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
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
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.
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
- Real Consumer
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.
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.
- Light and
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
The FEHBP shows
how consumer choice, competition, and light and reasonable
regulation can deliver high quality health care and high levels of
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.
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.
Moffit, Ph.D., is Director of the Center for Health Policy Studies
at The Heritage Foundation.