The road to good public policy is built upon lessons learned from policy

experiments in the past. What have we learned from the past performance of

federal health insurance programs?

Current health care proposals in Congress promise to contain costs and

maintain quality of care, which raises the question: What kind of federally

administered program can best achieve those goals while expanding coverage?

For almost five decades, the federal government has run two major health

insurance programs -- Medicare and the Federal Employees Health Benefits Program

(FEHBP) -- thereby creating a natural experiment in government-run health care.

In Putting Medicare

Consumers in Charge: Lessons from the FEHBP, noted health insurance

expert Walton Francis identifies key lessons from that experience, arguing not

only that both Medicare and the FEHBP can be improved, but also that each

program contains lessons -- both positive and negative -- for national health

care reform today.

The FEHBP has been a remarkable success because it operates, in important

ways, as a private health insurance program. The government provides a

voucher-like contribution to the premiums of hundreds of health plans, and

patients and their insurers are able to decide almost every aspect of plan

design, service, and cost. Fraud is rare and pork barrel spending nonexistent.

Enrollees are protected against catastrophic expense.

Medicare, in contrast, is micro-managed by Congress and the Executive Branch,

with annual legislation determining how much health care providers will be paid

and which pork-barrel projects will receive federal support. Original Medicare

fails to limit catastrophic medical expenses; both wasteful and fraudulent

spending are rampant in that program. The new Medicare Advantage and

Prescription Drug programs modeled after the FEHBP protect against catastrophic

expense while controlling waste and fraud.

For decades, the FEHBP consistently outperformed Medicare in cost control,

benefit generosity, fraud prevention, governance, and protecting enrollees from

catastrophically high health care expenses--until federal "reforms" in 2000

compromised the effectiveness of the program. Today, both programs face major

financial problems and are badly in need of real reforms to improve performance.

Rather than building upon the failed Medicare model, or reproducing the

mistaken "reforms" that have undermined the effectiveness of the FEHBP, Congress

would be wise to emulate the success of the original FEHBP program in providing

high-quality, affordable insurance that empowers consumers to make vital

decisions about their health care and thereby contains costs, limits fraud and

abuse, and drives innovation.

Francis highlights several major differences between Medicare and the FEHBP:

• The FEHBP offers federal employees the opportunity to choose among different

  private insurance plans through market-based competition. Medicare, in contrast,

  relies on thousands of pages of statutory and regulatory requirements that

  dictate almost every design and operational detail. Over 4,000 civil servants

  run Medicare, while fewer than 200 are needed to administer the FEHBP, a $40

  billion program that spends more money than some cabinet departments.

• In contrast to original Medicare, fraud is almost nonexistent in the FEHBP

  and the new competitive Medicare programs because private plans are far more

  effective than bureaucracy at preventing and eliminating fraud. Preventing fraud

  benefits private plans directly, an incentive absent from publically

  administered programs.

• The original Medicare program attracts rent-seeking private interests that

  leverage billions of dollars through lobbying activities and manipulation of

  Medicare payment rates. The FEHBP is virtually immune from such assaults because

  plan competition, not the government, sets benefits and rates.

So superior has been the historical performance of the FEHBP compared to

Medicare that Congress, in enacting the Medicare Modernization Act of 2003,

copied the FEHBP and adopted major reforms using design features of the FEHBP.

These features included a capped premium contribution that requires enrollees to

pay excess premium costs for plans that are more expensive than average. Both

Medicare Advantage and the Medicare Prescription Drug Program rely on plan

competition for enrollees, and both appear to be surpassing the performance not

only of original Medicare, but also of the FEHBP.

In 2000, just before these Medicare reforms were enacted, the Office of

Personnel Management placed the enrollee share of FEHBP premiums into the same

tax preferred status as most private employer health insurance, a decision which

eviscerated market incentives for consumers to choose more frugal plans, and for

companies to offer plans using cost-sharing to restrain spending on unnecessary

care.

• Since 2000, the FEHBP has lost much of its formidable cost control

  performance. Even original Medicare now slightly outperforms the FEHBP in cost

  control.

• The government's failure to coordinate Medicare and FEHBP premiums and

  benefits properly has increased wasteful spending in both programs--up to $1

  billion per year. Retired couples (age 65 and over) in the most popular plan are

  forced to spend over $7,000 annually in total premiums for unlimited "free"

  medical care, or give up Medicare altogether. Francis recommends that FEHBP

  plans instead be allowed to pay the Medicare Part B premium and retain modest

  cost sharing, to the benefit of both retirees and the taxpayer.

Medicare's recent superior performance in cost containment is due in part to

the Medicare Advantage and Prescription Drug plans, which create local market

incentives for physicians and hospitals to reduce wasteful spending on all

retirees, not just those enrolled in those programs. But, ironically, current

"reform" proposals would make massive cuts to Medicare Advantage and eliminate

the most effective cost saving feature of Medicare Part D: the "doughnut hole"

that creates incentives for generic and therapeutic drug substitution that hold

down enrollees' costs in that program.

Francis emphasizes that the most fundamental reform is to reduce the tax

preference for unlimited employee health care spending, a subsidy that swamps

market incentives and engenders massive waste throughout the health care system.

Reducing this tax preference will save money by creating incentives for prudent

shopping and prudent spending--what the Congressional Budget Office recently

called "bending the curve" of runaway cost growth.

Francis also recommends using high deductible plans with savings accounts,

and even the "doughnut hole" model, to provide first-dollar coverage for needed

medicines and preventive care while giving consumers incentives to spend less on

unneeded care and putting pressure on providers to counsel patients about

lower-cost treatment options. Finally, he proposes reforms that would improve

cost control and benefit design in these programs--and others such as

TRICARE--that would benefit both enrollees and the taxpayer.

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Walton Francis is an independent consultant and author who

served for many years as a policy advisor in the Office of the Secretary at the

Department of Health and Human Services. For thirty years, he has been the

principal author of the annual href="http://www.myfederalretirement.com/public/301.cfm">CHECKBOOK's Guide to

Health Plans for Federal Employees. This best-selling consumer guide

pioneered the systematic comparison of health plans, and has sold millions of

copies and saved hundreds of millions of dollars for both federal employees and

the taxpayers who pay most of the premium cost for those plans.

Source: American Enterprise Institute for Public Policy Research: href="http://www.aei.org">http://www.aei.org