Expanding FEHBP - allowing general population to enroll in Federal Employees Health Benefits Program

Can the insurance plan offered to federal employees work for the general population?

It began more as a sound bite than a thought-out proposal. "Give every American what Congress gets" became the rallying cry of those who support universal health insurance. It was an easy applause-getter, capitalizing on the public's cynicism about congressional perquisites.

Despite this inauspicious beginning, the idea of allowing segments of the general population to enroll in the Federal Employees Health Benefits Program (FEHBP), the health insurance plan offered to all federal employees, including the president and members of Congress, has rapidly gained momentum. Non-existent in the Clinton administration's original health reform plan (which would have phased out FEHBP), the option was included in three of the four major proposals under discussion in Congress at press time.

Unresolved, however, is exactly how the FEHBP option would be structured. The major health reform plans in play in mid-August differed in the way they open the program to the uninsured, unemployed, self-employed, and to employees of small businesses. In addition, dozens of technical issues remain to be resolved, including how the new FEHBP would function. For example, would it be a separate program, run parallel to the present FEHBP? Or would new enrollees simply be added to the federal employee pool?

Initiated in 1959, FEHBP currently covers 9 million current and retired federal employees. FEHBP is not an insurance plan. It is a national purchasing pool open only to federal employees. As such, it has been cited often as an example--albeit an imperfect one--of managed competition.

The program is run by the federal Office of Personnel Management (OPM). OPM licenses fewer than 400 health plans and health insurers to participate in FEHBP. In any given area, federal employees have a choice among a range of plans. Depending on the area, federal employees can choose from among four to more than 20 plans. The plans range from staff model HMOs and ppos to low-option Blue Cross and Blue Shield indemnity coverage to high option indemnity coverage.

Another choice is to remain uncovered. However, 85% of federal employees are enrolled.

FEHBP has been a progressive plan. It mandates community rating in the pool. And it requires that plans not exclude coverage for a preexisting condition when participants enroll or switch plans, which they may do yearly. About 10% do switch each year.

But FEHBP lacks one critical element of a true managed competition structure: The program has no minimum or standard benefits package. Thus, participating plans offer a broad array of coverage, coinsurance, deductibles, exclusions, limits, and rules. Enrollees receive a booklet each year that presents the benefits of each plan. But OPM officials freely acknowledge that the booklet takes an effort to digest. In addition, OPM doesn't try to compare the value of plans--the cost for a particular plan adjusted for the actuarial value of the benefits it offers.

FEHBP does conform to one critical principle of managed competition: Higher cost plans cost enrollees more out of their own pocket, giving them an incentive to choose lower cost plans. The government pays a lower portion of the premium of high-priced plans. For example, it pays about half the premium for the Blue Cross/Blue Shield High Option plan (which has a low deductible and minimal cost-sharing). In contrast, the government pays 75% of the premium of the Blue Cross/Blue Shield Standard Option plan, which has a higher deductible and coinsurance. On average, the government pays 72% of premium costs. The tab in 1992:$14 billion.

Despite the premium-sharing formula, the majority of federal employees are still in indemnity plans. Current]y, 28% of federal employees are enrolled in managed care plans and 72% have indemnity coverage; 34% are enrolled in Blue Cross Blue Shield indemnity plans.

Even though most federal workers are in indemnity plans, FEHBP has been slightly more successful than the private sector at containing costs. Overall, cost increases have averaged 10% per year over the last 15 years, compared with premium increases in the private sector of 12%to 15% annually.

Most of these savings can be attributed to the incentives health plans have to offer attractive prices to such a large number of customers.

The concept of opening FEHBP to non-federal employees is, then, not entirely based on political considerations. Because FEHBP is an established purchasing cooperative, efficiencies might be gained in expanding the program rather than establishing separate state-based purchasing pools for small business, health policy experts say.

But there are clear obstacles on this road. The central one is that FEHBP is a federally run program, and would presumably remain so. If FEHBP were to become a giant national cooperative that enrolled, say, 30% to 50% of small business employees, that would vastly expand the government's role in health care. Still, Republicans in Congress have embraced the expansion of FEHBP as eagerly as Democrats.

In general, the three bills that propose opening up FEHBP would do so for similar segments of the population: the unemployed, the uninsured, the selfemployed, and employees of small businesses. But the bills' specifics differ in important areas.

The House leadership bill, proposed by Richard Gephardt (D-Mo.) would permit employers with 100 or fewer workers to enroll their workers in FEHBP by January 1999. But under Gephardt's bill, this same group could also opt to enroll workers in a new Medicare program (Medicare Part C.)

The Gephardt bill mandates that small employers cover their workers, offer at least two plans (one managed care and one fee-for-service), and pay 80% of the premium costs by 1999. A small employer choosing FEHBP could offer two private plans plus FEHBP or offer only FEHBP.

The Senate leadership bill, put forth by George Mitchell (D-Maine), would require employers with 500 or fewer employees to offer their workers coverage through FEHBP or through a staterun or privately run purchasing cooperative. They could also offer community-rated insurance, contracted for individually. The bill does not require, however, that these companies pay any part of the premium. Such payments would only be required on a state-bystate basis, if by the year 2000, 95% of a state's residents are uninsured. Even then employers with 25 or fewer workers would be exempt from a mandate.

The bill proposed in the Senate by Minority Leader Robert Dole (R-Kan.) also would allow workers in small companies (two to 50 workers), and the uninsured, self-employed, and temporarily unemployed to enroll in FEHBP. It does not require companies to offer any kind of health insurance, however.

Only the bill proposed by the self-described bipartisan "mainstream coalition"

in the House would leave FEHBP out. Instead, it allows all employers to create voluntary purchasing pools.

A major question is whether the new non-federal FEHBP enrolls would be pooled with federal employees. The Gephardt bill proposes initially to establish a parallel pool that would segregate the two populations by community rates. Then, over the course of the next seven years, the two pools would be merged. In the eighth year, federal employees would essentially be community-rated along with the rest of the population. The initial segregation is to shelter federal employees from any rate hike that may result from a sudden inflow of unemployed and previously uninsured people.

The Mitchell bill in the Senate also appears to establish a parallel FEHBP program. It requires OPM to designate at least one health insurance purchasing cooperative (HIPC) in every HIPC region that would then enroll non-federal employees eligible for FEHBP. If a HIPC does not exist in an area, FEHBP must establish one.

The employer's premium contribution is broadly defined in the bills. The Gephardt bill specifies that if employers offer two private plans and FEHBP, the employer contribution would be 80% of the premium of the plan the employee chooses but no more than 80% of the employer's higher cost private plan premium. If the employer offers FEHBP only, the employer contribution would be 80% of the plan the employee chooses.

That formula differs from the current FEHBP, in which the government pays a lower portion of higher cost plans. But the proposed formula would still require enrollees to pay a larger out-of-pocket expense for high cost plans.

The Dole bill specifies that employers that choose to pay for their workers' coverage pay the same portion of the premium in FEHBP that the federal government pays of any particular plan. In effect, then, it lumps the non-federal employees into the federal rate pool. The Mitchell bill lacks specifics but states that non-federal workers allowed to enroll in FEHBP would pay "at an ageadjusted community rate."

Health policy specialists agree that no matter how FEHBP is expanded, there is no guarantee of success. "FEHBP works because of a delicate balance it developed through market forces over the last 40 years," says Jim Morrison, principal of Morrison and Associates, a public policy consulting company in Washington. "Any changes you make to it can easily upset that balance."

Timothy Ray, a partner with Coopers & Lybrand, CPAs in Washington, agrees: "Whenever you change the demographics of a plan, you're in danger of causing premiums to rise."

Others assert the program could be a godsend to many small employers, saving them time, hassle, and money, and allowing their employees a much larger choice of plans.

But the big question for small employers will be, will it save me money? Certainly, FEHBP's record bodes well. However, some of the features that help the current FEHBP contain costs may not be applied to the new one. For example, if there is no employer mandate or strict community rating, small companies with good risk profiles may continue to choose private coverage at lower cost. That could leave only small employers with poor risk profiles joining an expanded FEHBP, at potentially higher rates.

In addition, without a requirement to purchase insurance, many healthy workers in small companies might opt out. That would mean a greater proportion of older workers in FEHBP, at higher premium rates.

The program could even cause federal health expenditures to rise. If the unemployed and the working poor are pooled with federal employees, the government's FEHBP contribution could increase. And given FEHBP's liberal open enrollment policy, large numbers of older and sicker enrollees could shift into more costly indemnity plans.

Large companies that wouldn't be eligible for FEHBP are also concerned about expanding the program. "Allowing only some companies to enroll workers into FEHBP creates an imbalance," says Ray. In any area where a large percentage of the population is eligible for FEHBP, even very large employers may find themselves with less clout in negotiations with insurers.

Stephne Behrend, managing consultant with A. Foster Higgins & Co. Inc., benefits consultants in Stamford, Conn., worries that many plans would be forced to keep rates artificially low to compete for millions of FEHBP enrollees, and then shift costs to large employers. "Most of the big insurance companies will do what they have to in order to be part of an expanded FEHBP. If that results in higher cost for them, they will have to make it up with the only group that's left out there to do so--large companies."

Finally, Butler observes that the federal employees' unions will be watching closely whatever moves Congress makes to expand FEHBP. They'll want to make sure Congress doesn't jeopardize the excellent benefits federal employees currently receive.

COPYRIGHT 1994 A Thomson Healthcare Company
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