Federal Employees Health Benefit Plan
Encyclopedia
The Federal Employees Health Benefits (FEHB) Program is a system of "managed competition" through which employee health benefits are provided to civilian government employees
and annuitants of the United States government. Workers pay one-third of the cost of insurance, the government pays the other two-thirds.
The FEHB program allows some insurance
companies, employee associations, and labor unions to market health insurance plans to governmental employees. The program is administered by the United States Office of Personnel Management (OPM).
, as one of the few ways by which employers could escape wage and price control limitations on employee wages. The government originally proposed a system that would revolve around a dominant government-directed plan, but unions and employee associations, which had sponsored their own plans, protested and reflecting the political pressure they brought the Congress modified the Executive Branch proposal and all existing plans were "grandfathered" into the program. Thus, through what was essentially a historical accident and a political compromise, a system of competition among health plans driven by consumer choices was created.
s. After the annual enrollment, changes can be made only upon a "qualifying life event" such as marriage
, divorce
, adoption
or birth of a child
, or change in employment status of a spouse, until the next annual open season, during which employees can enroll, disenroll, or change from one plan to another. The exact dates of the open season change from year to year, but are usually from the Monday of the second full week in November through Monday, the second full week of December. Enrollment begins at or near the beginning of the calendar year, and lasts until a different plan choice is made in a subsequent open season or through a qualifying life event. In practice, there is a great deal of inertia in enrollment, and only about 5 percent of employees change plans in most open seasons.
Premiums vary from plan to plan and are paid in part by the employer (the U. S. government agency that the employee works for or, for annuitants, OPM) and the remainder by the employee. The employer pays an amount up to 72 percent of the average plan premium for self-only or family coverage (not to exceed 75 percent of the premium for the selected plan), and the employee pays the rest. This dollar amount is recalculated each year as health care costs and plans' premiums increase. Certain employees (such as postal worker
s) have a higher portion of their premiums paid as the result of collective bargaining
agreements. The precise percentage of the average paid by the employer is relatively unimportant to the design of this program and has changed over time to become more generous. What is important is that it is a "capped premium" design, in which the entire marginal cost of joining a plan with a premium near, at, or above the all-plan average is borne by the enrollee. In other words, enrollees pay the entire cost of their costly choices, but reap rewards if they make frugal choices. This creates constant pressure on the plans, since to attract enrollees they must hold down costs, while balancing this incentive against benefit offerings and customer service, to reach a position that will maximize their enrollment revenues and profits. This feature of the program is arguably its greatest strength and the primary reason that one expert summarized it has having "outperformed Medicare every which way--in containment of costs both to consumers and to the government, in benefit and product innovation and modernization, and in consumer satisfaction," decade after decade.
In 2010 about 250 plans participate in the program. About 20 plans are nationwide or almost nationwide, such as the ones offered by some employee unions such as the National Association of Letter Carriers
, by some employee associations, and by national insurance companies such as AETNA
and the Blue Cross and Blue Shield Association
on behalf of its member companies. There are about 230 locally available plans, almost all HMO
s. The FEHB program is open to all federal employees, including members of United States Congress
. The FEBHP's cost is about $40 billion in 2010, including both premiums and out-of-pocket costs. It enrolls about 4 million employees and annuitants and, with their dependents, 8 million persons in total. While its enrollment is about one-fifth that of the nation's largest health insurance program, Medicare
, it spends less than one-tenth as much because most enrollees are below age 65 and cost far less on average than the elderly and disabled who constitute Medicare's enrollees.
The FEHB program relies on consumer choices among competing private plans to determine costs, premiums, benefits, and service. This model is in sharp contrast to that used by original Medicare. In Medicare, premiums, benefits, and payment rates are all centrally determined by law or regulation (there is no bargaining
and no reliance on volume discounts in original Medicare; these parameters are set by fiat). Some have criticized the FEHB model because neither the monopsony
power nor purchasing power
of the federal government is utilized to control costs. This controversy is similar to that which surrounded legislation for the Medicare Prescription Drug Coverage
passed during the George W. Bush
administration. Over time, however, the FEHB program has outperformed original Medicare not only in cost control, but also in benefit improvement, enrollee service, fraud prevention, and avoidance of "pork barrel
" spending and earmarks. (Medicare Part D
has also controlled costs far better than originally forecast through a competitive, consumer-driven system of plan choices similar to and modeled after the FEHB program.)
One of the most prominent features of the FEHB program is the choices it allows. There are three broad types of plans: fee-for-service
and preferred provider organization
(PPO), usually offered combined, HMOs, and high deductible health insurance plans and other consumer-driven plans. In the Washington, D.C., metropolitan area, plans open to all federal employees and annuitants include 10 fee-for-service and PPO plans, seven HMOs, and eight high-deductible and consumer-driven plans. A similar number of choices is offered in almost all large metropolitan areas, and in many smaller cities and rural areas. The program is sometimes criticized for offering this broad array of choices, but there are many ways enrollees can obtain advice and assistance, including advice from office colleagues and friends, newspaper and magazine articles in both the general press and publications that specialize in federal employees or retirees, OPM publications and Web site, and several online tools that compare plans' costs, benefits, and services. As a noticeably consumer-friendly service, OPM requires that all plans publish brochures that describe benefits in plain English and in a standardized format that facilitates plan comparison and that can easily be downloaded in PDF format. Almost all plans provide Web sites that provide detailed information not only on their benefits, but also on their provider panels and their drug formularies. There is no published evidence that either in the FEHB program or in the other two federal programs that offer a wide range of plan choices, the Medicare Advantage and Medicare Prescription Drug programs, consumer confusion is a serious problem, or that health insurance choices are any more complicated to deal with than other consumer choices among complex products or services, such as choices as to automobile purchase or service, choice among physicians, or choice among life insurance and other insurance products. One study found that on the whole Medicare beneficiaries, who are both elderly and far less educated than the population at large, nonetheless were able to substantially reduce their drug costs by choosing, albeit imperfectly, Medicare prescription drug plans that reduced their drug costs from what would have been considerably higher costs. A recent evaluation of the FEHB program found that Open Season movement reduces premiums on average by about 1 percent compared to prior enrollment patterns, despite the tendency of enrollees to remain in current plans without considering alternative choices.
In the FEHB program the federal government sets minimal standards that, if met by an insurance company, allows it to participate in the program. The result is numerous competing insurance plans that are available to federal employees. Local plans have ready access to participation in the program, but the underlying statute prohibits entry of new national plans. Because OPM requires plans to price offerings closely to the health care costs of enrollees, and to offer comprehensive benefits, there is broad similarity in plan offerings. However, total premiums can vary substantially, and in 2010 the lowest cost plan option has a self-only premium cost of about $2,800 and the highest cost plan option for self-only enrollment is about $7,200. As an example of benefit variation, a cap of about $5,000 a year on potential out-of-pocket costs for self-only enrollment is found in a number of plans, but in some plans the cap may reach $15,000 or more (HMOs typically have no cap, but control potential cost exposure by using copayments).
The underlying legislation for the FEHB program is minimal and remarkably stable, particularly in comparison to Medicare. The FEHB statute is only a few dozen pages long, and only a few paragraphs are devoted to the structure and functioning of the program. Regulations are minimal; only another few dozen pages. In contrast, the Medicare statute found in title 18 of the Social Security Act is about 400 pages long and the accompanying regulations consume thousands of pages in the U.S. Code of Federal Regulations
.
The FEHB program has often been proposed as a model for national health insurance and sometimes as a program that could directly enroll the uninsured. These proposals began within its first decade and have continued ever since. Notable economist Alain Enthoven
explicitly built a proposal for a system of "managed competition" as a national health reform decades ago, and has continued promoting the idea ever since. A version of this proposal was recently adopted by the Netherlands. In the 2004 presidential campaign, Senator John Kerry
proposed opening enrollment in this plan to all Americans. In enacting the Medicare Modernization Act in 2003, the Congress explicitly modeled the reformed Medicare Advantage program and the new Medicare Part D Prescription Drug program after the FEHB program. One of the prominent proposals for health reform in the United States, the proposed bipartisan Wyden-Bennett Act is largely modeled after the FEHB program, as have recent "Republican Alternative" proposals by Representative Paul Ryan
.
Civil service
The term civil service has two distinct meanings:* A branch of governmental service in which individuals are employed on the basis of professional merit as proven by competitive examinations....
and annuitants of the United States government. Workers pay one-third of the cost of insurance, the government pays the other two-thirds.
The FEHB program allows some insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies, employee associations, and labor unions to market health insurance plans to governmental employees. The program is administered by the United States Office of Personnel Management (OPM).
History
The program was created in 1960. Employer sponsorship of health insurance in the United States became prevalent during World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, as one of the few ways by which employers could escape wage and price control limitations on employee wages. The government originally proposed a system that would revolve around a dominant government-directed plan, but unions and employee associations, which had sponsored their own plans, protested and reflecting the political pressure they brought the Congress modified the Executive Branch proposal and all existing plans were "grandfathered" into the program. Thus, through what was essentially a historical accident and a political compromise, a system of competition among health plans driven by consumer choices was created.
Plans
Choices among health plans are available to employees during an "open enrollment" period, or "open season," after which the employee will be covered fully in any plan he or she chooses without limitations regarding pre-existing conditionPre-existing condition
A pre-existing condition is a risk with extant causes that is not readily compensated by standard, affordable insurance premiums. Pre-existing condition exclusions by the insurance industry are meant to cope with adverse selection by potential customers. Such exclusions have become a topic in the...
s. After the annual enrollment, changes can be made only upon a "qualifying life event" such as marriage
Marriage
Marriage is a social union or legal contract between people that creates kinship. It is an institution in which interpersonal relationships, usually intimate and sexual, are acknowledged in a variety of ways, depending on the culture or subculture in which it is found...
, divorce
Divorce
Divorce is the final termination of a marital union, canceling the legal duties and responsibilities of marriage and dissolving the bonds of matrimony between the parties...
, adoption
Adoption
Adoption is a process whereby a person assumes the parenting for another and, in so doing, permanently transfers all rights and responsibilities from the original parent or parents...
or birth of a child
Childbirth
Childbirth is the culmination of a human pregnancy or gestation period with the birth of one or more newborn infants from a woman's uterus...
, or change in employment status of a spouse, until the next annual open season, during which employees can enroll, disenroll, or change from one plan to another. The exact dates of the open season change from year to year, but are usually from the Monday of the second full week in November through Monday, the second full week of December. Enrollment begins at or near the beginning of the calendar year, and lasts until a different plan choice is made in a subsequent open season or through a qualifying life event. In practice, there is a great deal of inertia in enrollment, and only about 5 percent of employees change plans in most open seasons.
Premiums vary from plan to plan and are paid in part by the employer (the U. S. government agency that the employee works for or, for annuitants, OPM) and the remainder by the employee. The employer pays an amount up to 72 percent of the average plan premium for self-only or family coverage (not to exceed 75 percent of the premium for the selected plan), and the employee pays the rest. This dollar amount is recalculated each year as health care costs and plans' premiums increase. Certain employees (such as postal worker
Postal worker
A postal worker is one who works for a post office, such as a mail carrier. In the U.S., postal workers are represented by the and the American Postal Workers Union, part of the AFL-CIO. In Canada, they are represented by the Canadian Union of Postal Workers and in the United Kingdom by the...
s) have a higher portion of their premiums paid as the result of collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
agreements. The precise percentage of the average paid by the employer is relatively unimportant to the design of this program and has changed over time to become more generous. What is important is that it is a "capped premium" design, in which the entire marginal cost of joining a plan with a premium near, at, or above the all-plan average is borne by the enrollee. In other words, enrollees pay the entire cost of their costly choices, but reap rewards if they make frugal choices. This creates constant pressure on the plans, since to attract enrollees they must hold down costs, while balancing this incentive against benefit offerings and customer service, to reach a position that will maximize their enrollment revenues and profits. This feature of the program is arguably its greatest strength and the primary reason that one expert summarized it has having "outperformed Medicare every which way--in containment of costs both to consumers and to the government, in benefit and product innovation and modernization, and in consumer satisfaction," decade after decade.
In 2010 about 250 plans participate in the program. About 20 plans are nationwide or almost nationwide, such as the ones offered by some employee unions such as the National Association of Letter Carriers
National Association of Letter Carriers
The National Association of Letter Carriers is an American labor union, representing non-rural letter carriers employed by the United States Postal Service...
, by some employee associations, and by national insurance companies such as AETNA
Aetna
Aetna, Inc. is an American health insurance company, providing a range of traditional and consumer directed health care insurance products and related services, including medical, pharmaceutical, dental, behavioral health, group life, long-term care, and disability plans, and medical management...
and the Blue Cross and Blue Shield Association
Blue Cross and Blue Shield Association
The Blue Cross Blue Shield Association is a federation of 39 separate health insurance organizations and companies in the United States. Combined, they directly or indirectly provide health insurance to over 100 million Americans. The history of Blue Cross dates back to 1929, while the history of...
on behalf of its member companies. There are about 230 locally available plans, almost all HMO
Health maintenance organization
A health maintenance organization is an organization that provides managed care for health insurance contracts in the United States as a liaison with health care providers...
s. The FEHB program is open to all federal employees, including members of United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
. The FEBHP's cost is about $40 billion in 2010, including both premiums and out-of-pocket costs. It enrolls about 4 million employees and annuitants and, with their dependents, 8 million persons in total. While its enrollment is about one-fifth that of the nation's largest health insurance program, Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
, it spends less than one-tenth as much because most enrollees are below age 65 and cost far less on average than the elderly and disabled who constitute Medicare's enrollees.
The FEHB program relies on consumer choices among competing private plans to determine costs, premiums, benefits, and service. This model is in sharp contrast to that used by original Medicare. In Medicare, premiums, benefits, and payment rates are all centrally determined by law or regulation (there is no bargaining
Bargaining
Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices...
and no reliance on volume discounts in original Medicare; these parameters are set by fiat). Some have criticized the FEHB model because neither the monopsony
Monopsony
In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...
power nor purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
of the federal government is utilized to control costs. This controversy is similar to that which surrounded legislation for the Medicare Prescription Drug Coverage
Medicare Part D
Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and went into effect on January 1, 2006.- Eligibility and...
passed during the George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
administration. Over time, however, the FEHB program has outperformed original Medicare not only in cost control, but also in benefit improvement, enrollee service, fraud prevention, and avoidance of "pork barrel
Pork barrel
Pork barrel is a derogatory term referring to appropriation of government spending for localized projects secured solely or primarily to bring money to a representative's district...
" spending and earmarks. (Medicare Part D
Medicare Part D
Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and went into effect on January 1, 2006.- Eligibility and...
has also controlled costs far better than originally forecast through a competitive, consumer-driven system of plan choices similar to and modeled after the FEHB program.)
One of the most prominent features of the FEHB program is the choices it allows. There are three broad types of plans: fee-for-service
Fee-for-service
Fee-for-service is a payment model where services are unbundled and paid for separately. In health care, it gives an incentive for physicians to provide more treatments because payment is dependent on the quantity of care, rather than quality of care...
and preferred provider organization
Preferred provider organization
In health insurance in the United States, a preferred provider organization is a managed care organization of medical doctors, hospitals, and other health care providers who have covenanted with an insurer or a third-party administrator to provide health care at reduced...
(PPO), usually offered combined, HMOs, and high deductible health insurance plans and other consumer-driven plans. In the Washington, D.C., metropolitan area, plans open to all federal employees and annuitants include 10 fee-for-service and PPO plans, seven HMOs, and eight high-deductible and consumer-driven plans. A similar number of choices is offered in almost all large metropolitan areas, and in many smaller cities and rural areas. The program is sometimes criticized for offering this broad array of choices, but there are many ways enrollees can obtain advice and assistance, including advice from office colleagues and friends, newspaper and magazine articles in both the general press and publications that specialize in federal employees or retirees, OPM publications and Web site, and several online tools that compare plans' costs, benefits, and services. As a noticeably consumer-friendly service, OPM requires that all plans publish brochures that describe benefits in plain English and in a standardized format that facilitates plan comparison and that can easily be downloaded in PDF format. Almost all plans provide Web sites that provide detailed information not only on their benefits, but also on their provider panels and their drug formularies. There is no published evidence that either in the FEHB program or in the other two federal programs that offer a wide range of plan choices, the Medicare Advantage and Medicare Prescription Drug programs, consumer confusion is a serious problem, or that health insurance choices are any more complicated to deal with than other consumer choices among complex products or services, such as choices as to automobile purchase or service, choice among physicians, or choice among life insurance and other insurance products. One study found that on the whole Medicare beneficiaries, who are both elderly and far less educated than the population at large, nonetheless were able to substantially reduce their drug costs by choosing, albeit imperfectly, Medicare prescription drug plans that reduced their drug costs from what would have been considerably higher costs. A recent evaluation of the FEHB program found that Open Season movement reduces premiums on average by about 1 percent compared to prior enrollment patterns, despite the tendency of enrollees to remain in current plans without considering alternative choices.
In the FEHB program the federal government sets minimal standards that, if met by an insurance company, allows it to participate in the program. The result is numerous competing insurance plans that are available to federal employees. Local plans have ready access to participation in the program, but the underlying statute prohibits entry of new national plans. Because OPM requires plans to price offerings closely to the health care costs of enrollees, and to offer comprehensive benefits, there is broad similarity in plan offerings. However, total premiums can vary substantially, and in 2010 the lowest cost plan option has a self-only premium cost of about $2,800 and the highest cost plan option for self-only enrollment is about $7,200. As an example of benefit variation, a cap of about $5,000 a year on potential out-of-pocket costs for self-only enrollment is found in a number of plans, but in some plans the cap may reach $15,000 or more (HMOs typically have no cap, but control potential cost exposure by using copayments).
The underlying legislation for the FEHB program is minimal and remarkably stable, particularly in comparison to Medicare. The FEHB statute is only a few dozen pages long, and only a few paragraphs are devoted to the structure and functioning of the program. Regulations are minimal; only another few dozen pages. In contrast, the Medicare statute found in title 18 of the Social Security Act is about 400 pages long and the accompanying regulations consume thousands of pages in the U.S. Code of Federal Regulations
Code of Federal Regulations
The Code of Federal Regulations is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the Federal Government of the United States.The CFR is published by the Office of the Federal Register, an agency...
.
The FEHB program has often been proposed as a model for national health insurance and sometimes as a program that could directly enroll the uninsured. These proposals began within its first decade and have continued ever since. Notable economist Alain Enthoven
Alain Enthoven
Alain C. Enthoven is an American economist. He was a Deputy Assistant Secretary of Defense from 1961 to 1965, and from 1965 to 1969 he was the Assistant Secretary of Defense for Systems Analysis. Currently he is Marriner S. Eccles Professor of Public and Private Management, Emeritus, at Stanford...
explicitly built a proposal for a system of "managed competition" as a national health reform decades ago, and has continued promoting the idea ever since. A version of this proposal was recently adopted by the Netherlands. In the 2004 presidential campaign, Senator John Kerry
John Kerry
John Forbes Kerry is the senior United States Senator from Massachusetts, the 10th most senior U.S. Senator and chairman of the Senate Foreign Relations Committee. He was the presidential nominee of the Democratic Party in the 2004 presidential election, but lost to former President George W...
proposed opening enrollment in this plan to all Americans. In enacting the Medicare Modernization Act in 2003, the Congress explicitly modeled the reformed Medicare Advantage program and the new Medicare Part D Prescription Drug program after the FEHB program. One of the prominent proposals for health reform in the United States, the proposed bipartisan Wyden-Bennett Act is largely modeled after the FEHB program, as have recent "Republican Alternative" proposals by Representative Paul Ryan
Paul Ryan (politician)
Paul Davis Ryan is the U.S. Representative for , serving since 1999. He is a member of the Republican Party and has been ranked among the party's most influential voices on economic policy....
.
External links
- Insurance Programs offered by the Office of Personnel Management, including health, dental, vision, life, flexible spending accountFlexible spending accountA flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
s, and long term care- Official website of the FEHB program