FEHBP: A bigger helping?

Q: Presidential candidates have suggested extending FEHBP to cover populations other than federal workers. Is this viable?

A: FEHBP has provided healthcare benefits to federal employees for more than 40 years, so it's no wonder that many have looked to this program as either a candidate for expansion or as a potential model for universal coverage. But just because FEHBP works in its current context does not mean it can or ought to be used to fix what's wrong with the current system.

Actuarially speaking, the FEHBP has worked in spite of design issues and inherent inefficiencies that could have prevented success. FEHBP offers federal employees an array of health plan choices, which are provided by the Blue Cross/Blue Shield Association (BCBSA) and by other commercial entities (including Humana, Aetna, Coventry, and various regional HMOs). The choices vary from one location to another, with Washington, D.C. offering the most options since it has the largest concentration of federal employees.

With all these choices, carriers end up competing with one another based on benefits. They've got an incentive to make the plans more attractive and thus more expensive. And the Office of Personnel Management (OPM), who administers the program, has been very resistant to reducing benefits, which is understandable given OPM's focus on employee well-being.

Some plans have structured their benefits to attract less-expensive participants. For example, in certain situations it can be advantageous for plans to specifically target retirees that are Medicare eligible. Other plans use wellness benefits to attract healthier, less-costly participants. Still, this approach has some drawbacks. Once they are enrolled in a plan, employees don't tend to move. And because most populations tend to become more expensive over time, there's an almost inevitable cost creep. One way to counter this is to introduce more new plans, but again, this approach eventually breaks down.

Q: What kind of selection would ensue if this program were made more broadly available?

A: If the FEHBP were made more widely available, it could result in selection problems. People who could find affordable insurance in the commercial market would select those options, leaving the more expensive population to opt for the FEHBP—and thereby making the program more expensive. The FEHBP works when it is restricted to federal employees, but when you open it up to a wider market the program is selected against and the most expensive people buy in.

While there may be lessons to draw from FEHBP in developing some kind of federal coverage for the uninsured, no program will work if it is too expensive. Cost is a barrier to entry for many of the uninsured. Unless plans are made affordable, the uninsured will remain uninsured. With its rich benefits, FEHBP does not seem to be a clear cost fit for the uninsured.

Q: What role does the government contribution play in the FEHBP and could the contribution be extended to a wider population?

A: The substantial government contribution helps make FEHBP work. That contribution is different for different options (and is different for postal employees versus all other employees), representing a maximum of 75% of the plan's premium, subject to a maximum government contribution for nonpostal employees. So, for example, the BCBSA Standard Option this year includes a 69% government match. Inside the different plans, the contribution doesn't vary by status, so an active employee pays the same out of pocket as an early retiree, even though early retirees are more expensive.

The fact that it is subsidized is important, not only because it makes FEHBP more affordable for the participants, but also because it leaves an out-of-pocket cost for the employees, and that cost helps fuel their eventual choice of plan. If people were allowed to buy into FEHBP but without the substantial government contribution, those who desperately needed the benefits (that is, only the very sickest people) would be the most likely to buy in.

Because of this subsidy, a high percentage of federal employees participate in FEHBP, which gives the program the broad selection of risks necessary for a tenable insurance program. Could the federal government afford extending this subsidy to a wider population? Could it afford to pay an even higher percentage of the premium? There would be significant additional cost to the government if the contribution was maintained for others who buy in.

Tom Snook is a principal and consulting actuary with the Phoenix office, specializing in managed healthcare and health insurance issues for payers and providers.