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FOIA Number: 2006-0810-F
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MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
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Health Care Task Force
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Subseries:
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FolderlD:
Folder Title:
Integration of Federal Health Programs into the New System [7]
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�For O f f i c i a l Use Only
BRIEFING BOOK ON THE FEDERAL EMPLOYEES HEALTH BENEFITS
PROGRAM
TABLE OF CONTENTS
Page
I.
BACKGROUND
1
A.
B.
Multiple Choice
1
C.
Employer Contribution
1
D.
Program Cost Increases
2
E.
Enrollment Patterns
2
F.
Comprehensive Benefits
3
G.
II.
General Information About the Federal Employees Health Benefits Program
(FEHBP)
1
The Role of the Office of Personnel Management
3
S
A.
Effect of the New System
5
B.
Cost-Effectiveness and Efficiency
5
C.
Concentration of FEHBP and Other Federal Health Insurance Enrollees . . . .6
D.
HI.
ISSUES
Behavior of FEHBP Enrollees in Selecting a Health Plan
RECOMMENDATIONS AND RATIONALE . .
6
7
A.
Option 1: Maintain an Independent FEHBP for Federal Enrollees Modified to
Conform with National Health Reform
7
B.
Option 2: Make Changes Based on Regional Variations
9
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IV.
INTEREST GROUP POSITIONS
12
A.
Federal Employees and Retirees
12
B.
Non-Postal Unions and NARFE
12
C.
Postal Unions
12
D.
Other Carriers Currently Participating in FEHBP
13
E.
Congress
13
F.
States
14
V.
QUESTIONS & ANSWERS
15
VI.
APPENDIX
16
1.
Concentrations of Federal Employees
2.
FEHBP Enrollment Behavior
3.
Congressional Report on the FEHBP
4.
Selected Material from Chapter 5 of Mandate for Change
5.
Heritage Foundation Report: Affordable Health Care
6.
SEIU Issue Paper: CALPers and Managed Competition
7.
Information on the Workers Compensation Program
�For O f f i c i a l Use Only
I. BACKGROUND
A.
GENERAL INFORMATION ABOUT THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM (FEHBP)
The program covers over nine million participants (2.5 million full-time and
part-time permanent employees, 1.7 million retirees, 5.0 million dependents).
There is an annual Open Season for enrollees to review informational materials
and make a new election if they choose.
There are no exclusions for pre-existing conditions or waiting periods when
enrolling in any plan in the program,
B.
MULTIPLE CHOICE
There are seven fee-for-service (FFS) plans open to all federal employees and
retirees; there are also eight employee organization plans that are limited to
certain groups.
The fee-for-service plan enrollees choose their own health care providers or
take advantage of the plan's Preferred Provider Organization (PPO).
•
C.
Over 300 participating Health Maintenance Organizations (HMOs) provide
prepaid health care through specific providers to employees and dependents
living in their service areas.
EMPLOYER CONTRIBUTION
•
Both the government, as an employer, and enrollees contribute a portion of the
premium costs for health insurance coverage.
�For O f f i c i a l Use Only
With the exception of the Postal Service, which makes a greater employer
contribution as a result of its collective bargaining agreements, the employer
contributes up to 75 percent of a plan's premium (i.e., the employer
contribution is capped at 75 percent). On average, the employer contribution is
72 percent of the premium costs for non-postal enrollees.
In 1992, 53 percent of the plans were bound by the 75 percent cap. In 1987, 25
percent of the plans were bound by the 75 percent cap. This change was the
result of large numbers of enrollees selecting plans, that would maximize the
government contribution and minimize their own. In most of these cases,
benefits were reduced.
No adjustment is made for the different risk levels of each health plan's
FEHBP population, nor are there any special provisions for low-income
individuals.
D.
PROGRAM COST INCREASES
This year (FY 1993) the employer's costs for FEHBP are estimated at $11.8
billion. Total program costs, including enrollee contributions, are estimated at
$15.7 billion.
Overall program costs have risen at an average annual rate of 9.5 percent (6.5
percent above inflation) since 1983. The employer has absorbed the bulk of
these FEHBP premium increases.
E.
ENROLLMENT PATTERNS
The Blue Cross and Blue Shield fee-for-service plan is by far the most
popular choice, selected by almost 40 percent of FEHBP enrollees.
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The percentage of those choosing to participate in HMO plans has steadily
increased, from six percent in 1970 to 28 percent in 1992 (based on 38 percent
of active employees and 13 percent of retirees being enrolled in HMO's).
Enrollees can select either Self or Self & Family coverage, and in some plans,
they may choose between a Standard or High level of benefits. According to a
1989 participant survey, price was the primary factor in active employees plan
selection; familiarity with the plan ranked first for retirees.
Of approximately 2.9 million Federal employees, an estimated 15 percent or
435,000 are not enrolled under FEHBP. About 58 percent of all nonparticipants are covered by a spouse's insurance. There are approximately
175,000 to 185,000 employees are not covered elsewhere and therefore have no
health insurance.
Approximately 620,000 retirees from a population of 2.3 million are not
participating in FEHBP; most are covered under Medicare.
F.
COMPREHENSIVE BENEFITS
Although FEHBP has no standard benefit package, certain coverage is required
of the health plans.
•
G.
Mental health coverage is provided; the level of benefits is better than what is
offered by many private sector employers, but is still not as generous as
benefits for physical conditions.
THE ROLE OF THE OFFICE OF PERSONNEL MANAGEMENT (OPM)
•
OPM administers the FEHBP. It prescribes minimum standards for health
benefits plans; sets the employer premium contributions each year according to
a statutory formula; negotiates contracts with the carriers over benefits and
�For O f f i c i a l Use Only
premiums; runs an Open Season; decides claim disputes between the carriers
and enrollees; and audits records of participating plans.
Agencies transmit both the employer and the employee share of premiums to
OPM. Funds are disbursed to the carriersfromthe Employees Health Benefits
Fund. Until now, OPM has not maintained any centralized enrollment
information other than number of enrollments by plan. A pilot project is
currently underway to provide more centralized data.
�For O f f i c i a l Use Only
n. ISSUES
A.
EFFECT OF THE NEW SYSTEM
Changes to the FEHBP should not take away the Federal government's ability to
maintain control over the cost and quality of the health benefits purchased and to
recruit and retrain qualified workers in competition with other employers.
B.
COST-EFFECTIVENESS AND EFFICIENCY
The most cost-effective and efficient management structure for the FEHBP under
national health reform needs to be determined. There are a number of issues that need
to be taken into consideration:
Should the Federal government (the largest employer in the country) be treated
the same or differently than other large employers?
How should the government as an employer contribute to the anticipated
increased risk pool costs generated by covering the uninsured if other large
employers are required to do so?
Should the FEHBP be totally regionalized, including fee-for-service
plans, or should only some administrative functions be regionalized
while others remain centralized?
Should the FEHBP continue to function as supplemental coverage to Medicare
for people over 65? In addition, should the minority of people over 65 covered
by FEHBP but not enrolled in Medicare be allowed to continue to do so?
Should other Federal programs be integrated with the FEHBP, and if so, which
programs and how should they be integrated?
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O f f i c i a l Use Only
What is the most effective way to maintain health plan choice
while minimizing or eliminating the negative effects of adverse
selection?
C.
CONCENTRATION OF FEHBP AND OTHER FEDERAL HEALTH INSURANCE
ENROLLEES
Analysis indicates a wide range of Federal population sizes, from high concentrations
in certain areas to intermediate or nominal in others (see accompanying charts and
tables in the Appendix). Such information is vital in deciding how to structure the
administration of health plans on a regional basis.
D.
BEHAVIOR OF FEHBP ENROLLEES IN SELECTING A HEALTH PLAN
Managed competition assumes that people will make rational choices about their
health care coverage based on information about costs and benefits. However, FEHBP
enrollees in large metropolitan areasfrequentlyselect health plans that are NOT the
best value (see accompanying charts and tables in the Appendix).
Other large employer populations (see the Service Employee International
Union study of the California Public Employees' Retirement System
(CalPERS), included in the Background Literature section) demonstrate similar
patterns.
This suggests that additional concerns motivate FEHBP enrollees to select
particular health plans, an important consideration when evaluating how to
design the national health system.
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ffl. RECOMMENDATIONS AND RATIONALE
After extensive deliberations, the group decided on two final options.
A.
OPTION 1:' MAINTAIN AN INDEPENDENT FEHBP FOR FEDERAL
ENROLLEES MODIFIED TO CONFORM WITH NATIONAL HEALTH
REFORM
RECOMMENDATION:
Retain the FEHBP as an independent Federal health alliance that would conform
with the Health Alliances established under the new system. That arrangement
could be modified at a later date based on the experiences of the national
program.
Under this option, the FEHBP would be treated as a large employer provided plan, but
would conform to the health alliance model and, perhaps, integrate other Federal
populations. FEHBP would act as a health alliance, and would adopt the standardized
benefit^ and employer contribution formula, and continue to have the statutory
authority to administer the program, and would have the latitude to determine plan
participation.
This option would retain the independent existence of the FEHBP as a large employer
administered health alliance with a conforming structure.
RATIONALE:
If all large employers are allowed to sponsor or purchase health insurance for their
employees, then the Federal government, the largest employer, should likewise
administer a health alliance for Federal enrollees. Since the FEHBP (or Federal health
alliance) would adopt the same benefits package, employer contribution level, risk
adjusters, and other structural features of the health alliances, this approach ensures
that the Federal community would be treated the same as others in the system.
�For O f f i c i a l Use Only
In this model, the Federal government would be able to address its interests as the
largest multi-state employer. It would continue to maintain a substantial amount of
control over the cost and quality of health benefits for its employees. Further, OPM
would continue to assume the same role that other large employers do in acting as
intermediary between its employees and the health care plans, resolving service
disputes, monitoring plan viability and quality and facilitating provision of benefits by
employees and retirees.
Once the FEHBP is transformed into a Federal health alliance, it could, if deemed
desirable allow all individuals connected to the Federal workplace to be covered by
the Federal health alliance. By remaining a free-standing health alliance for the
Federal population, the FEHBP would avoid burdening the newly-emerging state
health alliances with the administrative responsibility of serving at least nine and
possibly as many as 15 million people.
Transforming FEHBP into a health alliance could be accomplished quickly if the feefor-service plans, adhering to the prescribed benefits package, were competitively
selected. A global budget would need to be determined. With relatively few changes,
the path to health care reform could be explored through therapidtransformation of
the FEHBP to a Federal health alliance.
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B.
OPTION 2: MAKE CHANGES BASED ON REGIONAL VARIATIONS
RECOMMENDATION:
Adopt a "do whatever makes sense" approach that would be dictated by the
specific populations and conditions in given areas. In some cases, an independent
Federal health alliance would be created. In others, the FEHBP would disappear
and enrollees would be absorbed into the local health alliances. In still others, a
combined Federal-local health alliance would be developed.
Under this option, FEHBP would conform to the health alliance structure and would
proceed as the national program falls into place to adapt in various ways to local
situations. It would begin regionalization and either initiate or respond to requests
from health alliances to negotiate any of the. following outcomes as appropriate and
feasible:
Cease operation in "small Federal population regions" and shift enrollees to
local Health Alliance;
Operate as a Federal health alliance parallel to a local health alliance in "large
Federal population regions", possibly including CHAMPUS enrollees and
injured Federal workers covered under workers' compensation as well;
Merge with local health alliances under arrangements convenient to all parties
in "intermediate Federal population regions", for example, non-Federal
populations might be covered under the Federal health alliance on some
mutually agreeable basis.
Under this option, the FEHBP would embrace all of the elements of reform, and
would seek to preserve the flexibility to react appropriately — therefore differently —
to the many and varied circumstances that are sure to face both the FEHBP and the
health alliances as reform progresses.
�For O f f i c i a l Use Only
While this alternative includes key features of the other option, it also introduces an
additional possibility. FEHBP as a distinct program would continue — but only
where it made sense to the Federal government as the employer and to the local
Health Alliances that it do so.
RATIONALE:
Federal population statistics illustrate why the flexibility to adopt different approaches
in different geographic areas makes sense.
In the Washington, D.C. metropolitan area, the FEHBP insures one-third of the
area's population (852,000 FEHBP enrollees and their dependents plus a very
substantial number of CHAMPUS eligibles). It makes sense to keep the
program together where so many enrollees are involved and so many dollars
are at stake.
Where it would best serve the reform effort and Federal enrollees for it to do
so, the FEHBP could simply disappear. For example, in one small New
England state the FEHBP insures only a small portion of the area's population
and the Federal Government is not a major employer (14,000 FEHBP enrollees
and their dependents and a relatively small number of CHAMPUS eligibles
compared with 241,000 employed by others).
Similarly, one of the Western states has both a small FEHBP enrollment but
also a relatively small overall population (18,000 FEHBP enrollees and their
dependents and another two-thirds CHAMPUS eligibles compared with
165,000 employed by others). Where there are so few FEHBP enrollees that
FEHBP has no leverage, and where adding FEHBP enrollees to a sparse health
alliance population would significantly advantage the health alliance, it would
make sense to simply disband the Program and insure Federal enrollees through
the local health alliance.
The FEHBP structure and contracts could be used to bring coverage to other
groups. Thefirstand most obvious inclusion would be: other Government
10
�For O f f i c i a l Use Only
employees now insured through other means; injured workers through OWCP;
and military families and retirees through CHAMPUS.
The FEHBP could also help a particular health alliance get a head start on
insuring employees of small companies by allowing them to enroll in FEHBP
until the state Health Alliance is implemented. Such arrangements would have
the additional, significant advantage of giving health alliance employees direct,
practical experience with administering a new system program. However, this
would be the most difficult to do from an administrative, budgetary, and risk
pool perspective and would require careful structuring of the details.
11
�For O f f i c i a l Use Only
IV.
A.
INTEREST GROUP POSITIONS
FEDERAL EMPLOYEES AND RETIREES
The best case scenario as generally perceived by both these groups would be to have
reform proceed with as little disruption to the current programs as possible. However,
there could also be apprehension in some circles about the degree of power left to the
Federal Government as a large employer if it were allowed to remain independent of
the national health care system. The overriding concern under any circumstances
would be the effects of reform on enrollee health benefits, primarily as part of their
overall compensation or retirement package. You can expect strong opposition to any
proposal which would:
•
increase the premium cost paid by enrollees;
•
reduce the benefits offered by the health plans; and
significantly alter current relationships between enrollees and health care
providers.
B.
NON-POSTAL UNIONS AND NARFE
These groups will take a position generally in keeping with the one outlined for
Federal employees and retirees. We met with representatives of the AFIVCIO, NTEU,
and NARFE. There would be a positive reaction to extending coverage to the
currently uninsured portion of the Federal population.
C.
POSTAL UNIONS
Postal unions, such as the National Association of Letter Carriers (NALC) and the
American Postal Workers Union (APWU), that sponsor their own health plans will
12
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have a vested interest in maintaining an independent FEHBP in which they can
continue to participate.
D.
OTHER CARRIERS CURRENTLY PARTICIPATING IN FEHBP
Health insurance carriers can be expected to support any proposal that minimally
disrupts their current practices. Large amounts of money are at stake. Overall, the
program paid fee-for service carriers $862.3 million in administrative expenses and
$67.3 million in service charges (profits) in 1991. Current participants would certainly
prefer not to have to compete to participate in the program and would like to maintain
as much control as possible over the benefits packages they offer. However, to the
extent that these factors are mandated universally so that all employers and not just
those participating in the health alliances play by the same rules, opposition would be
mitigated.
We met with representatives of Mid Atlantic Medical Services, Inc. which offers an
individual practice plan type HMO under the FEHBP. That particular carrier was
generally pleased with the idea of a standard benefits package and indicated the
capability to expand capacity to accommodate significant numbers of additional
enrollees. Its primary concerns were in regard to financing (i.e., they prefer a general
tax rather than a health care industry specific tax), and the degree to which specific
state requirements rather than more standard federal requirements will be applied for
participation as a health plan under the health alliances.
Presumably most carriers would prefer to continue to deal with OPM as opposed to an
untested health alliance, unless of course insurance interests are substantially protected
through membership on health alliance boards.
E.
CONGRESS
The perception of FEHBP within Congress, as clearly demonstrated by the positions
adopted by Congressional staff from the House Post Office and Civil Service
Committee and Federal Services Subcommittee of the Senate Governmental Affairs
Committee who participated in the working group, is that in general the program
provides adequate health care protection to its enrollees and is competently
13
�For O f f i c i a l Use Only
administered, and that its structural problems can be corrected without major
programmatic overhaul. Thus, Congress may oppose any plan to significantly
decentralize programmatic control away from the Federal Government, unless it is
demonstrated that the resulting cost savings would be substantial.
Members with large numbers of federal employees as constituents would be
particularly vocal in opposing any changes perceived by enrollees such as "takeaways" (i.e., reduced benefits and/or increased premium share). Questions concerning
the fairness of such actions, as well as the impact on employee morale, would be
debated at length, although this undoubtedly would be tempered by the degree to
which these changes mirror what is required of employees/retirees outside the Federal
government.
F.
STATES
Assuming states are given the primary authority to oversee health alliances, one can
expect them to want access to risk pools of maximum size and diversity. Therefore,
states would support dissolution of the FEHBP and other federal insurance programs
so that their substantial populations would be absorbed into the health alliances.
Exceptions might be those areas of high federal employee population concentration,
where the benefits of risk pool normalization might be exceeded by the overwhelming
pressures placed on health alliance administrative capacities. Of course, to the degree
that non-participating employers are required to pay a surcharge to compensate for
risk pool advantages, this would become a less significant or insignificant issue.
14
�For O f f i c i a l Use Only
V. QUESTIONS & ANSWERS
1.
Will changes to the FEHBP affect the ability of Federal employees and retirees to
choose coverage from among various health plans?
One of the primary goals of national health care reform is to promote competition
among health plans. Federal employees and retirees will still be able to select a health
plan from among several different choices, including fee-for-service plans, even if the
FEHBP is substantially revised or ceases to exist as an independent program.
2.
Will changes to the FEHBP have an impact on the benefits offered by
participating health plans?
Under national health care reform, all health plans will be required to offer a standard
benefits package. This benefit package will not differ significantly from the typical
package currently offered by most FEHBP plans. It is possible that employee
organizations will be able to offer their members supplemental benefits.
3.
Will changes to the FEHBP affect the amount that Federal employees and
retirees pay in health insurance premiums?
The national health care system will feature a standardized employer
contribution to total health insurance premiums. The effect this would have on
the premium paid by FEHBP enrollees would depend on the formula used to
determine the employer contribution and the premium charged by each health
plan.
4.
Will those in the Federal population currently without health insurance be
covered under national health care reform, and if so, how?
Universal coverage is a fundamental goal of reform. The Federal government
will be required to provide coverage to all employees like all other employers.
15
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VI.
APPENDIX
1.
Concentrations of Federal Employees
2.
FEHBP Enrollment Behavior
3.
Background Literature
4.
Congressional Report on the FEHBP
5.
Selected Material from Chapter 5 of Mandate for Change
6.
Heritage Foundation Report: Affordable Health Care
7.
SEIU Issue Paper: CALPers and Managed Competition
8.
Information on the Workers Compensation Program
16
�Clinton Presidential Records
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This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
�TAB 1
CONCENTRATIONS OF FEDERAL ENROLLEES
�FEDERAL HIGH CONCENTRATION AREAS
By State and Washington, DC (N = 12)
Area
Ohio
Illinois
North Carolina
Washington
Pennsylvania
Virginia
Georgia
New York
Florida
Texas
Washington, DC
California
741.672
363.308
1154.208
1
200
400
600
1
800
1000
1
1200
:i570.845
1
1
1400
1600
Thousands
FEHB Enrollees
CHAMPUS Enrollees
Locations where the number of Federal
enrollees and dependents exceeds 3 0 0 , 0 0 0
v?.
FEHB D e p e n d e n t s
1800
�FEDERAL HIGH CONCENTRATION AREAS (HCAs)
Total Inside HCAs
7,833,604
Total Outside HCAs
5,271,728
Locations where the number of
Federal enrollees and dependents
exceeds 3 0 0 , 0 0 0
�FEDERAL HIGH CONCENTRATION AREAS:
Locations Where the Number of Federal Health Insurance Enrollees
and Dependents Exceeds 3 00,000
Area
Number o f
FEHB
Enrollees*
(1990)
Number o f
FEHB
Dependents"
(1990)
Number o f
CHAMPUS
Enrollees
(1992)
California
374,472
494,303
702,070
1,570,845
Florida
140,302
185,199
416,171
741,672
Georgia
109,404
144,413
227,709
481,526
Illinois
117,991
155,748
92,826
366,565
New Y o r k
178,097
235,088
99,323
512,508
North
Carolina
59,292
78,265
246,550
384,107
Ohio
110,413
145,745
89,127
345,285
Pennsylvania
160,364
211,680
83,016
455,060
Texas
213,335
281,602
468,371
963,308
Virginia
109,465
144,494
218,872
472,831
Washington
79,311
104,691
201,687
385,689
Washington
DC ( M e t r o
Area,
including
VA & MD)
367,440
485,021
301,747
1,154,208
2,019,886
2,666,249
3,147,469
7,833,604
TOTALS
Total
Enrollees
"Under Age 65, I n c l u d i n g Federal Employees E l i g i b l e
But Not P a r t i c i p a t i n g i n FEHB, Federal Employees
I n e l i g i b l e f o r FEHB, and Postal Service Employees.
"Based on an average of 2.2 dependents f o r t h e 60 percent of FEHB
enrollees covered under Self & Family insurance.
�FEDERAL INTERMEDIATE CONCENTRATION AREAS
Selected States (N = 23)
Area
Wisconsin
Minnesota
Mississippi
New Mexico
Indiana
Louisiana
Tennessee
Michigan
Massachusetts
Maryland
Oklahoma
New Jersey
Alabama
y///////////A
102.534
111.02
ZH) 131.395
0 142.07
:
163.684
W////////M.
w/////////////////,
0 184.252
D 205.42
:
:
Q 207.508
Hi 214.009
Id 231
148
243.25
264.326 j
"n
50
100
150
x—
— i —
^ 272.637
1
I
200
250
300
Thousands
FEHB Enrollees
CHAMPUS Enrollees
Locations where the number of Federal
enrollees and dependents is between
100,000 and 3 0 0 , 0 0 0
^
FEHB Dependents
350
�FEDERAL INTERMEDIATE CONCENTRATION AREAS
(ICAs)
Total Inside ICAs
4,372,652
Total Outside ICAs
8,770,056
Locations where the number of
Federal enrollees and dependents
is between 100,000 and 3 0 0 , 0 0 0
�FEDERAL INTERMEDIATE CONCENTRATION AREAS:
Locations Where the Number of Federal Health Insurance Enrollees
and Dependents i s Between 100,000 and 300,000
Area.
Number o f
FEHB
Enrollees
(1990)*
Number o f
FEHB
Dependents
(1990)**
Number o f
CHAMPUS
Enrollees
(1992)
Total
Enrollees
Alabama
65,487
86,443
120,707
272,637
Arizona
49,937
65,917
109,924
225,778
Arkansas
24,564
32,424
52,905
109,893
Colorado
62,530
82,540
133,728
278,798
Hawaii
32,699
43,163
96,272
172,134
Indiana
50,690
66,911
46,083
163,684
Kansas
30,048
39,663
70,901
140,612
Kentucky-
43,592
57,541
82,949
184,082
Louisiana
40,014
52,818
91,420
184,252
Maryland
71,512
94,396
65,240
231,148
Massachusetts
71,532
94,422
48,055
214,009
Michigan
66,045
87,179
54,284
207,508
Minnesota
37,710
49,777
23,533
111,020
Mississippi
29,542
38,995
62,858
131,395
Missouri
80,165
105,818
80,456
266,439
New M e x i c o
34,354
45,347
62,369
142,070
New J e r s e y
88,239
116,475
59,612
264,326
Oklahoma
60,154
79,403
103,693
243,250
Oregon
36,846
48,637
32,568
118,051
South
Carolina
41,608
54,923
164,140
260,671
Tennessee
50,037
66,049
89,334
205,420
Utah
47,914
63,246
31,781
142,941
Wisconsin
32,826
43,330
26,378
102,534
1,148,045
1,515,417
1,709,190
4,372,652
TOTALS
"Under Age 65, I n c l u d i n g Federal Employees E l i g i b l e
But Not P a r t i c i p a t i n g i n FEHB, Federal Employees
I n e l i g i b l e f o r FEHB, and Postal Service Employees.
"Based on an average of 2.2 dependents f o r the 60 percent of FEHB
enrollees covered under Self & Family insurance.
�FEDERAL LOW CONCENTRATION AREAS
By State (N = 16)
Area
Vermont
Wyoming
m w m \ 18.824
W / M
[I 30.076
West Virginia
Delaware
New Hampshire
North Dakota
33.768
'mm
ii:;;;::.• r
34 611
J
y//////////A
j j
South Dakota
Rhode Island
41.533
43.155
Q 46.885
y//////////////.
0
47.51
Montana
Idaho
Q 51.489
y//////////////A
:
ID 54.063
Iowa
68.849
Maine
80.228
Nevada
80.75
Nebraska
—D
Alaska
__-f)
Connecticut
85.308
87.61
94>H3
—
1^
20
40
60
i
80
r
-
100
Thousands
FEHB Enrollees
Locations where the number of Federal
enrollees and dependents is less than
100,000
^ ]
FEHB Dependents
I
I CHAMPUS Enrollees
120
�FEDERAL LOW CONCENTRATION AREAS (LCAs)
Total Inside LCAs
899,072
Total Outside LCAs
12,243,640
Locations where the number of
Federal enrollees and dependents
is below 100,000
�FEDERAL LOW CONCENTRATION AREAS:
L o c a t i o n s Where the Number of F e d e r a l Health Insurance E n r o l l e e s
and Dependents i s L e s s Than 100,000
Area
Number o f
FEHB
Enrollees
(1990)*
Number o f
FEHB.
Dependents
(1990)"
Number o f
CHAMPUS
Enrollees
(1992)
Total
Enrollees
Alaska
15,906
20,996
50,708
87,610
Connecticut
26,673
35,208
32,532
94,413
6, 748
8,907
18,956
34,611
Idaho
13,054
17,231
23,778
54,063
Iowa
22,457
29,643
16,749
68,849
Maine
20,685
27,304
32,239
80,228
Montana
14,109
18,624
18,756
51,489
Nebraska
18,456
24,362
42,490
85,308
Nevada
13,702
18,087
48,961
80,750
New Hampshire
10,447
13,790
17,296
41,533
N o r t h Dakota
9, 387
12,391
21,377
43,155
Rhode I s l a n d
12,466
16,455
18,589
47,510
South Dakota
11,767
15,532
19,586
46,885
Vermont
5,956
7,862
5, 006
18,824
West V i r g i n i a
7,258
9,581
16,929
33,768
Wyoming
7, 641
10,086
12,349
30,076
216,712
286,059
396,301
899,072
Delaware
TOTALS
'Under Age 65, I n c l u d i n g Federal Employees E l i g i b l e
But Not P a r t i c i p a t i n g i n FEHB, F e d e r a l Employees
I n e l i g i b l e f o r FEHB, and P o s t a l S e r v i c e Employees.
'Based on an average o f 2.2 dependents f o r t h e 60 p e r c e n t o f FEHB
e n r o l l e e s covered under S e l f & F a m i l y i n s u r a n c e .
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
2-
�TAB 2
FEHB ENROLLMENT BEHAVIOR
NOTE: Before reviewing the following tables and graphs, please note this brief explanation
of the methodology. The health plans used in the analysis were selected based on a
determination of which fee-for-service plan and HMO in each area had the largest FEHB
enrollment. The assumption was that these plans were most representative of area enrollment
behavior. However, for Postal employees enrolled in fee-for-service plans only, we
determined that a more accurate indicator of enrollment behavior would be an average of the
four health plans sponsored by Postal unions.
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Non Postal Employees, Self Only
64%
Boston
38%
-
60%
m\\\\\\\wj
24%~\ 74%
Chicago
Los Angeles
-
-22% L l
hN\N\\\\\\\\\^
W//////////^^^^
-
S\\\\^\\\W^
New York
3i%
-
-1% r
67%
27%
I 81%
w//////m 1- 9%
34%
%
Philadelphia
63%
-
-3%
m \ \ \ \ \ \ \ \ \ N \ \ \ \ i 27%
San Francisco
Washington DC
-
-*% r
82%
m\mwmi 2
7
%
//////////////////////A
-13%
L
\\\\\\\\\V\\\\\W^
I] 67%
33%~
32%
I
0%
50%
FFS Enrollment
HMO Enrollment
Premium Difference
100%
Plan Val. Difference
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
FFS: Blue Cross/Blue Shield Std.
HMO: Area Plan With The Greatest Enrollment
�COMPARISON OF HEALTH PLAN PREFERENCES WITHIN FEHB
Non Postal Employees, Self Only Coverage
Number o f
FFS
Enrollees"
Area
Number o f
HMO
Enrollees"
Percentage
of E n r o l l e e s
i n FFS Plan
Percentage
of E n r o l l e e s
i n HMO Plan
Boston
4,101
2,311
64%
36%
Chicago
4,042
1,405
74%
26%
Los Angeles
5,129
10,523
33%
67%
New York
8, 766
2,114
81%
19%
Philadelphia
4,700
5,212
47%
53%
San
Francisco
3,235
15,184
18%
82%
Washington DC
31,741
15,755
67%
33%
"Figures based on 1992 Non Postal employee enrollment i n Blue Cross/
Blue Shield Standard, the Fee For Service plan w i t h the l a r g e s t
enrollment i n each area. I n 1993, the number e n r o l l e d i n Blue
Cross/Blue Shield Standard nationwide i s expected t o r i s e
s i g n i f i c a n t l y , w i t h the increase p r i m a r i l y a t t r i b u t a b l e t o d e c l i n i n g
enrollment i n other FFS plans, and not decreased HMO enrollment.
"Figures based on the HMO w i t h the l a r g e s t FEHB enrollment i n the
area as of 1992. The f o l l o w i n g plans are represented:
Boston - Harvard Community Health Plan
Chicago - Humana Michael Reese
Los Angeles - Kaiser of Southern C a l i f o r n i a
New York - HIP of New York
P h i l a d e l p h i a - US Healthcare o f PA
San Francisco - Kaiser of Northern C a l i f o r n i a
Washington DC - Kaiser of the Mid A t l a n t i c
�COMPARISON OF HEALTH PLAN PREMIUMS AND BENEFITS WITHIN FEHB:
SELF ONLY ENROLLMENT, NON POSTAL EMPLOYEES
1992
Total
MonthlyPremium
(FFS)*
1992
Total
Monthly
Premium
(HMO)"
1992
Govt.
Share
(FFS)*
1992
Govt.
Share
(HMO)**
1992
Emp.
Share
(FFS)*
1992
Emp.
Share
(HMO) *
*
1992
Plan
Value
(FFS)***
Boston
$164.26
$192.70
$123 .20
$131.08
$41.06
$61.62
.93
1.15
64%
36%
Chicago
$164.26
$127.49
$123 .20
$95.62
$41.06
$31.87
.93
1.22
74%
26%
Los Angeles
$164.26
$168.13
$123 .20
$126.10
$41.06
$42.03
.93
1.18
33%
67%
New York
$164.26
$162.11
$123 .20
$121.58
$41.06
$40.53
.93
1.25
81%
19%
Philadelphia
$164.26
$159.90
$123 .20
$119.93
$41.06
$39.97
.93
1.18
47%
53%
San
Francisco
Washington
DC
$164.26
$157.50
$123 .20
$118.13
$41.06
$39.37
.93
1.18
18%
82%
$164.26
$142.68
$123 .20
$107.01
$41.06
$35.67
.93
1.23
67%
33%
Area
1992
Plan
Value
(HMO)*"
%
i n FFS
Plan
%
i n HMO
Plan
tfOTEt For Non P o s t a l employees, t h e Government pays 75 p e r c e n t o f t h e t o t a l h e a l t h i n s u r a n c e premium, w i t h
a maximum payment based on 60 p e r c e n t o f t h e average premium o f t h e s i x l a r g e s t h e a l t h p l a n s . Employees
pay t h e remainder o f t h e premium, a minimum o f 25 p e r c e n t .
'Blue Cross/Blue S h i e l d Standard, t h e Fee For S e r v i c e p l a n w i t h t h e g r e a t e s t e n r o l l m e n t .
"The f o l l o w i n g HMOs were s e l e c t e d based on l a r g e s t e n r o l l m e n t i n t h e a r e a :
Boston - Harvard Community H e a l t h Plan
Chicago - Humana M i c h a e l Reese
Los Angeles - K a i s e r o f S o u t h e r n C a l i f o r n i a
New York - HIP o f New York
P h i l a d e l p h i a - US H e a l t h c a r e o f PA
San F r a n c i s c o - K a i s e r o f N o r t h e r n C a l i f o r n i a
Washington DC - K a i s e r o f t h e M i d A t l a n t i c
" P l a n v a l u e s a r e s t a n d a r d i z e d on a base-one f o r m a t ( t h e average v a l u e f o r a l l FEHB p l a n s i s e q u a l t o
1.00). Thus t h e f i g u r e s g i v e n show t h e p e r c e n t a g e f r o m w h i c h t h e v a l u e o f p l a n b e n e f i t s v a r y above o r
below t h e average.
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Non Postal Employees, Self & Family
U
Boston
V//////A
86%
16%
1
178%
76%
Chicago
sWWWXWN
Los Angeles
31%
•W / / / / / / / / / ^
69%
m \ \ \ \ W H 27%
79%
New York
^vvm\\v\v\w< 3 %
4
ID 63%
67%
63%
Philadelphia
San Francisco
V////)//)ffl//////////////////////////////////Jtt
88%
27%
64%
Washington DC
V//////////////////A
^
^
^
^
36%
32%
1
50%
0%
FFS Enrollment
Premium Difference
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
100%
150%
'A HMO Enrollment
Plan Val. Difference
FFS: Blue Cross/Blue Shield Std.
HMO: Area Plan With The Greatest Enrollment
200%
�COMPARISON OF HEALTH PLAN PREFERENCES WITHIN FEHB
Non P o s t a l Employees, S e l f & Family Coverage
Number o f
FFS
Enrollees*
Number o f
HMO
Enrollees**
Boston
5, 883
Chicago
Percentage
of E n r o l l e e s
i n FFS Plan
Percentage
of E n r o l l e e s
i n HMO Plan
1,029
85%
15%
5,911
2,003
75%
25%
Los Angeles
7,090
15,496
31%
69%
New York
9,528
2,485
79%
21%
Philadelphia
5,515
7,393
43%
57%
San F r a n c i s c o
3,169
24,279
12%
88%
Washington DC
35,198
20,179
64%
36%
Area
"Figures based on 1992 Non P o s t a l employee e n r o l l m e n t i n Blue Cross/
Blue S h i e l d Standard, t h e Fee For S e r v i c e p l a n w i t h t h e l a r g e s t
e n r o l l m e n t i n each area. I n 1993, t h e number e n r o l l e d i n Blue
Cross/Blue S h i e l d Standard n a t i o n w i d e i s expected t o r i s e
s i g n i f i c a n t l y , w i t h the increase p r i m a r i l y a t t r i b u t a b l e t o d e c l i n i n g
e n r o l l m e n t i n o t h e r FFS p l a n s , and n o t decreased HMO e n r o l l m e n t .
"Figures based on t h e HMO w i t h t h e l a r g e s t FEHB e n r o l l m e n t i n t h e
area as o f 1992. The f o l l o w i n g p l a n s a r e r e p r e s e n t e d :
Boston - Harvard Community H e a l t h Plan
Chicago - Humana M i c h a e l Reese
Los Angeles - K a i s e r o f S o u t h e r n C a l i f o r n i a
New York - HIP o f New York
P h i l a d e l p h i a - US H e a l t h c a r e o f PA
San F r a n c i s c o - K a i s e r o f N o r t h e r n C a l i f o r n i a
Washington DC - K a i s e r o f t h e M i d A t l a n t i c
�COMPARISON OF HEALTH PLAN PREMIUMS AND BENEFITS WITHIN FEHB;
SELF & FAMILY ENROLLMENT, NON POSTAL EMPLOYEES
1992
Total
Monthly
Premium
(FFS)'
1992
Total
Monthly
Premium
(HMO)"
1992
Govt.
Share
(FFS)'
1992
Govt.
Share
(HMO)"
1992
Emp.
Share
(FFS)'
1992
Emp.
Share
(HMO)"
1992
Plan
Value
(FFS)"*
Boston
$345.13
$522 .41
$258.85
$282.92
$86.28
$239.49
.93
1.15
85%
15%
Chicago
$345.13
$357.02
$258.85
$267.77
$86.28
$89.25
.93
1.22
75%
25%
Los Angeles
$345.13
$417.17
$258.85
$282.92
$86.28
$134.25
.93
1.18
31%
69%
New York
$345.13
$415.13
$258.85
$282.92
$86.28
$132.21
.93
1.25
79%
21%
Philadelphia
$345.13
$414.81
$258.85
$282.92
$86.28
$131.89
.93
1.18
43%
57%
San
Francisco
$345.13
$366.51
$258.85
$274.88
$86.28
$91.63
.93
1.18
12%
88%
Washington
DC
$345.13
$379.17
$258.85
$282.92
$86.28
$96 .25
.93
1.23
64%
36%
Area
1992
Plan
Value
(HMO) "'
%
i n FFS
Plan
%
i n HMO
Plan
HOTE: For Non P o s t a l employees, t h e Government pays 75 p e r c e n t o f t h e t o t a l h e a l t h i n s u r a n c e premium, w i t h
a maximum payment based on 60 p e r c e n t o f t h e average premium o f t h e s i x l a r g e s t h e a l t h p l a n s . Employees
pay t h e remainder o f t h e premium, a minimum o f 25 p e r c e n t .
'Blue Cross/Blue S h i e l d Standard, t h e Fee For S e r v i c e p l a n w i t h t h e g r e a t e s t e n r o l l m e n t .
"The f o l l o w i n g HMOs were s e l e c t e d based on l a r g e s t e n r o l l m e n t i n t h e a r e a :
Boston - Harvard Community H e a l t h Plan
Chicago - Humana M i c h a e l Reese
Los Angeles - K a i s e r o f Southern C a l i f o r n i a
New York - HIP o f New York
P h i l a d e l p h i a - US H e a l t h c a r e o f PA
San F r a n c i s c o - K a i s e r o f N o r t h e r n C a l i f o r n i a
Washington DC - K a i s e r o f t h e M i d A t l a n t i c
"Plan v a l u e s a r e s t a n d a r d i z e d on a base-one f o r m a t ( t h e average v a l u e f o r a l l FEHB p l a n s i s e q u a l t o
1.00). Thus t h e f i g u r e s g i v e n show t h e percentage f r o m which t h e v a l u e o f p l a n b e n e f i t s v a r y above o r
below t h e average.
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Postal E m p l o y e e s , Self O n l y
Boston
bWWWWVVN
Chicago
-43%
V//////////////MA
r
Los Angeles
107%
2-4%-
S\W\V\VW\V^
68%
32%
31%
2
-26%
66%
\\\\\\\\\\\\\\^
27%
80%
New York
Y//MW/////MM//m 4o%
-27% I
Philadelphia
-28%
k\VV\\W\\W^l
34%
Y / / / / / / / / / / / / / / / / / / ^ / M / / / y / / / / j & 6%
4
I
27%
72%
San Francisco
-29%
I
m \ \ \ \ \ \ \ w j 2%
7
88%
Washington DC
-38%
k\\\\\\\\\\\W\^
-50%
0%
32%
50%
FFS Enrollment
HMO Enrollment
Premium Difference
100%
Plan Val. Difference
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
FFS: Avg. Of The Four "Postal" FFS Plans:
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�COMPARISON OF HEALTH PLAN PREFERENCES WITHIN FEHB
P o s t a l Employees, S e l f Only Coverage
Number o f
FFS
Enrollees*
Number o f
HMO
Enrollees"
Boston
1,365
Chicago
Percentage
of E n r o l l e e s
i n FFS Plan
Percentage
of E n r o l l e e s
i n HMO Plan
1,317
51%
49%
2,072
980
68%
32%
Los Angeles
2,607
5, 078
34%
66%
New York
3,230
2,160
60%
40%
Philadelphia
1,208
2,153
36%
64%
San F r a n c i s c o
1, 616
4, 072
28%
72%
Washington DC
1,344
623
68%
32%
Area
'Figures based on 199 0 P o s t a l employee e n r o l l m e n t n a t i o n w i d e w i t h i n
the f o u r open Fee For S e r v i c e " P o s t a l " p l a n s (APWU, M a i l Handlers,
NALC, Postmasters) as a percentage o f t o t a l P o s t a l employee
e n r o l l m e n t , w h i c h was. a p p l i e d t o t o t a l 1990 P o s t a l employee e n r o l l m e n t
i n each a r e a . These p l a n s were s e l e c t e d over Blue Cross/Blue S h i e l d
Standard because t h e y were c o n s i d e r e d more r e p r e s e n t a t i v e o f P o s t a l
employees' s e l e c t i o n o f Fee For S e r v i c e coverage.
" F i g u r e s based on the. HMO w i t h t h e l a r g e s t FEHB e n r o l l m e n t i n t h e
area as o f 1992. The f o l l o w i n g p l a n s a r e r e p r e s e n t e d :
Boston - Harvard Community H e a l t h Plan
Chicago - Humana M i c h a e l Reese
Los Angeles - K a i s e r o f Southern C a l i f o r n i a
New York - HIP o f New York
P h i l a d e l p h i a - US H e a l t h c a r e o f PA
San F r a n c i s c o - K a i s e r o f N o r t h e r n C a l i f o r n i a
Washington DC - K a i s e r o f t h e Mid A t l a n t i c
�COMPARISON OF HEALTH PLAN i ^^UMS AND BENEFITS WITHIN FEHB:
SELF ONLY ENROLLMuiNT, POSTAL EMPLOYEES
1992
Total
Monthly
Premium
(FFS)*
1992
Total
Monthly
Premium
(HMO)**
1992
Postal
Service
Share
(FFS)*
1992
Govt.
Share
(HMO) •
*
1992
Emp.
Share
(FFS)*
1992
Emp.
Share
(HMO) *
*
1992
Plan
Value
(FFS)***
Boston
$169.31
$192.70
$155.40
$163.85
$13.91
$28.85
.93
1.15
51%
49%
Chicago
$169 .31
$127.49
$155.40
$119.53
$13.91
$7.96
.93
1.22
68%
32%
Los Angeles
$169.31
$168.13
$155.40
$157.63
$13.91
$10.50
.93
1.18
34%
66%
New York
$169 .31
$162.11
$155.40
$151.98
$13.91
$10.13
.93
1.25
60%
40%
Philadelphia
$169 .31
$159.90
$155.40
$149.91
$13.91
$9.99
.93
1.18
36%
64%
San
Francisco
$169.31
$157.50
$155.40
$147.66
$13.91
$9.84
.93
1.18
28%
72%
Washington
DC
$169.31
$142.68
$155.40
$133.77
$13.91
$8.91
.93
1.23
68%
32%
Area
1992
Plan
Value
(HMO)***
%
i n FFS
Plan
%
i n HMO
Plan
TOTE: For Postal employees, the Postal Service pays 93.75 percent of the t o t a l h e a l t h insurance premium, w i t h
a maximum payment based on 75 percent of the average premium of the s i x l a r g e s t h e a l t h plans. Employees
pay the remainder of the premium, a minimum of 6.25 percent.
Figures based on an average of the four open Fee For Service "Postal" plans (APWU, M a i l Handlers,
NALC, Postmasters).
'The f o l l o w i n g HMOs were selected based on l a r g e s t enrollment i n the area:
Boston - Harvard Community Health Plan
Chicago - Humana Michael Reese
Los Angeles - Kaiser of Southern C a l i f o r n i a
New York - HIP of New York
P h i l a d e l p h i a - US Healthcare of PA
San Francisco - Kaiser o f Northern C a l i f o r n i a
Washington DC - Kaiser o f the Mid A t l a n t i c
"Plan values are standardized on a base-one format (the average value f o r a l l FEHB plans i s equal t o
1.00). Thus the f i g u r e s given show the percentage from which the value o f plan b e n e f i t s vary above o r
below the average. For FFS, the plan value i s an average of the f o u r open Fee For Service "Postal" plans
(APWU, Mail Handlers, NALC, Postmasters).
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Postal Employees, Self & Family
83%
Boston
YA 17%
-
J
&d
22
622%
24%
27%'
73%
Chicago
-
-18%
r
S 3 31%
.1
Los Angeles
44%
-
I
m
Y//A
134%
27%
30%
70%
New York
-
126%
^
:
34%
4
Philadelphia
y/yzv/i !6'%i
-
I
^
San Francisco
-
125%
27%
66%
-16%
G
^
27%
20
26%
74%
Washington DC
-
-6% [
^
32%
T
-100%
0%
100%
1
200%
300%
1
400%
1
500%
FFS Enrollment
600%
HMO Enrollment
Premium Difference
1
Plan Val. Difference
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
FFS: Avg. Of The Four "Postal" FFS Plans:
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
700%
�COMPARISON OF HEALTH PLAN PREFERENCES WITHIN FEHB
P o s t a l Employees, S e l f & Family Coverage
Number o f
FFS
Enrollees*
Area
Number o f
HMO
Enrollees"
Percentage
of E n r o l l e e s
i n FFS Plan
Percentage
of E n r o l l e e s
i n HMO Plan
Boston
5,458
1,141
83%
17%
Chicago
8,286
3, 030
73%
27%
Los Angeles
10,426
13,126
44%
56%
New York
12,918
5, 723
70%
30%
Philadelphia
4, 831
5,865
45%
55%
San F r a n c i s c o
6,465
11,773
35%
65%
Washington DC
5,378
1.880
74%
26%
"Figures based on 1990 P o s t a l employee e n r o l l m e n t n a t i o n w i d e w i t h i n
the f o u r open Fee For S e r v i c e " P o s t a l " p l a n s (APWU, M a i l Handlers,
NALC, Postmasters) as a percentage o f t o t a l P o s t a l employee
e n r o l l m e n t , which was a p p l i e d t o t o t a l 1990 P o s t a l employee e n r o l l m e n t
i n each a r e a . These p l a n s were s e l e c t e d over Blue Cross/Blue S h i e l d
Standard because t h e y were c o n s i d e r e d more r e p r e s e n t a t i v e o f P o s t a l
employees' s e l e c t i o n o f Fee For S e r v i c e coverage.
" F i g u r e s based on t h e HMO w i t h t h e l a r g e s t FEHB e n r o l l m e n t i n t h e
area as o f 1992. The f o l l o w i n g p l a n s are r e p r e s e n t e d :
Boston - Harvard Community H e a l t h Plan
Chicago - Humana M i c h a e l Reese
Los Angeles - K a i s e r o f Southern C a l i f o r n i a
New York - HIP o f New York
P h i l a d e l p h i a - US H e a l t h c a r e o f PA
San F r a n c i s c o - K a i s e r o f N o r t h e r n C a l i f o r n i a
Washington DC - K a i s e r o f t h e Mid A t l a n t i c
�COMPARISON OF HEALTH PLAN 1 ^^tJMS AND BENEFITS WITHIN FEHB:
SELF & FAMILY ENROLLMENT, POSTAL EMPLOYEES
1992
Total
Monthly
Premium
(FFS)*
1992
Total
Monthly
Premium
(HMO)"
1992
Postal
Service
Share
(FFS)*
1992
Postal
Service
Share
(HMO) "
1992
Emp.
Share
(FFS)*
1992
Emp.
Share
(HMO) "
1992
Plan
Value
(FFS)'"
1992
. Plan
Value
(HMO) "*
Boston
$363.36
$522.41
$336.21
$353.65
$27.15
$168.76
.93
1.15
83%
17%
Chicago
$363.36
$357.02
$336.21
$334.71
$27.15
$22.31
.93
1.22
73%
27%
Los Angeles
$363.36
$417.17
$336.21
$353.65
$27.15
$63 .52
.93
1.18
44%
56%
New York
$363 .36
$415.13
$336.21
$353.65
$27.15
$61.48
.93
1.25
70%
30%
Philadelphia
$363.36
$414.81
$336.21
$353.65
$27.15
$61.16
.93
1.18
45%
55%
San
Francisco
$363.36
$366.51
$336.21
$343.61
$27.15
$22 .90
.93
1.18
35%
, 65%
Washington
DC
$363.36
$379.17
$336.21
$353.65
$27.15
$25.52
.93
1.23
74%
. 26%
Area
%
i n FFS
Plan
%
i n HMO
Plan
TOTE: For Postal employees, the Postal Service pays 93.75 percent of the t o t a l h e a l t h insurance premium, w i t h
a maximum payment based on 75 percent of the average premium of the s i x l a r g e s t h e a l t h plans. Employees
pay the remainder of the premium, a minimum of 6.25 percent.
Figures based on an average of the four open Fee For Service "Postal" plans (APWU, M a i l Handlers,
NALC, Postmasters).
'The f o l l o w i n g HMOs were selected based on l a r g e s t enrollment i n the area:
Boston - Harvard Community Health Plan
Chicago - Humana Michael Reese
Los Angeles - Kaiser of Southern C a l i f o r n i a
New York - HIP of New York
P h i l a d e l p h i a - US Healthcare of PA
San Francisco - Kaiser of Northern C a l i f o r n i a
Washington DC - Kaiser of the Mid A t l a n t i c
"Plan values are standardized on a base-one format (the average value f o r a l l FEHB plans i s equal t o
1.00). Thus the f i g u r e s given show the percentage from which the value of plan b e n e f i t s vary above or
below the average. For FFS, the plan value i s an average of the f o u r open Fee For Service "Postal" plans
(APWU, Mail Handlers, NALC, Postmasters).
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Boston
: :
FFS Enrollment
64%
W M 51%
| 85%
83%
M l
36%
HMO Enrollment
7/A 49%
J 15%
i 17%
\
W////M
Premium Difference
107%
1 178%
^
622%
24%
24%
24%
24%
Plan Val. Difference
0%
100%
200%
300%
400%
500%
Non Post. Self Only
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
700%
Post. Self Only
Non Post. Self & Fam
600%
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Chicago
FFS Enrollment
HMO Enrollment
74%
68%
75%
73%
-
26%
32%
25%
27%
-
-22%
Premium Difference
-
-43%
3%
-18%
Plan Val. Difference
^
31%
31%
31%
31%
-
-50%
0%
50%
Non Post. Self Only
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
Post. Self Only
Non Post. Self & Fam
100%
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Los Angeles
FFS Enrollment
-
HMO Enrollment
-
Premium Difference
-
Plan Val. Difference
-
-40%
-20%
0%
20%
40%
Non Post. Self Only
Non Post. Self & Fam
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
60%
80%
100% 120% 140% 160%
•A Post. Self Only
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
New York
FFS Enrollment
-
HMO Enrollment
-
Premium Difference
-
Plan Val. Difference
_
i
-40%
-20%
0%
20%
r
40%
60%
80%
100% 120% 140% 160%
Non Post. Self Only
Non Post. Self & Fam
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
Post. Self Only
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Philadelphia
FFS Enrollment
-
HMO Enrollment
-
-2 8 %
Premium Difference
-
Plan Val. Difference
-
-40%
-20%
0%
"i
20%
r
40%
60%
80%
100%
Non Post. Self Only
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
140%
Post. Self Only
Non Post. Self & Fam
120%
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
San Francisco
FFS Enrollment
-
82%
HMO Enrollment
72%
-
88%
65%
-4%
Premium Difference
-:'.9%
-
6%
-16%
Plan Val. Difference
27%
27%
27%
27%
-
0%
50%
Non Post. Self Only
NOTE: Employee Premium Shares Used.
Premium and Plan Value Differences Based
On HMO Variation From FFS Data.
Post. Self Only
Non Post. Self & Fam
100%
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - Avg. Of The Four "Postal" FFS Plans
(APWU, Mail Handlers, NALC, Postmasters)
HMO: Area Plan With The Greatest Enrollment
�FEHB ENROLLEE HEALTH PLAN PREFERENCES
Washington DC
FFS Enrollment
HMO Enrollment
^
-
67%
68%
64%
74%
33%
32%
36%:
26%
-
-13%
Premium Difference
36%
-
12%
-6%
Plan Val. Difference
^
32%
32%
32%
32%
-
1
-50%
0%
50%
Non Post. Self Only
N O T E : E m p l o y e e Premium Shares U s e d .
P r e m i u m a n d Plan Value Differences Based
On H M O V a r i a t i o n From FFS Data.
Post. Self Only
Non Post. Self & Fam
100%
Post. Self & Fam
FFS: Non Postal - Blue Cross/Blue Shield Standard
Postal - A v g . Of The Four " P o s t a l " FFS Plans
( A P W U , Mail Handlers, N A L C , Postmasters)
HMO: Area Plan W i t h The Greatest Enrollment
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
3_
�TAB 3
CONGRESSIONAL REPORT ON THE
FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM
�(This document has not been reviewed and approved by the committee and, therefore,
may not necessarily reflect the views of all of its members.)
[COMMITTEE PRINT]
REPORT ON
FEDERAL EMPLOYEES HEALTH BENEFITS
PROGRAM
FOR THE
COMMITTEE ON
POST OFFICE AND CIVIL SERVICE
U.S. HOUSE OF REPRESENTATIVES
MAY 1992
Serial No. 102-6
PREPARED BY THE COMMITTEE'S CONSULTANTS
JOHN J. CREEDON
THEODORE ALLISON
RICHARD MELLMAN
WARREN SHERMAN
Printed for the use of the Committee on Post Office and Civil Service
U.S. GOVERNMENT PRINTING OFFICE
54-368 u
WASHINGTON : 1992
�PREFACE
This report was prepared for the House Committee on Post Office and Civil Service by a
team of independent health care consultants to assist the Committee in carrying out its
legislative and oversight responsibilities for the Federal Employees Health Benefits Program.
The release of this report could not be more timely. The program continues to suffer from
the same inflationary pressures that are affecting health care costs nationwide. Moreover,
the program's structural problems exacerbate these inflationary pressures as well as create
additional, unnecessary costs for enrollees. Premium costs continue to grow at a pace twice
the rate of inflation and more than twice the rate of Federal workers' annual pay raises -while enrollees face possible benefit reductions.
The Committee is fortunate to have health care experts of such stature and breadth of
experience and views available to serve as consultants. For nine months, they have worked
diligently and tirelessly to complete this report. This report is the independent product of
the consultants. It is not necessarily representative of my views or those of the other
members of the Committee. The Committee asked for and received the full benefit of the
consultants' independence and expertise.
I would like to thank the Honorable Louis W. Sullivan, M.D., Secretary of Health and
Human Services, and the Honorable Constance Berry Newman, Director of the Office of
Personnel Management, for the actuarial assistance their agencies provided the consultants.
In addition, the Committee thanks the Congressional Research Service staff for their
assistance.
I urge my colleagues in the House and Senate and officials in the Administration to carefully
review this report. While only time will tell whether the Committee agrees with the
consultants' recommendations, I hope that this report serves as the starting point for serious
discussions on reforming the largest employee health benefits plan in the world.
WILLIAM L. CLAY
Chairman
House Post Office and Civil Service
Committee
�May 14, 1992
The Honorable William L. Clay
Chairman
Committee on Post Office and Civil Service
U.S. House of Representatives
Washington, DC 20515
Dear Chairman Clay:
In accordance with the terms of the Contract Agreement effective August 2, 1991, between
the Committee on Post Office and Civil Service and the undersigned Consultants, as extended
by mutual agreement, the Consultants transmit herewith a Report containing a number of
recommendations for reform of the Federal Employees Health Benefits Program.
This Report represents the first stage of the work required by the Contract Agreement. We
stand ready to explain, clarify and/or supplement any of the materials contained in the Report.
We also remain available to provide advice and assistance concerning any developments
subsequent to the date of the Report as they affect either the current program or the Report
itself, including any proposals for reform evolving from the regulatory or legislative process.
It is appropriate to mention here the substantial actuarial assistance received by the
Consultants and especially Mr. Mellman from Clifton I . Maze, an actuary from the Health
Care Financing Administration (HCFA) who worked with us during preparation of the
Report. He was made available through the cooperation of Secretary Louis Sullivan of the
Department of Health and Human Services and of Mr. Maze's superiors in HCFA. His
contribution has been invaluable.
We also received optimal cooperation and assistance with respect to arrangements from
members of the Committee staff, for which we are most grateful.
The undersigned are pleased to have had the opportunity to provide services to the
prestigious Committee of which you are the distinguished Chairman.
Theodore Allison
Richard Mellman
man
arren Sherman
(V)
^
�I. INTRODUCTION
In a letter dated July 29, 1991, the Committee on Post Office and Civil Service (the
Committee) through its Chairman, the Honorable William L. Clay, and its ranking
Republican member, the Honorable Benjamin A. Oilman, informed the Honorable Charlie
Rose, Chairman of the Committee on House Administration, of its intention to develop
comprehensive legislation to reform the Federal Employees Health Benefits Program
(FEHBP).
In their letter, Messrs. Clay and Oilman indicated that concerns arose regarding FEHBP as
early as 1981 when the Committee contracted with William M. Mercer, Inc., for a study to
evaluate major aspects of FEHBP. Among the matters of concern cited were questionable
procedures, inaccurate estimates and longstandingfinancialcomplications at the Office of
Personnel Management (OPM). In 1987 another study by Towers, Perrin, Forster & Crosby,
Inc., (TPF&C) was undertaken at the request of OPM which resulted in a number of
suggested reforms of FEHBP. And the Committee requested in 1988 an extensive study of
FEHBP by the Congressional Research Service (CRS). Each of these studies has been most
significant and helpful to the Consultants in their work.
The immediate past Chairman of the Committee had hoped to address FEHBP reform in
the 101st Congress, and the Subcommittee on Compensation and Employee Benefits did
some important work to accomplish that objective. But early in the session, pay legislation
took priority. In early 1991, OPM sought to reform FEHBP administratively through its
annual call letter to participating carriers. At the Committee's request the call letter was
revised so as to allow the extensive reforms initially proposed by OPM to be the subject of
input provided by affected parties and outside experts through the legislative process.
�As stated in its July 29, 1991 letter, the Committee has felt that continuing pressures on
FEHBP make its reform imperative. The letter cited substantial benefit reductions,
significant premium increases and a reduction in the number of participating carriers as
evidence of continuing problems in recent years. Continued escalation of medical care costs
as well as legislative proposals addressing other aspects of the health care scene were also
mentioned.
Because of its concerns, the Committee thought it desirable to engage outside independent
contractors as Consultants. It was determined to allow the Consultants to use their initiative
and independence in performing their work. Accordingly, the Committee did not instruct
the Consultants regarding the results to be accomplished, nor in the details and manner of
doing their work. It did not exercise close and continuous control or supervision over the
Consultants' performance.
Rather, the Committee expressed in general terms its desire to have the Consultants help
the Committee in the "development of a comprehensive, efficient and effective program" and
in the process "to develop and assess alternative models" for the provision of health
insurance to Federal employees and annuitants. Along with that objective, the Consultants
were directed to provide technical assistance in assessing recent developments as they affect
FEHBP, including any reform recommendations proposed by OPM and any reform
proposals that evolve within the legislative process.
The Consultants chosen to assist the Committee were John J. Creedon, Theodore Allison,
Richard Mellman and Warren Sherman. Mr. Creedon was President and Chief Executive
Officer of Metropolitan Life Insurance Company for six and one-half years prior to his
retirement in September 1989. He is an attorney by profession, having served as Senior
Vice President and General Counsel of MetLife prior to becoming Chief Executive. He
served on the Presidential Commission on the Human Immunodeficiency Virus Epidemic
�(AIDS) and on a number of Presidential Commissions on Executive, Judicial and Legislative
Salaries.
Mr. Allison prior to his retirement in 1988 was a Vice President in the
Government Relations Department of MetLife and worked on health care policy for more
than twenty-five years, assisting Federal and state legislators and staff in developing health
legislation. Prior to employment by MetLife, he established and directed the research
department of the Blue Cross Association. Mr. Mellman also worked much of his career
in health insurance, having served as Vice President and Actuary for the Group Insurance
Department of Prudential Insurance Company of America and having headed the company's
health policy coordination for a number of years. Mr. Sherman worked for thirty-four years
in the employee benefits area at General Motors, where he had major responsibility for the
development and implementation of benefit plans, including health benefits, for General
Motors' 800,000+ employees and retirees.
The Consultants began work immediately after the Contract Agreement was approved.
Each worked independently to a large extent but coordinated his work with that of the
others by telephone, mail and many full-day meetings. These were conducted in office space
assigned in House Annex No. 1 in Washington, DC or in New York City. Work progressed
under a very tight time schedule. There were particular difficulties in assembling all the
actuarial data needed.
In this regard, Clifton I . Maze of the Health Care Financing
Administration (HCFA), who was detailed to work with the Consultants for a number of
months, was of great help.
Plans were made early on for a series of meetings with other interested parties. The
Committee staff often facilitated arrangements for these meetings. Included among those
interviewed by the Consultants were members of relevant Congressional committees and
their staffs, representatives of various Government agencies, spokespersons for each fee-forservice (FFS) plan and some health maintenance organizations (HMOs) now participating
in FEHBP, officials of a number of insurance carriers and employee organizations which
�have been involved in the operation of current or terminated FEHBP plans, and individuals
at trade associations, research organizations and other interested groups with special
knowledge of the program. (See Appendix C, Acknowledgments.) All were cooperative and
helpful. Except for a few telephone conversations, all meetings were in person, sometimes
with all Consultants present, but more often with one or two.
The Consultants each took primary responsibility for certain aspects of the work: Mr.
Sherman - historical developments and benefit plan design, Mr. Mellman -- actuarial, Mr.
Allison -- principal draftsman, Mr. Creedon - policy and direction. Messrs. Allison and
Sherman arranged for and attended most meetings with the various non-Governmental
interested parties.
The materials reviewed by the Consultants were voluminous. In addition to the major
studies mentioned, there were prints of extensive Congressional hearings, descriptions of the
numerous FEHBP plans, articles relating to FEHBP and various policy statements by those
closest to FEHBP (see Appendix E for a complete listing).
In accordance with the language in the Consultants' Contract Agreement calling for
development and assessment of "alternative models," alternative approaches to reform of
various aspects of the health benefits program are discussed throughout the Report. There
could be an infinite number of possible alternatives. For example if one or more of the
Recommendations are not adopted, the result is an alternative model. In developing a
recommended model the Consultants of necessity considered many other models. Every
alternative considered has not been set forth in the Report, nor because of time pressures
has the cost been estimated for each alternative. However, the actuarial methodology
developed and used in preparing the Report should facilitate the process of assessing the
cost of alternatives of interest to the Committee (see Appendix B).
�Thus, the Consultants believe the Report at this time will prove to be a reasonable starting
point for the Committee to begin the legislative process of reform of FEHBP.
Immediately following this Introduction is an Executive Summary of the Consultants'
Recommendations followed by an historical overview of FEHBP, seven chapters setting forth
more detailed consideration of the Recommendations and a brief conclusion followed by five
appendices. Footnotes do not appear in the Report; a complete list of references used in
its preparation is in Appendix E.
�H. EXECUTIVE SUMMARY
The subject of FEHBP reform has been on the political agenda for a number of years, and
in analyzing the program the Consultants have had the benefit of the various studies
conducted and the thoughts, deliberations and experience of the many interested parties.
All of the people with whom we have conferred have been helpful and cooperative. We
have come away with great respect for the views expressed and their articulation.
As might be expected with such a complex subject, there are different views as to whether
or not extensive reform is necessary, and among those who advocate reform there are wide
differences as to what form it should take. There are few areas where there is consensus.
We have tried to understand and weigh the differing views objectively and have developed
a series of recommendations, some of which we believe will be supported and endorsed by
many interested parties, but all of which we are confident will not be completely pleasing
to anyone. Employees generally would like more health benefits at less cost; the Federal
Government would like to reduce its health benefits costs or at least stop them from
increasing so rapidly; the insurance carriers, HMOs, the employee organizations, the
hospitals, doctors, other health care providers, and others interested all have particular
preferences as to whether and what reforms should be made.
In trying to strike a balance among the various interests, we have been guided by certain
objectives: to assure that all Federal employees, annuitants and their dependents have
available comprehensive health benefits at affordable and fair cost; to restrain cost escalation
by encouraging prudent use of health care resources and improved administrative efficiency;
and to reduce the share of the program's total cost paid by enrollees while not increasing
the cost to the Government.
�1)
Enrollees' Share of Premium - The evidence seems persuasive that Federal employees
on the average pay a larger share of health insurance premiums than their counterparts in
state government or in the private sector, particularly for self-only coverage. The most
recent data available indicate that the Federal Government pays about 71% of the aggregate
premium and enrollees pay on the average 29% (except for Postal employees, who pay 10%
on the average because the U.S. Postal Service has agreed in collective bargaining to pay
a higher share of the premiums for its active employees). A national survey of employers
of all sizes, including both privatefirmsand state and local government entities, found that
in 1990 employers on the average paid approximately 85% of total premiums for individual
coverage and 72% for family coverage.
RECOMMENDATION: Legislation should be enacted to provide that in the
aggregate the Government contributions for FEHBP coverage shall be 85%
of the cost for self-only coverage and 75% of the cost for coverage of
dependents for all enrollees other than Postal employees. (On the assumption
that FEHBP contributions for Postal employees will be the subject of
collective bargaining, the Consultants make no recommendations concerning
the contributions of Postal employees.)
Based on the overall costs of the existing health benefits program for 1991, the
recommended change would have reduced the annual costs for affected enrollees by $884
million or an average of $221 per self-only enrollment and $71 for dependents coverage —
a total reduction of $292 for an enrollee with self and family coverage.
2)
Determination of Enrollee and Government Contributions - Currently, the Federal
Government determines the amount it will contribute to the premium for each Federal
employee and annuitant through use of a formula stipulated by law. The dollar amount per
enrollee paid by the Government is the same for each plan regardless of its cost, except that
the Government share may not exceed 75% of the total cost (93.75% limit for Postal
employees). The enrollee pays the difference between the premium per person charged by
�8
the plan and the amount paid by the Government. As a result, because the total premiums
for the many plans in FEHBP differ considerably, enrollees pay varying amounts for their
insurance.
RECOMMENDATION: All enrollees with full FEHBP self-only coverage
should generally pay the same basic contribution and the contribution for
dependents coverage should also be uniform for all enrollees with such
coverage. The Government should pay the balance of the premium, with the
Government's payment targeted at 85% of the aggregate cost for self-only
enrollment and 75% of the aggregate cost for dependents coverage (excluding
Postal employees). The premium should be based on the total costs of
FEHBP rather than on costs of a limited number of plans, as is the case under
current law.
Premiums should be calculated separately for the limited FEHBP coverage
which Medicare-eligible annuitants receive as a supplement to Medicare (see
our next Recommendation); enrollee contributions for the supplementary
FEHBP benefits should be uniform for self-only coverage and for dependents
coverage, and the Government's contribution should cover 85% and 75%,
respectively, of the aggregate cost of self-only and dependents coverage.
As a result of this arrangement, the enrollee's contribution would be fixed but
the Government's would vary depending on whether the cost of a plan
negotiated by OPM is higher or lower than the average cost of all plans.
As mentioned earlier, the total cost for all enrollees would be reduced if their share of the
cost of the program is reduced as recommended. The contribution paid by most individual
enrollees under the present program would be reduced, but the contribution paid by some
individuals now enrolled in low-cost plans might be increased. The idea of leveling the
enrollees' payments so that all pay basically the same contribution for the same coverage is
consistent with the concepts of group insurance.
This Recommendation contemplates that the Government would negotiate aggressively but
fairly with insurance carriers, administrators and HMOs for competitively priced coverage,
thus offering the opportunity to keep the Government's and the enrollees' health insurance
�costs to a minimum. We believe there are opportunities for savings as a result of
competitive negotiations, but data are not available to permit reliable quantification of the
savings.
3)
Annuitants - There are three major categories of annuitants under FEHBP: (1) those
who retired before age 65 and are not yet eligible for Medicare (430,000), (2) those eligible
for Medicare (981,000 age 65 or older and 23,000 under age 65 who receive disability
benefits under Social Security) and (3) those age 65 or older who are not eligible for
Medicare Part A because they retired before 1983 when Social Security was first made
applicable to active Federal employees and did not qualify for Medicare through nonFederal employment (210,000). This non-eligible 65-and-over group under FEHBP is
decreasing and eventually will disappear. Some 60,000 of them, although not eligible for
Part A of Medicare, have enrolled for Medicare Part B coverage. Within each of the major
groups mentioned above there are some annuitants who are eligible survivors of deceased
employees or retirees.
In all, these groups constitute 41% of the FEHBP enrollees and their medical expenses tend
to be substantially higher than those of younger active employees. Currently, they all pay
whatever contribution employees pay for the particular plan in which they participate.
Some observers have proposed that the present Medicare-eligible group should pay a lesser
contribution for their secondary FEHBP coverage. Some others have suggested that all
annuitants be placed in a separateriskpool.
With respect to annuitants who are not Medicare-eligible (640,000), these individuals receive
the same coverage under FEHBP as active employees.
Of course, their medical care
expenses are much higher than those of active employees because of age and conditions of
health. Separating either or both groups of the non-Medicare-eligible annuitants (those
�10
under 65 and those age 65 or older) into separate risk pools would increase their
contributions for coverage because of their higher medical expenses. Moreover, the concept
of group insurance suggests that employees and retirees of an employer having similar
coverage but different age and conditions of health should be in the same risk pool and pay
equal premiums. Eventually the younger employees, when they retire, will have the benefit
of this more favorable annuitant arrangement.
With respect to Medicare-eligible annuitants (about 1,000,000 including the disabled), the
circumstances are quite different. The primary insurer for this group is Medicare and
FEHBP is secondary. Thus the coverage this group receives from FEHBP is different from
that provided to all other panicipants in FEHBP. Despite this different coverage which
essentially is a Medicare supplement, the group makes the same contributions as other
participants in the various FEHBP plans. This arrangement is not as inequitable as may first
appear because Medicare-eligibles do receive substantial benefits under FEHBP as a result
of OPM's policy requiring FEHBP plans to waive deductibles and coinsurance for Medicareeligible annuitants. While it is true that they receive on the average less benefits for each
dollar they contribute than other participants in FEHBP, CRS estimated their benefits are
two and one-half times their contributions. And under some plans they can collect 100%
of their allowable medical care costs through a combination of Medicare and FEHBP
because they need not pay FEHBP deductibles and coinsurance. Nevertheless, there is
reason to calculate their FEHBP contributions separately based on the value of their
FEHBP coverage.
Our preference in principle is that deductibles and coinsurance not be waived and allowable
benefits under FEHBP be reduced for the Medicare-eligible group by amounts paid by
Medicare - a so-called carve-out approach. Then the contributions of the Medicare-eligible
group would be reduced to reflect the lower benefits received under FEHBP. If the carveout approach were adopted, the estimated value of the reduction in benefits under the
�11
proposed plan would be on the order of $615 million or about $615 for each of the 1,000,000
Medicare-eligible annuitants.
For this reason, the carve-out approach for the current Medicare-eligible group is not
recommended.
Rather, the present method under some current FEFIBP plans of
coordinating benefits between Medicare and FEHBP should be continued. Under this
proposal deductibles and coinsurance in FEHBP for expenses covered by both Medicare and
FEHBP would be waived, but deductible and coinsurance provisions in FEHBP would be
applicable for FEHBP benefits not covered by Medicare, such as prescription drugs.
One hundred percent reimbursement of allowable medical expenses is not considered to be
a desirable policy because it may encourage over-utilization of medical services and the
patient has no interest in holding down costs. Accordingly, it would be appropriate to
provide that the carve-out approach would apply to Medicare-eligible annuitants retiring
after the recommended FEHBP reforms are enacted.
RECOMMENDATION: All annuitants should continue to be eligible for
FEHBP enrollment. Those not eligible for Part A of Medicare should
continue to pay the same contributions as active employees.
With respect to those who are eligible for Part A of Medicare, it is
recommended that their FEHBP contribution be calculated based on actual
FEHBP experience of the Medicare-eligible group, reflecting the fact that
Medicare is the primary insurer. Medicare benefits for this group should be
coordinated so that deductibles and coinsurance provisions in FEHBP would
be waived for expenses covered by both Medicare and FEHBP, but would be
applicable for FEHBP benefits not covered by Medicare.
In addition, all annuitants eligible for Medicare Part A should be required to
subscribe for and pay for Medicare Part B coverage. (Only 60,000 of this
group of over 1,000,000 do not already have Medicare Part B.)
In addition, it is recommended that a change be made so that for those who
retire after FEHBP reforms are enacted the allowable benefits under FEHBP
would be reduced by amounts paid by Medicare. Their contributions would
�12
then be based on their FEHBP benefits reflecting the carve-out and the
contributions would be lower than the contributions made by current
Medicare-eligibles. Over time, the current group would disappear and all
remaining Medicare-eligible annuitants would have carve-out benefits.
Ideally, those 65 and over who are not eligible for Medicare, a gradually decreasing group,
should also be made Medicare-eligible to facilitate administration and for purposes of
simplicity. In some respects it is unfair to treat them differently than other retirees, most
of whom would not have paid significant Medicare taxes before retirement. As indicated
in the discussion on pages 68-69, this subject requires further study before any action is
taken because of the complexity of determining and valuing the appropriate course of action.
4)
Insurance vs. Self-Insurance - A number of organizations and studies have pointed
out that many large private employers self-insure their employee health benefits plans and
have suggested that the Federal Government plan also be self-insured because of cost
considerations. Private employers have generally moved to self-insurance to avoid state
mandated benefits and state premium taxes and to recover various reserves required under
insurance contracts. These three reasons do not apply to the Federal Government as an
employer because the Government is exempt from state premium taxes and mandates and
the bulk of reserves are held by the Treasury. However, in a self-insured program, the
Government could independently determine the amount of reserves to be maintained rather
than having to consult with the insurance carriers as is now required.
The actuarial cost of the insurance element in a health plan should depend on the insurer's
risk, which in the case of FEHBP is principally limited to the risk of contract termination
while a plan or its underwriter is in a deficit position. Thisriskis a real one and some risk
premium is appropriate to protect against it. The risk charge is only one of several elements
included in the service charge presently paid by the Government to the experience-rated
plans. The service charge is calculated separately from the amounts allowed the plans for
operational expenses (claims processing, customer service, etc.). The service charge may not
�13
exceed 1.1% of the sum of incurred claims plus allowable administrative expense. Total
service charges were less than 1% of incurred claims plus expenses in recent years. For the
element in the service charge relating to risk, the maximum amount payable is two-tenths
of one percent of the sum of incurred claims and administrative expenses. In 1990 the total
risk charges paid to all experience-rated FEHBP plans were slightly more than $6 million.
Consequently, a relatively small amount - approximately five one-hundredths of one percent
of the total cost of the program - would be saved by eliminating the risk charge through
self-insurance.
Moreover, the amount saved would be offset by amounts, of actual
underwriting losses which in some instances in the past have been borne by terminated
insurance carriers.
It has been suggested that there may be "profits" realized by current FEHBP carriers in
addition to any covered by the service charge.
The TPF&C study reported that
administrative expenses are significantly higher for FEHBP plans than for health benefits
plans of large private employers, and the CRS study cited concerns that OPM efforts to
control the administrative costs of the carriers have been inadequate.
Conclusions of a
recent General Accounting Office (GAO) study are summarized in its title, "Federal Health
Benefits Program: Stronger Controls Needed to Reduce Administrative Costs" (GAO/GGD92-37). Such criticisms, however, are not arguments for self-insurance. Even if the program
were self-insured and administered for the Government by a carrier or administrator,
appropriate OPM supervision would be necessary to assure that desired efficiency is
achieved.
Some people have suggested that there may be some disadvantages of self-insurance, to wit:
greater political pressure on the operation of the program and less diligence in claims
administration by a carrier when it is not at risk.
RECOMMENDATION: To put the Federal Government in the most flexible
position, OPM should have the authority to contract with all carriers either on
�14
an insured or self-insured basis. With this authority, the Government could
invite bids on an insured and/or an uninsured basis. As indicated above, the
Consultants are not sure that self-insurance would reduce costs significantly.
It would have to be monitored carefully by OPM if and as implemented. If
both insured and uninsured arrangements were used, good comparisons should
be feasible.
5)
Multiplicity of Plans - Presently, there are a substantial number of different health
plans from which Federal employees and annuitants may choose. Some of these plans are
FFS plans, while others are HMOs. Plans may compete for enrollees in several ways ~ by
offering lower premiums, by providing lesser or better insurance benefits, or by some
combination of these approaches.
As the TPF&C report stated, to a large extent
competition is based on providing benefit packages that appeal to younger, healthier risks.
The number of competing plans and the annual open enrollment period encourage enrollees
to switch from plan to plan depending on their particular anticipated medical expenses in
the upcoming year. Thus, an enrollee expecting high medical expenses for certain conditions
may select a particular plan with high benefits for those conditions, and this selection can
cause deterioration in the plan's claims experience. An employee who does not expect to
have high medical expenses may choose to move to a plan with a lower premium. As more
healthy individuals leave a particular plan, the claims experience of that plan will become
worse and the premium must be increased for the remaining enrollees. This increase will
cause more of the better risks to leave, and so the spiral of rising rates and declining
enrollment goes on.
There are those who believe that a multiplicity of plans is desirable because the plans
compete actively for enrollees. The CRS study pointed out that in terms of the value of
benefits the plan with the highest value exceeded the plan with the lowest value by 41%,
while the highest total premium of a FEHBP plan was 246% greater than the lowest total
premium. These numbers raise questions concerning the effectiveness of the competition.
�15
As noted above, competition among the FEHBP plans is oriented toward attracting enrollees
who are goodrisks,thereby increasing risk segmentation and the concomitant imbalance in
the premium structure.
Health benefits plans which include a large number of carriers competing independently to
insure the same group of enrollees and annuitants are not found in the private sector. They
are not consistent with the idea of group insurance. The concept of group insurance is to
have a cross section of employees of different ages and different conditions of health, all of
whom pay the same contribution for the same basic coverage.
RECOMMENDATION: Change the law to provide for one basic FFS plan,
in addition to such number of HMOs as is necessary to provide coverage in
the areas serviced. It is recommended that the Government-wide FFS plan
be administered on a regional basis, involving an appropriate number of
geographical regions nationwide -- possibly 8 to 15 regions. Insurance carriers
or administrators would be invited to bid for a contract for up to a three-year
period after which the Government could renew or put the contract out to bid
if circumstances so warranted.
The basic FFS plan in each region should include an option for enrollees to choose to
receive service from a preferred provider organization (PPO) at lesser out-of-pocket expense
for the enrollee. Some bidders might be able to offer the so-called "triple option" which
would involve not only the FFS plan, with a PPO, but also an HMO and a point of service
(POS) plan, where the employee has the choice at the time of service to go to a managed
care organization or another provider. Thus, while there would be a single FFS plan,
enrollees would have significant choices with HMOs and POS and PPO arrangements.
Any of the present insurers or sponsors of FFS plans would be eligible to bid competitively
to insure or administer the FFS plan for a particular region. In addition, in the case of any
bids invited for administration of the FFS plan offered on a self-insured basis, non-insurance
third party administrators (TPAs) would be potential contractors. Thus, there should be
�16
real, effective competition as to price, quality of service and related factors. It is also
contemplated that in addition to the basic health plan, supplemental benefit plans could be
offered to participants on an enrollee-pay-all basis. Of particular interest might be dental
plans, vision care plans, long-term care plans, etc. Such plans could be offered and
administered by employee organizations presently providing FEHBP plans to Federal
employees and annuitants and by other organizations acceptable to the Government.
While we believe that the recommended reduction in the number of health plans and the
use of competitive bidding by region will reduce overall costs, we have not been able to
arrive at a reliable estimate of the savings. However, the TPF&C study in 1988 estimated
that $500 million in unnecessary FEHBP expenditures were attributable to inefficiencies in
program design and suggested that there be competitive selection of a limited number of
insurers or administrators. In addition, a recent GAO study estimated that there could be
annual savings of up to $200 million if the structure of FEHBP were legislatively reformed
and the carriers/administrators were selected through competitive procedures requiring costeffective administration.
6)
The Proposed Health Plan - The proposed health plan has been developed by
studying those plans which currently insure Federal employees and annuitants. The
numerous plans presently offered contain a variety of coverages with no two plans being
exactly the same. Obviously, the recommended plan cannot contain every benefit found in
every existing plan. If it were to do so, the cost would be greater than any of the present
plans. The purpose of the proposed plan is not to pay all medical expenses incurred by
enrollees. Rather it is to protect enrollees from having to directly pay an unusual level of
medical expenses in any one year. We believe the recommended plan achieves that
objective. It is recognized that as experience under the plan is evaluated and medical
technology improves, changes in the benefits provided may be desirable. Accordingly, it is
anticipated that benefits could be added, deleted or modified legislatively in the future. If
�17
the proposed plan is enacted into law, questions of administrative details will inevitably arise
and OPM should have reasonable flexibility in this area.
RECOMMENDATION: Under the recommended plan, 100% of authorized
inpatient hospital charges for an unlimited number of days would be covered
after a $200 per admission deductible (which would be waived if the hospital
were a preferred provider). Hospital charges for surgery, emergency
treatment and pre-admission and pre-surgical testing received in hospital as
an outpatient would be 100% covered for authorized charges. Certain
preventive services - well baby care and mammography - would also be
covered 100% without any deductible.
Professional charges for surgery and medical care and fees for diagnostic tests
would generally be covered at 90% of scheduled fees after a $250 deductible,
it a preferred provider is used. On the other hand, if an enrollee chooses not
to use a preferred provider, then 80% of scheduled fees would be paid after
a $250 deductible. The deductible amounts would be doubled for self and
dependents coverage. It is also recommended that the deductibles be indexed
to increases in the overall cost of FEHBP and increased from time to time as
appropriate in $50 increments.
Treatment for mental illness and substance abuse would be covered at
specified levels, with incentives for use of preferred providers (e.g. coinsurance
of 70% vs. 60%). Prescription drugs, ambulance service, hospice and home
care, and medical equipment would also receive specified levels of coverage.
The recommended plan provides for catastrophic protection, by reimbursing
100% of authorized expenses when deductibles, coinsurance and copayments
exceed $2,000 for an individual and $4,000 for a family. These limits on outof-pocket expenses should be indexed to increases in the overall cost of
FEHBP and increased from time to time as appropriate in $100 increments.
For further details of the recommended plan, see Appendix A and pages 82 to 90 in this
Report.
One of the issues to be considered is whether a new health benefits plan should be legislated
or left to a Government agency and perhaps an advisory board to design and modify over
time. While there are pros and cons of each approach, the Consultants lean toward the
�18
legislative approach and feel that the legislation should clearly set forth the authority and
responsibility of OPM in administering the benefits provided by law.
7)
Provider Reimbursement - At present, the FFS plans in FEHBP pay hospitals on
different bases, some of which reflect the hospitals' actual costs and others of which are at
higher rates. (In some instances, where carriers have preferred provider agreements,
hospital charges are discounted.) Under current payment arrangements hospitals do not
have an incentive to control utilization of ancillary services, and per diem payments may
encourage hospitals with low occupancy rates to extend lengths of stay unnecessarily.
All but one of the FFS plans pay physicians' "reasonable and customary" charges. In
determining what is reasonable and customary, carriers review not only the pattern of a
particular physician's charges, but also those of the physician's peers. As practitioners raise
fees in anticipation of increased costs, the higher fees become the norm for what is
reasonable and customary. The Consultants believe this approach to fee determination is
inflation-driven and helps to escalate costs rather than contain them.
Substantial medical expenses are now paid by the Federal Government on the basis of
scheduled fees, specifically payments for hospital, medical and surgical treatment for
Medicare beneficiaries and hospital services provided under the Civilian Health and Medical
Program of the Uniformed Seivices (CHAMPUS). In the case of CHAMPUS, health care
providers participating in Medicare are required to accept CHAMPUS scheduled fees in
order to remain eligible to participate in Medicare.
RECOMMENDATION: The Government-wide FFS plan should limit
payments to health care providers other than hospitals to the lesser of
reasonable and customary charges and specified scheduled fees. In the case
of hospitals, it is contemplated that a Diagnosis Related Groups (DRG)
approach would be appropriate. Under a DRG approach specified amounts
are paid for all hospital charges related to treatment of a particular illness or
injury (a diagnosis related group ~ e.g. appendectomy, tonsillectomy, etc.).
ii
�19
Demographic characteristics and health needs of FEHBP enrollees should be
taken into account in developing DRG payments and scheduled fees to be
used in FEHBP; these predetermined payments should be sufficient to cover
the reasonable costs of providing care, and providers should be required to
accept the predetermined amounts as full payment.
Under this arrangement, scheduled fees would differ as appropriate by region and within
each region by city, suburb, rural or other division to reflect realistic cost differences. All
providers would be required to accept the scheduled fees (perhaps with some leeway during
a transition period; e.g., up to 10% above the scheduled fee but no more than reasonable
and customary charges). Such a requirement would reduce out-of-pocket payments now
made by enrollees for physicians' charges in excess of benefits allowed by FFS plans.
With respect to FEHBP annuitants 65 and over who are not eligible for Medicare, the 1990
Omnibus Budget Reconciliation Act (OBRA90) requires FFS plans in FEHBP to apply the
Medicare limits effective January 1, 1992, to hospital payments for inpatient services
rendered to these annuitants.
And such payments must be accepted by providers as
payment in full. The President's recent budget proposed legislation which would similarly
limit charges for Medicare Part B covered services.
We have estimated (conservatively, we believe) that scheduled payments for two important
types of benefits could reduce inpatient hospital claim payments 15% and payments for
physician, diagnostic x-ray, laboratory, and pathology services 8%, thereby reducing total
claim payments under the current FEHBP by approximately 7.7%. Both Medicare and
CHAMPUS have reported savings percentages from scheduled benefits substantially in
excess of our estimates. In 1991 this reduction would have been about $960 million. These
savings would be more than sufficient to pay for the reduced enrollee contributions proposed
in our first Recommendation. Medical expenses should be further reduced through the use
of stronger cost containment including PPOs and managed care.
�20
One of the disadvantages of scheduled hospital fees may be that some of the reduced costs
under FEHBP might be shifted to non-Government payers as is said to have occurred with
Medicare. If the calculation of DRG payments under FEHBP accurately reflects reasonable
costs of hospital treatment, including an appropriate amount for education in teaching
hospitals and charity and other uncompensated care, the payments should be adequate
reimbursement for hospitals and should not be an occasion for cost-shifting. At the same
time, DRG payments would be a strong incentive to use resources most efficiently and avoid
unnecessary utilization. In any event, through PPOs and managed care, non-Government
employers are also gradually moving in the direction of scheduled benefits.
8)
HMOs - In 1991, 27% of all enrollees in FEHBP belonged to HMOs. The number
and percentage have been growing steadily in recent years, although at a slower rate in 1990
and 1991. Many are attracted to HMOs because of their convenience, cost, quality of care
and coverage. In some HMOs, health benefits coverage is less costly than FFS plans and
the enrollee contribution is smaller. It has been suggested that at least for newer HMOs the
enrollees may be younger and healthier than for FFS plans -- but over time, if enrollees stay
with HMOs, the age characteristics will change.
We believe that HMOs can be effectivefinancingand distribution vehicles for health care.
Because of their entrepreneurial nature, there are natural pressures to provide quality care
and to avoid unnecessary medical treatment. And we do not believe the number of HMOs
should be limited to a specified number.
However, the present arrangement under which OPM is virtually obligated to keep accepting
HMOs into FEHBP and has limited ability to terminate any that are not considered first
rate, has resulted in a proliferation of HMOs in some areas and is not considered to be
satisfactory.
�21
RECOMMENDATION: OPM should have the authority to limit the number
of HMOs in a particular area to the number it believes is necessary to
adequately serve Federal employees and annuitants in the particular
community. In addition, OPM should be able to invite competitive bids from
HMOs, to negotiate aggressively with them and to select a limited number
based on coverage, quality, cost and other relevant factors.
The HMOs selected should provide at least the proposed benefits of the
Government-wide FFS plan. Each enrollee would pay the uniform FEHBP
contribution. The HMO could offer benefits greater than the Governmentwide FFS plan, if the total cost of the HMO plan does not exceed what the
benefits of the Government-wide FFS plan would cost for the FEHBP
population enrolled in the HMO. These greater benefits should be limited to
reduced cost sharing and preventive care. On the other hand, if the total cost
of the HMO plan as limited above would not allow the HMO to eliminate or
reduce the FFS deductible and coinsurance features in a manner compatible
with the HMO's normal practice, such an elimination or reduction of the FFS
deductible and coinsurance as well as preventive care benefits could be
provided with OPM approval on an enrollee-pay-all basis.
This arrangement is intended to provide a more competitive environment for choosing
between HMOs and the Government-wide plan. It is nevertheless expected that over time
HMOs will continue to attract an increasing share of FEHBP participants. While the HMO
changes recommended are not primarily motivated by cost considerations, we believe that
careful negotiations with and monitoring of HMOs should produce FEHBP savings.
9)
Strong Cost Containment - The Consultants believe that the Government can save
substantial money for itself and its employees over and above that saved by scheduled fees
through stronger plan-wide cost containment measures similar to those which have proved
effective in the private sector. The responsibility for managing this process can be placed
on the regional carriers and administrators. Increasingly, large employers are recognizing
that effective cost controls should be exercised not only with respect to administrative
expenses, but more importantly with respect to claims payments. In the past, too many
employers have concentrated their attention on carrier retention (expenses and profits) and
ignored claims control. Increased expense dollars used for a full range of cost containment
�22
measures, including managed care and careful claims control, can return much larger savings.
Recently, an effort has been made to control FEHBP hospital costs as required by OBRA90.
This law requires all FFS plans to precertify hospital admissions and implement large-case
management. However, the impression received by the Consultants is that efforts thus far
are not as uniform nor as extensive as is desirable.
RECOMMENDATION: Cost containment measures for all providers should
be implemented throughout the Government-wide FFS plan. An incentive
compensation arrangement for regional carriers or administrators should be
instituted with carefully developed performance standards and goals, with
rewards for superior performance and penalties for failure to meet the goals
- as now exists in some private plans and as contemplated by OBRA90.
HMOs should be required to provide periodic reports on the effectiveness of
their cost containment measures.
The OPM administrative role will be critical to the optimal success of the program. Health
care financing and delivery systems are rapidly changing. In this dynamic environment,
teams of actuaries, computer technicians, health care analysts, auditors, lawyers, contract
specialists and others will all be essential. They will especially be needed as the program is
implemented, not only to assure appropriate pricing and administration, but more
importantly to be sure that high quality medical care remains available to FEHBP
participants. OPM, as with any employer, must be in firm control.
RECOMMENDATION: Accurate and timely information is essential for effective
control. OPM should develop a computerized management information system that
would make such control possible, including a centralized eligibility system and
facilities to interpret and evaluate claims data.
In order to effectively administer the envisioned program, OPM capabilities
would need to be strengthened, either through hiring or contracting-out.
It is difficult to develop reliable estimates concerning cost savings as a result of cost
containment measures including PPOs, especially if scheduled fees for providers are also
utilized. We nevertheless believe that the potential for savings, as a result of strong cost
�23
^
containment and more effective administration, is substantial depending on appropriate
j
implementation. As mentioned earlier, TPF&C estimated savings of $500 million for a
I
package of reforms, including cost containment, and GAO's estimate was $200 million.
I
10)
FEHBP Reserves - In providing health benefits to its employees, the Federal
Government operates in a somewhat different atmosphere than does a private employer.
Decisions are a matter of political concern. Consequently, there may be pressure to impose
restraints on funding during a period of large Federal budget deficits. However, the funding
must be sufficiently conservative to provide the health care benefits and protect the plans
against insolvency in a period of higher than anticipated claims. In this regard, it is
particularly important to recognize that health care cost escalation, especially under insured
plans, has tended to be somewhat cyclical, with increases in costs being relatively moderate
in some years and very substantial in other years.
The Consultants believe that employee health care benefits should be protected as much as
possible from tinkering during Federal Government budgetary emergencies. To this end,
contingency reserves held by OPM have been built up over a period of years for each health
plan separately. In the last ten years, aggregate contingency reserves have ranged from less
than one month's premiums in 1982, 1987 and 1988 to more than five months' premiums in
1985. Since 1988, contingency reserves have been at or near OPM's target level of about
two months' premiums. In addition, for experience-rated plans (the FFS plans and 14
HMOs) OPM holds special reserves up to an amount equal to 3.5 times the sum of an
average month's claims payments plus an average month's administrative expenses and
retention.
RECOMMENDATION: Contingency and special reserves comparable to
reserves now maintained for FFS plans should be established for each carrier
underwriting the recommended Government-wide FFS plan. If a portion of
the plan is self-insured, a separate reserve should be established for that
portion, but a distinction between contingency and special reserves would not
�24
be necessary forrisksassumed entirely by the Government. For other plans
continuing to participate in FEHBP, current arrangements for reserves should
be continued. Greater emphasis should be placed on using reserves to smooth
out premium fluctuations.
Reserves of present FEHBP plans that are discontinued would be handled in
accordance with applicable law -- perhaps with some authority in OPM to
transfer any excess funds to any new plan.
11)
Open Season - One of the most unusual aspects of FEHBP has been the annual open
season, during which participants can choose from the array of plans available for the
ensuing year. While this wide spectrum of choices has been seen by many as an advantage
to Federal employees and annuitants, substantial money and time are invested in preparing
materials, advertising, promoting the plans and communicating with participants. For the
typical enrollee it is difficult, if not impossible, to accurately evaluate the benefits, costs and
quality of the various plans.
As a result, many employees and annuitants make
inappropriate choices. The comparative material is so complicated, private parties have
published and sold booklets in an effort to describe plan differences. The Consultants agree
with the observation of one Congressman that too many choices amount to no real ability
to choose. We believe that the proposed health plan with its HMO, PPO, POS and fee-forservice features will provide adequate real choice.
Presenting these choices in a
comprehensible way will still be challenging.
RECOMMENDATION: There should be a statutorily required annual open
season. With only one Government-wide FFS plan and selected HMOs,
expensive marketing devices such as open season fairs should no longer be
necessary. In addition, OPM efforts should be increased to provide
educational materials to all employees and annuitants to help them better
understand choices available to them. It will be especially critical to prepare
all enrollees adequately for any and all changes in their health plans made by
legislation or regulation because of the critical importance of FEHBP to those
covered by its provisions.
�25
Cost considerations are not the primary motivation for the Consultants' Recommendation
on open seasons. Rather the important issue is better, more effective communication to
enrollees, which should be facilitated by having a single Government-wide FFS plan.
12) Flexible Spending Accounts - The Internal Revenue Code provides employees (but not
annuitants) the opportunity to pay for health insurance premiums and other medical care
costs with before-tax dollars. Many health plans in the private sector provide these Flexible
Spending Accounts (FSAs) for their employees, the only cost to the employer being the
administrative expense for operating the accounts. These accounts, however, result in a
revenue loss for the Federal Government because income tax and Social Security taxes are
not paid on money placed in and paid out of the accounts. In principle, we believe that
these accounts should also be available to Federal employees, but we have estimated the
resultant Federal revenue loss at $347 million.
Because of this cost to the Federal
Government of FSAs, we have not included it as a firm recommendation. An approach
which some employers use is simply arranging for payroll deduction before taxes of only
employees' contributions to health insurance premiums.
This approach reduces the
administrative cost of FSAs but similarly involves Federal revenue losses which we estimate
at $330 million.
In connection with the foregoing Recommendations, one important caveat is in order. The
process of making cost estimates for a program the size of FEHBP is complex and
judgmental. Our actuaries have worked hard with others to develop reasonable estimates.
Based on these estimates we believe the Recommendations, if implemented, would be at
least budget neutral and we recommend them on that basis.
Some observers have commented that the need for FEHBP reform may no longer exist
because the percentage increase in overall costs and enrollee contributions in the past two
54-368
0 - 9 2 - 2
�26
years has substantially moderated. While it is possible that this more moderate pattern will
continue, increases in health insurance costs have tended to be quite volatile and cyclical.
Furthermore, the upward trend of health care costs nationwide has continued to far exceed
the increase in the general Consumer Price Index (CPI). Hence, it is likely that the double
digit increase pattern of the past will recur (in which event the Recommendation concerning
FEHBP reserves could help to moderate premium increases).
In fact, while we believe the Recommendations made herein if implemented for 1991 would
have produced substantial savings compared with actual FEHBP costs of $12,463 billion, it
is important to note that CRS in June 1991 estimated 1992 costs at $14.5 billion, an increase
of 16%. Even with the use of scheduled fees, competitive pricing, greater cost containment
and continued movement toward HMOs, medical care costs generally in the United States
are expected to continue to escalate for a variety of reasons and the costs of FEHBP will
undoubtedly continue to escalate as well (albeit at a more moderate rate, we believe, if the
Recommendations are effectuated).
It is the impression of the Consultants that to some extent FEHBP just "grew like Topsy."
The original two legislated Government-wide plans were joined by many more plans over
time, and the number of HMOs entering FEHBP seems to have been largely uncontrollable.
Be that as it may, the largest employee health plan in the country exists in its present form
and there are many vested interests. We recognize both the multiplicity of conflicting
interests and the political difficulty of making the extensive changes recommended herein.
It may be noted that all the recommended changes are largely independent of each other,
except that maintaining at least budget neutrality does depend on having scheduled fees and
stronger cost containment if enrollee contributions are to be reduced as recommended. It
may be desirable to provide thoughtfully designed transitional arrangements over a period
of several years in implementing some Recommendations.
�27
The Consultants believe that if the suggested plan and Recommendations, other than the
recommended reduction in the enrollees' share of the total cost, had been in effect for 1991,
the aggregate cost of FEHBP would have been $1,631 billion less than the cost of the
present program.
The recommended reduction in enrollee contributions to 15% for self-only and 25% for
dependents coverage (from 29% for both now) with contributions calculated separately for
Medicare-eligible annuitants and for other enrollees would have used $766 million of the
$1,631 billion cost savings. If our recommended program had been in effect for 1991, the
anticipated enrollee contribution paid by employees and annuitants not eligible for Medicare
would have been $9.20 biweekly for a self-only enrollment, and $30.90 for a self and
dependents enrollment. Medicare-eligible annuitants would have paid about $6.75 biweekly
for self and $17.70 for self and dependents. In comparison, under present FEHBP plans,
all enrollees paid an average of $24.20 for self-only and $42.90 for self and family in 1991.
The remaining savings of $865 million ($1,631 minus $766 million) could be used in a variety
of ways. Some possible alternative uses are set forth below with the estimated costs
involved:
Estimated Cost
1.
Adopt a full FSA
$347 million
2.
Adopt an FSA limited to employees' FEHBP
contributions (preferred to item 1 above)
$330 million
3.
Decrease active employee self-only
contributions to zero (not recommended)
$838 million
4.
Decrease Medicare-eligible annuitant
contributions for FEHBP supplemental
coverage to zero (not recommended)
$312 million
�28
5.
Add a modest dental insurance plan
$400 million
6.
Add a reasonably comprehensive dental
insurance plan
$800 million
7.
Make all annuitants 65 and over eligible
for Medicare
? (see pp. 68-69)
8.
Reduce the limit on out-of-pocket expenses
to $1,000 (self) and $2,000 (self and dependents)
9.
Relate the limit on out-of-pocket expenses
to income, as follows:
$100 million
$90 million
Out-of-Pocket Limit
GS Grades*
1-3
4-6
7-10
11-18
Self
$ 500
1,000
1,500
2,000
Dependents
$ 1,000
2,000
3,000
4,000
* Comparable income groups could be established
for employees covered by other salary scales and
for annuitants.
10.
Reduce Government's cost by full savings
$865 million
Although it is obvious, it must be stressed that all estimates shown are based on 1991 data.
Actual savings and costs would depend on the time of adoption of any Recommendations.
Finally, it should be noted that FEHBP is in most respects a very good plan that provides
significant protection to enrollees.
But as earlier studies have indicated and as the
Consultants conclude, FEHBP has some features that need to be changed. Some changes
suggested in earlier studies have been made in recent years either legislatively or by OPM
administrative action. However, major problems still exist. Our purpose here is to build on
what is there now and make it better, so that FEHBP provides all Federal employees and
�29
annuitants with continued good protection and the opportunity for high quality health care
at uniformly fair and affordable costs. We believe the Recommendations provide a basis
to achieve that purpose.
Further discussion of the Recommendations in this Executive Summary appears in Chapters
IV through X.
�Clinton Presidential Records
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�TAB 4
SELECTED MATERIAL FROM
CHAPTER 5 OF MANDATE FOR CHANGE
�s
A Progressive Plan for Affordable,
Universal Health Care
JEREMY D. ROSNER
�C O N S U M E R C H O I C E IN A C T I O N : T H R E E
P U B L I C E M P L O Y E E H E A L T H PLANS
There is already practical evidence that managed competition
works. The health plan for federal workers and the ones for public
�employees in California and Minnesota already incorporate many
of the features described above, and the results are impressive.
The Federal Employees Health Benefits Plan (FEHBP) covers
some nine million Americans under a system that gives them a
market-based choice among a wide range of competing private
plans. This competition, managed by the federal Office of Personnel Management (OPM), helped hold FEHBP cost increases to an
annual rate of 12 percent from 1980 to 1988, compared to 14
percent for private sector premiums over the same period.
Minnesota also runs a multiple choice health plan system for its
public employees, with about 120,000 persons covered. In the
mid-1980s, the state changed the system in ways that made it more
market-based and similar to managed competition. The state saw
a dramatic slowdown in cost increases soon after. While the system's average premiums grew at double digits throughout the
1980s, their average annual growth rate for 1990-1993 has been
6.8 percent.
The California Public Employees Retirement System (CALPERS), which covers some 800,000 people, has also proved the
ability of a large health insurance purchasing cooperative to spread
risk, cut administrative costs, and provide consumer choice. Like
Minnesota, it recently changed its structure in ways that make it
more market driven. Partly as a result, after seeing average premium increases of 16.9 percent and 11.3 percent in the two previous years, CALPERS's average premium increase was only 6.2
percent for 1992-1993, the first year premiums were negotiated
since the rule changes.
These systems, along with various studies, demonstrate that
managed competition can dramatically control health costs, and
that in well-structured health markets consumers can make informed choices based on the relative value of competing options.
The question arises: If millions of public employees already benefit
from such a system, why shouldn't all Americans have the same
opportunity?
23
u
23
26
ADVANTAGE ONE: MARKETS CONTROL
H E A L T H C O S T S B E T T E R THAN P R I C E
SETTING
The Progressive Plan and other managed competition plans
have many advantages over the other major health reforms. The
most important is that they control the nation's runaway health
�ciiie CUSLS, not oy naving me puonc secior set universal neaitn
budgets and prices, but by using consumer choice and decentralized market forces to weed out the low-value parts of our excessive
health spending. While managed competition-relies on regulation
of the health market in certain ways, it focuses on regulating the
ground rules of the competition, not the prices or volume of specific medical procedures. Price controls—public regulation of the
price and volume of most medical procedures, as practiced under
Medicare—appear to promise speed, certainty, and accountability
in restraining health costs. But their proponents ignore the limitations of Medicare price setting and, more generally, the dismal
record of price controls and central planning, from U.S. gas lines
in the late 1970s to the worldwide fall of command economies in
the past four years. Specifically:
Markets are more likely to hold down health costs. While some
have charged that all-inclusive national health budgets would lead
to rationing, it may be more likely such budgets simply would not
be met. Since most budgeted plans do not change the system's
inflationary incentives, their effect would be like putting a lid on
a boiling pot without first turning down the heat. At some point,
the lid blows off. Medicare's price controls and existing state
health budgeting efforts have an escape valve: Providers can make
up any money lost due to the price controls by raising rates on
nonregulated services or customers. Comprehensive budgets could
make such cost shifting impossible, but then public budget-setters
would win far fewer battles with providers. Exceptions and waivers would proliferate. Consider the Gramm-Rudman law: Congress exceeded every one of its supposedly binding annual budget
limits—in the law's fifth year, by over $265 bilhon.
The Progressive Plan and other managed competition proposals, by contrast, simply turn down the heat, and provide a more
comprehensive and sensible way to temper both consumer demands for services and provider demands for compensation. Public officials are not well suited to resist consumer and provider
pressures; their political survival depends on saying yes. Health
plan managers and personnel are ideally suited to balance those
pressures; their economic survival depends on focusing both patients and providers on the most prudent and effective forms of
care.
Markets are more effective at reducing low-value spending.
Price controls, which have little means to reward high-quality
medicine, would lock in or exacerbate the inefficiencies of our
current health system. They would tend to cap prices for good and
27
28
�bad providers in equal measure. There is little question that Canada, Germany, and other nations with budgeted health prices have
held their spending below American levels. But neither their experience nor our own suggests that public budgeting in the U.S.
would help us weed out low value health care spending. State rate
setting (especially for hospitals) has had mixed results. Medicare's system for pricing hospital services has restrained public
spending in part by shifting costs onto private payers. Public
efforts here and abroad to limit physicians' fees have often resulted
in physicians compensating for those limits by increasing their
volume of procedures. Medicare's new effort to control total
physician costs, with across-the-board cuts in physician rates if
necessary, may result in doctors performing a higher volume of
services than needed, and not necessarily focusing on the procedures of greatest value to the patient.
Under managed competition proposals, such as the Progressive
Plan, the driving force for cost control would be neither a politically determined budget ceiling nor bureaucratic judgments about
what constitutes a wise expenditure of health resources. Rather, it
would be a consumer-driven competition among health care plans
to provide the highest quality care at the lowest cost. Plans that
cut costs without sacrificing quality could lower premiums and
attract more customers. This competition would spur health plans
to negotiate more aggressively with medical providers over prices.
It would drive hospitals and clinics, in turn, to make hard choices
about which acquisitions of expensive technologies they prudently
can delay. It would leave health plans and physicians free to
innovate on higher-value ways to deliver care while giving them
better information for determining what procedures and delivery
systems produce value. With this focus on value, the U.S. could
actually leapfrog the health care systems in other developed countries—going from the most costly and arguably least efficient system in the developed world, to the only universal health care
system organized around the principles of value and efficiency.
Faster, less bureaucratic, and more umoyative. While budgets
sound like a quick way to control health costs, public price setting
is notoriously bureaucratic and slow. It would take years to develop the studies, regulations, and enforcement mechanisms
needed to budget all of U.S. health care. Consider what it takes just
to run Medicare, which accounts for less than afifthof U.S. health
spending. The Health Care Financing Agency (HCFA), which
administers Medicare, must work with insurance carriers in each
state to oversee more than 400 million billsfrom7000 hospitals
29
30
31
32
33
�and 500,000 physicians, using 475 hospital price codes, and 7000
codes for physician payment. Changes in this system proceed
slowly. It took Congress and HCFA some five years to develop
Medicare's new rate-setting system for physicians, which will
phase in over an additional four years. That system's adjustments
to physician rates each year will rely on 15-month-old data, and
the system's methodology is required to be updated only every five
years. Medicare's regulations often lag years behind clinical innovations and provider scams. In the interim, existing regulations
may discourage the use of newer and more cost-effective procedures, or overpay for an obsolete or low-value procedure. While
Medicare has yielded its recipients many benefits, it would be a
mistake to extend its cost-control techniques to the rest of the
health care economy.
Market-based systems need some degree of regulation and public bureaucracy to set and enforce ground rules to ensure that
specific health plans do not suffer from an undue concentration of
high-cost patients, and to administer certain subsidies. But specific
negotiations over prices and measurements of output and quality
are left to private, decentralized negotiations, which tend to be
quicker, moreflexible,and less politicized. In FEHBP, for example, each of the participating health plans is free to negotiate rates
with physicians and hospitals at will, and is instantly rewarded for
cost-saving innovations. As the table on the next page suggests,
this approach, relative to Medicare's centralized public price setting, leads to fewer public sector employees and fewer pages of
statute and regulation per person insured. Certainly this is partly
because HCFA carries out more of the insurance process for Medicare than OPM does for FEHBP. But that begs the question of
what functions need to be carried out by the public sector, and the
table suggests that FEHBP has produced an answer that rehes far
less on government. Nor is the issue administrative simpUcity;
Medicare boasts much lower administrative costs than the current
private insurance market, probably including carriers that participate in FEHBP. The point, rather, is that private health plans in
a competitive environment are more dynamic: they can and will
exert stronger, quicker, and morefine-tunedcost controls internally than public regulators can impose from the outside. While
private health plans have their own bureaucracies (including their
own budgets and, often, price schedules), compared to public
agencies each is far smaller and unencumbered with congressional
second-guessing, multiagency sign-off" procedures for new regulations, civil service rules, and other public constraints.
34
35
�A Comparison of Bureaucracies: Medicare vs. the
Federal Employees Health Benefits Plan (FEHBP)
36
Federal Employees Administering per
Million Covered Lives
37
FEHBP
Medicare
Pages of U.S. Statute and Regulation per
Million Covered Lives
38
FEHBP
Medicare
More accountable and less politicized. Supporters of all-inclusive national health budgets claim that approach ensures political
accountability. But the accountability is more to organized interests than the public. The history of Medicare is replete with cases
of organized groups acting through Congress to add coverage for
specific illnesses or procedures, or to affect changes in specific
prices. If all of American health care functioned under a public
budgeting system, health carefirmsand professions would have
even more reason than they do today to make campaign contributions and exert political pressure on the health experts setting
prices and the elected officials approving them (particularly members of key congressional committees). Populous states could be
expected to use their political clout in Congress to press for favorable formulas in determining how the national budget was to be
apportioned among the 50 states.
By contrast, the Progressive Plan and managed competition
would be more accountable to the public. The key pressure point
would be consumers' individual decisions about which plans to
choose, not the decisions of a few public officials. Smart health
plans would invest less on influencing public price-setting processes, and moire onfindingways to cut costs without losing customers in each year's open enrollment.
�Markets make government accountable in the right way. In a
sense, health budgets make government over-accountable. They
make every problem into a political problem, even on matters best
resolved by the private sector. Every provider who feels his rate
inadequately reflects some local variation; every patient who suffers waiting for use of a scarce technology; every hospital forced
to effect layoffs—each of these individually wrenching problems is
laid at the feet of the local member of Congress, and, ultimately,
the party and the president responsible for creating and enforcing
the public budget. And each effort to address such crises begets
more detailed regulation.
Under managed competition, there is still accountability. A
disgruntled patient can switch plans; an unhappy doctor can sign
on with a different health plan. But, unlike in a budgeted system,
neither is likely to focus as much resentment on public officials.
The purpose of such an arrangement is not to abdicate public
accountability, but rather to limit public accountability to the
kinds of decisions the public sector is best suited to make. The
public sector is the right place to make decisions about subsidylevels, methods of raising revenue, and the ground rules for health
markets. It is the wrong place to make judgments about the relative values of procedures, providers, and systems for organizing
and delivering care.
Mixing budgets and markets. Over the past year, the center of
gravity in this debate between public budgeting and market competition fortunately has shifted toward markets. Unfortunately,
many health reformers who have begun recognizing the value of
competitive health markets still maintain we should expand public
price controls and budgeting, either as a short-term solution, or as
a complement to private competition. New endorsements for
national rate setting from prominent physician groups make this
kind of mixed strategy seem politically possible/
Some degree of public budgeting will need to occur under
managed competition—if only to budget Medicare and public subsidies for lower income consumers. But, generally, a mixed strategy is a bad prescription. It repeats the key mistake of U.S. health
care policy over the past 30 years: adopting fragmented policies for
different parts of health care rather than one cohesive strategy.
One leading argument for a mixed strategy—that tight budgets on
fee-for-service medicine, with exemptions for HMOs, could push
more providers into HMOs—ignores history and politics. There
are few if any examples of regulators intentionally driving their
subjects (even inefficient ones) out of business; more often, those
39
0
�who cannot survive in the market find a way to survive in the
legislature. Thus, such budgets might simply perpetuate a safe
haven for inefficient delivery systems. Moreover, the mammoth
effort to create and enforce an all-inclusive^iational health budget
would drain political and intellectual energy from the effort to
create well-structured markets. Any ambitious health economist,
politician, or lobbyist would want to be in the middle of the decisions over the budget and its price controls. Efforts to create a
fundamentally new set of market rules would likely be placed on
the back burner, where, in American politics, nothing ever boils.
A better strategy is to give a comprehensive market-based approach a chance to work. Later, if policy makers felt the need to
do more to limit costs, they would be better able to do so. At that
point, the system's incentives would work with budgets rather than
against them—the heat would have been turned down under the
pot. The information systems set up under this Plan would be
producing more of the data needed to pursue budgets/ The fact
that public budgeting remains an option may well prompt cooperation from some in the provider community who understand that
their enlightened self-interest lies with better markets, not more
regulation of prices and volume.
1
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indicated below.
Divider Title:
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�TAB 5
HERITAGE FOUNDATION REPORT:
AFFORDABLE HEALTH CARE
�,;
v
i
^ ' " ' i i A . . ? ' . . '.":*:r'. iC . "'••".•••".'r' '':>'MM^Hii^Bi ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
l
218
Assurin
AffordaBle
Health Care for
All Americans
By Stuart M. Butler, Ph.D.
�Assuring Affordable Health Care for All Americans
by Stuart M. Butler, PhJX
The United States spends over 11 percent of its gross national product on health care.
That translates into more than $2,000 per person each year—more than the per capita GNP
of many countries. Yet although the U.S. spends far more than any other country on health
care, there are gaping holes in the system's coverage, and health care'services are gripped
by runaway inflation. As many as 37 million Americans lack adequate insurance against
health care cost, and many others who have insurance still dread thefinancialimpact of a
serious disease.
How can America be spending so much on health, and yet have a system with so many
shortcomings? The reason is that the system has been buUt upon unsound foundations.
Each time we have tried to deal with a particular health care need, we have added on a new
component without addressing the .underlying problems. But when a house is built on bad
foundations, adding on extra rooms leads to continuous and expensive repairs—and the
possibility of collapse.
PROBLEMS WITH THE U.S. HEALTH SYSTEM
There are three serious underlying problems with the current health care system. First, it
actually invites runaway costs. For historical and tax reasons, health care benefits are
provided to most Americans through their employers.These benefits are tax-free income,
and most employees pay little or none of the premium costs out of pocket, and they have
little knowledge of the actual costs of the services they use. For the worker, these services
are essentially "free," and so he or she has little reluctance to demand them. Similarly, the
hospitals and doctors who provide health care services know that the patient will pay little
or none of the costs. Consequently, they have little incentive to avoid prescribing costly
procedures, even if these are of marginal benefit The net result is a tendency for prices in
the health care area torisevery rapidly because neither provider nor consumer is sensitive
to cost Consumers not covered by tax-free employer plans, on the other hand, generally
have to pay for their health care in after-tax dollars.Thus a self-employed person, a worker
in a small business not covered by a plan, or the dependent of a worker not included in a
company plan faces much higher costs for the same insurance than someone covered by a
company plan.This tax dynamic within the insured health care market also pushes up costs
for all Americans, insured or uninsured,richor poor.
The second problem is that the direct and indirect assistance provided by government
does not channel the greatest help to those who need it most The tax code, as mentioned,
favors company-based health plans.Thus individuals purchasing their own insurance for
Stum M. Butler, PkD. is Director of Domestic Policy Studies at Tbc Heritage FoundaUon.
He spoke on October 2,1989, at Meharry Medical College, Nashville, Tennessee, at their conference, "Health
Care for the Poor and Underserved."
ISSN 0272-1155. C1989 by The Heritage Foundation.
�ealth care needs and employees and dependents not covered under company plans face
higher costs for obtaining protection.This cost differential tends to make insurance
comparatively more expensive for lower skilled workers and their dependents. In addition,
Medicaid is Meed to the welfare system.Thus a poor family which stays intart and off
welfare is, in many states, ineligible for most govemment-fonded health services.
Third, we in the U.S. are very reluctant to require households to protect themselves
against health care needs. Thus wefindmany individuals and families, particularly among
the young, who dedde to use their income for other objectives than health care insurance,
even though they have the means to obtain insurance without cutting back on other
necessities. Often these are individuals who are healthy.They are playing Russian roulette
with their continued good health.
The result of these problems is the system we have today, in which many Americans find
itfinanciallydifficult to obtain the protection they need against thefinancialimpact of
illness.The veryrichand the very poor, who are insulated by income and tax breaks on the
one hand and welfare-based government assistance on the other, generally have adequate
protection. It is the child of a worker in a large company not covered by thefirm'splan, the
-employee of a smallfirm,or some similar blue-collar or even middle-class individual who
risks falling into the gap of an uninsured illness.
SOLUnONS" THAT WILL NOT WORK
Many ideas have been put forward to address this problem. Increasingly, pressure is
building for some kind of national health insurance system in America. I believe that
eventually the U.S. will have a "national health system," in the sense of a system that
assures each citizen of access to affordable health care. At issue is the kind of national
system we should have. Unfortunately, many of the seemingly attractive proposals being
offered have such serious side effects that they would be a step backward.
Government-Funded Systems
Consider the government-funded national health systems such as those found in Britain
and Sweden.The system in Canada, now so fashionable as a proposed panacea, is similar to
these European models established many years ago. In these systems, all citizens have
virtually free access to hospitals and physicians, and government pays the cost In Britain,
even millionaires and royalty can, if they wish, receivefreemedical care.
The problem with these systems is that, with government controlling the purse strings and
a system that is free at the point of consumption, demand for services always outstrips the
supply. Thus Britain has for many years functioned on a triage principle. Rationing based on
suchfactorsas age and political sensitivity in practice determine who gets what services. In
addition, long waits—sometimes months or ev<*" --cars for services that would be treated as
urgent in the U.S.—are endemic to the British system. Canada is twenty-five years behind
Britain, but we are beginmng to see the same system of rationing and shortages slowly
erge within the Canadian system.
�Employer Mandates
While most Americans would be reluctant to accept the endemic shortages and explicit
rationing of a national health service, many are drawn to the idea of requiring employers to
provide full coverage to workers az.u their families and mandating large employers to
subsidize the health care needs of small firms and the unemployed. Such proposals
admittedly are politically attractive. There always has been an assumption in the U.S.,
usually encouraged by politicians, that services provided by an employer are somehow the
proverbial free lunch. A budget-strapped federal government understandably is drawn to
the idea of shifting the potential cost of programs to the private sector. Unfortunately, there
are serious hidden costs associated with such a mandated benefits strategy.
The underlying problem with the approach is that costs may be hidden, but they are still
there. If an employer is required to provide medical care coverage for an employee and his
family, you may be sure that the potential cost of this mandate will be taken into account in
hiring practices. Thus when a job applicant mentions that he has four orfivechildren and
his wife is without work, for example, the employer translates that into an enormous
potential health care cost Thus there will be a strong tendency forfirmsto avoid hiring the
very people that the mandated benefits strategy is designed to help. With mandated
benefits, the danger is that someone with a job but no insurance today will end up
tomorrow with no insurance and no job either. Similarly, a mandated benefits approach
would tend to put the greatest hardship on small employers, precisely those who generate
the most jobs and create the most employment opportunities for the least skilled
Americans.Thus a mandated benefits approach would have the unintended consequence of
eliminating economic opportunity for many lower paid Americans without significantly
increasmg the health care services available to them.
These practical considerations regarding mandated health care benefits, moreover, fail
to deal with a deep philosophical issue: Why should employers have the responsibility for
the good health of their employees? Employers are not expected to guarantee an adequate
diet for their employees, nor are they expected to provide good clothing, good shelter, or a
good education. It may seem pragmatic to require employers to provide care, but
unfortunately recent debate over mandated benefits has been accompanied by the thesis
that employers have some moral responsibility for the health needs of employees. Yet there
is no ethical argument for this—and a far stronger argument for households themselves to
take the primary moral responsibility for meeting their own health needs.
THE HERITAGE PLAN
The fundamental defects of the existing system and the seriousflawsin most solutions to
the problem of uninsurance has led The Heritage Foundation to propose a national health
system based on very different foundations. Developed in detail in » new monograph,^
National Health System for America, the Heritage plan aims at achieving four related
objectives:
• • All citizens should be guaranteed universal access to affordable health care.
• • The inflationaiy pressures in the health industry should be brought under control.
�• • Direct and indirect government assistance should be concentrated on those who
^ed it most
• • A reformed system should encourage greater innovation in the delivery of health
care.
The Heritage plan has several key components:
I) Change the tax treatment of health care.
Hie plan would treat all health care benefits provided by employers as taxable income to
the employee. Thus it would end the personal income tax exclusion for company-based
health plans. But the plan would then provide above-the-line tax credits directly to
households to protect them from the unreasonablefinancialimpact of health insurance or
out-of-pocket health costs. Specifically, a 20 percent credit would be provided for all
insurance purchases that met basic requirements (such as covering catastrophic health
costs). In addition, a steeply rising credit would be available for out-of-pocket health care
spending by a famhy.TIus credit is related to health care costs as a percentage of family
income.The higher expenditures were as a percentage of family income, the higher the
percentage credit
In addition, a credit would be available for households to purchase insurance or pay for
health care costs for dependents.The rule for dependents under this plan, however, would
be far more generous than under normal dependency tests.Thus a parent might obtain a
edit for covering the health needs of older children living awayfromhome or a grandchild
bt covered by some other plan, even though they might not be considered dependents
jidcr the normal definition.
Impact of the Incentives. This change in the tax code would have a very significant impact
on the health care market By shifting the tax benefits awayfromemployer-provided
services and to the individual, the plan would give the same tax incentives for all health care
coverage regardless of the type of employment of the family earners. Thus the worker in a
small business or one who is self-employed would have the same tax benefits for health care
as the employee in a Fortune 500 company. Not only would this provide a powerful
incentive for insurance to those who currently have no such incentive, but it also would
allow households to shop around for the best plan to meet their needs. By obtaining a larger
credit for out-of-pocket expenses than for insurance premiums, Americans would have
more incentive to pay directly for routine, modest health expenditures and to reserve
insurance protection for potentially heavy costs. As consumers thus became more sensitive
to these incentives, they would spur far stronger competition within the health care
industry, helping to keep costs under control
This heightened competition would be a fundamental departurefromthe current system,
in which competition spurred by the consumer is minimal. This proposed tax change also
would have a dramatic effect on the current uninsured. Because it would target tax uenefits
to individuals, especially those with the greatest need, Americans who now lack the means
to obtain insurance would have assistance—in some cases very generous assistance—in
btaining proper protection and defraying their out-of-pocket costs.
�Consumer Ignorance? Many health analysts worry that a consumer-based model will not
work in health care, because most Americans have little expertise in medical questions, and
often such services must be purchased in an emergency situation. But these concerns
overlook the way competition and consumer choice would operate in the Heritage model.
In practice, there would be two levels of competitiorL Spurred by larger tax credits for
out-of-pocket health expenses, more Americans would pay directly for routine service now
often covered by insurance, such as dental work, eyeglasses, annual physicals, and treatment
for minor scrapes and bruises. In these cases, the required medical knowledge is small, and
consumer choice would be based on such issues as cost, waiting time, and other important,
but usually nonmedical features of the service.
. But competition and consumer choice would also work effectively among insurers,
despite limited medical knowledge among buyers. When an individual buys a new car, he
rarely has any technical knowledge of the carburetor design or the specifications of the
transmission, and yet the impact of consumer choice is felt strongly by manufacturers.The
reason? The car buyer is purchasing something he rates as a "package." He obtains
informed opimons of the package as a whole and judges accordingly. It is this consumer
choice that forces competing manufacturers to make very detailed decisions on
specifications.Thus consumer choice, although limited in knowledge, forces highly
informed decisions by insurers — and also by hospitals and physidans wishing to be induded
in an insurance package.
Bringing Down Costs. Other analysts are concerned that incentives to encourage
individual insurance will mean higher insurance costs for families, since individual
insurance today is more costly than group plans. Again, this concern arises from a
misconception of the workings of insurance. In thefirstplace, individual insurance today is
the exception, and usually the buyer is a person who for some employment or health reason
is not part of a group. That makes serving the individual expensive. But if all families were
individually insured, the economies of scale would bring costs down to the cost level
routinely found in today's group plans.
The second reason the fear is groundless is that, in fact, insurance probably would
continue to be provided through groups, since both buyers and sellers wouldfindit to their
advantage. Very likely the larger employers would continue to administer plans, since
employees wouldfindit convenient But the tax benefits would go directly to the employee.
So a worker would not be trapped in the company plan if it did not provide therightmix of
benefits for his family at the best cost He might choose instead to join a plan administered
by his union (indeed, that could be a powerful recruiting tool for unions), or just a local
HMO. A farmer might turn to a state Farm Bureau plan. The point is that groups would
form, and families would have freedom of choice without losing tax breaks.
Afinalworry about a consumer model is that insurance companies would "cream" the
market Insurers would want to serve only healthy people and ignore the rest This is
nonsense. Some insurers certainly would spedalize in low-risk families, and the market no
doubt be intense.That would drive down insurance costs for healthier Americans. But other
insurers would spedalize in higher-risk people—at a higher price. Just as it does for life
insurance, the market would offer differently priced plans for different medical histories,
and the services covered would be tuned to the segment of the market being sought (an
improvement on the "one-size-fits-all" plans normally offered by employers). Would this
�lean higher costs for some Americans? Yes, but those higher costs would be offset by the
;er credits under the Heritage proposal Would the government lose tax revenue because
Jic larger credits for more expensive plan? No, because although more revenue would be
lost on more expensive plans, the revenue loss on low-cost plans for healthy Americans
would be much lower.
2) Mandate all households to obtain adequate insurance.
Many states now require passengers in automobiles to wear seatbelts for their own
protection. Many others require anybody driving a car to have liability insurance. But
neither the federal government nor any state requires all households to protect themselves
from the potentially catastrophic costs of a serious accident or illness. Under the Heritage
plan, there would be such a requirement
•
This mandate is based on two important principles. First that health care protection is a
responsibility of individuals, not businesses. Thus to the extent that anybody should be
required to provide coverage to a fandly, the household mandate assumes that it is the
family that carries thefirstresponsibility. Second, it assumes that there is an implicit
contract between households and sodety, based on the notion that health insurance is not
like other forms of insurance protection. If a young man wrecks his Porsche and has not had
the foresight to obtain insurance, we may commiserate but sodety feels no obligation to
repair his car. But health care is different If a man is struck down by a bean attack in the
street Americans will care for him whether or not he has insurance. If wefindthat he has
spent his money on other things rather than insurance, we may be angry but we will not
eny him services—even if that means more prudent dtizens end up paying the tab.
A mandate on individuals recognizes this implidt contract Sodety does feel a moral
obligation to insure that its dtizens do not sufferfromthe unavailability of health care. But
on the other hand, each household has the obligation, to the extent it is able, to avoid
placing demands on sodety by protecting itscli
3) Provide help to those who cannot afford protection.
A mandate on households certainly would force those with adequate means to obtain
insurance protection, which would end the problem of middle-dass "freeriders"on
sodety's sense of obligation. But of course there are many lower-income households who
could not reasonably afford to meet that obligation and yet are not eligible for current
direct assistance programs such as Medicaid.
Tax Credits. To an extent the problems of affordability among these families would be
dealt with through the system of tax credits outlined above. The Heritage plan also sees
these tax credits as refundable—that is, a check would be sent to the family if the total
credit exceeded the tax liability. In this way, families would receive direct assistance
through the tax code to enable them to fulfill the obligation to obtain insurance.
Nevertheless, there are certain families for whom even this assistance is not suffident
Families with a very long history of health problems, for instance, mayfindinsurance
prohibitively expensive, even with generous tax benefits. In these cases, the Heritage plan
pro
nvisions an expansion of subsidizedriskpools operated through the states. Many states
^^knv
e these plans, in which high-risk individuals are pooled together, and then insurers are
invited to compete to cover the pool with rates subsidized by the government
�Using subsidizedriskpools allows high-risk individuals to be subsidizedby taxpayers in
general. An alternative strategy—mandating insurance coverage without regard torisk—is
attractive to some analysts, but it has the defect of pushing up rates for all insured
individuals. Thus the cost of protecting the high-risk group is shouldered etjually by all
insured families.This is far more regressive than using the general tax code to cover these
individuals.
Medicaid Reform Help for those who cannot afford insurance under the proposal also
would be provided by reforms in the Medicaid system. Specifically, the Heritage plan
envisions the decoupling of Medicaid from welfare eligibility under AFDC or SSL Under
the plan, a new index of eligibility would be developed to link Medicaid coverage to poverty
instead of welfare. This is an important distinction, because many poor families struggling to
keep off welfare currentlyriskenormous and uncovered medical bills because they are not
eligible, or do not seek, to go on to the welfare rolls. In addition, there are many families
who go on to welfare, with its attendant costs to government, specifically to obtain the
Medicaid coverage.Thus changing the eligibility aiteria in the way proposed would not
necessarily lead to a significant increase in Medicaid costs, even though it would make the
program more attuned to the needs of the poor.
To keep Medicaid costs under control, the Heritage plan suggests steps to encourage
greaterflexibilityand creativity within state Medicaid programs. Specifically, the plan
would encourage states to manage their health care delivery systems more creatively. States
were given incentives to move in this direction during the Reagan Administration. Under
the Heritage plan, the federal government would give greater latitude to states to enroll the
poor in prepaid medical plans and to institute more experimental management procedures.
The aim of such reforms not only is to stimulate the creative juices of the states, but also to
make Medicaid more like a genume insurance program. Medicaid has tended to operate
only as a reimbursement system. It does not, in general, build in management techniques
and incentives to encourage cost-effective decisions before treatment takes place —it just
picks up the tab.
4) Reform programs for the elderly.
The recent political battle over catastrophic health care for the elderly illustrates the
current shortcomings of the Medicare system. Neither is the program a true insurance
system nor is it a system that channels aid to those who really need it In addition, its
structure discourages cost consciousness once the deductibles have been met
Medicare. The Heritage proposal calls for major reforms of the Medicare system to use
funds more effectively and to introduce greater cost consciousness. Under the proposal, the
deductibles for Medicare would be increased, and part of the savings used to offset the
extra costs for the less affluent elderly. In addition, there would be further encouragement
for the elderly to use Medicare funds, in the form of a voucher, to obtain private insurance
or HMO-type coverage instead of using Medicare as a reimbursement system. In these
ways, the elderly would have more incentive to question costs, while the program would
insure proper protection for those who really need it. By fostering consumer sensitivity, the
reforms also would encourage the same kind of competition through Medicare as the tax
reforms would accomplish for the working population.
�Long-Term Nursing Costs. The Heritage plan also deals with the area of nursing home
psts. While proposals have been put forward to address nursing home costs by instituting a
new payroll tax, this approach would simply repeat the inflationary problems associated
with all social insurance programs (such as Medicare itself). Addressing the problem of
nursing home costs begins by recognizing that for most of the elderly the real concern is
that they have considerable assets thatriskdepletion through nursing home expenditures.
Thus the real problem is not the availability of funds to cover costs but the fear that an asset
painstakingly built up over an entire working life will be destroyed by the cost of nursing
care.
The Heritage plan seeks to provide a remedy for two groups—those already retired and
those in the current working populationJn the case of retirees, the plan would provide a
number of avenues through which the elderly could obtain an important degree of
protection for their assets while allowing other sssets originally intended for one purpose to
be converted to nursing home use when the original purpose was no longer necessary.
Specifically, the proposal would:
• • Allow Americans to use their retirement funds to purchase long-term care
insurance.
Retirees (as well as workers) would be permitted to use funds in pension plans, 401 (k)
plans, individual retirement accounts (IRAs), and other retirement plans to make tax-free
purchases of long-term care insurance. In this way, retirees would be given tax assistance to
ibtain nursing home insurance.
• • Encourage conversion of life insurance policies into long-term care insurance
policies.
Families buy life insurance to protect themselves against the loss of earnings by the
breadwinner during working years. When individuals reach retirement, however, such life
insurance is less necessary since the children have left the home and other forms of income
guarantees are available (such as Social Security). Thus it would make sense for many
retirees to convert life insurance policies into nursing home care insurance. While some
companies promote such conversions, others do noLThus the federal government should
support this notion by encouraging companies to offer such plans and perhaps even by
providing tax incentives for such conversions.
4 • Promote home equity conversion.
Many companies already offer some variant of the home equity conversion. Under these
conversions the elderly are permitted to take a lump sum or receive an annuity by selling
the equity built up in their homes. Under these plans, the elderly have therightto remain in
their home until the death of both spouses, at which point the company providing the
financing recoups its equitvfromthe sale of the home.
The Department of Housing and Urban Development recently launched a demonstration
program to provide access to the secondary mortgage market for such financing
arrangements. This demonstration program should be expanded to encourage more
^^Htinan
Enandal institutions to enter thisfield.By doing so, funds locked up in housing equity
would be made available to cover nursing home expenses or premiums on nursing home
insurance.
�In addition, the Heritage proposal focuses on steps that could be taken to encourage
working age Americans to purchase long-term care insurance. While such insurance
currently is available, very few Americans purchase it.Thus the strategy of the federal
government, in essence, would be to encourage households to consider nursing home care
insurance to be as normal and prudent a purchase as life insurance.To stimulate the
long-term care life insurance market, the federal government could:
4 4 Publicize information about long-term care insurance policies.
One reason long-term care insurance is not widely purchased is because it is confusing to
most buyers. By providing a classification system for insurance, under which certain types of
coverage would be required to receive a certain classification, the federal government could
provide an invaluable service to the public and make comparisons between policies easier
for potential buyers.This consumer information would help stimulate the market for such
insurance.
• • Provide tax relief for the purchase of long-term care policies.
Currently the purchase of long-term care insurance receives no significant tax benefits,
and indeed, the tax treatment of long-term care poh'cies is far inferior to that for pension
plans and medical policies- Under the Heritage proposal, a range of tax benefits would be
provided to encourage working age Americans to obtain insurance when it is less expensive.
For instance, ERA funds could be used to purchase long-term care insurance without
incurring tax when the funds are withdrawn. Similarly, companies could be allowed to
include long-term insurance in "cafeteria" plans. Current law does not allow long-term care
insurance to be induded in such tax-free fringe benefits. Similarly, a new IRA could be
introduced specifically for the purchase of long-term care insurance.
A CONSUMER-BASED SYSTEM
All of these measures, from the basic tax treatment of health care to the encouragement
of long-term care insurance, would introduce a far greater degree of consumer activism into
the health care markeLThis strategy, combined with a requirement for basic health
coverage and the focusing of government assistance to those who need it most, would
change the foundations of health care in America. Rather than the current system with its
built-in inflation and enormous gaps in coverage, the result would be a system providing not
only coverage to all but also a powerful set of incentives for the health care industry to be as
effident and consumer sensitive as possible. In this way, America could create a national
health system that combines universal health care with a degree of quality, access, and
budget control that is unavailable in other national health systems around the world.
•
•
•
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
k
�TAB 6
SEIU ISSUE PAPER:
CALPers AND MANAGED COMPETITION
�SEIU
Service Employees International Union, AFL • CIO, CLC
1313 L Street N.W., Washington, D.C. 20005
THE CALPERS EXPERIENCE
AND MANAGED COMPETITION
The California Public Employees' Retirement System (known as CalPERS), which
administers a health benefits plan for 887,000 state and local government workers, family members
and retirees, is touted as one of only three working models of the "managed competition" theory of
healthcare delivery (the others being the Federal Employees Health Benefits Program and the
Minnesota state workers' health program). One of the largest health groups in the U.S., CalPERS
has just announced that healthcare premium increases for its basic health plan will rise an average
1.5 percent this year, compared to 10 to 12 percent nationally.
"This is powerful evidence that managed competition works," said Stanford Professor Alain
Enthoven, father of the managed competition concept and chair of the PERS Health Benefits
Advisory Committee.
Is it?
The Service Employees International Union (SEIU), which represents roughly half of the
active employees enrolled in CalPERS and has worked closely with the Advisory Committee and
the CalPERS board, set out to examine what lessons the CalPERS experience offers for national
healthcare reform and whether it indeed proves that managed competition works.
In its pure form, managed competition would offer consumers a wide choice of healthcare
plans and provide incentives for consumers to switch out of costly fee-for-service plans into less
costly managed care. Health plans would compete for enrollees by improving efficiency and
lowering prices. The market would be organized by large sponsors known as Health Insurance
Purchasing Cooperatives (HIPCs). There would be no cost controls or rate regulation.
March, 1993
§
4900-1000
�The theory is undergomg scrutiny on a variety of fronts. Some studies have pointed to
geographic barriers that limit competition in rural areas. One study, conducted by long-time
managed competition proponent Richard Kronick, found that nearly 40 percent of the U.S.
population lives in areas too sparsely populated to support the number of health plans needed for
effective competition. Other research has raised questions about whether sufficient information is
available to allow consumers to make effective choices.
But the hottest debate centers on whether managed competition alone can bring down
soaring medical costs, or whether cost controls such as a national budget and/or rate controls are
necessary. The U.S. Congressional Budget Office recently concluded that managed competition,
by itself, would produce no cost savings for at least five years.
1
CalPERS is an invaluable source of lessons and insights for the national healthcare reform
debate, some of which are explored here. Led by Assistant Executive Officer Tom EUdn and guided
by an activist, consumer-dominated board, CalPERS' reputation for innovation is well-deserved.
But the CalPERS experience, according to our analysis, does not offer evidence that a
competitive model of health care will bring down costs in the absence of other cost constraints.
Despite the ability of consumers to choose from an array of HMO plans with varying costs
throughout the 1980s, CalPERS experienced higher premium increases than employers nationally.
Only in the last two rounds of premium negotiations, for the plan years 1992/93 and 1993/94,
were costs held well below national trends. Why? In response to California's fiscal crisis, the state
effectively imposed a budget on the CalPERS program by freezing contributions to it. CalPERS
then used its clout as a multi-employer purchasing cooperative — a giant consumer — to aggressively
negotiate limits on premium increases charged by CalPERS plans.
The CalPERS experience does not validate the cost-containment theories of managed
competition purists so much as the German model of budget targets and regional negotiations
between large purchasing funds and provider groups.
It also shows that much of the market infrastructure essential to consumer-based competition,
such as information on quality, does not yet exist or is in the early developmental stage.
1
Controlling rates through tough negotiations or rate-setting are two similar, while obviously
different approaches, used by countries that have had success in holding down health inflation.
Both must operate within the discipline of an overall budget.
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�I.
The CalPERS Health Benefits Program
The California Public Employees' Retirement System (CalPERS) operates a health benefits
program for state and local government workers in California, where the Service Employees
International Union is the largest non-teaching public employee union. Currently, 787 public
employers — including the state, counties, municipalities and school districts -- participate in the
CalPERS system. The plan covers nearly 887,000 government workers, retirees and their famihes
at an annual cost of over $ 1.4 bilhon, including $ 100 million per month in employer contributions.
The Service Employees union represents roughly half the active employees in the system.
In addition to operating a health benefits program, CalPERS controls the nation's largest
public employee pension fund. CalPERS is governed by a 13-member board — six elected by
beneficiaries, five representing employers, and one each appointed by the Governor and the
California legislature. In addition, a State Employee Coalition represents the different unions whose
members are covered by CalPERS. The Coalition is very active and provides recommendations on
programs and pohcy to the CalPERS board.
CalPERS was established in 1937 as a pension system for retirees of the state and some local
California governments. In 1962, the Public Employees' Medical and Hospital Care Act expanded
the system to administer health benefits for active and retired state employees. The Act was
amended in 1967 to permit public agencies which participated in the PERS retirement system to
elect participation in the health benefits program.
The defmition of eligible agencies was subsequently expanded and in July, 1986, eligibility
rules were liberalized to allow public employers in California either to contract with CalPERS for
all their employees and annuitants or to contract on a bargaining-unit-by-bargaining-unit basis.
Since 1989, the number of public employers participating in CalPERS has climbed from 452
to 787. Employers other than the state account for 30 percent of the total enrollment, and threequarters of the employers in the CalPERS health plan have fewer than 100 employees. Small
employers are attracted and retained by the low administrative fee — one half of one percent.
Employers can, however, opt out at any time.
Larger local governments - including the two largest, Los Angeles County and the City and
County of San Francisco - have stayed out, primarily because they have been able to negotiate
competitive rates outside PERS. Local governments that don't provide retiree health coverage are
less likely to join because CalPERS requires employers to provide health coverage to their retirees.
The California program offers individual consumers a wide choice of plan options -- 19
health maintenance organizations (HMOs) and two self-funded preferred provider organizations
(PPOs) open to all subscribers, as well as four association PPOs with enrollment restricted to certain
bargaining units (highway patrol, firefighters, and correctional/peace officers). The HMOs agree
to provide comprehensive services through a restricted set of providers for a fixed price per enrollee.
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�HMOs are typically less costly than PPOs, which allow enrollees to see their physicians of choice.
PPOs negotiate discounted prices with preferred providers; enrollees can see other physicians but
must pay more. Because of geographic limitations, not all the HMOs are available to all enrollees:
10 of the 23 HMOs offered in 1992/93 were available in eight or fewer counties.
Of the over 887,000 covered lives in the program today, 78 percent are enrolled in an HMO
(well above the 45 percent HMO enrollment rate for California's entire insured population) and 22
percent are enrolled in PPOs — nearly 12 percent in the state's large self-funded PPO known as
PERS-CARE and 10 percent in the association PPOs.
Eighty-eight percent of the members are active employees or their dependents and 12 percent
are retired. Retirees and active employees are in the same pool and carriers provide one rate for all.
CALPERS ENROLLMENT, 1993
• • Number of Enrolless
Percent of Total
Total Enrollees
887,000
100%
Enrolled in HMOs
692,000
78%
Enrolled in PERS-CARE
102,000
12%
Enrolled in Association Plans
93,000
10%
Actives and their Dependents
783,000
88%
Retirees and their Dependents
104,000
12%
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�II.
Redirecting the CALPERS Program
Beset by exploding premium costs, CalPERS was forced to change dramatically in the early
1990s. Convinced that "a crisis in health care (was) brewing for state employees and all public
agency groups covered by the Public Employees' Retirement System," the State Employee Coalition
offered detailed recommendations for cost-effective changes. The recommendations, aimed at
solving spiralling costs, severe market segmentation, deteriorating quality and access to care,
included the standardization of a strong benefits package, risk-adjustment of premiums, and
measures to improve quality, access and accountability.
Some of the employee coalition's recommendations — including better coordination in plan
administration and improved data collection to enhance quahty assurance -- were incorporated in
modifications to the system a few years later. A number of other changes were promulgated by the
CalPERS Board.
Contract Year
MEASURES ENACTED TO CONTROL HEALTH COSTS
1988/89
PERS consohdates fee-for-service plans into one self-funded PPO
1991/92
Stflfp; r.hangM its pre.minm cnntribntinn fnTrrmla
1992/93
PERS takes hard line with plans, asks 0% increase in premiums
1993/94
PERS requires detailed cost and performance information from plans
1993/94
PERS standardizes benefits for all HMO options
One of the first major changes to the CalPERS system was the consohdation of fee-forservice plan offerings. Until December, 1988, CalPERS offered four conventional or indemnity
carriers. These carriers fought for enrollees by enhancing their benefits, driving indemnity
premiums higher and higher. The cost escalation was fueled by the ease of switching plans
(changing indemnity carriers involves only paperwork, without changing physicians). In an attempt
to control the rising costs, yet maintain a fee-for-service option, the conventional plans were
consohdated into a single, self-insured PPO called PERS-CARE in January, 1989. (Minnesota's
public employee plan underwent a similar consohdation.)
... Employer contribution rates were the second area targeted for change. Faced with muchpubhcized budget problems, the state of California determined it could no longer afford double-digit
increases - 11.3 percent in 1991/92 and nearly 17 percent in 1990/91 - in employee health plan
costs.
Until August, 1991, the state had paid a fixed contribution for each covered employee equal
to the weighted average premiums of the four largest health plans. If employees chose a plan that
cost more than the four-plan average, they had to make up the difference themselves. For the
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�HMOs, that was usually a small amount - $ 10 to $ 15 per month, on average, for a family plan, less
for single coverage. For those enrolled in PERS-CARE, however, the employee contribution for
family coverage quickly exceeded $100 per month.
This formula was inflationary because premium increases automatically pulled up the
employer contribution rate. California Assembly Bill 702, passed in 1991, ended the practice of
basing employer contributions on the big-four formula for active employees. Enacted under extreme
fiscal pressure, the new law declared that bargaining between state employees and the government
would determine the state's contribution. In subsequent negotiations, the employer contribution
level for active employees was frozen for three years until August, 1995.
For the contract year 1992/93, PERS engaged in aggressive price negotiations with the health
plans — the third major change for CalPERS. These negotiations were driven by the board's
mandate to protect consumers against high costs -- a mandate guaranteed by a dominant consumer
voice on the board. The CalPERS Board issued a strong "request" for reductions in premium rates - i.e., a zero increase target for its negotiations.
The response was largely positive: the average increase for 21 of the 23 HMO carriers was
3.1 percent for the 1992/93 plan year. But the largest HMO, Kaiser Permanente, challenged
CalPERS with a 10.5 percent increase. When Kaiser refused to lower its premium increase,
CalPERS imposed an enrollment freeze on the plan as a sanction. Overall, CalPERS premium
increases were well below the average U.S. HMO increase of 10 percent for the year.
Aggressive negotiations aimed at limiting premium increases took place the next year and
were enhanced by PERS' request that participating HMOs expand information on utilization trends,
administrative overhead and member demographics.
The final change was the standardization of benefits. In 1989, the State Employee Coahtion
had recommended the development of a standard HMO package and a standard fee-for-service
package, primarily to help CalPERS make better price comparisons in rate negotiations. Since that
time, a standardized benefit package for HMOs has been jointly developed by labor and
management and will go into effect in August, 1993. Standardization is expected to provide the
state as well as consumers better information on prices, lessen the incentives to switch plans based
on known medical conditions, and reduce the number of HMO plan options. The new Standard
Benefit Package is included as an Appendix.
Benefit standardization, it should be noted, is partially responsible for low premium increases
for 1993/94. The Kaiser Permanente plan, for instance, will cut back some benefit offerings and
institute new co-payments for some services because of standardization, thereby allowing for an
actual reduction in rates.
-6-
�m.
The CalPERS Cost Record
CalPERS was one of the best experiments in organized healthcare competition throughout
the 1980s. Until 1992, CalPERS rehed on market forces to hold down costs, and the results were
not encouraging.
During this period, CalPERS experienced premium increases in line with or exceeding those
of other employers and encountered significant problems in organizing and disciplining the market.
Prior to the 1992 Changes,
CalPERS Premiums Escalated Rapidly
Avg. Family Premium
$550
Jp 4 6%
Jp 1.6*
S250
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
Plan Year
S o u r c e : CalPERS
•
Double-digit premium increases were common prior to 1992. Overall health
premiums jumped an average 11.3 percent in 1991/92 and 16.9 percent in 1990/91.
Premium escalations were especially high among fee-for-service plans.
•
CalPERS actually fared worse than other employers nationally in managing
healthcare costs during the 1980s. According to Lewin-ICF (now Lewin-VHI)
data, average family health premiums increased 9.4 percent annually between 1982
and 1992, compared to 12.9 percent annually for CalPERS fee-for-service plans and
9.8 percent for CalPERS HMO plans.
Only in the last two rounds of negotiations, for the plan years 1992/93 and 1993/94, were
costs held below national trends. CalPERS limited average health plan rate increases to 6.1 percent
in 1992/93 and an even lower 1.5 percent in 1993/94. Especially impressive was CalPERS' abihty
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�this year to wring out an average price reduction of .2 percent for its 19 HMOs which cover 78
percent of enrollees.
After New Cost Controls, CalPERS Rate
Increases Are Below the National Average
Annual Percent Change
14%
14%
12%
7.9*
69%
PPO
•
6.1%
JLilJ
HMO
12%
Overall
1992
1.5%
•C.2%
HMO
PPO Overall
Proj. 1993
Source: CalPERS. CalPERS a n d SEIU Projections for 1993
U.S.
•P
E
R
S
Managed competition advocates point to this success as "powerful evidence" that managed
competition works. But controlled costs were not the result of individual consumers making
informed decisions as managed competition theorists claim.
To some extent, the 1993/94 cost relief reflects the standardization of benefits that allowed
some larger HMOs to reduce benefits and introduce co-payments for the first time. Kaiser
Permanente, which covers about 37 percent of CalPERS enrollees, lowered its premiums by 2.2
percent in the North and 3.3 percent in the South, partly by cutting back benefits to the standard
package. Lower premium hikes in 1993/94 also reflect cyclical trends in the industry ~ where
several years of high rates are followed by several years of lower rates.
Even so, the two years of cost containment stand in remarkable contrast to previous years.
What changed?
The California fiscal crisis forced the PERS board to take strong measures to control costs.
The system was effectively put on a budget in 1992/93 and a rate control mechanism - tough
negotiations — was set up to enforce the budget. Global budgeting took place through PERS'
announcement of a zero target on health premium increases for all health plans, together with
aggressive price negotiations with insurance carriers as enforcement.
The following table presents the total premiums for family coverage and overall plan
enrollment for the 1992/93 plan year. Interestingly, all but four CalPERS plans have premiums
higher than the average premium in 1992 for insured working families in the U.S., estimated based
on CalPERS and HIAA data.
-8-
�CalPERS PLANS - FAMILY PREMIUM COST AND ENROLLMENT, 1992/93
iiililiiiifiHi^
PERS-CARE
PPO
S590.00
12.0%
PORAC
PPO
$521.30
0.7%
CCPOA
PPO
$489.47
2.3%
CAHP-PBP
PPO
$470.00
1.9%
Kaiser South
HMO
$469.68
15.8%
Headth Plan of the Redwoods
HMO
$436.00
0.8%
Kaiser North
HMO
$433.11
21.0%
Foundation
HMO
$429.94
9.6%
Lifeguard
HMO
$427.25
1.8%
Valucare
HMO
$425.00
2.4%
Health Net
HMO
$421.43
9.2%
PacifiCare
HMO
S420.05
2.2%
Aetna South
HMO
$417.00
1.4%
Maxicare of California
HMO
$416.28
1.3%
Lincoln
HMO
$415.77
1.0%
Qual-Med
HMO
$414.92
0.9%
Takecare
HMO
$414.25
3.0%
Bridgeway
HMO
$414.14
0.5%
PCA
HMO
$411.53
0.9%
Firefighters
PPO
$410.00
0.5%
Blue Shield-HMO
HMO
$409.00
2.4%
Family Health Plan
HMO
$408.48
0.9%
Health Plan of America
HMO
$406.95
1.5%
Maxicare of Illinois
HMO
$406.35
0.01%
Aetna North
HMO
$395.00
0.8%
Cigna
HMO
$394.07
4.1%
Travelers
HMO
$393.28
0.4%
St. Joseph's Omni
HMO
$374.87
0.4%
: Average Family Pronium, U.S. ;: •;
Source: CalPERS; HIAA data projected
-9-
�Cost Cutting or Cost Shifting?
CalPERS' two-year record of a 7.6 percent premium increase - well below the 25 percent
average national increase — is impressive. But is it cost cutting or cost shifting?
CalPERS enrollees represent only a small share of the large HMOs' total enrollment. Many
in the state worry that carriers will compensate for lower premiums to CalPERS by hitting other
employers with larger increases. There is some evidence to validate this concern: Foundation
Health Plan held its CalPERS premium increase to zero for 1993/94, but gave other customers
increases of five to seven percent. Qual-Med, a large HMO, increased its premium rate to CalPERS
a modest 1.5 percent, while increasing premiums for the City of San Francisco 9.2 percent. Kaiser
North cut its CalPERS premium this year 2.2 percent, while raising the premium it charges the city
of San Francisco by three percent.
Cost shifting is not a new phenomenon. For more than a decade, large payers, including
Medicare, and big employers have wrung cost savings from insurers and providers. But for the most
part, the discounts won by big payers were passed along in the form of higher charges to weaker and
smaller employers and plans. The cost containment by CalPERS may be producing another version
of this type of cost shifting, rather than actual cost reductions by participating health plans.
The workers enrolled in CalPERS may find themselves victims of yet another kind of cost
shifting, mirroring the nationwide trend by employers and health providers to dump more and more
costs onto employees.
Cost-shifting to workers nationwide squeezed family budgets in the 1980s and contributed
to falling living standards that undermine efforts to restore long-term economic growth.
State workers covered by CalPERS could experience more cost-shifting if premium rates
begin to rise faster next year, since the state has frozen its contribution rate until 1995. Although
the PERS Board has been successful in moderating the cost burden for participants to date,
continuing this trend will be a major challenge in the years ahead.
-10-
�IV.
Consumer Choice in CalPERS - The Role of Cost, Physician Choice,
Quality and Geography
The pure managed competition theory assumes that the ability of informed consumers to
switch health plans will lower costs and improve quahty through competition among health plans
for new enrollees.
The experience of CalPERS enrollees does not confirm this assumption. In general,
CalPERS enrollees tend to choose a health plan option and stick with it. There is no evidence of the
switching among health plans that managed competition theorists envision. In fact, PERS estimates
that less than five percent of enrollees actually change plans during the annual open enrollment
period.
And the CaPERS experience demonstrates how difficult the notion of cost and quality
comparisons on the part of individual consumers is to realize.
How do consumers choose their healthcare plans? The CalPERS experience provides little
evidence for the contention that people choose their health plans primarily, or even
principally, based on cost. Rather, there is much evidence that geographic location and consumer
satisfaction measures, such as the ability to choose one's physician, are important contributors to
healthcare decisions.
Role of Price in Consumer Choice
Only 25 percent of the plan participants say cost is the #1 reason for their health plan
selection, according to a CalPERS Consumer Experience Survey conducted in 1991. As a factor
in plan selection, cost ranks far behind the abihty to choose one's own physician, which was the #1
reason for 35 percent of participants.
According to CalPERS, enrollees who select plans based on cost, regardless of quahty, tend
to be younger workers with few medical needs. In plan year 1991/92, seven out of the 10 plans that
had no employee cost sharing and were rated by consumers as lower quality had an enrollee
population significantly younger than the overall average age of 46.1 years.
Asked whether they would choose higher out-of-pocket expenses or reduced benefits, 38
percent of survey participants said they would choose higher costs, compared to only 10 percent
who said they would choose fewer benefits. Fifty-two percent were unsure.
Consumer choice theory postulates that competing health plans gain or lose market share in
response to consumer comparisons of cost and quality. But an analysis of total enrollment and price
differences in the PERS basic health plan indicates that the distribution of enrollees among the
various plan options, high cost and low cost, has remained remarkably constant over the past five
years.
-11-
�Out of 28 plan options offered in 1992/93, over two-thirds of all participants selected one
of five plans - Kaiser North, Kaiser South, PERS-CARE, Foundation, and Health Net. The cost of
a family plan for each of these five plans was above that of the average HMO plan in that year.
Over Two-Thirds of All Enrollees
Are in One of the "Big Four;"
All Are Above Average Cost
Kaiser (N&S)
37%
PERS-CARE
12%
Foundation
10%
Health Net
9%
23 Remaining Plans
32%
1993 Enrollment
Source: CalPERS
•
By contrast, the lowest cost plans fared poorly in attracting plan participants.
Although there were nine plans in 1992/93 that required no employee contribution
towards the family premium, their combined enrollment totaled just 11 percent of all
participants.
•
In 1992/93, only 17.3 percent of all participants chose to enroll in one of the 14 plans that
offered family premium rates below the average for CalPERS plans.
In fact, most plans have neither gained nor lost market share. The one notable exception
is PERS-CARE, down from 17.5 percent of all participants in 1989 to 12 percent in 1993,
indicating some price sensitivity when the difTerential is enormous.
By 1993/94, the total family premium for PERS-CARE was $7,644. Since the employer
contribution rate is fixed for all plans, PERS-CARE enrollees pay 18 times more out-of-pocket for
family coverage than if they were enrolled in the average HMO plan. The difference is more than
$200 a month for family coverage (an average co-payment of $153 per year for an HMO compared
to $2,724 for PERS-CARE). What may be most remarkable is the fact that 12 percent of CalPERS
enrollees resist such extraordinary cost pressures to remain in PERS-CARE.
-12-
�The Gap Between HMO Premiums and
PERS-CARE Continues to Grow...
Average Monthly Family Premium
$700
$600-
• PERS-CARE
HMOs
S200
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
Plan Year
Source:
CalPERS
... And Consumers Pay the Difference
Average Employee Contribution. Family Plan
$250
$200-
$150• PERS-CARE
HMOs
$100-
$50-
1988/89
1989/90
1990/91 1991/92
1992/93
Plan Year
Source:
CalPERS
-13-
1993/94
�Not only does it appear to take huge, punitive price differentials to move people out of feefor-service plans, but the ultimate result for consumers is apparently no higher quality and service.
PPO enrollees report higher satisfaction levels. Many who chose low-cost plans rated their health
plans as offering below average quahty.
Although cost may be a factor in the choice between an HMO and a fee-for-service plan, it
has an insignificant role in the choice among competing HMOs. Despite a 25 percent price
differential between the highest and lowest cost HMOs, enrollment is not concentrated in the lower
cost plans.
If price were the primary motivator in consumer choice among competing healthcare plans,
lower cost plans would be gaining market share over time. Yet from 1989 to 1993, only one HMO
plan, Health Net, experienced any appreciable gain in its market share -- up from 3.6 percent of total
enrollment in 1989 to 9.2 percent in 1993. Interestingly, its price has varied over this time period,
ranging both above and below the HMO average. Indeed, several HMO plans' cost ranking varies
from year to year. This may well inhibit consumers from making cost-driven decisions. For
example, Kaiser North was a low cost plan in 1991; subsequent premium increases have kicked the
plan into the above-average cost category.
In a textbook competitive market situation, health plans with the lowest cost and highest
satisfaction ratings would emerge to dominate the market. Yet the CalPERS experience imparts no
evidence of this trend. Enrollment remains concentrated in the plans that offer lower costs/less
satisfaction or greater satisfactionThigher costs (see page 16).
Role of Physician Choice
According to the 1991 PERS consumer experience survey, the most often cited reason for
selecting a healthcare plan was the abihty to select (and keep) one's own physician. Thirty-five
percent of CalPERS plan members overall - and 62 percent of those enrolled in PERS-CARE -reported this was the #1 factor in their decision.
The PERS-CARE plan offered the greatest flexibility in physician choice, enabling
participants to choose from among more than 36,000 physicians and 30,000 related healthcare
professionals throughout the state. Since PERS-CARE enrollees tended to make nearly twice as
many visits to the doctor as the average CalPERS participant, it is not surprising that these
individuals placed a great deal of emphasis on retaining freedom of choice in the doctor-patient
relationship.
But the abihty to select their own physician was also cited as the most important factor by
a majority of participants in some CalPERS HMOs plans - including Health Plan of the Redwoods
(70.9) and Foundation (56.7 percent).
Not surprisingly, the abihty to choose one's physician was positively correlated with
participants' overall satisfaction with their healthcare plans. The 1991 PERS survey calculated a
composite satisfaction score for each of the health plans. Four of the top five rated plans were PPOsi
despite the fact that these plans carried significantly higher price tags than the HMOs. The sole
- 14-
�HMO on the list. Health Plan of the Redwoods, is a unique HMO with broad benefits and available
in only four counties.
PLANS WITH HIGHEST OVERALL SATISFACTION
1991 CONSUMER EXPERIENCE SURVEY
:
Rank lpia&itfa^
pianlType, Premium ('91/92)
1
Health Plan of the Redwoods
HMO
$430.00
2
PORAC (Association Plan)
PPO
$474.56
3
PERS-CARE
PPO
$563.00
4
CAHP-PBP (Association Plan)
PPO
$450.00
5
Firefighters (Association Plan)
PPO
$545.00
Average Cost for HMO Plans:
$401.23
Role of Quality in Consumer Choice
The 1991 CalPERS consumer survey revealed a level of satisfaction quite similar to the
satisfaction levels found among insured Califomians overall by health attitudinal analyst Robert
Blendon of Harvard's School of Public Health. Only 12 percent of CalPERS enrollees surveyed said
they would switch to another health plan if they could. And 71 percent of respondents said they
would recommend their health plan to a friend.
According to the survey's overall satisfaction rankings, 40 percent of participants were
enrolled in plans rated more satisfactory, and 60 percent were enrolled in plans rated less
satisfactory.
One reason there is not more movement out of less satisfactory plans is likely because most
plans are HMOs. Changing HMOs, unlike changing indemnity carriers, requires a total disruption
of one's healthcare relationships.
The CalPERS experience points up the difficulty of providing information on quality as well
as cost that would enable consumers to make inteUigent comparisons of plans. Currently, consumers
rely upon a PERS plan booklet to make their health plan selection. The booklet offers cursory
information on plan benefits, counties served and a telephone number. Consumers receive a great
deal of information from advertising.
When the State Employee Coahtion recommended a community buyer comparison of PERSCARE physicians and hospitals, CalPERS responded that outcomes data were costly and not
necessarily informative at the consumer level. They also argued that outcomes management systems
capable of providing longitudinal outcomes data were not yet commercially available.
- 15-
�Such a data collection system is now underway. The new move to standardize benefits
among all HMO plans should help consumers choose plans on more objective quahty measures in
the future, but it is clear that the consumer's role in monitoring the quahty of care is inherently
limited.
CALPERS ENROLLMENT BY SATISFACTION INDEX, 1991
LOW COST/LESS SATISFIED
LOW COST/MORE SATISFIED
Enroll.
Lifeguard
1.6%
Valucare
1.5%
Health Net
6.7%
Takecare
2.7%
Kaiser North
23.1%
Bay Pacific
0.9%
Health Plan of America
1.9%
Bridgeway
0.6%
PCA
0.7%
SUBTOTAL
5.7%
Family Health Plan
0.9%
Cigna
2.3%
Health Plan of Redwoods
0.8%
Maxicare of Illinois
0.01%
PORAC
0.9%
Lincoln
0.8%
PERS-CARE
15.6%
Maxicare of California
1.6%
CAHP-PBP
2.3%
39.6%
Firefighters
0.5%
Kaiser South
17.7%
Foundation
10.3%
Qual-Med
1.1%
Travelers
0.4%
Partners
1.6%
CCPOA
3.0%
SUBTOTAL
20.4%
SUBTOTAL
33.8%
60.0%
HIGHER COST/LESS SATISFIED
393%
HIGHER COST/MORE SATISFIED
Role of Location and Geography in Consumer Choice
After physician choice and cost, the third most important criterion for selecting a health plan
is location. According to the PERS Consumer Satisfaction survey, 10.1 percent of the participants
rated location convenient to their work or home as the primary reason for their choice. But the
location issue hides an even more important role of geography — accessibility to one's servic
market.
-16-
�The avail abihty of health plans within a particular region (or the lack thereof) can determine
consumer choice, often negating other important factors such as cost and quality. For example, the
Health Plan of the Redwoods received the highest overall ratings in the 1991 consumer satisfaction
survey — but enrolls fewer than one percent of the entire PERS population. The catch: the plan is
available in only four northern California counties. Of the 23 HMOs offered in 1992/93, 10 were
available in eight or fewer of California's 58 counties.
The most populous state in the nation, California nonetheless has large areas that lack the
density to support a competitive system. Ten California counties had no HMO option available
at all (let alone the three or more that effective competition requires). Participants living in
these 10 rural counties not served by HMOs have only one option, the higher-priced PERSCARE.
Under the system, all participants clearly are not afforded the same degree of choice of plans.
Taken in sum, the CalPERS experience suggests that the theory of "empowered consumers"
making cost-effective choices based upon price and quality is a simplistic picture of how individuals
make healthcare decisions. While the connections between quahty, cost and choice seem logical,
probably because of experience in other buying decisions, the reahty is so comphcated as to make
difficult any attempt to influence behavior towards a particular end.
-17-
�V.
CalPERS - Special Implementation Problems
The CalPERS experience points up critical problems in creating a market infrastruture
essential to a competitive model.
Advocates of the managed competition theory claim health insurance purchasing
cooperatives can organize the markets within one to two years. The PERS experience, however,
suggests there is a long learning curve to understanding the market and consumer base and
implementing the data information systems necessary for economic discipline to work. Despite
nearly three decades of operation, the PERS competitive model is still in the testing stage.
In addition to the limitations on the consumer choice theory discussed in Section IV, special
market inequities emerge because of the large retiree population (12 percent of its enrollees), rural
residents with no choices and competing plans offering different benefits which consumers value,
but which segment the market and raise costs. Implementation of solutions to correct these market
deficiencies has proven difficult in practice (as opposed to in theory).
Difficulty in Keeping an Affordable Fee-For-Service Option
Managed competition purists would prefer to see consumers have no fee-for-service medical
option at all — or else force them to pay a steep price for the privilege of full choice of doctors. But
even in Cahfomia, fee-for-service plans are still the only plans available on a state-wide basis ~
particularly for members who live in rural areas with no access to an HMO.
The managed competition approach compounds the problems of holding down fee-forservice costs. Managed competition aims to encourage HMOs to use their cost advantages to cut
prices in order to attract consumers. At the same time, consumers are given economic incentives
to choose lower-priced HMOs because they are forced to pay the difference for a higher-priced
indemnity plan.
Thus the managed competition approach quickly drives up the price difference between feefor-service and other plans, which in tum causes healthy individuals who can do so to leave the plan
~ a process called adverse selection. Adverse selection further shifts costs to older, sicker enrollees,
with no impact on total cost (insurance premiums plus patients payments).
After years of tremendous rate hikes-30.5 percent in 1989/90,16.6 percent in 1990/91,9.5
percent in 1991/92 - assertive management of PERS-CARE in response to the state's fiscal crisis
cut the PPO premium increases to 4.9 percent for 1992/93. PERS-CARE rates, however, are up
again by 7.9 percent for the current year. The plan's disproportionate share of retirees, the less
healthy and rural employees with no place else to go explains much of the difficulty in controlling
costs.
As of January 1993, the average age difference between CalPERS PPO and HMO enrollees
had climbed to eight years (51 for a PERS-CARE member and 43 for an HMO member) ~ one and
a half times the age difference just 10 years ago.
- 18-
�PPO members are also much sicker, on average. According to the CalPERS consumer
satisfaction survey, more than twice as many PERS-CARE enrollees described their health as poor
as did CalPERS enrollees overall. One-third of those in PERS-CARE visited the doctor at least five
times a year for a chronic illness, compared to 17 percent of CalPERS enrollees overall.
The ever-spiralling fee-for-service premium increases have created severe consumer
inequities, destabilized the PPO plans, and threatened their long-term viability.
• The PPO plans find it increasingly difficult to compete against HMOs. By
1993/94, the total family premium for PERS-CARE reached $7,644, nearly $2,600
higher than the average CalPERS HMO premium
• PERS-CARE participants continue to see large jumps in their share of the total
premium - up from $840 annually for a family in 1988/89 to $2,724 by 1993/94.
These consumer inequities created severe political problems and prompted government
intervention in the market. In addition to the takeover of the indemnity option, the California state
legislature was forced to intervene strongly in the market, requiring higher employer contributions
for retirees and a rural subsidy for persons in service areas designated as "no choice."
Risk Adjusted Premiums Are Untested
Managed competition theorists say that the way around adverse selection isriskadjustment
of health plan premiums so that all plans compete on a more equal playing level. With risk
adjustment, every employer would pay a community rate to the PERS board, which would adjust
what it pays each plan up or down depending on the risk composition of the plan enrollees.
Otherwise, adverse selection could drive an otherwise efficient plan out of business.
But risk adjusting premiums has not yet been field tested by any of the large employee
systems. CalPERS, the most innovative existing health benefits system, has been unable to
implement risk adjustment. Neither the Federal Employee Health Benefits Program nor the
Minnesota public employees' system have done so, either.
Risk adjustments require large enrollee bases in most plans so as to minimize large swings
in premium rates from year to year as risk composition changes. (The risk composition of a small
group can change significandy if only a few enrollees move in or out.) Successful risk-adjustment
would probably require estabhshing a minimum plan size for each service area. CalPERS, where
1993 plan enrollments range from 129 (Maxi-Illinois) to 165,936 (Kaiser North), is now looking
toward HMO consohdation.
Benefit DifTerences Lead to Market Segmentation and Higher Costs
When the "basic plan" for a system is defined as an indemnity option, HMOs with more
comprehensive packages have wide room to differentiate their products. Many of the participating
-19-
�plans in PERS believe that differentiated benefit levels are important competitively and help to
reduce costs.
The State Employee Coahtion, however, favored standardization of HMO packages, as noted
earlier, to help PERS make better price comparisons in rate negotiations.
Since the new standardized benefit package will not go into effect until August, 1993, the
reaction of consumers to a more standardized benefit package ~ and therefore the political fallout - is unknown. We do know that consumers place value on choice of benefit packages rather than
choice of standard plans.
-20-
�VI.
The Lessons of C a l P E R S for National Healthcare Reform
The CalPERS experience offers a wealth of lessons and insights for the national healthcare
reform debate.
•
Competition alone did not constrain costs; tough negotiations over premium increases- one form of rate control — did.
The CalPERS competitive model by itself failed to dampen the rise in health costs. But
putting the system on a budget did produce significant cost savings for the two years since its
inception. It is not yet clear whether these savings will continue or simply shift costs to other
California employers.
•
Much of the market infrastructure necessary for consumer-driven competition does not
yet exist or is the early developmental stage.
There are major hurdles to relying on consumer choice as the central pillar of cost control - including limitations imposed by geography and the fact that switching HMOs means changing
doctors and losing continuity of care. CalPERS has not yet been able to develop many of the
sophisticated market institutions called for by managed competition theorists, including consumer
information systems and therisk-adjustingof premiums, which are necessary to give consumers
dependable price signals. CalPERS considered and rejected risk-adjusting because of its
complexity. At the same time, the high statewide HMO penetration rate of 45 percent gives
CalPERS advantages not duphcated in other states.
•
Giving consumer representatives a major role in governance is crucial to protecting the
pocketbooks of families.
CalPERS' response to the state's contribution freeze - aggressive negotiations with plans ~
was driven by the board's mandate to protect consumers against high costs. Only by giving
consumers a strong voice on the purchasing cooperative's board is it possible to guarantee that the
system will take a tough line on their behalf. Otherwise, the purchasing cooperative may be
captured by the plans and simply pass along whatever rate increase insurers dictate.
•
Rural populations are especially vulnerable to high costs.
Areas with low population density cannot support even one HMO-type plan, let alone the
three or more that effective competition demands. A plan of last resort based on a network of feefor-service providers would be required, along with substantial subsidies to bring consumer costs
in line with the average. The state of California faced enormous political pressures that required it
to adopt special higher subsidies for its beneficiaries with no HMO option. That subsidy is
scheduled to expire this year.
-21-
�•
Retirees could destabilize a managed competition system.
The cost of coverage for pre-Medicare age retirees is a major problem for many large
companies. In CalPERS, retirees tend to cluster in non-HMO plans, contributing to the spiralling
cost of those plans. The state has been forced to use more generous contributions for retiree
coverage.
•
Quality data must be collected and disseminated to CalPERS negotiators and
consumers.
Consumers are handicapped by the lack of information on which to make informed choices.
In fact, it is not clear whether individual consumers will be able to get and act upon comprehensive
price and quahty information, suggesting a large role for the purchasing cooperative in evaluating
plan quahty and costs — a role not envisioned by most managed competition theorists. PERS
negotiators, acting as consumer advocates, have begun to exercise this responsibihty.
Overall, our analysis suggests the following design features are essential in any purchasing
cooperative like CalPERS:
1. Serious cost enforcement powers. These include the abihty to negotiate premium
increases, to impose restrictions on the number of plans as well as their conditions of
operation, and to monitor quahty.
2. A board of directors with purchasers only. It should not include representatives of
insurers or providers. A consumer-dominated governance structure modeled after CalPERS
should be explored.
3. A region-wide, fee-for-service plan affordable through subsidies. This plan must be
kept affordable for residents in areas with no other plan options. California law allows for
a subsidy for enrollees in designated "no choice" service areas that is scheduled to expire
soon.
4. The purchasing cooperative must include a very large proportion of the population
to maiimize negotiating clout and prevent cost shifting. Much of the cost control
potential of CalPERS is unrealized because its nearly one million enrollees represent less
than seven percent of the state's total HMO enrollment.
5. A system of subsidies for plans with a higher-than-average proportion of retirees.
Sincerisk-adjustingpremiums may not be feasible, some alternative subsidy mechanism will
be necessary to put in place at the start.
6. A major role in quality monitoring on behalf of consumers. Investments in
developing quahty information systems should focus on the cost and performance data
necessary to augment rate negotiations and quality monitoring functions. Enrollees must
have access to consumer satisfaction ratings, disenrollment rates for each plan, and other
information that allows them to make informed plan comparisons.
-22-
�7. HMOs should be required, as a condition of participation in a purchasing
cooperative, to establish an enrollee advisory council to ensure the availability of
adequate consumer information and the resolution of service problems. There should
also be an ombudsman, independent of the purchasing cooperative, as a last-resort avenue
for consumers to raise quality problems.
###
-23-
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
J_
�TAB 7
INFORMATION ON THE WORKERS COMPENSATION PROGRAMS
�OFFICE OF WORKERS' COMPENSATION PROGRAMS
Federal employees have workers' compensation coverage under t h e
Federal Employees' Compensation Act (5 USC 8101 e t seq.)Like
most such l e g i s l a t i o n , t h e Act s u b s t i t u t e s broad "no f a u l t "
coverage o f work-related i n j u r i e s f o r t h e employee's r i g h t t o sue
the employer f o r i n j u r y caused by work. The Act provides f u l l
medical coverage f o r i n j u r y and occupational disease r e l a t e d t o
Federal employment, as w e l l as wage loss compensation, v o c a t i o n a l
r e h a b i l i t a t i o n b e n e f i t s , s u r v i v o r b e n e f i t s and some other b e n e f i t s .
For the most p a r t , n e i t h e r medical nor d i s a b i l i t y l i a b i l i t y may be
resolved by lump sum settlement under present law o r r e g u l a t i o n .
The FECA i s administered nonadversarially by the O f f i c e of Workers'
Compensation Programs i n the Department o f Labor, which administers
two other Federal programs (Longshore and Harbor Workers'
Compensation Program and t h e Coal Mine Workers' Compensation
Program). Federal employees who are i n j u r e d on t h e j o b f i l l o u t
i n j u r y r e p o r t s and present them t o a supervisor a t work, who signs
them and may i n d i c a t e disagreement ("controversion") w i t h the f a c t s
as presented.
I f there w i l l be a medical b i l l o r time l o s t from
work, t h e i n j u r y r e p o r t i s forwarded t o OWCP, which reviews t h e
f a c t s and makes a d e c i s i o n on t h e claim.
Funding and A d m i n i s t r a t i o n
177,000 new i n j u r y and disease r e p o r t s were f i l e d i n FY 1992.
About h a l f o f these were claims f o r medical treatment o n l y , no time
having been l o s t from work. Benefits are paid on approved FECA
claims by O C and charged back t o the employing Federal agency.
WP
Each agency includes t h e annual b i l l i n i t s a p p r o p r i a t i o n request
t o t h e Congress. (The U.S. Postal Service and some other agencies
pay from operating budgets).
I n FY 1992, O C paid about
WP
$450,000,000 f o r medical care o f a t o t a l b e n e f i t o u t l a y o f $1.7
billion.
Most o f t h i s cost was f o r treatment; t h e t o t a l also
includes about $14 m i l l i o n f o r v o c a t i o n a l r e h a b i l i t a t i o n and $5
m i l l i o n f o r independent medical evaluations.
FECA's t o t a l
a d m i n i s t r a t i v e budget i s about $60 m i l l i o n f o r FY 1993.
B e n e f i t Coverage and E l i g i b i l i t y
Federal employees are covered from the f i r s t day of employment f o r
any i n j u r y t h a t arises out o f employment.
The law allows t h e
i n j u r e d Federal worker t h e i n i t i a l choice o f physicians. Any
prescribed treatment deemed l i k e l y t o "cure o r give r e l i e f " f o r
the work-related c o n d i t i o n i s covered i n f u l l . Other than recovery
from t h e c o n d i t i o n , there i s no s p e c i f i c upper l i m i t on medical
coverage i n time o r d o l l a r s , and an i n j u r e d worker cohtinues t o be
e l i g i b l e f o r medical coverage f o r as long as treatment i s needed.
Because o f s t e e p l y r i s i n g costs, O C has i n s t i t u t e d various
WP
q u a l i t y and cost c o n t r o l s through procedure and r e g u l a t i o n ,
i n c l u d i n g a medical fee schedule and p r i o r a u t h o r i z a t i o n f o r
surgery and p h y s i c a l therapy.
�Like other workers' compensation programs, and l i k e health care
payers generally, OWCP has experienced steeply r i s i n g costs i n the
past several years. I t i s thought that "cost-shifting" to workers'
compensation and d i f f e r e n t i a l pricing i s causing some of t h i s .
Integration with a Federal Workers' Health Alliance
The
option
of combining medical benefits under workers'
compensation with health care coverage under FEHB could relieve
t h i s pressure on workers' compensation,
and achieve s p e c i f i c
s a v i n g s — through more e f f i c i e n t and better-managed health care,
perhaps through introducing copayments, and by consolidating
payment agencies so that d i f f e r e n t i a l pricing i s reduced. However,
i f under t h i s reform, OWCP i s not able to medically manage cases
i n order to reduce d i s a b i l i t y and promote return to work, any
savings could be overwhelmed by an increase i n wage-loss
compensation (indemnity) costs.
�
Dublin Core
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Title
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Health Care Reform
Identifier
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2006-0810-F
Description
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<p>This collection consists of records related to Hillary Rodham Clinton's Health Care Reform Files, 1993-1996. First Lady Hillary Rodham Clinton served as the Chair of the President's Task Force on National Health Care Reform. The files contain reports, memoranda, correspondence, schedules, and news clippings. These materials discuss topics such as the proposed health care plan, the need for health care reform, benefits packages, Medicare, Medicaid, events in support of the Administration's plan, and other health care reform proposals. Furthermore, this material includes draft reports from the White House Health Care Interdepartmental Working Group, formed to advise the Health Care Task Force on the reform plan.</p>
<p>This collection is divided into two seperate segments. Click here for records from:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0810-F+Segment+1"><strong>Segment One</strong></a> <br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0810-F+Segment+2"><strong>Segment Two</strong></a></p>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records
Publisher
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William J. Clinton Presidential Library & Museum
Text
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Original Format
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Paper
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
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Integration of Federal health Programs into the New System [7]
Creator
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Health Care Task Force
General Files
Identifier
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2006-0810-F Segment 1
Is Part Of
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Box 57
<a href="http://clinton.presidentiallibraries.us/items/show/36144" target="_blank">Collection Finding Aid</a>
<a href="https://catalog.archives.gov/id/12090749" target="_blank">National Archives Catalog Description</a>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records: White House Staff and Office Files
Publisher
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William J. Clinton Presidential Library & Museum
Format
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Adobe Acrobat Document
Medium
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Preservation-Reproduction-Reference
Date Created
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5/5/2015
Source
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42-t-2194630-20060810F-Seg1-057-005-2015
12090749