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 7, 2003 13 min read
Robert E. Moffit
Senior Research Fellow, Center for Health and Welfare Policy
Moffit specializes in health care and entitlement programs, especially Medicare.



President George W. Bush indicated in his State of the Union 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. Senator Bill Frist ( R-TN), the Senate Majority Leader, 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 the conduct of biomedical science at the National Institutes of Health (NIH) to the delivery of the mail at their local post office.


A Working Model. The U.S. General Accounting Office (GAO), the fiscal investigative agency of Congress, has recently conducted a comprehensive analysis of the FEHBP, Federal Employees' Health Plans: Premium Growth and OPM's Role in Negotiating Benefits.[2] The report 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 other large 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 FEHBP is the largest group health insurance program in the world. 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 ordinary Americans discern the reality behind the flood of congressional rhetoric on the subject. 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. 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-services 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 cost drivers 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 together, 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 carries. 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]

    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 buy both the government and enrollees, amounted to $22 billion.[17]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.[18] 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.[19]
  • This year the  FEHBP will likely outperform other large insurance purchasers in controlling costs, reinforcing a solid record of cost control. Throughout most of its history, the FEHBP outperformed private sector corporate plans in controlling health care costs. In its report, 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.[20]


  • 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, with higher demand for medical services. What this means, of course, is that the performance of the FEHBP is even more relevant  as a model of Medicare reform than many Washington  policy makers 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."[21] OPM actuaries, says the GAO, estimate that every 1-year increase in the average age of the federal employee pool results in a 3.3 percent increase in "total health care costs."[22]




The President 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.


The  President has indicated in his State of the Union address 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 not some policy analyst's abstraction, but a working 43-year-old program. The General Accounting Office, the 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 the direct question from ordinary Americans about the program in which they and their families are already enrolled.



[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 Geroge 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 28th 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.


[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]Ibid., p. 4.

[18]Ibid., p. 6.

[19]Ibid., p. 12.

[20]Ibid., p. 2.

[21]Ibid., p. 16.



Robert E. Moffit
Robert Moffit

Senior Research Fellow, Center for Health and Welfare Policy