NCPA - National Center for Policy Analysis

Federal Health Plan Encourages Employees To Buy Too Much Insurance

December 21, 1999

Kenneth Thorpe of Emory University says the Federal Employees Health Benefits Plan (FEHBP) is a popular model for Medicare reformers because of its success in controlling health care costs, and its dependence on market forces rather than regulatory mandates. Thorpe evaluated design features of the program that have the greatest impact on both consumer choice and health spending.

Among his findings:

  • Premiums within the program have grown at a slower rate than premiums in the private sector -- 3 percent compared to 5 percent from 1992 to 1999.
  • But employees are more likely to choose high-cost plans that cost the government more, even though they deliver benefits, actuarial value and satisfaction equal to that of the less costly standard option plans.
  • Consumers choose high-cost plans because "where the government sets the fixed price contribution is the most important design factor" in terms of resource use -- in other words, individuals choose plans that maximize the federal contribution, rather than being cost-conscious and choosing the lowest price plan for the desired benefit level.
  • Thus, despite the slower rise in premiums within the FEHBP, total expenditures within the program itself are higher than necessary.

When Thorpe compared consumer satisfaction levels across all levels of plans, he found the percentage of enrollees extremely satisfied with their plan hovered around 19 percent for all price ranges, while the percentage extremely to very satisfied ranged from 63 to 64 percent, again across all price ranges.

To control costs, beginning in 1999 the federal contribution for FEHBP became the lesser of 75 percent of a plan's premium or 72 percent of the average of all premiums, weighted by enrollment. Whether or not this will alter consumers' decision-making processes is not yet known.

Source: Health Care Financing & Organization: News & Progress (Robert Wood Johnson Foundation), "Structure of Employer Contributions in the Federal Employees Health Benefits Plan May Prompt Employees to Buy More Coverage Than They Need," November 1999, Alpha Center, 1350 Connecticut Avenue, N.W., Suite 1100, Washington, D.C. 20036, (202) 296-1818.


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