Blueprint for the Future? Or Trapped in a Lockbox?

The Federal Employees Health Benefits program has been touted as the way managed care is supposed to look. Expanding it, however, may not be feasible.

Frank Diamond

Senior Editor

The Federal Employees Health Benefits program has so often been held up as an example of how the managed care industry should operate, that praising the government system sometimes inhibits understanding it.

It is beneficial, in some cases, to describe a thing by stating what it is not. The FEHB program is not a defined-contribution system, although some experts see it as being ideally suited to adapt to such a payment scheme. It is also not solely, or even mainly, linked with the Washington, D.C., area. Perhaps most importantly, it has not been immune to the effects of rising costs — although proponents will vouch that it has done a better job of combating that effect than have other partnerships between employers and HMOs.

These realities aside, those who tout the FEHB program as the system for the future may not be far off the mark. The FEHB web site describes it as the “largest employer-sponsored health benefits program of its kind.”

Some history

Established by Congress, the FEHB program began covering employees July 1, 1960. It now provides benefits to some 9 million enrollees and dependents through contracts with about 245 plans. The program “carriers provide health benefits coverage to most employees and retirees of the United States government and the United States Postal Service and their families,” according to the FEHB web site.

The program relies on an activist employer, educated consumer, and cooperative health plan, which are seen as the bulwarks of any successful attempt to reform managed care. These elements, however, point to the X-factor of transformation: free will. Are the players able to change so much that the FEHB program can be replicated everywhere? Would the market accept such a shift? Even if HMOs, employers, and consumers want — and are encouraged — to change, can they?

Poor prospects

“Yes, health care should be just like the federal plan and we all should eat three healthy meals a day, and exercise, and not watch TV,” says Robert Field, Ph.D., director of the Graduate Program in Health Policy at the University of the Sciences in Philadelphia. “It’s wonderful, but I think that there are serious practical implementation problems.”

In other words, the short answer is that the FEHB program cannot be duplicated throughout the country, says Ed Flynn, the associate director for retirement and insurance for the Office of Personnel Management, which runs the system.

“We feel very strongly that some of the principles upon which this program is based — choice, competition, information, partnership — are very valuable and contribute largely to the success of this program,” says Flynn. “However, it is far too simplistic — when you look at the problem of the uninsured and other aspects of providing health care to a population that is many, many times the size of the group we cover — to simply assume that you can take what we do and transfer it.”

However, there is the possibility that it can be expanded. Further, large employers are already trying to do what the FEHB program does, says James N. Astuto, regional manager of the health care management group for GTE/Verizon.

“We offer a vast array of choices to all of our employees,” says Astuto. “It’s doable. We and the General Motors of the world offer lots of selection.” There are, however, only so many companies in that league. “It becomes, administratively, a burden for small companies,” Astuto adds.

If tax barriers are removed, employer coalitions could possibly enhance the reach of FEHB program-like health insurance.

“Incrementally, maybe it could be expanded bit by bit to add employer groups to see experimentally how it goes,” says Field.

Probably not well, predicts Tracy Cassidy, a principal with William M. Mercer.

“If the company you work for and the company I work for decided that they wanted to get together and purchase health insurance so that they could have bigger buying power, they would have to form a multi-employer trust,” says Cassidy. “There’s paperwork involved. If your employer and my employer have people in different states, it’s subject to state laws for filings and that type of thing.”

There would be, in other words, complications.

“Where would the money go?” says Cassidy. “That’s the complicating factor. Does the money go directly to the insurance company or does employees’ money go someplace before it goes to the insurance company? If it goes someplace before it goes to the insurance companies, that’s what gets regulated. If it’s an employee’s money and somebody’s going to hold it and could or could not use it for the insurance, that’s when the regulatory issues kick in.

Disparate group

Just when, how, and what type of regulations are applied to an expanded version of the FEHB program is the subject of speculation. One of the nice things about the FEHB program is that Congress resists the temptation to micromanage it, says Jeff Lemieux, senior economist with the Progressive Policy Institute, a center-left think tank.

“It allows the Office of Personnel Management to negotiate directly with plans under a broad set of rules, not a very narrow, targeted set of rules like Medicare has,” says Lemieux. “That flexibility seems to have helped the program a lot. All FEHB plans have decent drug benefits. That’s because the administrators of the programs were allowed to work with plans to get that in place rather than having to rely on Congress to pass a law.”

What seems to account for the FEHB program’s appeal is that it applies government oversight — as opposed to interference — in fostering a very active market-driven system. The result, according to proponents, is happy employees. (About 300,000 of the program’s members reside in the Washington metropolitan statistical area.)

There is no shortage of help available to members who want it. For example, Walton Francis, M.P.A., is an economist and the chief author of a book published every year called Checkbook’s Guide to Health Insurance Plans for Federal Employees that he says helps government workers select plans offering the best coverage.

Says Francis: “There’s also a comparison booklet that the federal government publishes that gives you summary information on each plan, such as premiums, some key benefits features, and how it has done on various quality measures, the most important of which is a survey of enrollees. So you have quality information, cost information, and benefit information on all the plans you can join.”

Even in markets where choice — at least on the surface — seems limited, federal employees will have more options. For instance, insists an OPM official who did not wish to be identified, while some cities have only two competing for-profit HMOs, “Federal employees are going to have a half-dozen fee-for-service plans from which to choose as well. And if they’re members of particular groups — like if they’re law-enforcement personnel — they may have a plan or two specifically for them that they can join.”

What makes the FEHB program exemplary?

“Choice and competition among competing plans,” answers Flynn. “We provide a wealth of information to individuals that helps them make those choices and that information gets more and more sophisticated each year. It also has to do with plan administration, plan quality, and accreditation. The combination of choice and competition works well most of the time. You have to remember that we’re talking about a lot of members. In general, employers in the private market offer fewer choices to their employees than are available in the Federal Employees Health Benefits program.”

Freedom of choice

Because there are more choices, members probably take more time than your usual HMO customers to review them, say proponents.

Freedom of choice, however, has not so far encouraged a lot of movement from benefits package to benefits package. OPM officials estimate that 3 to 5 percent of members actually change plans each year.

As our OPM source put it: “That suggests to us that while we do provide a wealth of information — both in printed form and on the web — we still have a lot of work to do to make sure that people have information and that they use it wisely.”

Members aren’t the only ones who need information, says health care lawyer Steven B. Epstein, the founder of Epstein Becker & Green, a major Washington D.C. firm.

“Very often there’s a terrible problem at the beginning of every year for the health plans,” he says. “They don’t know who’s disenrolled and who’s re-enrolled and who’s going to show up at their door. The government’s not very efficient at getting that eligibility information out. I hear that complaint consistently.”

Apparently, the government’s priorities are elsewhere. By almost all accounts, it is an intensely interested employer.

“The government will do whatever it can to ensure the health and well-being of its work force,” says the OPM official. “Clearly, a healthy work force is a productive work force.”

Alissa Fox, director for policy at Blue Cross/Blue Shield Association — the program’s largest contractor — says the government has become even more activist in the last few years. “It’s more involved in designing the benefit package,” says Fox.

This could be a reaction to rising health care costs, something that the FEHB program has had as hard a time dealing with as anyone else, contends Epstein.

“They’re watchdogs for federal employees, but they haven’t controlled any costs and ultimately, if you can’t do something that controls costs, it’s not a solution,” says Epstein. “Solution? When you’ve got a 36-percent increase in three years? You’re not solving anything.”

Happy members, high costs?

Flynn acknowledges that rising costs are always a problem.

“It’s a fair assessment that we’re struggling with the very same issues that any other health purchasers struggle with in terms of increasing medical care costs that we’ve seen throughout the health care economy over the past four years,” says Flynn.

Lemieux says that what makes members happy isn’t necessarily going to be cost-effective.

“The way that the FEHB program handles its beneficiary premiums — I wouldn’t want to see that duplicated,” says Lemieux. “There are very weak incentives for FEHB program employees to really seek out the cheapest plan because they only save 28 cents on the dollar. A lot of the Medicare reform plans that use that model sort of flip it around and give the enrollee, or potential enrollee, 75 cents on the dollar instead of 25.”

Employees can save on copayments.

“In Blue Cross/Blue Shield, which is what I have, if I were to go up to the high coverage, my percentage of coverage might be a little greater and my copayments might be a little lower,” says the OPM official. “Then again, with Blue Cross/ Blue Shield as an example, there is limited dental coverage offered under the standard option. There is none offered on the high option. You can’t necessarily say that there are more benefits offered under the high option than there are under the standard option.”

Recently, the fluidity within the FEHB program has not been solely in how members chose plans, points out Cassidy, of William M. Mercer.

“There were about 65 HMOs that dropped out of the FEHB program last year, and this year, I think, there were another 35,” says Cassidy. “Some of them are like Prudential, which is being integrated into Aetna U.S. Healthcare — so that makes sense. Other HMOs out there just decided, ‘We’re not going to renew.'”

That’s a reflection of industry instability, counters Flynn.

“The reasons for HMO withdrawals are essentially what’s going on in the HMO market across the United States,” he says. “Mergers, consolidations, buyouts — and then just straight business decisions about whether they want to work with a particular employer. It’s largely just a reflection of what’s going on in the HMO world in general. In fact, the General Accounting Office did a review of HMO withdrawals from the federal plan last year and came to that very conclusion.”

FEHB officials consider contracting HMOs to be “partners” and that helps streamline the operation to a point where it needs to be staffed only by about 165 OPM employees.

“What you have to remember here is that this really is a partnership between us and about 250 health insurance plans,” says the OPM official. “Because it is a partnership, we can do the things that we do very well and very effectively and they can do the things that they do very well and very effectively.”

One of the things the government expects plans to do very well is to put their information on easily understood brochures that are then distributed to employees, says Epstein.

“The government goes through a very carefully orchestrated process so that your brochure will match up so that everybody’s comparing apples to apples, oranges to oranges, pears to pears.”

The seeds for these sorts of assessments were planted at the creation, says Francis, the man who puts out a booklet that guides federal employees to the better plans.

Compare it to Medicare

In the late 1950s, he recalls, bureaucrats began toying with the idea of creating a health plan for federal employees.

“It was intended to look a lot like [what would become] Medicare, because we’re talking about the same era,” says Francis. “There would be a hospital part and an outpatient part. They peddled some legislation on the hill and it would have meant that all the employees would have had to leave the health plan they were in. So the employees and their unions and plan organizations said, ‘Wait a minute. Why can’t we be grandfathered in?

“By historical accident and the political process, which says ‘Don’t inflict pain on existing arrangements,’ we wound up having this multiplan system. What’s turned out to be the case is that it’s worked marvelously well.”

“Medicare doesn’t have catastrophic coverage,” continues Francis. “All federal employee plans have catastrophic. Medicare doesn’t have prescription drugs. All of these plans have prescription drugs. There are hundreds of nuances in which the FEHB program is better than Medicare because plans that don’t have nuances don’t keep customers.”

Francis also says that the FEHB program made the transition from fee-for-service to managed health care “painlessly.”

“Now, the PPO part is really the predominant part in all the service plans,” says Francis. “The HMO penetration has stopped and has been basically level at around 40 percent for the last decade. But the percent in managed care as a whole has gone from 40 percent to 99 percent. We converted from overwhelmingly fee-for-service to 99 percent managed care painlessly, without complaint, without consumer revolt. People always choose the best combination of plan costs, features, and service.”

Any discussion of the FEHB program eventually turns on the “can-it-be-expanded” question. The answer: No, at least not for now.

“Let me give you an example of why that would be a challenge,” says Fox, the Blue Cross/Blue Shield official. “Take our premium. Under the FEHB program, we charge one rate whether you’re in Massachusetts or you’re in Iowa.

“If — and remember this is for a large, broad-based population — those over 65 could buy in, there is a concern that nonseniors in high-cost areas would join and use more services than seniors in low-cost areas. These would drive up costs, creating an adverse-selection problem.”

Employers would have similar concerns, says Astuto.

Quality’s penalty

“A good health plan that draws a lot of sick people can be more expensive, because it’s providing a lot more care than another plan,” says Astuto. “So you get an adverse-selection issue.”

While the government could possibly act as go-between in any effort to expand the program, the OPM itself has its hands full.

“We’re about the business of providing employer-sponsored health insurance for the people who work for the government,” says the OPM official. “We don’t spend a lot of time thinking about how we might be able to do it for other groups. We’ve been willing to offer insight to people who want to explore doing that, but that’s not part of our job.”

A dissenting voice on this issue comes from Francis. Organizational inertia, rather than logistical hurdles, keeps the FEHB model from expanding into the private sector, he says.

“It’s just basic conservatism,” he says. “The thinking is: ‘We’re a personnel office. We have a set of benefits for these people. We have one salary schedule. We have one pension plan. Well, we have one health insurance plan.’ That’s sort of the thinking.”

Even this may be overcome as health care seems to be taking its cues more and more from the consumer who, increasingly, has come to mean individual members, rather than employers.

“I know that federal employees don’t complain about their health insurance nearly as much as others, mostly because if they don’t like it one year, they can switch the next,” the Progressive Policy Institute’s Lemieux reminds us.

This may, in the end, be the simple argument that changes everything.

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