National Market Could Cure America’s Health Care Crisis: Policy Analysts

Published January 1, 2007

Is the remedy to America’s health care problems right under our noses?

It could be, according to some health care analysts, if the opportunity available to federal government employees were extended to everyone else. Other analysts, however, say there are problems with that approach.

According to the U.S. Office of Personnel Management, health insurance premiums under the 2007 Federal Employees Health Benefits Program (FEHBP) will rise an average of 1.8 percent, while the average American will see a 7.7 percent increase, according to an annual Kaiser Family Foundation survey released in October.

Sixty-three percent of FEHBP employees’ premiums will not increase at all, and the 1.8 percent average is the smallest rate increase for federal workers in more than a decade.

Although 2007 also will mark the slowest premium increase since 2000 for the average American, rates have increased 87 percent over the past six years, while income levels have increased by only 20 percent.

Numbers like these have spurred some health care analysts to highlight the differences between the FEHBP and the average American’s health care options.

Federal Benefits

“There are three outstanding benefits to the Federal Employees Health Benefits Program in comparison to the average American’s,” said Robert E. Moffit, director of The Heritage Foundation’s Center for Health Policy Studies.

“The first is that if you are in the federal program, you get the health insurance you want at the price you want to pay,” Moffit said. “You have a range of choices that, basically, no other American has. And if a plan doesn’t work for you, then the next year you can just fire that company and get a new one. No other American has that type of personal choice.”

Under the FEHBP, federal employees can choose from 284 plans offered by several health insurers nationwide: fee-for-service, health maintenance organizations (HMOs), preferred provider organizations (PPOs), and health savings account plans (HSAs). Benefit providers include unions, employee or religious organizations, and traditional insurance companies.

Few Americans have such a range of options when joining a private-sector employee health plan.

All that competition in the federal plan keeps prices down, Moffit said, and seeing it at work should make legislators more open to using it as a model for national reform.

“To replicate the FEHBP, all you have to do is let Americans pick and choose their health care plans nationwide,” Moffit explained.

“So in New Hampshire and New Jersey, where health insurance premiums are high, people could then have the choice to pick a cheaper plan in Iowa,” Moffit said. “With a national market for health insurance, you would have the same dynamics in play that are there for federal employees. And with large national pools, you would have lower administrative costs.”

Potential Drawbacks

Although federal workers can choose plans from several companies, 56 percent buy Blue Cross Blue Shield plans, according to the Congressional Budget Office. But that might not work nationwide–some say a similar plan in the private sector could lead to an even smaller playing field.

“I think one reason why the FEHBP works for the federal government is because they have so much buying power, yet aren’t so big that they can take over the whole market,” said Devon Herrick, a senior fellow at the National Center for Policy Analysis.

“For the most part, federal employees are healthy and tend to be in pretty good shape. And because the group they are underwriting is so large, they are able to squeeze the price and make things more affordable,” Herrick noted. “But if the entire country worked that way, it would squeeze the market too much and a lot of the competition would go away.”

Under the FEHBP, the government pays 71 percent of premium costs. Employees are able to decide how to use that money when they choose one of the 284 health plan options, making it a defined-contribution health care plan. Creating a tax credit system to make up the difference between the employee contribution and health care costs would allow the private health care system to mirror the federal one.

“To implement this in the private sector, employers would contribute what they want. At the same time tax credits would be generous enough, depending on income and health care costs, to make up the balance,” Moffit explained. “In other words, if you are low-income and have high health care costs, the credit would be generous. If you’re a Rockefeller you would get a basic credit, regardless of your health care costs, because of income level.”

Tax Code Reform

Current tax codes exempt private employees’ entire benefit values from their income if they are enrolled in an employer-sponsored health care plan. That could become a problem if the private sector began using an FEHBP-type model for heath care.

“The tax situation could feasibly be changed into a credit system,” Herrick said. “Tax credits would give us less incentive to over-insure, which is half the problem with the current health care system. But the FEHBP is a very lavish plan, and most people probably could not afford it. A lot more of federal employees’ compensation is in their benefits plan–much more than the average person’s in the private sector.”

As the cost of health care continues to skyrocket, reform continues to be a hot topic on Capitol Hill.

“Congress’s performance in this area has been poor,” Moffit said. “They have the responsibility to fix the tax code in health care and administer it in a fair and efficient way. Promoting interstate commerce is another one of Congress’s responsibilities under the constitution.

“If they just do their job, which is to regulate interstate commerce and taxes, we could have an intense market of competition that would also push innovation in treatments,” Moffit said.

Interstate Competition

Essentially, the way to model the private sector’s health insurance system after the FEHBP is to broaden customer choice that allows for interstate commerce, which would create a competitive marketplace, and change the tax code, Moffit said.

In a health care system where premiums are rising at more than four times the rate of the average person’s income, most people agree some form of reform is necessary. And, more than anything else, most people seem to want choice, Herrick added.

“I think that health insurers need to be able to create unique products,” Herrick said. “People want insurers to innovate so they can choose a plan that works best for them. HSAs are good plans because less of the person’s dollar goes to the insurance company and more goes into a personal health savings account.

“That way,” Herrick noted, “people can choose how to spend the money, maximize choice, and ensure that their health care dollars go toward protecting their health, not their insurer’s bottom line.”

Aricka Flowers ([email protected]) is a freelance writer in Chicago.

For more information …

Kaiser Family Foundation’s 2006 Employee Health Benefits Survey,