Edward Zurndorfer, Certified Financial Planner

The Office of Personnel Management (OPM) has proposed -- and will be offering -- a new health insurance option for Medicare-eligible federal annuitants and survivor annuitants. It's called the "suboption" to the traditional standard coverage of an existing Federal Employee Health Benefits Insurance Program (FEHB) plan.

OPM hopes to offer this new coverage starting in the year 2011. If an annuitant chooses the suboption to an FEHB insurance carrier's standard option, the annuitant will pay the same premiums as an employee or an annuitant enrolled in the traditional standard option. However, unlike an annuitant who is enrolled in Medicare Parts A and B (and perhaps Part D) and is also enrolled in the standard option plan, the annuitant would not pay the Medicare Part B (medical insurance) or Part D (prescription drug coverage) premium. The FEHB plan would instead pay the full monthly Part B or Part D premium cost.

According to the National Association of Active and Retired Federal Employees (NARFE), the "suboption" election could consequently save the annuitant the (current) monthly Medicare Part B premium of $96.40, or the approximately Part B annual cost of $1,200. However, the suboption plan enrollee would then be required to pay the same deductible, co-payments and/or coinsurance as employees or annuitants age 64 or younger and who are not eligible for Medicare. NARFE further states "that with the exception of premiums and prescription drug co-payments, most annuitants age 65 and older who are enrolled in Medicare Parts A and B and a traditional FEHB fee-for-service or preferred provider plan pay no out-of-pocket costs".  According to NARFE, the suboption "could therefore be cost-effective for an annuitant who does not have high out-of-pocket costs."

From an actuarial underwriting standpoint, NARFE statements are most likely not true.

The "suboption" plan could ultimately lead to increasing out-of-pocket and FEHB premium costs for the average federal annuitant age 65 and older and enrolled in Medicare Part B or Part D.

The following are some issues that NARFE may have neglected to consider when NARFE President, Margaret Baptiste, praised OPM's voluntary suboption plan.

"Annuitants would save $1,200 annually in Medicare Part B premiums."

These savings assume a federal annuitant pays $96.40 each month in Part B premiums. Since 2007, Medicare Part B has been a "means" tested program. That means that those Part B recipients who have larger adjusted gross incomes (AGI) pay more in monthly premiums compared to recipients who have lower AGI. The following chart summarizes the cost of Part B monthly premiums during calendar year 2010. These costs are based on a recipient's modified adjusted gross income during 2008.

Depending on an annuitant's modified AGI, an annuitant's Part B monthly premiums could therefore be as high as $353.60. There are also Medicare Parts A and B deductibles that a Medicare recipient is required to pay before Medicare pay its share of bill. For example, during 2010, the Medicare Part A (hospital insurance) deductible is $1,100 while the Part B (medical insurance) deductible is $155.

Two questions come to mind.

First, under the "suboption" plan, will the FEHB plan pay the full amount of the monthly Part B premium, including for annuitants whose monthly Part B premium far exceed $96.40 (2010), resulting from the annuitant's greater MAGI?

Second, will the FEHB plan also pay the full Part A and Part B (or Part D) deductibles? Moreover, does the $1,200 in Part B premium savings apply to every federal annuitant, no matter an annuitant's age or health? As annuitants age, they are most likely to incur more medical expenses that Medicare will not pay in full but their FEHB plans will pay after a deductible is satisfied in addition to perhaps larger co-payments and/or co-insurance.

Under current offerings, federal annuitants 65 and older and who are enrolled in Medicare Parts A and B together with a FEHB "Medigap" plan (typically a "fee-for-service" plan), will have Medicare as their "primary" coverage for hospital and doctor/laboratory expenses.

Medicare pays on average 50 to 75 percent of the annuitant's medical expenses, with their FEHB plan paying the remaining 25 to 50 percent. While some doctors and hospitals will accept "assignment" (accept whatever Medicare will pay), many do not. As such, the FEHB plan will usually pay in full whatever Medicare does not pay. The reason: The federal annuitant is paying the full FEHB plan premium even though Medicare is paying most of the bill.  Under this scenario, most annuitants have virtually  no out-of-pocket expenses, including co-payments, deductible or co-insurance. Because the FEHB plan is secondary to Medicare, in order to save on monthly premiums federal annuitants who are enrolled in Medicare are encouraged to enroll in a less expensive health insurance plan. For example, if a federal annuitant is enrolled in a "high" option plan, he or she is encouraged enroll in a "low-option" plan; if he or she is enrolled in the "standard" option, he or she should enroll in the "basic" option. The reason is that since Medicare pays most of the medical bills, the annuitant should enroll in less expensive "Medigap" coverage, saving on FEHB premiums.

With the passage of national health care, most individuals -- including those on Medicare -- will be encouraged to purchase health insurance.

To keep Medicare costs from skyrocketing, Medicare will most likely have less coverage, paying for less and making it mandatory for a retiree to buy a "Medigap" (Medicare supplement) plan that is more extensive and typically more expensive. A retiree should expect to pay more overall through higher co-payments and deductibles if the retiree does not buy a more expensive Medigap plan. Like employees, most retirees will most likely pay more in out-of-pocket expenses. However, unlike employees who have the option and the benefit of enrolling in tax-advantaged health care flexible accounts (HCFSA). Retirees- and this includes federal annuitants --  are not permitted to enroll in HCFSAs.

One criticism of the FEHB has been that it offers only two types of coverage - self and self and family. Self and family coverage encompasses families of all sizes, including an employee/annuitant and spouse only, an employee/annuitant and any number of eligible children, or a parent together with one child (parent-child coverage). The bi-weekly or monthly premium rates for a given FEHB plan are the same when it comes to self and family, no matter the size of the family or whether the enrollee is an employee or a retiree. As is true with the federal government's dental and vision insurance program (FEDVIP), there should in fact be a third category of coverage that is available in the FEHB to both employees and especially annuitants, namely, "self plus one". As indicated, this would include coverage for an annuitant and spouse with no children. The premium rates for "self plus one" coverage are less expensive than self and family. After all, how many married federal annuitants have children who are still eligible for FEHB coverage?

OPM should therefore consider offering a "self plus one" coverage option for federal annuitants. This would allow annuitants to pay less in total premiums for their FEHB insurance, while paying for their Medicare coverage. In the past, this suggestion has been presented to OPM on numerous occasions without any action on OPM's part.

Another fact to consider.

As a result of national health care reform, starting in January 2011 OPM intends to allow federal employees and annuitants with unmarried and uninsured children between the ages of 22 and 26 to be included in their FEHB insurance as part of "self and family" coverage. Until now, with the exception of one FEHB plan, an unmarried child cannot be included on a parent's FEHB plan once the child became age 22. The question: In order to expand their "self and family" coverage will FEHB plans be increasing premiums for all FEHB "self and family" enrollees (including annuitants)?
 
 Everyone agrees that it is OPM"s real intention to reduce the cost of health care to federal annuitants. But the "suboption" will most likely significantly increase the overall health-care costs to the average federal annuitant enrolled in Medicare in the form of higher deductibles, co-payments and co-insurance.

A suggestion has been made that  OPM should consult with organizations such as the American Association of Retired Persons (AARP), the National Association of Insurance Commissioners (NAIC) and the National Association of Health Underwriters (NAHU) to ultimately come up with a better health care model that will ultimately slow down the increasing health care costs to federal annuitants and survivor annuitants. AARP, NAIC and NAHU all have the experience in working with the various employer groups who have offered group health insurance to their employees and retirees. 

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD.  He is a seminar speaker at federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. and writes numerous columns and books on federal employee benefits.

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