Answering Critics

In last week’s newsletter, I briefly referred to an article from the Feb. 20 Wall Street Journal, saying that I believed it raised questions about the Federal Employees Health Benefits Program as a model for Medicare modernization.

This concept is central to plans by the Bush administration and congressional leaders to strengthen and improve Medicare. While the article contained a good balance of quotes and information, it seems important that the questions be answered. (This reminds me of the old adage: Good news is nice, but bad news is more important?)

Because reporter Sarah Lueck’s article is not available online without a subscription, here is a more detailed report on the article with some answers to the issues she raised.



  • Costs. The article’s most serious critique was that ?premiums in the federal employees’ program increased at double-digit rates in the past three years, compared with Medicare’s single-digit increases.? A chart accompanied the article showing that FEHBP cost increases were greater than those for either Medicare or private plans.

    But then the article points out, ?Medicare costs have risen more slowly, in part because of legislative changes that cut payments to providers and increased efforts to fight fraud and abuse. Also, Medicare doesn’t cover most outpatient prescription drugs.?

    Walt Francis, an FEHBP guru, has said that if Medicare were offered as an option to federal workers, no one would pick it because it is so substandard. The Centers for Medicare and Medicaid Services says that Medicare covers only 53% of seniors’ health costs, far less than are covered by the typical FEHB plan or other employment-based policies.

    Comparing Medicare and the FEHBP, therefore, is like comparing apples to oranges.

    On the other hand, FEHBP costs are rising because the program faces the same cost-drivers as private sector plans, such as increased demand for services, more expensive medical products, rising labor costs, compliance with mandates and regulation, and soaring litigation expenses. Plus, the FEHBP covers an aging federal workforce with consequent higher health care costs.

    Chris Hansen, a top AARP official, says that the organization is open to an FEHBP-type system for the elderly, provided enough money is on the table. Alain Enthoven argues, ?We have to find a way to unhook people from the traditional fee-for-service Medicare entitlement? because of Medicare’s burgeoning costs.

    Economist and Medicare expert Gail Wilensky is quoted by the Journal as saying that the FEHBP approach to Medicare ?isn’t a magic bullet?but it can help by making people more cost-sensitive.?


  • How much to pay. The article says that both Sens. John Breaux and Bill Frist believe that the FEHBP is proof that private competition and consumer choice can thrive in a federal program.

    Critics like Urban Institute Medicare expert Marilyn Moon, however, fear that an FEHBP-type system would saddle sick elderly people with higher costs.

    But, as we reported last week, Boston University statistician Arlene Ash has developed a program that will facilitate risk adjustment for Medicare payments. Risk-adjusted payments – paying plans more to cover higher-risk and higher-cost patients – would encourage health plans to seek out older sicker patients as well as younger and healthier ones, minimizing that concern.

    Walt Francis makes an important point in the Journal article about the incentive structure in the current FEHBP that should be corrected: He said that beneficiaries in a revamped Medicare program should be allowed to keep a greater share of the savings if they select a less-expensive plan as an incentive to keep costs down. Francis concludes: ?Compared with all other government programs, [FEHBP] is a striking success.?


Change is inevitable and imperative, and both taxpayers and beneficiaries will be better served by a modernized Medicare program. Winning this battle is well worth the fights ahead.

For more, please see a paper by Bob Moffit of the Heritage Foundation. ?What the GAO Says About the Best Model for Medicare Reform.?

Grace-Marie Turner



Grace-Marie Turner is president of the Galen Institute, a public policy research organization that focuses on free-market ideas for health reform. She can be reached at P.O. Box 19080, Alexandria, VA 22320, or at galen@galen.org

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In last week’s newsletter, I briefly referred to an article from the Feb. 20 Wall Street Journal, saying that I believed it raised questions about the Federal Employees Health Benefits Program as a model for Medicare modernization.

This concept is central to plans by the Bush administration and congressional leaders to strengthen and improve Medicare. While the article contained a good balance of quotes and information, it seems important that the questions be answered. (This reminds me of the old adage: Good news is nice, but bad news is more important?)

Because reporter Sarah Lueck’s article is not available online without a subscription, here is a more detailed report on the article with some answers to the issues she raised.



  • Costs. The article’s most serious critique was that ?premiums in the federal employees’ program increased at double-digit rates in the past three years, compared with Medicare’s single-digit increases.? A chart accompanied the article showing that FEHBP cost increases were greater than those for either Medicare or private plans.

    But then the article points out, ?Medicare costs have risen more slowly, in part because of legislative changes that cut payments to providers and increased efforts to fight fraud and abuse. Also, Medicare doesn’t cover most outpatient prescription drugs.?

    Walt Francis, an FEHBP guru, has said that if Medicare were offered as an option to federal workers, no one would pick it because it is so substandard. The Centers for Medicare and Medicaid Services says that Medicare covers only 53% of seniors’ health costs, far less than are covered by the typical FEHB plan or other employment-based policies.

    Comparing Medicare and the FEHBP, therefore, is like comparing apples to oranges.

    On the other hand, FEHBP costs are rising because the program faces the same cost-drivers as private sector plans, such as increased demand for services, more expensive medical products, rising labor costs, compliance with mandates and regulation, and soaring litigation expenses. Plus, the FEHBP covers an aging federal workforce with consequent higher health care costs.

    Chris Hansen, a top AARP official, says that the organization is open to an FEHBP-type system for the elderly, provided enough money is on the table. Alain Enthoven argues, ?We have to find a way to unhook people from the traditional fee-for-service Medicare entitlement? because of Medicare’s burgeoning costs.

    Economist and Medicare expert Gail Wilensky is quoted by the Journal as saying that the FEHBP approach to Medicare ?isn’t a magic bullet?but it can help by making people more cost-sensitive.?


  • How much to pay. The article says that both Sens. John Breaux and Bill Frist believe that the FEHBP is proof that private competition and consumer choice can thrive in a federal program.

    Critics like Urban Institute Medicare expert Marilyn Moon, however, fear that an FEHBP-type system would saddle sick elderly people with higher costs.

    But, as we reported last week, Boston University statistician Arlene Ash has developed a program that will facilitate risk adjustment for Medicare payments. Risk-adjusted payments – paying plans more to cover higher-risk and higher-cost patients – would encourage health plans to seek out older sicker patients as well as younger and healthier ones, minimizing that concern.

    Walt Francis makes an important point in the Journal article about the incentive structure in the current FEHBP that should be corrected: He said that beneficiaries in a revamped Medicare program should be allowed to keep a greater share of the savings if they select a less-expensive plan as an incentive to keep costs down. Francis concludes: ?Compared with all other government programs, [FEHBP] is a striking success.?


Change is inevitable and imperative, and both taxpayers and beneficiaries will be better served by a modernized Medicare program. Winning this battle is well worth the fights ahead.

For more, please see a paper by Bob Moffit of the Heritage Foundation. ?What the GAO Says About the Best Model for Medicare Reform.?

Grace-Marie Turner



Grace-Marie Turner is president of the Galen Institute, a public policy research organization that focuses on free-market ideas for health reform. She can be reached at P.O. Box 19080, Alexandria, VA 22320, or at galen@galen.org

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About the author