HOW SICK IS THE FEDERAL HEALTH INSURANCE SYSTEM?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400770003-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 4
• Document Creation Date: December 27, 2016
• Document Release Date: April 16, 2013
• Sequence Number: 3
• Publication Date: September 1, 1988
• Content Type: OPEN SOURCE

Declassified and Approved For Release 2013/04/16: CIA-RDP90-00530R000400770003-6
HOW SICK IS THE
FEDERAL HEALTH
INSURANCE SYSTEM?
Open season is approaching, bringing with it another astronomical increase
in premiums, especially for the elderly and the ill. ? BY LESLEY BARNES
The patient is ill, and a variety of
specialists have been called to the
sickbed to offer their diagnoses.
But there's no consensus on a cure.
That's how many people might describe
the state of the federal health insurance sys-
tem. Today as never before, its maladies are
under the microscope.
The symptoms are painfully evident to
thousands of enrollees in more than 500 fed-
eral plans who watch helplessly as costs con-
tinue their dramatic rise. This month, the
government will announce that its share of
premiums will cost roughly 30 percent more
in 1989 than it did in 1988; the increase
comes on top of a 31 percent jump between
1987 and 1988. Enrollees also have to shoul-
der an increase: Those in typical family plans
will pay more than $1,200 next year, or
i about $500 more than in 1987.
And yet the typical family is a lot better off
than some. Older and less healthy enrollees
can face premiums exceeding $250 a month,
or more than $3,000 a year.
That's another troubling symptom of the
system's illness. With a large variety of plans
to choose from, healthy people usually
choose the cheapest and least comprehen-
sive. This process of "risk selection" leaves
the less healthy and most federal retirees
grouped together in the expensive, more
comprehensive plans.
To add insult to injury, the government's
system is more expensive for employees
than many private sector plans. Whereas
federal workers on average pay about a third
of the cost of their insurance, with the gov-
ernment picking up the rest, private sector
?
workers often pay no more than a quarter of
the cost of plans bought by their employers.
The system has attracted much attention
this year. A consulting firm retained by the
Office of Personnel Management (OPM) in
May recommended that Congress "ur-
gently" consider a sweeping overhaul to cor-
rect "major problems." Later that month, a
pair of congressional hearings provided an-
other forum for critics. And at the end of
July, an OPM hearing brought forth wit-
nesses with dozens of conflicting ideas about
the health of the system and possible reme-
dies for ailments they perceived.
One of the most dolorous of diagnoses at
the OPM session came from John Harris of
the American Federation of Government
Employees. The rising costs of the insurance
program, "even exceeding the rate of infla-
tion in medical care, make [it] unacceptable
as an employee benefit," said Harris. "Bene-
fits have been cut, and premiums for em-
ployees have risen to a point where it is one
of the worst health benefit plans offered to
employees in the country."
RIDING THE HEALTH INSURANCE ESCALATOR
Since 1980, the monthly premium cost of the average policy under the federal health
insurance program has more than doubled, rising from $86.52 to $195.99. The
government's share of the total in 1988 is $135.32, or 69 percent, while the employee's
share is $60.67, or 31 percent. The figures represent the average premiums for both
families and individuals in the 500-plus plans that operate in the $7 billion program.
Premiums would have been even higher this year if the mix of insurance plans chosen
by federal employees were the same as in 1980. But many enrollees have been moving
from high-option to standard-option plans, thus holding down premium costs. This trend
also has the effect of increasing the government's share of total premiums. In 1980, the
government paid 61 percent of average premium costs.
Government share ?Enrollee share r, % change from previous year
Average monthly premium
$200
AA0
$150
$ 1 00
$50
0
1980 1981 1982
Source: Office of Personnel Management
1983 1984 1985
1986 1987
1988
GOVERNMENT EXECUTIVE ? SEPTEMBER 1988 33
Declassified and Approved For Release 2013/04/16 : CIA-RDP90-00530R000400770003-6
Declassified and Approved For Release 2013/04/16: CIA-RDP90-00530R000400770003-6
But others say the system doesn't need
such a drastic overhaul, arguing that it gives
workers a wide range of options at a modest
cost to the government.
While debate on reforming the system
continues this fall, federal employees face
the beginning of "open season" in Novem-
ber. Once again, they will choose from a
plethora of confusing options, each costing
much more than it did one year earlier.
The Federal System
The Federal Employees Health Benefits
Program began in 1960, with two plans of-
fered government-wide and coverage also
available from a few health maintenance
organizations (HMOs) and employee groups.
The program covers all federal employees
and their dependents, as well as retirees
with at least five years of government ser-
vice. Feds who retired before 1983 are ineli-
gible for Medicare, so many depend solely on
the program to pay their medical bills.
Today, about 11 million employees and
their dependents are covered by 520 plans.
But because most of the providers are re-
gional HMOs, each individual has about 25
options to choose from. Eighty-five percent
of eligible active employees participate.
The two government-wide insurers, Blue
Cross/Blue Shield and Aetna, enroll 41 per-
cent of active employees and retirees in
standard- or high-option plans, while 37 per-
cent belong to plans sponsored by unions and
other employee organizations and 22 per-
cent are in HMOs.
Standard-option plans, HMOs and em-
ployee organization health policies cover all
or part of such expense's -as hospital room
and board for surgical or medical care; sur-
gery; X-ray and laboratory procedures; doc-
tor visits; prescription drugs; physical ther-
apy; and routine dental care.
High-option plans differ from standard-op-
tion plans both in premium costs and in the
extent of coverage. The 1988 Blue Cross/
Blue Shield standard-option plan, for exam-
ple, costs a family $57.58 a month in premi-
ums, while the high option costs $228.25. In
the standard plan, a family suffering a very
expensive illness would face out-of-pocket
costs, not covered by insurance, of up to
$2,500, while such costs are limited to
$1,500 in the high-option version.
The standard option covers 75 percent of
doctors' bills for in-patient care, while the
high option covers 80 percent. The standard
plan covers dental care, while the high op-
tion doesn't.
OPM is also charged with setting qualify-
ing standards for HMOs and employee or-
ganization plans. HMOs, comprehensive
What is a Best Western?
More than 1,350 Best Westerns offer government rates.
Consult your U.S. General Services Administration
Federal Hotel/Motel Discount Directory for the right
place at the right price.
1-800-528-1234
34 GOVERNMENT EXECUTIVE ? SEPTEMBER 1988
Best
Western?
INDEPENDENT
WORLDWIDE
LODGING
"Worlds largest chain of
independenttr owned
and operated
hotels, motor inns and resorts"
prepaid plans which operate through affili-
ated doctors and hospitals, are generally less
expensive than traditional plans and empha-
size preventive and out-of-hospital services.
Employee organization plans, which are
underwritten by insurance companies, gen-
erally tailor their benefits packages to mem-
bers' needs and wants, and many offer both
high and standard options. With only a few
exceptions, all federal employees can enroll
in any given organization's plan even if they
are not organization members, as long as
they pay an associate membership fee, usu-
ally no more than $30.
Employee organizations pull in about $25
million a year in associate membership dues,
and some count on the revenue for their
very survival, experts say. The National
Federation of Federal Employees, the Na-
tional Association of Government Employ-
ees and the Mail Handlers Union are among
groups that depend on associate member-
ship fees. Not surprisingly, employee groups
generally support the current structure of
the federal health insurance system.
OPM sets the benefits and costs of each
plan annually, under contracts with the pro-
viders. In fiscal 1987, the cost to the govern-
ment of all of the plans was about $4.7 bil-
lion, and employees paid another $2.3 billion
in premiums and deductibles.
The employees' share is set by a formula
that calculates 60 percent of the average
premium costs of the six biggest plans and
then sets the government's share at 75 per-
cent of that, not to exceed $2,010 in premi-
ums for a family and $930 for an individual in
1988. Employees can control their own pre-
mium costs by wisely choosing an adequate
plan from the wide variety available.
Walton Francis, an economist and co-au-
thor of CHECKBOOK'S Guide to Health In-
surance Plans for Federal Employees, cal-
culated costs for 20 of the federal program's
biggest plans?which cover 80 percent of all
enrollees?in 1988 and found that on aver-
age the premiums for a family plan cost
$2,960, of which $1,990 was paid for by the
government and $970 by the employee.
Workers in the private sector get a better
deal. According to a survey of policies main-
tained by large and medium-sized companies
in 1986, 54 percent of workers with individ-
ual coverage and 35 percent with family poli-
cies paid no premiums at all. In companies
requiring employee contributions, premiums
averaged $13 a month for individuals and
$41 a month for families, the survey by the
Bureau of Labor Statistics found.
"And if costs are higher fin the federal
program] than in the private sector, OPM
has some explaining to do since the same
companies administer almost identical plans
for both the private sector and the [federal
program]," Francis argues.
npriassified and Approved For Release 2013/04/16: CIA-RDP90-00530R000400770003-6
Declassified and Approved For Release 2013/04/16 : CIA-RDP90-00530R000400770003-6
Cherk Oui Our Standard OILOon Pi." I
Low serts?CSULII-V. SI NM, ?04 7?14,,,, 4114,1
Do OVER 200,000 FED :
KNOW SONTETHINC
An onslaught of insurance options faces federal employees during open season each
November. But a report commissioned by the Office of Personnel Management says that
meaningful competition among health plans is actually "a myth."
But companies are now moving to shift
more of the costs of health insurance to their
employees. This will help control the use of
benefits, notes Nelson Ford, a partner at the
accounting firm of Coopers and Lybrand,
who also says the private sector's health in-
surance policies are becoming quite similar
to the government's.
Diagnosing the Problems
In response to rising costs and growing com-
plaints about the insurance program, OPM
last year commissioned Towers, Perrin,
Forster & Crosby Inc. to evaluate the fed-
eral health program.
The consulting firm's report, released in
May, concluded that the program "poorly
serves the needs of many enrollees and
. . costs upwards of one-half billion dollars a
year more than would be necessary under a
more efficiently designed system." The re-
port has been the catalyst for recent cries
for reform in Congress, at OPM and among
some of the larger employee associations.
The report identifies two main problems
with the program: economic inefficiency and
the erosion of the group insurance principle
by risk selection, as individuals representing
the same level of risk have congregated in
the same plans.
In theory, the government's practice of
contracting with such a large number of in-
surance carriers promotes competition and
offers the consumer wider choice. But the
LUSTRATION BY CINDY JOHNS
report says that meaningful competition
among the health plans is actually a "myth."
Competition to qualify for, and stay in, the
federal program by offering good coverage
at reasonable costs would clearly be in the
interests of federal employees. But that kind
of competition does not exist; plans need
only meet a statutory definition to get in, and
once in can stay indefinitely. What compe-
tition does take place is designed "almost
exclusively to attract the better risks, not to
provide a product in the most cost-effective
manner," the report says. This "actually ex-
acerbates" inefficiencies in the system that
stem from allowing so many carriers in the
first place?a practice that multiplies costs
and fragments the government's potentially
tremendous leverage over plan design.
These inefficiencies are compounded by
the fact that each plan must retain adequate
reserves that are, in the aggregate, larger
than necessary, thus adding to premium
costs, the report also says. And there is little
incentive to adopt cost-containment strate-
gies; such measures might irritate consum-
ers. Finally, the open season that begins
each November costs OPM and the carriers
more than $1 million a year in explanatory
and marketing materials while offering the
average enrollee "little chance of under-
standing the choice he must make," says the
Towers, Perrin report, adding that "in a
simpler program with clearer choices, open
season would be both less expensive and
more effective."
The risk selection problem, which has
arisen in part because of the competition to
attract healthier clients, has segregated the
elderly and the ill in more expensive plans.
While a young, healthy family might pay as
little as $400 a year in premiums, an elderly
or sicker family can pay eight times as much
in the high-option plans. About 20 percent of
the people in the federal program pay 50
percent of its costs, according to John D.
Bohon, an assistant vice president at Aetna.
He says that these people, mostly retirees,
"pay an average of $1,750 a year for their
coverage, compared with average annual
contributions of $600 for the remaining 3.1
million employees."
High-option plans were originally in-
tended to offer additional benefits, says Jean
Barber, OPM's associate director for retire-
ment and insurance. But that is no longer
true in most cases; the plans now have
higher costs simply because it costs more for
the carriers to insure older and sicker enroll-
ees, who choose high options because they
believe they offer better benefits, she adds.
But high-option plans no longer necessar-
ily offer better benefits, just different bene-
fits, Barber says. For example, a standard-
option may offer modest hospital and basic
dental coverage, while a high-option version
GOVERNMENT EXECUTIVE ? SEPTEMBER 1988 35
Declassified and Approved For Release 2013/04/16: CIA-RDP90-00530R000400770003-6
Declassified and Ap
roved For Release 2013/04/16 : CIA-RDP90-00530R000400770003-6
seasons and requiring minimum levels of
coverage for benefits such as mental health
and alcohol- and drug-related care.
Opposite sides of the coin: Economist and author Walton Francis (left) thinks the Federal
Employees Health Benefits Program gives employees "a very good deal." But OPM's Jean Barber,
who oversees the program, says it could benefit from an overhaul.
may offer more hospital and no dental cover-
age. Actuarially, the two plans have the
same value, but the older and very ill enroll-
ees will flock to the high option. Since this
high-risk group uses the health services rel-
atively intensively, the cost of the plan goes
up. The result is a more expensive plan that
doesn't really offer better benefits.
Demands for Reform
The Towers, Perrin study gave new force to
critics' charges that the insurance program
is inflexible and anachronistic. There are
"hundreds of problems" with it, says OPM's
Barber. She says that there's been no thor-
ough review of the program since its incep-
tion in 1960, "which, in health insurance, is
like the Middle Ages," and that it will take
nothing short of an overhaul to get the pro-
gram back on track. Over the years, said
Rep. Gary L. Ackerman, D-N.Y., at a hear-
ing last summer, the program "has degener-
ated into a clumsy patchwork of inadequate
and confusing plans, for which federal em-
ployees pay far too much." Ackerman chairs
the House Subcommittee on Compensation
and Employee Benefits.
Barber's biggest complaint is that the pro-
gram serves the elderly and the very ill?
those who need the benefits most ?"very
poorly."
Gordon Brown, secretary of the National
Association of Retired Federal Employees
(NARFE), says he has been advising retirees
to avoid expensive high-option plans since
the program began. Federal retirees, he
adds, are hurting in the area of long-term
care. He says OPM should require all plans
to cover long-term care, and that the cost
and the risk of such care should be spread
among all participants in the federal pro-
gram. As the program is designed now, only
NARFE's plan and a few other employee
organization plans cover long-term care, and
36 GOVERNMENT EXECUTIVE ? SEPTEMBER 1988
so most older people must pay themselves.
The most commonly requested reform is
a reduction in the number of plans. "Risk
selection is ruining the program, making it
unnecessarily expensive and insufficiently
responsive to the needs of its enrollees,"
said Harry P. Cain II, senior vice president
for Blue Cross/Blue Shield's federal pro-
grams during the subcommittee hearing
held by Ackerman. Aetna agrees.
The idea of a single government self-in-
sured plan to be administered by major in-
surance companies has been embraced by
some lawmakers and a few employee orga-
nizations. Barber says a single-plan system is
"a very interesting idea."
The National Treasury Employees Union
(NTEU) has proposed replacing the current
system with one basic government health
insurance policy provided at employer cost;
a limited HMO option; supplemental insur-
ance and benefit packages offered through
employee organizations like NTEU; and an
independent Federal Employees Health
Benefits Board to administer the program.
Saying that "fundamental legislative re-
form is urgently needed," the Towers, Per-
rin report suggested that "a limited number
of administrators or insurers" should be ad-
mitted only on a competitive basis to pro-
mote better service at lower cost. Among
changes it said might be made by adminis-
trative action: establishment of minimum
benefit standards for all plans and quality
standards for HMOs. Employee organiza-
tions should be limited to offering plans only
for regular dues-paying members, and
should be required to offer both high and low
options, it said. The firm recommended that
all plans be required to adopt cost-contain-
ment measures, and that the least popular
plans should be terminated.
Others suggest simply fine-tuning the
present structure: having less-frequent open
Outlook
And some say the current system is essen-
tially adequate.
"It's not at all clear that anything has to
be done," argues CHECKBOOK author
Francis. He paints a theoretical picture of
how a system like the one proposed by
NTEU would evolve: In a program with one
government-wide plan and a limited number
of HMOs in all regional areas, risk selection
would still show up, although further down
the road, and its effects would actually be
worse. When most of the "expensive enroll-
ees" join the one government plan, HMOs
would become more and more popular and
their rates lower and lower. As people flock
to HMOs, the costs of the government-wide
plan would skyrocket, leading eventually to a
worse situation than exists today.
"The federal employee is getting a very
good deal right now," even though he may
not realize it, Francis concludes.
Ford, of Coopers and Lybrand, says that
federal consumers now "have broad choice.
At the same time, the government has a plan
whose costs are under good control, from
the government's perspective." In that
sense, he adds, the federal insurance pro-
gram could be a model for solving the coun-
try's medical cost inflation dilemma. Ford
was project manager for national health in-
surance policy at the Office of Management
and Budget during the Carter Administra-
tion and is still insured by a government
plan, in part because his wife is a federal
employee.
A single-plan system would unfairly raise
premiums for lower-paid employees, says a
vice president at CNA Insurance Cos., which
has been underwriting employee organiza-
tion plans for the federal program since the
1970s. "The system would be unfair," he
says, "and that's not in the government's
best interest."
The House Post Office and Civil Service
Committee has requested an extensive re-
view of the federal health insurance program
from the Congressional Research Service
and the General Accounting Office, to be
completed by March 1. And OPM is busy
gathering information and advice "so that
we will be in a position to inform the new
administration very quickly," says Barber.
Though she doesn't expect legislation this
year, she adds that OPM will push for re-
forms that will produce better benefits at
lower costs.
"Some fine-tuning will help, but in order
to get a program that will take us through
the year 2000, we need to make some pretty
basic changes," she says. 0
and Annroved For Release 2013/04/16: CIA-RDP90-00530R000400770003-6