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Key developments in the world of federal employee benefits: health, pay, and much more.

Reining in the FEHBP

The Federal Employees Health Benefits Program provides health care coverage for 9 million federal employees, retirees and their families. The cost of that coverage has risen nearly 50 percent over the past four years, including a 13 percent average increase for 2002. From Nov. 12 to Dec. 10, during the Office of Personnel Management's annual FEHBP open season, federal employees and retirees will be able to switch health plans. Switching to less expensive health plans, however, often means getting fewer benefits. Last week, the House Government Reform Committee's civil service panel held a hearing on the FEHBP. Unions, lawmakers and other observers offered a spate of suggestions on controlling FEHBP costs, many of which have been proposed for years. But no major changes have been made and costs continue to soar. Still, here is a rundown of some of the proposals that various groups have made to help control health care costs for federal employees and retirees.
  • Make the government pay more. Under current law, the government pays about 72 percent of FEHBP premiums. Employees pick up the other 28 percent. Rep. Steny Hoyer, D-Md., introduced a bill (H.R. 1307) in April that would make the government pay 80 percent, reducing the employee portion to 20 percent. Federal unions support this proposal.
  • Make retirees' premiums tax-free. Three bills (H.R. 2125, S. 1022, S. 561) would give federal retirees a tax break by making their health insurance premiums tax-free. Active federal workers already pay their premiums out of pre-tax income, putting a couple hundred dollars more in their wallet each year.
  • Create a standard benefits package. Under current rules, insurance companies have the freedom to design benefits packages, albeit with some congressional and OPM mandates. The American Federation of Government Employees contends that such freedom encourages the insurance companies to create benefits packages that favor low-risk, healthy workers. Workers with little need for health care congregate in cheap health plans, while workers with substantial needs congregate in more expensive plans. "If they make that one simple adjustment, that all carriers have to offer the same package, competition would be on the basis of quality and cost," said Jacque Simon, AFGE's public policy director.
  • Charge older people more. Heritage Foundation analyst Robert E. Moffit told the House panel that the way to deal with the problem of young, healthy workers separating themselves from older, unhealthier workers, would be to charge different age groups different premiums. Government contributions would also vary by age group to protect older workers from nasty premium increases. This would discourage young workers from dropping out of FEHBP plans.
  • Eliminate mandates. Insurance companies such as BlueCross Blue Shield want Congress to eliminate benefit mandates, such as contraceptive coverage, that the insurers say drive up costs. People should be able to choose the benefits they want and not have to pay for ones they don't want, they say.
  • Limit competition. In 2002, 180 health plans will be offered to federal employees and retirees. Several Pay and Benefits Watch readers have suggested that OPM restructure the FEHBP to limit competition to a few carriers. Limiting competition would increase the purchasing power of federal enrollees, the readers suggest, because health plans would have a better chance of getting more business. That would lower costs for everyone, the readers said.
  • Increase competition. Current law prevents OPM from letting additional fee-for-service health plans into the FEHBP, the Heritage Foundation's Moffit told the House panel last week. Additional plans have to be health maintenance organizations. "Normal market efficiency is served when suppliers of services can freely enter and exit the market, responding quickly and efficiently to changes in consumer demand," Moffit said. "This legal restriction is pointless and simply undermines both market competition and consumer choice."
  • Buy drugs in bulk. AFGE's Simon said OPM should find a way to piggyback on discounted drug programs available to the Defense and Veterans Affairs departments. A previous effort to do so crumbled amid resistance from drug companies. The National Treasury Employees Union supports the proposal as well.
  • Reduce unnecessary visits. Dr. Tom Coburn, a former Republican member of Congress from Oklahoma, said many of his patients schedule visits when they don't need to see him. Higher deductibles and co-pays would discourage unnecessary visits, Coburn said. He also argued that prescription drug advertising on television encourages people to visit their doctors when they don't need to.
  • Create medical savings accounts. Lawrence Mirel, commissioner of the District of Columbia Department of Insurance and Securities Regulation, told the House panel that insurance should only be used for catastrophic illnesses and injuries. The money saved from reducing insurance to that level could be put into medical savings accounts for workers, who would then pay routine medical expenses out of those accounts.

What are your thoughts on these proposals? Do you have your own ideas for FEHBP reform? Send your thoughts and ideas to


Brian Friel is founder of One Nation Analytics, an independent research, analytics and consulting firm for the federal market.

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