Stability in the Federal Employees Health Benefits Program

Recently the Federal Employees Health Benefits Program has been the subject of much discussion in Washington as a result of the rather large premium increases in 1982 and 1983, the delayed open season of 1981, and the benefit reductions. Enrollees responded in May 1982 to the changes; a record number switched plans. It appears that enrollees were simply responding to the new premiums and benefits. In this paper we describe the economic incentives faced by enrollees in the FEHBP. We find that, due to the strong incentives for enrollees to leave certain high-cost plans, continued instability should be expected. In fact, the disparity between expected benefits and premium is so great for some plans (e.g. the Blue Cross high-option) that their survival is questionable. This lack of stability raises important questions about the viability of some pro-competition proposals involving multiple-insurer systems.