Medicare Restructuring: The FEHBP Model
Executive Summary
As policymakers consider measures to assure the long-range solvency of Medicare, one option that has received increasing attention is a “premium support” system. Under such a system beneficiaries would choose between the original Medicare fee-for-service program and a variety of competing health plans. They would receive a fixed government contribution toward the plan of their choice and would pay any remaining costs themselves. Proponents of a premium support option have suggested as a model the Federal Employees Health Benefits Program (FEHBP), which offers multiple plans to federal employees and annuitants.
How Do Medicare and FEHBP Differ?
Medicare beneficiaries in many areas already have a choice between original Medicare and Medicare-contracting HMOs. The Medicare+CHOICE program established by the Balanced Budget Act (BBA) of 1997 will broaden the health plan options available to beneficiaries and provide for more structured competition. As a result, Medicare’s operations will more closely resemble those of FEHBP.
Table E-1 compares key features of the Medicare+CHOICE and FEHBP programs. Similarities in the two programs have sometimes been obscured by differences in terminology and administrative structures:
- Under both programs, participants may choose from among competing plans during a uniform open enrollment period, and may change plans only at specified times.
- Once the BBA is fully implemented, participants in both programs will receive uniform comparative information on the health plan options available to them.
- Under both programs, the most popular plan is a national fee-for-service plan. Medicare’s plan, “original Medicare,” is operated by the government on a self-insured basis. The FEHBP national plan is operated by a private insurer, but the insurer is not really at risk and effectively functions as an contracted administrator. Under both programs, the national plan operates under an open-ended federal spending commitment.
Still, there are important differences between Medicare+CHOICE and FEHBP:
- Medicare beneficiaries are enrolled by default in original Medicare and must actively choose to shift to a different plan. All FEHBP participants must make an initial choice of health plans.
- Medicare beneficiaries have a choice of plans only when there is a managed care plan available in their area. FEHBP participants in all areas have a choice of multiple fee-for-service plans; they may or may not have an HMO available.
- Original Medicare has a guaranteed minimum defined benefit package that can be modified only by an act of Congress; other plans (except medical savings account plans) must offer at least these minimum benefits. No minimum benefits are guaranteed under FEHBP; benefit changes for any plan can be negotiated by the Office of Personnel Management (OPM).
- The government contribution for Medicare options is fixed in advance, using a formula based in part on historic local costs for original Medicare, subject to national minimums and maximums. The contribution for FEHBP reflects the weighted average cost or price of all available plans.
- Premiums and government contributions for Medicare+CHOICE plans partially reflect costs in specific localities and are adjusted for enrollee demographics (and, beginning in 2000, risk). Under FEHBP, nationally priced fee-for-service plans compete with locally priced HMOs, and there are no demographic or risk adjustments.
- A Medicare enrollee who selects a plan that costs less than the government contribution receives the savings in the form of additional benefits. An FEHBP enrollee who selects a less costly plan receives some of the savings in the form of reduced premium payments.
- OPM has greater discretion than the Health Care Financing Administration (HCFA) in determining what plans may participate and in negotiating premium rates and benefits.
Table E-1. Comparison of Medicare+CHOICE and Federal Employees Health Benefits Program Medicare + CHOICE FEHBP Choice of plans Beneficiaries are enrolled by default in original Medicare (the fee-for-service program operated by the government). They may obtain private supplemental coverage or may choose to obtain Medicare benefits (plus supplements) from a local or regional HMO, PPO, or other coordinated care plan; a private fee-for-service plan; or an MSA plan.
81 percent of beneficiaries are in original Medicare; 19 percent in HMOs or similar plans. Participants choose from among: a national Blue Cross/Blue Shield PPO plan, national fee-for-service plans operated by employee associations (also usually with PPO options), and about 300 local or regional HMOs, some of which offer point-of-service options.
70 percent of enrollees are in Blue Cross/Blue Shield or other fee-for-service plans; 30 percent in HMOs. Benefits All plans must provide at least the same benefits as original Medicare. Most provide supplemental benefits, including reduced cost-sharing and often additional services such as prescription drugs. (Plans whose expected Medicare profit margin is greater than that for commercial enrollees must share the excess profit in the form of supplemental benefits.) Each plan designs its own benefits subject to limited guidance from OPM. There is no fixed minimum, and benefits vary widely. Premium rates Each HMO or other plan quotes a premium for basic Medicare benefits plus any supplements.
The rate is based on what the plan would charge non-Medicare enrollees for the same benefits, adjusted for characteristics of Medicare enrollees. Each plan quotes a premium for its benefit package.
For most HMOs, the rate is what the plan would charge other large groups for the same benefits; it may or may not be adjusted for characteristics of FEHBP enrollees. For fee-for-service plans, the rate is based on actual expected costs for FEHBP enrollees. Government contributions For each enrollee, the government pays according to a fixed formula that does not take into account rates of competing plans. The government contribution varies by geography and demographic and risk characteristics of plan enrollees. For each enrollee, the government pays the lesser of: 75 percent of the plan’s premium, or 72 percent of the weighted average premium for all plans. The government contribution is not adjusted for enrollee demographics, risk, or geography. Enrollee contributions All beneficiaries pay a monthly part B premium. Enrollees in Medicare+CHOICE plans may pay an additional premium if the government contribution does not cover the plan’s full price for its benefits. The enrollee pays the portion of the plan premium not covered by the government contribution (never less than 25 percent of the plan’s premium). Plan risk The premium represents payment in full; each plan is at risk for costs exceeding premium revenues. Contingent reserves are established for each plan through a premium surcharge paid by the government and enrollees. The plan may draw on these reserves if costs exceed premium revenues. Budgetary treatment Entitlement: Medicare must pay for covered services defined by law at rates defined by law, without budgetary limit. Virtual entitlement: agencies must pay the government contribution defined by law for the plans chosen by their employees. OPM can affect this amount by negotiating premiums and benefits, but does so without any spending target. Enrollment and consumer information When Medicare+CHOICE is fully implemented, beneficiaries may generally change plans only during fixed periods. HCFA is making some progress toward providing comparative information on plan options. Enrollees may generally change plans only during an annual open season. OPM provides extensive comparative information on plans. Administration HCFA’s dealings with plans are governed by explicit statute and regulations. HCFA’s administrative costs (for functions equivalent to OPM’s) equal 0.2 percent of benefit payments. OPM has somewhat greater discretion to select health plans and negotiate benefits and premium rates. OPM’s administrative costs equal 0.1 percent of benefit payments.
Summary Part 2
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