Giving Rural Seniors a Choice of Health Plans: The FEHBP Model forMedicare Reform

Report Health Care Reform

Giving Rural Seniors a Choice of Health Plans: The FEHBP Model forMedicare Reform

April 17, 2003 8 min read
Senior Research Fellow, Health Policy
Nina Owcharenko Schaefer is well known as a champion of patient choice and robust competition in America’s health insurance markets.



Every senior citizen, especially a person living in a rural state, should be able to choose a better health plan and a richer package of benefits, including prescription drug coverage. To guarantee the  right to choose a better plan, Congress should model Medicare reform after the successful Federal Employees Health Benefits Program (FEHBP). Using such a model, all seniors, including those who live in rural districts, would have access to expanded coverage options under an improved and strengthened Medicare program. Specifically, such a model would:


  • Provide rural seniors with a richer benefits package, including drug and catastrophic coverage.
  • Guarantee access to a multiplicity of health plans.
  • Enhance patient satisfaction.

Today's Medicare program does not include prescription drug coverage. Its payment system for reimbursement has proven to be cumbersome and inequitable, especially for those in rural communities. Overall, the program is governed by a rigid bureaucracy that is slow to incorporate and mainstream changes both for services and administration.


Yet these current problems will be dwarfed by future challenges. According to the 2003 Medicare Trustees Report, the program faces insurmountable financing problems that will be exacerbated when approximately 77 million baby boomers reach retirement.[1] Members of Congress should approach these issues by implementing policy changes that bring flexibility to the program and are based on patient choice and control.


The Key Features Of An FEHBP Model For Reform


The Federal Employees Health Benefits Program provides a model for policymakers to consider for improving the Medicare program.[2] The FEBHP provides health care coverage to over 8 million federal employees and federal retirees, including Members of Congress, their families, and their staffs. It covers 2.2 million active workers, 1.9 million retirees, and 4.2 million dependents. The program contracts with fee-for-service plans, managed care plans, and variations on these plans.[3] Individuals are able to choose from the wide assortment of coverage options to find a plan that best meets their personal needs. In 2003, there are 188 choices for individual enrollees.[4]


There are two categories of coverage available under the FEHBP. Enrollees can join:


1.National Fee-for-Service Plans. This category includes traditional fee-for-service options, preferred provider organization (PPO) options, or a variation of these options. Under a traditional fee-for-service option, individuals choose the provider of their choice, and payment by the insurer is either made directly to the provider or by reimbursing the individual patient. Under a PPO option, individuals receive a discounted rate for seeking out those providers who have agreed to the discount. New coverage innovations, such as the health reimbursement account offered by the American Postal Workers Union (APWU), further expand consumer options under this category.[5]


2.Geographical Health Maintenance Organizations (HMOs). This category of options allows insurers to establish a network of providers to serve enrollees in a particular geographic area. While this health care delivery system tends to be more highly managed than the traditional fee-for-service options, it also can be a less costly option. Variations on the typical HMO include a point of service (POS) option, which allows an individual to go "out-of-network" for services but requires that they pay a greater share of the cost for using those non-network providers.


State-by-State Table on choices in FEHBP for HMO's



The Impact of FEHBP on Rural Enrollees


In the FEHBP, rural enrollees have access to a variety of competing coverage options, while the degree of HMO coverage varies state by state. At a minimum, every FEHBP enrollee, including in rural areas, has a choice of 12 competing national fee-for-service options from seven different carriers with varying benefit designs.[6]


Interestingly, the majority of all FEHBP enrollees choose to join a national fee-for-service option. According to Kay Cole James, Director of U.S. Office of Personnel Management (OPM), 72 percent of enrollees join a fee-for-service option while 28 percent join an HMO option.[7]


Furthermore, if an individual (1) lives in a rural area that is also designated a "medically underserved area" and (2) is enrolled in a fee-for-service option, OPM requires that the insurer pay "for covered services provided by any medical practitioner properly licensed under applicable State law."[8]


By promoting a competitive, consumer-oriented system, the FEHBP gives participating individuals, including those in rural areas:

  • More choices. With 12 competing national plans, individuals are able to select the plan that best suits their individual needs. They are able to choose the plan design that includes their doctor and addresses their unique medical needs.
  • Enhanced services. With plans competing for enrollees, insurers must design benefit packages that adjust to meet the demands of enrollees. For example, unlike the existing Medicare program, all plans participating in the FEHBP provide a prescription drug benefit for enrollees regardless of where they live.
  • Better access. While rural areas have fewer provider options, enrollees are still able to access the same services as those that are available to individuals enrolled in similar national plans. In extreme cases of workforce shortages, OPM can require insurers to pay for services from any qualified provider regardless of whether that provider is considered a plan provider.
  • Greater satisfaction. Under the FEBHP model, if a person doesn't  like their plan, that person  can switch to one of its competitors. Therefore, insurers must be more attuned to the needs of their enrollees or risk losing their business. Director James reported that the fee-for-service plans had a 79 percent satisfaction rate among participants and that HMOs has a 63 percent satisfaction rate among participants, higher than the industry average of 62 percent.[9]

Conclusion.If they design it correctly, Members of Congress can use the Federal Employees Health Benefits Plan as a model for Medicare reform. Medicare beneficiaries should have a choice of competing and varying health care plans, as well as the choice to remain in traditional Medicare.


Under a well-designed FEHBP model, seniors, even those in rural communities, would have expanded coverage options that are better able to adapt and incorporate improvements into the delivery of health care services and are more focused on the enrollee. Real market competition will bring about more choice, enhanced services, better access, and greater satisfaction for seniors, all of which are especially important features for those in rural communities.


-Nina Owcharenko is Senior Health Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.

[1]Social Security and Medicare Boards of Trustees, Status of the Social Security and Medicare programs: A 2003 Summary of Annual Reports, p. 1. For further discussion, see Robert E. Moffit, "The 2003 Trustees' Report on the Medicare Program," Heritage Foundation Web Memo No. 223, March 18, 2003.

[2]For a description of how to use such a model for drafting a reform package, see Robert E. Moffit, "The Do's and Don'ts of Medicare Reform," Heritage Foundation Web Memo No. 208, February 14, 2003.

[3]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, December 2002, p.4.

[4]Remarks by The Honorable Kay Cole James, Director, U.S. Office of Personnel Management, at the American Medical Association National Advocacy Conference, Washington, D.C., March 4, 2003.

[5]The American Postal Workers Union is offering a new consumer-driven option. For a brief description of this option, see U.S. Office of Personnel Management, "Guide to Federal Employees Health Benefit Plans," November 2002, AWPU Health Plan 2003, p. 9, at

[6]U.S. Office of Personnel Management, "Guide to Federal Employees Health Benefits Plans," November 2002, p. 12.

[7]See "Remarks by The Honorable Kay Cole James."

[8]U.S. Office of Personnel Management, "Federal Employees Health Benefits Program: Medically Underserved Areas for 2003," Federal Register, Vol. 67, No. 175, September 10, 2002, p. 57463, at For 2003, determined states include Alabama, Idaho, Kentucky, Louisiana, Maine, Mississippi, Missouri, Montana, New Mexico, North Dakota, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wyoming.

[9]See "Remarks by The Honorable Kay Cole James."


Nina Owcharenko Schaefer

Senior Research Fellow, Health Policy

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