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In Brief: Structuring Health Care Benefits: A Comparison of Medicare and the FEHBP

This In Brief summarizes the findings and implications of the AARP Public Policy Institute Issue Paper, Structuring Health Care Benefits: A Comparison of Medicare and the FEHBP. The Federal Employees Health Benefits Program (FEHBP) has been considered as a potential model for restructuring Medicare. The FEHBP reflects a premium support approach, in which the federal government would contribute defined amounts toward subscribers' health insurance premiums, and the subscribers would pay any remaining premium amount out-­of-­pocket. This approach differs from Medicare's current defined benefit structure in various ways, which are discussed in the Issue Paper. The Issue Paper compares key design components of Medicare and the FEHBP, in order to provide a basis for analyzing the potential impact of premium support on the structure of Medicare benefits. It describes Medicare and the FEHBP and their structures primarily as they are defined by law and regulation. The comparison also highlights how Medicare+Choice, which offers private sector options for organizing and financing Medicare's benefits, differs from original fee-­for-service Medicare yet maintains or builds upon important characteristics of the original program's structure.

Key Findings

Currently, Medicare benefits are protected in value and scope by a combination of structural elements, including mechanisms that: 1) define specified benefits as an entitlement for all beneficiaries; 2) protect beneficiaries from exposure to certain financial risks through specific regulations that govern cost-sharing and provider billing; and 3) create a process by which beneficiaries can seek to enforce their rights to their Medicare benefits as defined in the original program.

Although Medicare+Choice differs from original Medicare in important ways, its structural elements preserve the underlying entitlement. In particular, enrollees in Medicare+Choice plans are entitled, at a minimum, to the benefits defined by original Medicare. This benefits package, as interpreted in original Medicare, forms the basis for coverage and payment decisions applicable to Medicare+Choice enrollees as well as beneficiaries in original Medicare. Also, Medicare+Choice plans' cost-­sharing requirements cannot exceed the aggregate level imposed under original Medicare.

The FEHBP is administered by the federal Office of Personnel Management (OPM), which oversees contracts with health plans as well as the subscriber enrollment process. In contrast to Medicare, the FEHBP statute lists broad "types" of benefits that plans "may" cover, suggesting only that plans offer benefits to cover hospital care, surgery, ambulatory care, and obstetrics. The FEHBP does not explicitly regulate premiums and cost-sharing (i.e., deductibles and coinsurance). In general, subscribers can reduce their premium and cost­sharing liabilities by choosing lower-­cost plans. While the FEHBP includes a process through which subscribers can seek review of coverage and payment decisions, the reviews are based on individual plan contracts rather than a defined set of benefits to which all subscribers are entitled.

Implications

As a health insurance program for older individuals and persons with disabilities, the Medicare program is more than just the simple sum of its parts. Important program components combine in various ways to reinforce the value of Medicare benefits to these populations. Medicare+Choice offers private sector options for organizing and financing the benefits, but it does so while maintaining or building upon essential characteristics of the original program. One conclusion that could be drawn from examining the structure of Medicare itself is that improvements to the fee-for-service program are particularly important, as the original program remains the foundation of the Medicare entitlement.

In comparing Medicare to the FEHBP, several salient points emerge. First, although the FEHBP statute has a fairly comprehensive list of categories of covered services, there is no legally defined package of specific benefits, as there is in Medicare. Second, many of the potential financial protections afforded to FEHBP subscribers derive from discretionary actions of OPM, not laws or regulations. In fact, the OPM's discretion in approving FEHBP plan offerings each year does not necessarily work in favor of subscribers. While the agency's flexibility in this regard has been seen as promoting innovations in plan design and management, this structure also permits the OPM to reallocate the burdens of increased health care costs between the program and subscribers in any given year.

The FEHBP is considered by many analysts to be successful at providing health care coverage for federal workers and their dependents. These analysts commend the quality of plan information available in the FEHBP, and credit OPM and market competition with keeping subscriber out-­of-pocket costs low and maintaining a range of acceptable benefit packages. Whether restructuring Medicare on the FEHBP model would engender comparable advantages for the Medicare population remains an important question, and a difficult one to answer.

In any case, the FEHBP lacks several of the structural characteristics that reinforce the value of the Medicare benefits to its beneficiaries, whether they are enrolled in original Medicare or Medicare+Choice. It is not the introduction of more private sector options that would necessarily undermine Medicare as an entitlement to health benefits. Rather, any premium support proposal that weakens the structure of the original program, which is the foundation of the Medicare entitlement, could have serious ramifications for current and future beneficiaries.

Footnote

  1. Structuring Health Care Benefits: A Comparison of Medicare and the FEHBP, AARP Public Policy Institute Issue Paper #2000­05 (May 2000).

Written by Craig F. Caplan and Lisa A. Foley, AARP Public Policy Institute
May 2000
©2000 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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