means that the overall rise in health care costs will be reflected in an increase in the government contribution to employees' health plans.

    Even more important, employees and retirees can switch plans every year, though no more than 5 percent of the enrollee population switched during the past two years.20 Previous analyses of the FEHBP have indicated a high degree of enrollee satisfaction with the various health plans. In seeking value for money, enrollees who do switch have an impact on the overall premium increases. For 2003, OPM officials estimate that switching from higher-cost to lower-cost health plans will reduce the overall premium increase by 1.2 percent from what it would otherwise have been; since 1997, enrollee switching has reduced average premium increases by about 1 percent per year.21

  • This year the FEHBP will likely outperform other large insurance purchasers in controlling costs, further reinforcing its solid record of cost control
    Throughout most of its history, the FEHBP has outperformed private-sector corporate plans in controlling health care costs. In its report, the GAO notes that the unique federal program outperformed other large employers in the first half of the past decade, but FEHBP premiums rose faster than those of large employers in the past five years. According to the GAO,
Since 1991, the average increase in premiums for FEHBP has been similar to those of other major purchasers. Premiums for FEHBP, CalPERS, and other large employers increased on average, about 6 percent per year from 1991 through 2002. FEHBP premium increases were lower than other purchasers' average from 1991 to 1996, while from 1997 to 2002 FEHBP's premium increases were higher than other large purchasers. The 11 percent average premium increase for 2003 for all FEHBP plans that OPM announced in September 2002 represents a lower rate of increase than FEHBP's 13.3 percent average increase in 2002 and is less than some employee-benefit experts expect for many other purchasers.22
  • During the 1980s, the FEHBP registered a clearly superior record in controlling costs. According to a Congressional Research Service analysis, during the period 1980 through 1988, FEHBP premiums increased by an average of 12 percent while private-sector plans rose by an average of 14 percent.23

    This performance is all the more remarkable when one considers that FEHBP plans do not limit or exclude retiree coverage, or require employees or retirees to endure waiting periods, or face limitations or exclusions from coverage because of pre-existing medical conditions. In sharp contrast to Medicare, the FEHBP does not attempt to "control costs" by relying on complicated systems of administrative pricing, the imposition of complex fee schedules for doctors and hospitals, or price controls. And, as noted, FEHBP plans cover catastrophic illness and expensive prescription drugs; Medicare does not.

  • The FEHBP's record of cost control is even more impressive given the composition of its pool
    While the FEHBP has had a progressively richer benefits package, analysts should realize that the FEHBP pool is increasingly composed of retirees and an aging federal workforce, which translates into a proportionately higher demand for medical services.

    What this means, of course, is that the FEHBP's performance is even more relevant as a model for Medicare reform than many Washington policymakers realize. As the GAO has noted, "From 1998 through 2000, the average age of the FEHBP enrollees increased about half a year, from 61.6 years to 62.1 years."24 OPM actuaries, says the GAO, estimate that every one-year increase in the average age of the federal employee pool results in a 3.3 percent increase in "total health care costs."25


President George W. Bush has proposed a major reform of the financially troubled and managerially challenged Medicare program. It is long past time for an honest, open, and serious national debate on the future of Medicare.

In his State of the Union address, the President indicated that the model for Medicare reform should be the popular and successful Federal Employees Health Benefits Program, which covers the White House, Members of Congress, congressional staff, and 8.3 million federal employees, retirees, and their dependents. The model for Medicare reform is therefore not some policy analyst's abstraction, but a working 43-year-old program. The General Accounting Office, fiscal investigative arm of Congress, has described clearly how the program works, including its broad choice of plans, its historical deference to the personal choices of consumers, its flexibility in benefits and administration, its capacity for innovation, and its solid record in controlling costs.

Clearly, the FEHBP is the best model for Medicare reform. The model is not the flawed Medicare+Choice program, some ambiguous future system of HMO networks, or conventional private, employer-based health insurance. More important, Members of Congress, regardless of their position on the future of Medicare, can no longer avoid answering some direct questions from ordinary Americans about the program in which they and their families are already enrolled.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.

1. "And just like you, the members of Congress, and your staffs and other federal employees, all seniors should have the choice of a health care plan that provides prescription drugs." President George W. Bush, State of the Union Address, January 28, 2003. In a separate set of talking points on the President's State of the Union address, White House officials on January 28 clarified the point: "All seniors will be given choices of a variety of health plans--similar to those enjoyed by Members of Congress."

2. U.S. General Accounting Office, Federal Employees' Health Plans: Premium Growth and OPM's Role in Negotiating Benefits, Report to the Subcommittee on International Security, Proliferation, and Federal Services, Committee on Governmental Affairs, U.S. Senate, GAO-03-236, December 2002.

3. The comparisons were made with large purchasers such as CalPERS (the plan that covers California public employees), the Pacific Business Group on Health, and General Motors.

4. GAO, Federal Employees' Health Plans, p. 4.

5. Ibid., p. 6.

6. Ibid.

7. Ibid., p. 7. A number of the health plans are offered by and for employee organizations and associations, such as the Foreign Service plan and the Secret Service plan.

8. Ibid., p. 6.

9. Ibid., p. 7.

10. Ibid., p. 7.

11. Ibid., p. 6.

12. Ibid., p. 3.

13. Ibid., p. 21.

14. Ibid., p. 13 (emphasis added).

15. Ibid., p. 14.

16. Ibid., p. 20.

17. U.S. General Accounting Office, Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies, Report to the Honorable Byron L. Dorgan, U.S. Senate, GAO-03-196, January 2003, at www.gao.gov/cgi-bin/getrpt?GAO-03-196.

18. Ibid.

19. GAO, Federal Employees' Health Plan, p. 4.

20. Ibid., p. 6.

21. Ibid., p. 12.

22. Ibid., p. 2.

23. See U.S. Congress, Committee on Post Office and Civil Service, The Federal Employees Health Benefits Program: Possible Strategies for Reform, a report prepared by the Congressional Research Service, Committee Print 101-5, May 24, 1989, p. 50.

24. Ibid., p. 16. Based on the three largest plans.

25. Ibid.


Robert Moffit

Senior Fellow