Promoting Choice and Controlling Cost: What Congress Can Learn -Again - From its Own Health Insurance Program

Report Health Care Reform

Promoting Choice and Controlling Cost: What Congress Can Learn -Again - From its Own Health Insurance Program

September 20, 2002 9 min read
Senior Fellow
Robert E. Moffit is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

Next year, unlike millions of ordinary Americans, Members of Congress and the nearly 9 million federal workers and retirees enrolled in the Federal Employees Health Benefits Program (FEHBP), a consumer-driven health care program, will be able to choose from an even broader array of health care options. In addition, their ability to make choices will be improved through the availability of new information technology.  OPM is also allowing new health plan option that is still largely unavailable to millions of workers and their families enrolled in the conventional private health insurance.


Unlike many retirees in the private employer-based health insurance system, federal retirees enrolled in the FEHBP have routine access to the full range of health benefits available to active federal employees and are not burdened by extraordinary rate increases or cutbacks in benefits or coverage. And, unlike millions of their fellow citizens who will face much higher cost increases, Members of Congress and federal workers and retirees will benefit from a significant restraint in increases to their health insurance premiums.


After concluding months of sensitive negotiations with private health insurers, the United States Office of Personnel Management (OPM), the agency that runs the popular and successful FEHPB, has just announced the program's rates and benefits packages for 2003. A highlight of these new benefits is a series of policy changes, outlined by OPM Director Kay Cole James and the new management team at OPM, which will improve the program for federal workers and their families. OPM policy is:


Promoting Cost Control. Health care costs are soaring, and the cost driving trends in the health care sector of the economy are affecting the FEHBP. But the FEHBP will experience a slowing of projected average annual cost increases next year. For 2002, OPM projected an average annual health premium increase of 13.3 percent for FEHBP enrollees; for 2003, OPM projects an 11.1 percent increase. As James explains, "Their average health insurance premium increases will be among the lowest in the nation." [1]


Both private employment-based health insurance and many public programs have been burdened with significantly higher health care costs in 2002. For example, the California Public Employees Retirement System( CalPERS)-the second largest group-purchasing program after FEHBP-announced this summer an average annual premium increase of 25 percent for its HMOs.[2] Likewise, in a major survey of private employers, the Kaiser Family Foundation Health Research and Educational Trust found that employer-based health insurance rose 12.7 percent in 2002.[3] A survey of employer-based plans conducted by the Hewitt and Associates, a prominent Washington based consulting firm, estimated that health insurance premiums for HMO coverage alone would climb by 15.3 percent in 2002.[4]  For 2003, in contrast to the 11.1 percent average annual premium cost increase projected for FEHBP enrollees, Hewitt and Associates expects that HMO rates could jump by 20 percent.[5] Similarly, Mercer Human Resources Consulting, another prominent benefits consulting firm, has estimated that companies could face health insurance premium increases of 12 to 15 percent next year. [6]


Promoting Personal Choice and Control. In sharp contrast to the experience of millions of private sector workers, Members of Congress and federal workers and retirees enrolled in the FEHBP will have an expanded menu of plans to choose from in 2003, including innovative private-sector health-care policy options. These enrollees will be able to choose among 188 private health plans nationwide,[7] including various fee-for-service and preferred-provider organizations, as well as managed care plans.


In 2003, FEHBP enrollees can also choose a plan with a special health reimbursement account to pay for medical services. The OPM has accepted a proposal from the American Postal Workers Union (APWU), one of the largest of the postal workers' unions, to offer a new standard option through Definity Health, a prominent company marketing consumer-driven health care. Under the new APWU plan, federal workers could get a health-care spending account worth $1,000 per person or $2,000 per family. Federal workers enrolled in the APWU plan would be able to use this account to pay for visits to their doctor's office, dental and vision care, lab tests, and prescription drugs. If a federal worker or his family spends all of the allotted money in a given year, they must then pay a portion of their medical expenses out of pocket-$600 per person and $1200 per family; thereafter, the plan will cover their medical expenses. If an individual or family does not spend all of the account money in a given year,  the funds in it can be rolled over tax free and added to the account allocation in the following year.[8] This is a dramatic change in health care policy.


And, for the first time, beginning in July 2003, FEHBP enrollees will be able to have access to flexible spending accounts (FSAs), a tax-free health-care account now available to millions of workers in many private corporations for out-of-pocket payments for medical services. Under the OPM guidelines, the FSA option would allow federal workers to deposit up to $3,000 a year in an account tax free to pay for out-of-pocket expenses and up to $5,000 a year tax free for child care and the care of aged parents. [9] It is worth noting that OPM's inclusion of the FSA option is strongly backed by the National Treasury Employees Union.[10] 


Additionally, in accordance with the Bush Administration's commitment to seek legislation to expand medical savings accounts (MSAs) and allow employees each year to roll over unspent FSA funds tax free, OPM has indicated that it will pursue both options for federal workers and their families.


Promoting an Information-Based Health Care Program. OPM has long promoted an effective consumer education program in the FEHBP, enabling federal workers and their families to compare health plans. A number of private-sector organizations, such as Consumers' Checkbook and the National Association of Retired Federal Employees (NARFE), have also published excellent guides comparing plans with regard to benefits, quality and price.


Historically, the OPM's efforts to educate enrollees have been far superior to programs such as that administered by the bureaucracy in the Medicare program. With the advent of information technology, the OPM educational effort has taken a quantum leap forward. OPM is now giving enrollees an opportunity to compare plans on its website (, which includes an interactive comparison tool that enables them to review to comparative plan information in their specific geographic region by entering their zip code. OPM is also developing a special annuitant web site for federal retirees, where they will have access to "custom designed interactive decision support tools to help them make an informed choice." [11]


Promoting Market Friendly Management. In a remarkable policy address to a conference of competing health-care carriers on March 6, 2002, OPM Director Kay Cole James told the insurance executives: "If your proposals are consistent with the President's vision-patient-centered health care, choice, and quality-you will find OPM very receptive. Our job is to provide consumers protection; it is not to dictate choices. We are not going to tell you what to do because the best ideas for helping to contain costs and promote quality are going to come from you in the marketplace. You will have to convince employees that your product is best."[12]


In the meantime, James has ordered OPM staff to rewrite existing OPM regulations in plain English and initiated an outside audit of the accretion of mandated health benefits throughout the past ten years to assess the true cost and impact of federal and state mandates on the FEHBP and its enrollees.


The Lessons for Broader Health Reform. While the massive Medicare program, covering 40 million senior and disabled citizens, suffers from serious problems in governance and will face critical financial problems within the next few years, the FEHBP is financially sound and governed through a light and flexible regulatory regime. While the even larger Medicaid program, the federal-state program that covers the poor and the indigent, is facing a series of financial crises in several states and is cutting back on medical services (including prescription drug coverage) for its enrollees, the FEHBP is expanding the affordable coverage options offered to its enrollees-including federal retirees, who make up approximately 40 percent of the FEHBP population. While millions of Americans are locked into conventional employment-based health care plans, often with little or no choice, and are faced with skyrocketing health care costs in the absence of the restraining influence of consumer-driven market competition, Members of Congress and federal workers and retirees can seek value for their money and are empowered to vote with their feet and drop poorly performing health plans.


OPM's innovations and improvements in the FEHBP this year show, once again, that a model for a patient-centered consumer driven system exists, providing an array of choices and private benefit options. This successful model, based on patient choice and market competition, can be adapted in other arenas-for example, through the introduction of tax credits or premium subsidies to reform the distorted private health insurance market or by introducing premium support and the right choose better health plans for Medicare and Medicaid enrollees.


Real choice and genuine competition, coupled with flexible, market-friendly systems of administration, could provide a superior health care system for all Americans.


Robert E. Moffit Ph.D. is Director of Domestic Policy Studies at the Heritage Foundation, and a former Assistant Director of the United States Office of Personnel Management (OPM) during the Reagan Administration

[1] Hon. Kay Cole James, Director of the United States Office of Personnel Management, remarks on "The 2003 Federal Employees Health Benefits Program Premium Increases,", The United States Office of Personnel Management, September 17, 2002, p.1.

[2]OPM, "The Federal Employees Health Benefits Program," press briefing paper, September 17, 2002.

[3] The Kaiser Family Foundation and the Health Research and Educational Trust, Employer Health Benefits: 2002 Annual Survey, p. 2.

[4] Ceci Connolly, "Health Care's Soaring Cost Takes A Toll,", The Washington Post, July 9, 2002, p. A-1.


[6]Reed Abelson, "'Hard Decisions for Employers as Costs Soar in Health Care," The New York Times, April 18, 2002.

[7] James, 2003 Federal Employees Health Benefits Premium Announcement, p. 1.

[8] Stephen Barr, "Federal Health premiums Rising 11.1 Percent,", The Washington Post,p. B-5.



[11] OPM, press briefing paper, September 17, 2002.

[12]Hon. Kay Cole James, Director of the Office of Personnel Management, address to the Federal Employees health Benefits program Carrier Conference, "FEHBP: Past, Present and Future,", March 6, 2002, p. 4.


Robert Moffit

Senior Fellow