Will Health Insurance Choice Fix Medicare

Commentary by Pete du Pont

Let's be blunt -- Medicare is a mess.

The federal program that provides health insurance for America's 37 million seniors will be bankrupt by the end of the next president's first term. Worse yet, 500,000 seniors are already being dumped from their Medicare HMOs because government reimbursements to health care providers are too low.

Amidst this turmoil, the Bipartisan Commission on the Future of Medicare is scheduled to recommend some solutions to Medicare's problems in about six weeks. One proposal being given serious consideration by the commission is to model Medicare after the health care program that covers some nine million federal government employees and their dependents: the Federal Employees Health Benefits Program (FEHBP).

Long touted as a model for reform of the private health insurance system that covers those under age 65, the FEHBP relies on choice and competition in an effort to keep costs down and quality up. This system has a number of good points, and it would be an improvement as it works today. But it will need some work to help seniors.

Under the FEHBP, federal employees can choose from a range of health insurance options: HMOs, PPOs and traditional fee-for-service plans. The government pays a fixed portion of the premium; employees pay the rest. If workers choose a more expensive plan, they have to bear the additional cost. If they are not satisfied with their plans, they have the option of switching once a year, in what is known as the annual "open season."

If Medicare were to adopt this model, seniors too would be able to choose from a range of plans. The federal government would pay a fixed portion of the premium (say, 90 percent) and seniors would pay the rest. A senior who wanted a more expensive plan would, like a federal worker, have to pay the additional cost. Medicare beneficiaries would likely be allowed to switch plans also, perhaps once a year.

Sounds good, and it is. But there are some inherent problems that must be solved if it is going to work -- especially with the senior population.

When people are permitted to shift from one health plan to another, some will try to game the system by going into the cheapest plan with the lowest premiums when they are healthy because they know they can shift to a better or more comprehensive plan if they get sick. For example, a healthy senior may pay no attention to which health plan has the best heart surgeons, choosing a plan based on other considerations such as price. However, that perspective will change should a heart attack occur.

As a result, no health plan could afford to have the best of any expensive medical service because it would draw all the seniors who needed that care -- driving up premiums and ultimately pricing healthy people who don't need that type of care out of that plan.

There are ways to avoid this problem, but none of them are very satisfactory. One solution is to reduce or eliminate the open season, allowing seniors to switch plans once in three or five years, for example. This would force seniors to consider all the pluses and minuses of a health plan or insurer before joining.

Another solution is to socialize the plans so that there are no benefits or quality differences between them. If a senior gets the same benefits package and same quality of care regardless of the plan he joins there would be no advantage in switching. Of course, that is much like Medicare is today, and it would undermine the goal of providing seniors with a range of health insurance options.

In fact, both of these problems occurred in the FEHBP during the 1980s. Instead of changing the open season, program managers decided to make the plan benefits more alike. And they prohibited any plan from adding options or benefits that might attract younger or healthier government workers.

Of course, another way to resolve the problem is to let dissatisfied seniors return to traditional Medicare, but they could not automatically join other plans if they were sick. That would probably lead to a system in which most sick seniors would be in the traditional Medicare program, while healthy seniors were in health plans. As a result, traditional Medicare would become the insurer of last resort, acting as a sort of high-risk pool for the elderly population.

"Fixing" Medicare will be no easy task, because most solutions create their own problems -- and moving to an FEHBP model would be no exception. However, it would achieve one important result: people would begin to see Medicare as a program that pays for health insurance. Once that becomes clear, it will be much easier to make the case that people should set their Medicare payroll taxes aside in a personal account that can be used to pay for health care after retirement.

If moving to an FEHBP model will achieve that goal, we should embrace it immediately.

The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues.