Members of the House-Senate conference on
Medicare legislation are deciding the future of the Medicare
program. Section 241 of the Medicare Prescription Drug and
Modernization Act, passed by the House of Representatives, attempts
to create a reformed Medicare system in 2010. The Senate version
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.
Significantly, the authors of the House bill have as an explicit
objective the creation of an "FEHBP-style" competitive system for
the next generation of retirees. In recent years, however, the
FEHBP's performance has been increasingly misrepresented, either
directly or by implication, by ardent defenders of the statist
Medicare model.
Congressional Opposition
In
the meantime, many Members of Congress are strongly opposed to the
creation of a Medicare program based specifically on the FEHBP.
Recently, Representative Lincoln Davis (D-TN) offered a motion to
instruct the House conferees to reject the provisions of Section
241, Subtitle C of Title II of the Medicare Prescription Drug and
Modernization Act, which would provide for the application of an
FEHBP-style competitive reform beginning in 2010. Although the
motion failed by a vote of 221 to 191, the strength of
congressional opposition to the FEHBP model is curious, since
Members of Congress are invariably enrolled in this popular
program. It is also mysterious since the House of Representatives
recently passed legislation to protect federal and congressional
retirees from the future impact of the Medicare legislation in the
House-Senate conference.
While many Members of Congress somehow
believe that the FEHBP is an inferior option for America's
retirees, many leading health policy analysts who have examined
both the FEHBP and Medicare are convinced otherwise. For example,
Harry Cain, former vice president of the Blue Cross/Blue Shield
Association and a careful student of both the FEHBP and Medicare,
opined several years ago that "the FEHBP has outperformed Medicare
every which way--in containment of costs both to consumers and the
government, in benefit and product innovation and modernization,
and in consumer satisfaction."
There are ample data to support these
conclusions, dispel misconceptions about the FEHBP, and guide
Medicare reform. 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 (FFS) or preferred provider organization (PPO)
plans and 63 percent of enrollees in health maintenance
organizations (HMO) 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's costs over most or all of the life of the
Medicare program.
A
recent Joint Economic Committee report reached similar conclusions.
That study found that over the period 1983 to 2002, the average
annual increase in Medicare spending was 6.7 percent, the average
annual increase in FEHBP spending was 6.5 percent, and the average
annual increase in FEHBP spending without drugs was 5.8 percent.
Misrepresenting FEHBP Performance
Careful analysis of the FEHBP model is
particularly important, as previously noted, because of the extent
to which its performance has been subject to misrepresentation. For
example, analysts at the Commonwealth Fund recently published an
analysis described in its abstract as an answer to those who
seek to remake the federal health
insurance program for the elderly...on the model of the...Federal
Employees Health Benefits Program. This paper...rebuts those
argu-ments by showing that Medicare bene-ficiaries are more
satisfied with, have better access to, and have greater confidence
about their access to health care, and they report having fewer
financial problems as a result of medical bills than those enrolled
in private employer plans.
Likewise, the Kaiser Family Foundation
recently published an analysis claiming that the "FEHBP has
done...slightly worse than Medicare, on average, [in controlling
costs] since 1996." The selection of 1996 as a
base year leads to a conclusion contradicting the author's own
analysis in a prior Kaiser Family Foundation report showing that
the FEHBP outperformed Medicare very substantially from 1992 to
1997.
This same author persistently states that there are only six plans
available to all federal employees and retirees when there are in
fact 12 plans available to all, and 15 to 20 available to most.
Yet
another report comparing the FEHBP to Medicare, published by Public
Citizen, is subtitled "Limiting Choice of Doctors" and is
accompanied by a press release saying that "this study shows that
the Bush administration's [Medicare reform] plan would really place
beneficiaries between a rock and a hard place."
Upon
analysis, all three of these reports contain misrepresentations.
Interestingly, the actual data and analysis presented in all three
analyses are also far less negative than claimed.
Nine Reasons Why the FEHBP Is Superior to
Medicare
REASON #1:
Health Benefits
Medicare serves as a lifeline to the elderly of America.
Its coverage of hospital and doctor costs is vital to the economic
well-being and survival of millions.
Yet Medicare is infamous for its obsolete,
vintage 1960 design. It does not provide a catastrophic ceiling on
costs even for those costs it covers. It does not cover
prescription drugs, except in rare instances. It does not cover
many preventive services. It does not cover dental services. By
failing to cover health care costs incurred abroad (except in
Canada and Mexico), it forces the elderly either to forgo
retirement travel outside of North America or to obtain other
coverage. Indeed, Medicare coverage is so deficient that over 90
percent of its enrollees purchase supplementary insurance or have
it purchased for them.
The FEHBP has none of these deficiencies.
It has painlessly evolved over time through the competitive,
consumer-driven process that is its central feature. The Medicare
plan can be rated for its benefit coverage in 2003, compared to
average FEHBP plans. For a retired person without dual coverage,
for example, cost comparisons demonstrate that FEHBP retirement
benefit coverage is far superior to Medicare's. (See Table 1.)
There is another significant dimension of
benefit superiority. In both programs, the great majority of common
hospital and physician procedures are covered routinely. However,
at the margin, Medicare coverage choices are dictated either by
statutory law or by administrative law dictated through the
Medicare coverage processes. Although there is some variation by
area because of carrier discretion, this tends to be minimal.
Further, all Medicare HMOs are required to offer benefit coverage
identical to that in traditional Medicare.
In the FEHBP, coverage choices are made by
individual plans. This means that consumers can seek out plans that
have better coverage for particular services of importance to them.
Acupuncture, cardiac rehabilitation, expensive dental procedures,
and other services are usually available, at a price, in some
available plan. Medically proven procedures, such as pancreas-only
transplants and the latest advances in pacemakers, are covered in
all or almost all FEHBP plans but are often covered by Medicare
only after years of delay, if ever. And FEHBP plans are free to
cover, and often do cover, services that they would not ordinarily
cover if the services are approved as part of a case management
package tailored to a particular enrollee's needs.
During the 10-year period ending in 1992,
out-of-pocket costs in the FEHBP for a market basket of hospital,
medical, drug, and dental costs decreased from about 32 percent of
total costs per enrollee to about 20 percent of total costs. This
improvement resulted from benefit improvements in both FFS and HMO
plans and from a significant shift in enrollment from the former
(higher cost) to the latter (lower cost).
Both sources of improvement have largely
halted in the past decade, primarily because of rising prescription
drug costs and increases in copayments aimed at restraining these
costs. Furthermore, copayments play a significant role in
restraining FEHBP costs, and plans have very little room left for
copayment reduction without facing untenable cost and premium
increases.
Finally, as plans approach complete
coverage, the margin for further improvements necessarily
decreases. However, no such improve-ment has ever occurred in
Medicare, whose benefits on a market basket basis have deteriorated
over this entire period.
REASON #2:
Provider Choice and Access
In a sense, Medicare is one of America's relatively few
remaining FFS medical plans. Most private plans either limit
provider choices substantially or, as is quite common, provide
differential cost sharing depending on whether or not the provider
is "preferred." Of course, Medicare is not really a fee-for-service
plan since it regulates prices and, indeed, makes it illegal for
providers to negotiate higher prices with enrollees and still be
reimbursed.
Almost all of the FEHBP national plans
allow enrollees to go "out of plan" and pay only one-fourth of a
reasonable charge. These plans' reimbursements are more favorable
for "preferred" physicians, but some payment is available whether
or not the physician has an arrangement with the insurance company.
At worst, the patient pays the bill and then gets reimbursed
directly by the insurance company. Every federal retiree can join
any of a dozen health plans that reimburse costs for virtually any
physician who accepts private patients.
More physicians are available through the
FEHBP than through Medicare. The Medicare Payment Advisory
Commission, which advises Congress on Medicare physician payment,
also surveys physicians. In its most recent report, the panel found
that physicians are significantly less willing to accept Medicare
patients than private plan patients.
Specifically, in 2002, over 99 percent of
physicians accepted private FFS and PPO patients, but only 96
percent accepted Medicare patients. This is a seemingly small
difference, but if it includes a person's doctor or the best
specialist in town, it can have a major effect on that person's
health care. Until the recently enacted increases in Medicare
payments, the proportion of physicians unwilling to accept Medicare
patients was apparently about to rise substantially.
In this context, the FEHBP has a
significant advantage over Medicare because of its multiplicity of
plans. In 2003, every federal employee or retiree, no matter where
he or she lives, anywhere in America or anywhere in the world, has
no fewer than 12 plan options from which to choose.
Federal retirees in areas covered by
participating HMOs have additional plans from which to choose.
Thus, while a retiree in North Dakota or Wyoming may have "only" 12
plan choices, a retiree living in a medium- and large-size city
will typically have several more plan options. In the larger
metropolitan areas, where the great majority of both Medicare and
FEHBP retirees reside, about 20 plan choices are often available to
federal retirees.
Public Citizen, a self-styled consumer
interest organization, has published a particularly misleading
analysis of access. It purports to examine the
effect of Medicare "beneficiaries' choice of doctor if they were
enticed to join private PPO plans." The analysis focuses on four
counties in each of five states and compares FEHBP PPOs to
Medicare, focusing on primary care and two specialties, cardiology
and oncology.
In a sense, the study's findings are
unexceptionable. In general, it finds that only one-third to
one-half of Medicare participating physicians are preferred
providers. Of course, this is true. The purpose of preferred
provider panels is to selectively enroll a fraction of all
physicians.
The Public Citizen report, however, makes
this appear like a sinister result, neglecting to mention that
federal employees in these same PPO plans are remarkably satisfied
with their access to care, with about 90 percent giving these plans
the two highest ratings on "getting needed care," "getting care
quickly," and "getting referrals to specialists."
REASON #3: Rural
Access
Of particular concern to rural Americans is the absence of
plan choices in the areas in which they live. One recent analysis
by the Rural Policy Research Institute (RUPRI) shows that under
Medicare+Choice (M+C), only 7 percent of rural counties offer
Medicare beneficiaries any choice of plan beyond traditional
Medicare. In contrast, using an
overly conservative methodology that significantly understates
choice in the FEHBP by using enrollment levels rather than actual
plan availability, the RUPRI study finds that 87 percent of rural
counties enroll federal employees and retirees in six or more plans
and that 98 percent enroll them in three or more plans.
Another study, published by the Kaiser
Family Foundation, attempts to minimize the FEHBP's strong rural
access by claiming that, "unless participants in more isolated
areas are willing to travel long distances or pay extra amounts for
care, they may find that only one or two plans offer meaningful
access to services." This analysis focuses on
Lebanon, Kansas, and states that only two plans (actually, four
plans because the analyst erroneously ignores dual plan options)
offer preferred primary care providers within 25 miles.
This is true, but three of the dismissed
FEHBP plans (including the National Association of Letter Carriers
plan and the two Mailhandlers plans) use the FirstHealth network
and offer 694 preferred physicians and clinics within 50 miles, a
large total for a town that is not within one hundred miles of a
metropolitan area. Further, why should the study cavalierly dismiss
these and other plans when they pay 70 percent or 75 percent of the
charge for any physician in or near Lebanon simply because this
requires participants to "pay extra amounts for care" compared to
the less costly preferred provider rate? Why is 75 percent
reimbursement of reasonable physician charges characterized as less
than "meaningful access" to services?
Regardless of how one characterizes access
in Lebanon, Kansas, a proper comparison would cover a larger number
of rural areas because preferred provider networks vary from place
to place and no network is equally comprehensive everywhere.
Furthermore, the fundamental access problem for rural Americans
encompasses specialist care and hospitals, not just primary
care.
One of the interesting areas in the RUPRI
analysis is Kenedy County in southwest Texas. This county has fewer
than 500 residents, and RUPRI scores it as one of the 2 percent
most underserved areas in the FEHBP because federal employees and
annuitants among these residents have signed up for no more than
two plans. Residents of Sarita, the
primary town in this Texas county, have no physicians or hospitals
that are preferred providers within 20 miles under the FirstHealth
network.
But Kenedy County is only one county
removed from Corpus Christi, Texas. Using a 50-mile-radius search
that reaches that metropolitan area, Sarita residents have 13
hospitals and 694 physicians and clinics available under the
supposedly inferior FirstHealth network.
FirstHealth may not be quite as
comprehensive as Blue Cross or the other FEHBP networks, but it
does contract as preferred provider with over 4,000 hospitals and
almost 400,000 ambulatory providers. With this kind of reach, it
obviously provides substantial preferred provider access to
virtually all rural residents of the United States. The same can be
said for all of the provider networks used by the national FEHBP
plans.
Public Citizen charges that Medicare
beneficiaries would have highly limited access to care in PPOs.
Table after table shows only zero, one, or two preferred
specialists available in rural counties. Much of this alleged
scarcity of physician access results from a cleverly misleading
analytic approach.
The Public Citizen report counts the
number of participating physicians in each plan by county, but
ordinary Americans do not get health care by county. Neither
hospitals nor physicians are randomly scattered throughout
counties. Instead, they tend to cluster together in cities, often
in cities just across county lines. People in rural areas around
those cities do not look across the road to the farming village for
specialist health care; instead, they travel 10, 25, or 50 miles to
the city for the specialized care they need.
As an example, Public Citizen presents
tables showing that no FEHBP plan has more than one preferred
cardiologist or oncologist--and most have none--in Franklin County,
Maine. In fact, taking Farmington (the largest town in Franklin
County) as the starting point, several FEHBP plans have 50 or more
preferred provider cardiologists and 10 or more oncologists within
50 miles.
REASON #4:
Innovation and Reform
The importance of health plan choices, of course, goes far
beyond serving patient needs for provider choice and benefit
options. The FEHBP, like most other services in the U.S. economy,
relies on competition for consumers to improve quality and restrain
costs. For example, plans are free to add, drop, increase, or
decrease deductibles.
These are not trivial decisions.
Deductibles have substantial effects on consumer acceptance,
premiums, and health care utilization. Plans that strike the right
balance do best over time. Persistent wide variations in
deductibles over time suggest that there is more than one "right"
model.
In fact, most plan benefits are quite
stable. Deductibles are infrequently changed. But some benefits do
change rapidly in most plans.
Notable for experimentation and change are
plan payments for prescription drugs. Ten or 15 years ago, most
plans charged either a nominal copayment or a modest coinsurance
percentage for all drugs. Enrollees were free to go to the drug
store of their choice. Mail order and formularies were almost
nonexistent.
In the past decade, with ever increasing
spending on drugs--reflecting mainly new drugs with major new
therapeutic benefits--plans have vigorously changed their
approaches. Today, most plans have a six-tier benefit structure for
drugs. There is one set of copayments for mail order, and another
somewhat higher set is for preferred pharmacies. Generic drugs cost
the enrollee the lowest copayment, preferred name-brand drugs on
the formulary cost somewhat more, and other name-brand drugs cost
the most.
One can only imagine the political turmoil
and potential for unnecessarily costly or constraining decisions if
price controls and formularies were proposed as features of a
Medicare drug benefit. It is inconceivable that such a benefit,
once enacted into law under the standard Medicare approach, would
receive the kind of nimble evolutionary adjustments used in the
FEHBP as plans jockey for the best mix of generosity and cost
control in order to attract customers.
Current FEHBP drug benefit structures
place both the burden and the opportunity for decision-making on
the enrollee. They encourage frugality but allow for medical
necessity. They have evolved virtually without political
controversy and without legislative and bureaucratic fiat. This has
proven effective in restraining drug spending and saving both the
payer and the enrollees a great deal in premium costs.
Based on RAND research, the annual savings
to the FEHBP from current tiered payment systems is approximately
$500 million annually: about 2 percent to 3 percent of program-wide
premium costs, shared by the government and enrollees. Additional
savings from the use of pharmacy benefit managers (PBMs) may equal
or exceed those from tiered copayments. Adoption and continuing
reform of prescription drug and other benefits in the FEHBP has
been politically and programmatically painless while saving
billions of dollars over time.
"Open season" is the annual opportunity,
each fall, for federal employees and annuitants to "vote with their
feet" by switching plans. Although only about 5 percent change
plans each year, this annual switching generates relentless and
continuing pressure on all plans to adapt and improve services
while controlling costs. In contrast, most private employers
frequently attempt to lower costs by changing their single plan
from one insurance company to another. This imposes major
disruptions on their employees and their families, who are forced
to change physicians when involuntarily transferred from Plan A to
Plan B.
Paradoxically, the seemingly radical FEHBP
system of continuous competition is far more stable. This stability
benefits enrollees not only directly and immediately, but also over
time, since plans retain incentives to invest in preventive care
today to avoid higher expense years in the future.
REASON #5:
Consumer Satisfaction
Consumer satisfaction is difficult to measure fairly,
particularly in comparing Medicare to the FEHBP. However, the
innovative use of quality information in the FEHBP program by the
Office of Personnel Management (OPM) has led to the adoption of
participant surveys. These surveys measure overall satisfaction as
well as specific dimensions of plan performance, such as getting
needed care, how well doctors communicate, and claims processing.
By providing this information to enrollees, the OPM has
significantly aided them in plan selection.
The most recent survey shows that about 79
percent of FFS and PPO enrollees and 63 percent of HMO enrollees
rate their plans 8 or higher on a scale of 1 to 10. Taking
into account both open season movement and survey results, the
overall level of enrollee satisfaction with the FEHBP is clearly
very high.
A recent Commonwealth Fund Survey of
Health Insurance compared Medicare and private insurance. It found
that 85 percent of Medicare elderly rated their plan as good, very
good, or excellent. In contrast, "only" 81 percent of those
privately insured and of working age rated their plans as highly.
However, these results really prove nothing. It is well-known that
plan satisfaction increases with age of respondent. Younger
enrollees are far more critical.
This largely explains the differential
between FFS and PPO ratings in the FEHBP, since HMOs
disproportionately attract younger enrollees. HMOs enroll 40
percent of federal employees but only 10 percent of retirees. In
the Commonwealth survey, an 81 percent favorable rating by those
aged 19 to 64, compared to 85 percent favorable among those aged 65
or more, arguably shows that private health plans would actually be
rated far higher by consumers than Medicare if available equally to
each age group.
Finally, the reported results failed to
distinguish between the elderly enrolled in Medicare alone, without
any supplementary benefits, and the roughly 90 percent who have
supplemental plans, including retirees simultaneously enrolled in
Medicare and the FEHBP--an extraordinarily rich benefit
combination. Thus, the results say nothing at all about
satisfaction with traditional Medicare standing alone. Indeed, the
survey shows that the Medicare disabled--a younger group much less
likely to have a supplemental benefit--give Medicare only a 66
percent favorable rating. Thus, among the respondents who are below
age 65, Medicare scores far worse than private health plans.
Another recent survey, sponsored by the
American Association of Health Plans, offers additional evidence on
seniors' views of health plans. This survey, in which the
respondents were exclusively elderly, found that 72 percent of
seniors enrolled in traditional Medicare (88 percent among M+C
enrollees) believed that a choice of plans was important.
On a variety of measures of plan
satisfaction, enrollees in traditional Medicare and M+C showed
essentially identical satisfaction levels. For example, 82 percent
of the traditional Medicare enrollees and 79 percent of M+C
enrollees were very or somewhat satisfied with the benefits they
received. This is expected since the overwhelming majority of the
former group has supplemental benefits and presumably re-sponded
based on their total benefit package. Just as for the Commonwealth
survey, one can reasonably assume that those enrolled in
traditional Medicare alone, without either supplemental benefits or
an M+C option, would have registered far lower satisfaction
levels.
REASON #6:
Guaranteed Solid Benefits
The FEHBP and Medicare programs differ fundamentally in
several ways, one of which is the difference between a "premium
support" structure and a "defined benefit" structure. A study by
the American Association of Retired Persons argues that the
Medicare approach is better because the benefits are "entitlements"
that are "protected" by law. This line of argument is
fundamentally flawed in three ways.
First, statutorily defined benefits can be
taken away whether or not they are defined as legal entitlements.
The Medicare deductible was set by law at $50 but is now $100.
Congress once enacted prescription drug benefits and then repealed
them. Indeed, Congress amends the Medicare statute every year. As
the program steadily progresses toward insolvency, maintenance of
current benefit levels hardly seems assured.
The FEHBP is also an "entitlement," but it
is handled differently. The FEHBP premium level is "protected" by
law, and the "entitlement" formula that defines it provides a
substantially better level of insurance benefits than Medicare. The
entitlement says, in essence, that the government pays 75 percent
of the average cost of plans that enrollees voluntarily choose.
Indeed, unlike Medicare, the FEHBP statute has never been amended
to reduce enrollee benefits.
Second, FEHBP benefits have been superior
to Medicare benefits for decades. The "defined benefit" has become
a guarantee of second-rate benefits, and the allegedly weaker
"premium support" guarantee has proven a superior guarantor of
benefits.
Third, premiums and benefits can be
guaranteed in statute without having every benefit enumerated in
excruciating, micromanaged detail as is done with Medicare.
Enrollees can be guaranteed by law an actuarially reasonable value
of benefits, both overall and in broad categories such as hospital
or drugs. Within such constraints, plans can make the decisions,
for example, as to which deductibles (if any) to use, where to set
deductible levels, where to set copayment and coinsurance levels,
whether or not to tier benefits, which treatments to accept as
medically proven, and where to set the catastrophic guarantee
level.
In fact, this is essentially how the OPM
operates the FEHBP. The FEHBP statute could be amended to
explicitly guarantee actuarial fairness and soundness tests better
than those of Medicare without changing the program in any way.
The "premium support" model used by the
FEHBP has proven to be both better and safer as an entitlement than
the "defined benefit" Medicare model.
REASON #7:
Promoting Consumer Understanding
It is often alleged that consumers, particularly elderly
consumers, cannot handle the complications of a competitive plan
system. After all, many consumers do not understand traditional
Medicare itself.
However, while choice certainly is more
complicated than no choice, no evidence shows that consumer choice
poses any more of a problem for health insurance than for any other
product or service. The elderly choose their own doctors,
automobiles, foods, and living arrangements. Any of these is as--or
more--complicated than choosing health insurance. What is truly
bizarre about these academic discussions is that they often contain
no--or minimal--references to the rich informational resources
available to federal retirees.
Medicare's Communications Problem.
Furthermore, criticisms of plan choice implicitly assume that
traditional Medicare poses little or no information burden. In
fact, traditional Medicare creates difficult informational problems
and choices.
For example, upon turning age 65, most
people have a choice among various Medigap plans, but they receive
little or no information from Medicare or any other source as to
the comparative value of such plans. Low-income beneficiaries may
be eligible for Medicare supplement and premium payments, but they
are rarely informed of these benefits. If they attempt to explore
the benefits, they are faced with the daunting Medicaid
bureaucracies. Hundreds of thousands of older workers (e.g., state
employees hired before 1986) are not even eligible for Medicare but
do not know it. Errors in Medicare
decision-making expose the elderly to financially disastrous
mistakes.
These problems are so serious that one
analyst calls for new informational campaigns and for reforming
state application processes, arguing for the need to "act now to
fix the programs that we already have in place" before modernizing
Medicare.
In contrast, the FEHBP program poses few
"gotchas" and is essentially free of complex decision issues. The
worst potential financial error arises from the requirement that
enrollees participate continuously in the program for five years
before retirement to retain benefits after retirement. The most
complex decision is the choice at age 65 as to whether or not to
enroll in Medicare Part B to supplement the FEHBP benefit. In the
FEHBP, unlike traditional Medicare, errors in plan enrollment
decisions and changing circumstances can be remedied or
accommodated each year in the annual open season.
Federal employees and retirees are, on
average, better educated than Medicare beneficiaries. The average
working American is also better educated than the elderly and far
less likely to suffer mental impairments. But no system of choices
in our society--whether choices of friends, spouses, foods,
automobiles, or anything else--depends on every single consumer's
being smart and well-informed. Errors inevitably occur, but that is
the price of individual autonomy in decision-making.
Most fundamentally, criticisms of choice
based on decision complexity create a ridiculous standard. How many
consumers of any age or educational level understand the innate
workings of automobiles--the physics of and technology used in
engine, transmission, braking, and other systems? Yet, somehow,
through magazine ratings, recommendations of friends, test drives,
modest government oversight and regulation, past experience, and
above all the pressures of a competitive marketplace, the elderly
overwhelmingly select and use cars that are effective, durable,
safe, comfortable, and economical. Banning competition in the
automobile industry because some consumers are ignorant or
uninformed, or even incapable of understanding certain
complexities, and a few therefore make bad choices would be
absurd.
The entire economy rests on consumers
making choices among tens of thousands of competing goods and
services, choices that are analytically complex beyond even the
abilities of Consumer Reports to simplify in its relative handful
of comparative analyses. Somehow, despite all these complexities,
some critics identify health insurance as the one service that will
overwhelm normal cognitive abilities and choice among plans as the
one decision that consumers cannot be trusted to make.
Comparative Information. Competitive
choice among health plans is certainly facilitated by careful
oversight and information dissemination. The OPM has done this, and
the private market has provided additional information to consumers
and those family and friends who advise them. However, most consumers do
not rely primarily on these formal and organized information
sources. Instead, they use their own experience, the experience of
friends and neighbors, and--above all--the market-driven menu of
good options to make annual decisions among plans.
Since most FEHBP plans are excellent
choices, overwhelmingly satisfying enrollee preferences for
benefits, provider choices, responsiveness, and cost, 95 percent or
so make the simplest possible choice each year: remaining in the
same plan. In contrast to federal employees, the elderly do not
have coworkers to advise them on plan selection. But seniors have
information networks of their own, including an extensive system of
counselors located in area aging agencies.
Confusion in choosing among competing
products has simply not been a problem for the millions of federal
annuitants who, over the years, have benefited from their plan
selection decisions. If Medicare is reformed into a pro-consumer
choice system, assuring adequate information will not be difficult
if the OPM approach is emulated and the private sector is
encouraged to supplement government information.
REASON #8:
Controlling Adverse Selection
Some argue that any form of multiple plan choice will
necessarily lead to destructive risk selection and unpredictable
exit and entrance of plans--the dreaded "death spiral." The FEHBP
has no system of any kind for managing risk selection. In
contrast, Medicare ceaselessly searches for improved methods of
fine-tuning its risk-management features. Reform of the Adjusted
Average Per Capita Cost formula was delayed for a decade or more
because no one could devise a perfect system. The long-delayed
reform failed again to correct the fundamental design error: that
well-managed health care does not in fact cost 50 percent more in
one place than another.
There is even a respectable argument that
some risk selection is desirable. For example, if people with
dental problems tend to join plans with better dental benefits and
willingly pay the full marginal cost of their decision, what
ethical or managerial principle is violated?
The FEHBP has survived for four decades
with no management of risk selection other than the stability
inherently produced by its insurance subsidy. Curtis Florence and
Ken Thorpe, analysts at Emory University, recently concluded that
the program has almost no measurable adverse risk selection. An earlier
Kaiser Family Foundation study, while critical, nonetheless
concluded that the "FEHBP's stability may amount to stable biased
selection."
Whatever circumstances may lead to the
"death spiral," they do not obtain in the FEHBP. Amusingly, program
critics like to cite the 1990 departure of the Aetna FFS plan from
the FEHBP. However, Aetna was dropping all of its FFS products at
that time and simply found its increasingly marginal FEHBP position
a convenient excuse to leave the program.
A related and often repeated accusation is
that FEHBP plans will attempt to "cherry pick" lower-risk enrollees
through benefit design, selective coverage of geographic areas, and
selective advertising. This is the principal argument advanced for
requiring all plans to provide identical benefits. However, no such
behavior has ever been observed: The accusation is pure
hyperbole.
REASON #9:
Achieving Superior Cost Control
The most recent comprehensive examination of cost control
found that the FEHBP had actually controlled costs slightly better
than Medicare. This author's updated
analysis of those data now shows that the two programs roughly tie
when costs are analyzed without regard to benefit changes. (See
Figure 1.) However, when benefit improvements are taken into
account, the FEHBP maintains its superiority in cost control.
Each program has good years and bad years,
and these do not correspond in any simple way. By careful selection
of the base year, it is easy to "prove" that one program
outperforms the other. Depending on the length of the comparison
(e.g., one, three, five, or 10 years), the answer can vary
dramatically.
To get around these problems, one good
method is to use multiple rolling averages covering 10 years. This
shows long-term performance without the noise that affects shorter
comparisons. One needs multiple 10-year comparisons because the
latest one can be (and usually is) unduly influenced by a
particular good or bad base year in one program or the other. Table
2 shows the latest results. (See the Appendix for the raw
data.)
In recent years, both programs have had a
10-year average cost increase of around 5 percent or 6 percent per
year. Over the full set of comparisons, the programs have differed
by more than 1 percentage point only a few times. Measured this
way, the cumulative difference over 28 years is a 1 percent
advantage for Medicare.
Another way to view relative performance
over time is to chart the average cost per enrollee, using the same
data. As shown above, the FEHBP and Medicare both started and ended
at almost exactly the same levels over the 28-year period. However,
during this period, the FEHBP was consistently below the Medicare
level, often by substantial amounts. Hence, the FEHBP cumulatively
saved substantial amounts compared to Medicare. And this comparison
does not include adjustments for improvements in FEHBP benefits
over time.
In summary, the FEHBP and Medicare
programs have virtually identical records over time on controlling
costs, ignoring substantial and costly benefit improvements in the
FEHBP. Put another way, after accounting for benefit improvements,
the FEHBP clearly outperforms Medicare in cost control.
In recent years, however, Medicare has had
an advantage, and the future performance of these programs is
almost impossible to predict. One substantial problem facing the
FEHBP is that, with recent increases in government cost sharing,
enrollees pay only about 17 percent of after-tax premium costs (as
compared to 25 percent before tax), and incentives to attenuate
cost and premium differences are greatly attenuated from those of
past years.
It should not be surprising that the
records are broadly similar, since both programs operate in the
context of the American health care system, with the same
underlying structure of hospitals, doctors, costs, technological
changes, and a myriad of other commonalities.
However, viewed another way, it is a
surprise. The Medicare Administrator operates a system of price
controls. As Congress has so amply demonstrated in its recent
flip-flop attempts to set physician, hospital, and M+C
reimbursements at the "right" levels (determined in large part by
the decibel level of the political outcry), price controls can be
set arbitrarily within a fairly broad range. Medicare, therefore,
could outperform the FEHBP in reducing premium costs through
cutbacks in provider prices and income, benefit reductions, and
other government-mandated reductions--health care resources, both
human and bricks and mortar, are not perfectly mobile in the short
run. Thus, the Medicare budget is set ultimately by what the
political system tolerates, not by the market or any objective
method.
There is also the question of how Medicare
compares to the private sector's cost-control experience generally.
One recent and prominent study by Cristina Boccuti and Marilyn
Moon, researchers at the Urban Institute, claims that "Medicare can
be counted on to control per enrollee spending growth over time,
more than private insurers can." This study relies on a
comparison of Medicare and private insurance payment data derived
from National Health Accounts data provided by the agency that
administers Medicare. The data purport to show that since the
mid-1980s, Medicare has consistently outperformed the private
sector in controlling spending on comparable services (e.g.,
excluding prescription drugs because these are not covered by
Medicare).
A competing analysis published by The
Heritage Foundation uses the National Health Accounts data together
with data from the National Medical Care Expenditure Survey (MEPS)
and other sources. It demonstrates that when cost increases are
adjusted for benefit improvements, the private sector at large has
outperformed Medicare over the last 30 years. In other words, whether
looking at private spending in general or the FEHBP in particular,
benefit-adjusted private-sector costs have increased less than
Medicare costs over most or all of the life of the Medicare
program.
This cost-control performance has come
despite (or because of) higher administrative costs for the FEHBP,
paying physicians and other providers more than Medicare, and the
near absence of direct managerial controls. One reason, of course,
is that Medicare lurches from one crisis to another as both
consumers and providers find ways to game the system. In the FEHBP,
plans are ceaselessly looking for ways to control unnecessary
spending, relying on a wide range of techniques. The OPM can urge
plans to adopt useful innovations by simple requests, unencumbered
by the Federal Register process used by the Centers for Medicare
and Medicaid Services, which on average requires years from
inception to final publication of binding rules.
For example, it took years of regulatory
indecision, and ultimately an act of Congress, to stop Medicare
payment for unnecessarily expensive seat-lift chairs, once
routinely prescribed by doctors for patients who saw beautiful and
expensive lounge chairs advertised on television as covered by
Medicare. In the FEHBP, the OPM was not involved, and plans simply
agreed to pay for only the most austere models of seat lifts,
relying on "reasonableness" clauses in their policies.
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. This paper is based largely on the
author's testimony before the Senate Special Committee on Aging on
May 6, 2003, and before the Senate Finance Committee on June 6,
2003.
APPENDIX
