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A health-care plan most of us could buy: it's right under Congress' nose.

It's right under Congress' nose

Ruth Kain didn't exactly get the best deal possible. Kain lives in the little town of Ava, Mo., where she and her husband of 47 years, Rufus, settled after he retired in 1990. Rufus had been able to retain his company health insurance until he qualified for Medicare, at which point Ruth was allowed by Rufus' former employer to buy a COBRA plan for 36 months. When that expired, Ruth was 63 and not yet eligible for Medicare; nor, as a result of a heart ailment constituting a "pre-existing condition," could she find a private insurer willing to cover her in the interim.

Ruth Kain is just the type of person legislators were trying to help when they passed the 1996 Kennedy-Kassebaum bill requiring insurance companies to provide coverage even to Americans with pre-existing medical conditions. Alas, private carriers have hardly been leaping to assume this new responsibility. (I know: You are shocked -- shocked -- to hear that health insurers wouldn't insure people who need health care) Many penalize agents who write such policies, while one -- exploiting a loop-hole in the law that says insurers need not provide coverage for a condition that has gone uninsured for the last 63 days -- actually stretches out the processing of applications from individuals with preexisting conditions for more than 63 days, and then routinely denies the request. When they do make coverage available, it is often at rates double the norm.

The end result: Even with Kennedy-Kassebaum in place, Kain couldn't obtain insurance that would cover her heart problems. And sure enough, as all such stories go, after shelling out $10,000 for a pacemaker that her policy didn't cover, she began experiencing severe chest pains last November and wound up spending Thanksgiving in the hospital. To cover the bill for her stay -- a daunting $14,000 -- she and Rufus were forced to sell the farm they lived on.

Clearly, Ruth Kain had gotten a bum deal.

President Clinton seemed to agree. In January, he proposed an expansion of Medicare, the federal health insurance program for the elderly, to cover people like Kain. Under the Clinton plan, retirees from age 62 to 65, as well as people over age 55 who have been laid off and lost insurance, could buy into Medicare for more or less the actual price of such coverage. (Those in the early retiree group would pay slightly lower premiums than other new entrants, but would make up for it with slightly higher monthly payments once admitted to "regular" Medicare at 65.) This is a pretty good deal, cheaper-by-half than the $1,000-a-month that Kain could expect to pay a private insurer -- assuming she could find one willing to issue her a policy. And so white-haired Ruth Kain from Ava, Mo., stood by Bill Clinton in the White House three months ago as the president unveiled his grand plan.

Republicans, with their usual flair, promptly declared the president's proposal Dead On Arrival. First they wheeled out the standard objection to Medicare expansion: With the impending retirement of the massive Baby Boom generation, the system is already too financially shaky to pile even more beneficiaries onto the program. ("If you're on the Titanic, you wouldn't invite more people to join you," huffed one GOP congressman) But Clinton basically rendered this argument moot by proposing that recipients essentially pay their own way.

A slightly more sophisticated criticism of the plan is that it would worsen Medicare's financial problems through "adverse selection." Unlike Social Security or Medicare Part A, the president's buy-in program would be voluntary, which means a disproportionate number of the people flocking to sign up for it would be those having trouble finding alternative coverage at a reasonable price -- i.e., those who present the worst health risk and thus bear the highest price-tag for coverage. This, say critics, would eventually drive Medicare's per-person costs higher, rendering it a not-so-good deal for those already in it.

Finally, Republicans fear The Slippery Slope and are aware that such a program could eventually lead to -- gasp! -- health insurance for all Americans, not just the old. This, of course, is the real specter haunting the right, though they have yet to articulate why wiping out the ranks of the uninsured (without using tax subsidies, mind you) is such a bad thing.

But, whatever the merits of their various concerns, on one very important point, the Republicans are right: This was still not the best deal Ruth Kain could have been offered.

We could, instead, allow Americans to buy into another existing government program, one that does not possess the problematic fiscal "pre-existing condition" that Medicare does. One in which the phenomenon of "adverse selection" is minimized. One in which the sort of consumer choice that conservatives claim they want to inject into government-run health coverage -- particularly Medicare -- already exists, with a vengeance. One that might actually save taxpayers money if it were expanded. One that it might even make sense to expand to all Americans. The program that could do all this? The Federal Employee Health Benefits Program, or FEHBP -- pronounced, rather disconcertingly, as "Feeb."

The People's Choice

With nearly 10 million enrollees nationwide, FEHBP constitutes the largest medical plan in the United States. All federal employees -- as well as members of Congress, the Supreme Court, and the Cabinet -- are eligible for coverage. While employees elsewhere hope for "cafeteria plans," FEHBP enrollees are treated to a virtual Valhalla of smorgasbords: A total of 380 health plans nationwide participate in FEHBP, offering the average beneficiary at least a dozen options for coverage in her locality, ranging from managed care to traditional fee-for-service. It allows enrollees to choose their own physicians. Even before Kennedy-Kassebaum, it basically insured everyone in its population, regardless of preexisting conditions. There is no cancellation for catastrophic illness. And if the plan you choose isn't working out for you, the annual "open season" allows you easily to switch insurers within a year. Consumer satisfaction is strikingly high: 87 percent for those in fee-for-service plans and 85 percent for those in HMOs.

Most of FEHBP's features are not available to the vast majority of Americans -- including beneficiaries of Medicare, where more and more seniors are simply being herded into managed care. One might therefore expect that this Cadillac of coverage plans suffers from gold-plated prices. One would be wrong. As health-care costs exploded between 1982 and 1994, FEHBP's average premium rose by approximately 3.5 percent less than did premiums for private-sector, big-business group plans. In 1994, Republican Sen. Ted Stevens (ironically, in a statement opposing extending FEHBP to non-government employees) explained: "The system holds down growth in costs by forcing insurers to compete for customers by providing the best service at the lowest premiums."

How low? One of the largest insurers in the program, the Government Employees Health Association, offers a fee-for-service plan for single individuals at a cost of $2,548 a year ($212 per month), including both the employee's and the government's share. The full-family version prices out at $5,496 ($458 per month). The Blue Cross standard package available to FEHBP families costs $5,254 a year -- about 13 percent less than the similar Blue plan offered to small groups, and $1,000 less than the average conventional plan available to the largest employers.

With this kind of competitive pricing, it's not surprising that fans ranging from Sen. Edward M. Kennedy (D-Mass.) to the Heritage Foundation have hailed FEHBP as a model for health-care reform. Republican Sen. William Roth of Delaware -- co-author of the Reagan-era Kemp-Roth tax cut intended to slash government -- proposed several years ago that uninsured Americans, the self-employed, and members of small groups be allowed to buy into the program. "The FEHBP is a government sponsored, private-sector operated, nationwide health care delivery system," Roth observed at the time. "It has a proven record. It could serve as an excellent vehicle for providing health care to those in our country who need it but can't afford it because they are not part of a large group." (Roth's proposal, dubbed "CareNet," would have also subsidized the purchase of coverage by the unemployed by eliminating uncompensated care reimbursements to hospitals -- essentially buying the poor competitively priced insurance instead of waiting to pay for their expensive emergency room care) Senator Stevens similarly declared that FEHBP "deserves to be recognized as a basic success in health-care insurance."

Did anyone tell these guys that this is a government program?

Of course, the secret of FEHBP's success can be pinned on a fact that has nothing -- and yet everything -- to do with its government nature. Yes, part of FEHBP's success lies in the fact that private companies, not a government bureaucracy, design, offer, and administer the benefits; that market competition, not governmental diktat, determines both inputs and outcomes; and that the program is voluntary, not mandatory like Medicare and Social Security (although, with the government paying a large share of the premiums, an eligible individual would have to be nuts not to enroll). But the main reason the Federal Employee Health Benefits Program can cut such good deals with insurers rests on the most basic of capitalist concepts: Market Power. When it comes to access to health-insurance consumers, FEHBP is the 10-million-pound gorilla. The brass ring. The Holy Grail. With 10 million people looking to spend about $1,000 apiece each year -- $10 billion! -- on your product, what insurer wouldn't offer a sweet deal in order to get a piece of the action? In essence, it's the same sort of advantage that entrepreneurs like John D. Rockefeller have understood and pressed since the time of Croesus. Only here's the catch: The predator exploiting its oligopsony (that's the demand-side version of "oligopoly") power is the government. So far, even Bill Gates hasn't been able to put together the purchasing clout of the federal government. And therein lies not just the path to more affordable, more consumer-friendly health coverage for more Americans, but a template for the role of government in the future -- a future in which there will be more competition and government will be less powerful, less like government as we've known it in the Industrial Age and more like ... what? Like FEHBP!

The Big Offer

If Congress just let the rest of us in on its health-care deal, insurance would no longer be a problem for the great majority of Americans. Of course, some of the same concerns about Clinton's Medicare proposal would have to be addressed. Which brings us back to the issue of adverse selection. As with the Medicare expansion idea, the people who would find the chance to buy into FEHBP most appealing are those who arguably present the greatest risk of high health-care costs: small business owners and employees, other non-group members, and those who are legally entitled to coverage under Kennedy-Kassebaum but can't afford it. But this will prove less of a problem than it first appears -- and certainly less than with the Clinton plan.

First, we need to separate the "high risk" group into two categories: statistical and actual. Small businesses and their workers currently pay more for insurance than do large groups -- not because they have higher health-care costs, but because they pose higher statistical risks. Think of it like this: Could you better predict the likely outcome of one coin flip or of a thousand? With one flip, the odds are as good that you'll be completely wrong as that you'll be right; with a thousand, if you guess half heads and half tails, the odds are overwhelming that you'll be reasonably close. If you're at all risk-averse, or simply want to plan your finances intelligently, you'd prefer the relatively predictable outcome of a thousand tosses. This is what statisticians call "The Law of Large Numbers": the bigger the group, the smaller the risk (unless, of course, the group is selected on the basis of some risk factor, such as being residents of a leper colony). Thus, if members of a small group were suddenly made members of a large group, their "riskiness," and therefore their insurance costs, would automatically decline. In fact -- and this is a crucial point -- so would the riskiness and costs of the large group, because it just got even larger.

Of course, the uninsured and those with pre-existing conditions, whose actual health-care costs are typically higher than average, pose a somewhat different problem. They are more like the members of the leper colony -- and are treated as such in the marketplace. If these folks are allowed to buy into a program like FEHBP at the same price as the average consumer, most will jump at the chance, because it's significantly cheaper than what risk-related policies would run them. In doing so, they will drive up the cost of care for the insurance pool, resulting in either lower profit margins for the insurer or higher premiums for all other consumers. (Guess which) This, at least, was the argument in 1994 when then-Senate Majority Leader George Mitchell (D-Maine) proposed expanding FEHBP to these groups.

In reality, however, most of the people in these categories couldn't afford to participate in a buy-in program without some sort of government subsidy like that proposed by Senator Roth under CareNet. And, strictly speaking, buy-ins aren't about subsidies. Some people might question whether this then undermines the point of health-care reform. But this begs the question. "Reform for whom?" Without doubt, it's terrible that 18 percent of non-elderly Americans have no health insurance. But 82 percent of the population has overpriced coverage. And lowering the costs of insurance overall will ultimately lead to more of the uninsured population being able to afford coverage (as well as cutting the cost to taxpayers of subsidizing coverage for the rest, should the welfare state ever make a come-back -- but that's a different article). The point here is that FEHBP would be unlikely to be flooded by high-cost patients.

In any event, it turns out that FEHBP already starts with a higher-than-average-cost insurance pool: As a general rule, the older the individual, the higher the health-care costs. And while the average age of workers in the private sector is only 37.7 years, federal workers are significantly older -- 43.8 years, on average. What's more, 40 percent of FEHBP enrollees are retirees. So just on the basis of health spending patterns, FEHBP already is not the insurance pool ideal. Why does it achieve such good bargains then? Because of the Law of Large Numbers and the Law of the Market. And it will continue to do so even -- perhaps especially -- if large numbers of small-business employees and the currently uninsured choose to join. (In fact, many of the uninsured are actually young people who don't present high risks but see current insurance options as not worth the price; if they were to buy into FEHBP's over-aged pool, they would actually improve the average risk. Thus, KPMG Peat Marwick recently concluded that adding all the uninsured to smaller state government employee-risk pools "should not raise premiums considerably.")

Moreover, if FEHBP enrollment is open to anyone, it is not just these more marginal groups who will join: Employees of any business could switch, especially if their employer continues to pay the same share of the premiums. And why wouldn't they? With wider choice, greater consumer protections, higher satisfaction, and greater market power, the federal plan is a great deal if you can get it. And the best part is: The more people who take advantage of the offer, the better a deal it becomes. Why? Because of the Law of Large Numbers and the Law of the Market.

In short, if the government became the "buying cooperative" for all of us, it could use its market clout to obtain better and better deals in the private market. This would have three effects: It would provide new and improved options for the millions of Americans looking for a better deal on their health insurance. Second, by enlarging the FEHBP pool, it would lower rates for FEHBP enrollees, meaning that the costs taxpayers are currently bearing for federal employee benefits would decrease. Third, even those Americans who chose not to buy into FEHBP would likely experience improvement in their insurance coverage. Why? Because they (or, at least, their employers) would always have the option of leaving their current plan and signing on with FEHBP if other players in the market didn't keep pace with the federal plan. The huge federal buying co-op, then, would keep constant competitive pressure on the market to lower prices and improve satisfaction for all consumers.

The government's role in this process would not be as a regulator or provider. (Recall the Republican elegy to FEHBP as a program of private-sector provided services chosen by participants through market mechanisms.) The government would act purely as a market participant, as a voluntary association of citizens, as an aggregator of consumer preferences. With government serving as a large purchasing co-operative into which any American could voluntarily buy (starting with the "critical mass" of 10 million federal employees), we would have the advantages attributed to a "single payer" system of health insurance, but without drawbacks such as inefficient government bureaucracy and involuntary participation.

Examples of government acting in such a role already exist. The Clinton administration's direct-lending program for student loans, for instance, was so successful that banks, who were losing out on the business, demanded that the "pro-competition"' Republican Congress curtail it. The Postal Services ability to compete successfully with private shippers has drawn similar opposition. God forbid that the federal government should actually offer something more efficiently than the private sector!

But the fact is that it can -- aggregating the interests of millions of small economic actors, achieving economies of scale. Governments everywhere are losing the abilities to tax, regulate, and redistribute resources. Is there anything to replace them? Yes: facilitating the ability of ordinary people to act together in the marketplace in the face of large opposing interests. Not all (or even most) market-power enhancing combinations will be "governments" -- but there will still be some problems that purely "private" arrangements will be unable, or unwilling, to address.

Allowing anyone to buy into FEHBP, then, may not just encourage a lower-priced, more-competitive health insurance market for all Americans. It may also mark what Bush White House adviser James Pinkerton has called "The Big Offer": a revised conception of government's role that addresses the new needs of the vast majority of people. And that could help cure more than just our health-care problems.

Eric B. Schnurer is president of Public Works, a public policy analysis and consulting firm.
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Title Annotation:Federal Employee Health Benefits Program
Author:Schnurer, Eric B.
Publication:Washington Monthly
Article Type:Cover Story
Date:Apr 1, 1998
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