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Executive Summary #1674 on Health Care

August 7, 2003

Executive Summary: The FEHBP as a Model for Medicare Reform:Separating Fact from Fiction

By

Members of the House-Senate conference on Medicare legislation are deciding the future of the Medicare program.

On the issue of competition among health plans, there are significant differences between the House and Senate bills. Section 241 of the Medicare Prescription Drug and Modernization Act (H.R. 1), passed by the House of Representatives, attempts to create a reformed Medicare system in 2010. The Senate version (S. 1) does not seriously attempt to provide for a consumer-driven version of Medicare reform.

The best model for serious Medicare reform is the Federal Employees Health Benefits Program (FEHBP), the working program that has covered federal workers and retirees for over four decades. The explicit objective of Section 241 of the House bill is to re-create that system for future Medicare beneficiaries. In recent years, the FEHBP's performance has been increasingly misrepresented, either directly or by implication, by ardent defenders of the statist Medicare model.

In fact, however, the FEHBP has clearly outperformed Medicare. For example:

  • The FEHBP is superior to Medicare in providing access to physicians, health plans, and rural health coverage
    Based on recent data, 99 percent of physicians accept national FEHBP plans; FEHBP enrollees always get a choice of between 12 and 20 plans; and FEHBP enrollees in 87 percent of rural counties in America have chosen from among six or more health plans.
  • The FEHBP is superior in providing innovative benefits and satisfying consumers
    Beyond providing prescription drugs and catastrophic protection, FEHBP plans routinely and rapidly upgrade their benefit offerings. Not surprisingly, 78 percent of FEHBP enrollees in fee-for-service or preferred provider organization plans and 63 percent of enrollees in health maintenance organizations rate their plans at 8 or higher on a scale of 1 to 10.
  • The FEHBP is superior in controlling costs
    Based on data comparisons over 28 years, the FEHBP ties Medicare in cost control without regard to benefit changes over time. Taking into consideration these benefit adjustments, FEHBP costs, as with private-sector insurance generally, have increased less than Medicare costs over most or all of the life of the Medicare program.

Misrepresenting FEHBP Performance
Careful analysis of the FEHBP model is particularly important because in recent years the FEHBP's performance has been increasingly misrepresented. Upon analysis, studies published by the Commonwealth Fund, the Kaiser Family Foundation, and Public Citizen contain such misrepresentations. Interestingly, the actual data and analysis they present are far less negative than claimed.

The Components of Real Reform
Members of Congress can reform Medicare based on the FEHBP model, but they must build on the best features of the program. Specifically:

  • Ensure that the government is a good business partner with private plans
    This means providing a reasonable and predictable level of payment to private plans while allowing them to make changes in the details of their benefits packages to cope with consumer demands and changes in medicine.
  • Promote flexibility
    Just like the FEHBP, health plans should be allowed to decide coverage details. Congress should ensure that service areas are flexible, and exempt competing plans from state mandates and regulations.
  • Encourage existing employer-based plans and FEHBP plans to participate in the new Medicare system
    Individuals should be able to keep their existing coverage and take it with them into retirement if they wish to do so, and that should include both public-sector and private-sector retiree coverage.

Conclusion
The choice before Congress ultimately is between these two models--consumer choice or detailed legislative and bureaucratic control of benefit design, prices, and operational decisions. The food stamp program has long demonstrated that it is possible to have a government entitlement that leaves purchasing decisions almost entirely with consumers rather than legislators or bureaucrats.

By good fortune, Congress has a successful example of the consumer choice model in the FEHBP, which meets the health care needs of 9 million federal employees, retirees, and family members. Surely, Congress can use this model to aid in reforming the Medicare program.

Walton Francis is a self-employed economist and policy analyst and has authored the annual CHECKBOOK's Guide to Health Insurance Plans for Federal Employees for the past two decades.

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