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FOR IMMEDIATE RELEASE: October 19, 2009

The road to good public policy is built upon lessons learned from policy experiments in the past. What have we learned from the past performance of federal health insurance programs? Current health care proposals in Congress promise to contain costs and maintain quality of care, which raises the question: What kind of federally administered program can best achieve those goals while expanding coverage?

For almost five decades, the federal government has run two major health insurance programs--Medicare and the Federal Employees Health Benefits Program (FEHBP)--thereby creating a natural experiment in government-run health care. In Putting Medicare Consumers in Charge: Lessons from the FEHBP (AEI Press, October 2009), noted health insurance expert Walton Francis identifies key lessons from that experience, arguing not only that both Medicare and the FEHBP can be improved, but also that each program contains lessons--both positive and negative--for national health care reform today.

The FEHBP has been a remarkable success because it operates, in important ways, as a private health insurance program. The government provides a voucher-like contribution to the premiums of hundreds of health plans, and patients and their insurers are able to decide almost every aspect of plan design, service, and cost. Fraud is rare and pork barrel spending nonexistent. Enrollees are protected against catastrophic expense.

Medicare, in contrast, is micro-managed by Congress and the Executive Branch, with annual legislation determining how much health care providers will be paid and which pork-barrel projects will receive federal support. Original Medicare fails to limit catastrophic medical expenses; both wasteful and fraudulent spending are rampant in that program. The new Medicare Advantage and Prescription Drug programs modeled after the FEHBP protect against catastrophic expense while controlling waste and fraud.

For decades, the FEHBP consistently outperformed Medicare in cost control, benefit generosity, fraud prevention, governance, and protecting enrollees from catastrophically high health care expenses--until federal "reforms" in 2000 compromised the effectiveness of the program. Today, both programs face major financial problems and are badly in need of real reforms to improve performance.

Rather than building upon the failed Medicare model, or reproducing the mistaken "reforms" that have undermined the effectiveness of the FEHBP, Congress would be wise to emulate the success of the original FEHBP program in providing high-quality, affordable insurance that empowers consumers to make vital decisions about their health care and thereby contains costs, limits fraud and abuse, and drives innovation.

Francis highlights several major differences between Medicare and the FEHBP:

• The FEHBP offers federal employees the opportunity to choose among different private insurance plans through market-based competition. Medicare, in contrast, relies on thousands of pages of statutory and regulatory requirements that dictate almost every design and operational detail. Over 4,000 civil servants run Medicare, while fewer than 200 are needed to administer the FEHBP, a $40 billion program that spends more money than some cabinet departments.
•  In contrast to original Medicare, fraud is almost nonexistent in the FEHBP and the new competitive Medicare programs because private plans are far more effective than bureaucracy at preventing and eliminating fraud. Preventing fraud benefits private plans directly, an incentive absent from publically administered programs.
• The original Medicare program attracts rent-seeking private interests that leverage billions of dollars through lobbying activities and manipulation of Medicare payment rates. The FEHBP is virtually immune from such assaults because plan competition, not the government, sets benefits and rates.

So superior has been the historical performance of the FEHBP compared to Medicare that Congress, in enacting the Medicare Modernization Act of 2003, copied the FEHBP and adopted major reforms using design features of the FEHBP. These features included a capped premium contribution that requires enrollees to pay excess premium costs for plans that are more expensive than average. Both Medicare Advantage and the Medicare Prescription Drug Program rely on plan competition for enrollees, and both appear to be surpassing the performance not only of original Medicare, but also of the FEHBP.

In 2000, just before these Medicare reforms were enacted, the Office of Personnel Management placed the enrollee share of FEHBP premiums into the same tax preferred status as most private employer health insurance, a decision which eviscerated market incentives for consumers to choose more frugal plans, and for companies to offer plans using cost-sharing to restrain spending on unnecessary care.

• Since 2000, the FEHBP has lost much of its formidable cost control performance. Even original Medicare now slightly outperforms the FEHBP in cost control.
• The government's failure to coordinate Medicare and FEHBP premiums and benefits properly has increased wasteful spending in both programs--up to $1 billion per year. Retired couples (age 65 and over) in the most popular plan are forced to spend over $7,000 annually in total premiums for unlimited "free" medical care, or give up Medicare altogether. Francis recommends that FEHBP plans instead be allowed to pay the Medicare Part B premium and retain modest cost sharing, to the benefit of both retirees and the taxpayer.

Medicare's recent superior performance in cost containment is due in part to the Medicare Advantage and Prescription Drug plans, which create local market incentives for physicians and hospitals to reduce wasteful spending on all retirees, not just those enrolled in those programs. But, ironically, current "reform" proposals would make massive cuts to Medicare Advantage and eliminate the most effective cost saving feature of Medicare Part D: the "doughnut hole" that creates incentives for generic and therapeutic drug substitution that hold down enrollees' costs in that program.

Putting Medicare Consumers in Charge outlines reforms that will restore the FEHBP's efficiency and move Medicare toward fiscal solvency. Francis emphasizes that the most fundamental reform is to reduce the tax preference for unlimited employee health care spending, a subsidy that swamps market incentives and engenders massive waste throughout the health care system. Reducing this tax preference will save money by creating incentives for prudent shopping and prudent spending--what the Congressional Budget Office recently called "bending the curve" of runaway cost growth.

Francis also recommends using high deductible plans with savings accounts, and even the "doughnut hole" model, to provide first-dollar coverage for needed medicines and preventive care while giving consumers incentives to spend less on unneeded care and putting pressure on providers to counsel patients about lower-cost treatment options. Finally, he proposes reforms that would improve cost control and benefit design in these programs--and others such as TRICARE--that would benefit both enrollees and the taxpayer.

This book is not just an analysis of Medicare and the FEHBP; it is a case-study in the design of effective government programs that minimize unintended adverse side effects. Putting Medicare Consumers in Charge is a comprehensive resource for policymakers considering the future of health care in America.

Walton Francis is an independent consultant and author who served for many years as a policy advisor in the Office of the Secretary at the Department of Health and Human Services. For thirty years, he has been the principal author of the annual CHECKBOOK's Guide to Health Plans for Federal Employees. This best-selling consumer guide pioneered the systematic comparison of health plans, and has sold millions of copies and saved hundreds of millions of dollars for both federal employees and the taxpayers who pay most of the premium cost for those plans.