Restructuring the Federal Employees Health Benefits Program: the private sector option

The Federal Employees Health Benefits Program (FEHBP) needs to contain its costs. This paper recommends reforms of FEHBP that would substantially lower costs. As a first step, FEHBP should offer each employee a high and low option from a single conventional carrier, plus several HMO alternatives. FEHBP's practice of offering employees a choice of conventional carriers is virtually unheard of in the private sector. Cost control is more likely when carriers compete for employment groups rather than for individual employees. In addition, my analysis suggests that FEHBP should self-insure, competitively select third-party administrators (TPAs), one for each region of the country, aggressively manage program costs through preadmission certification and DRGs, and allow Medicare-eligible annuitants to enroll in Medicare HMOs and receive the government contribution. All of these reforms have been successfully implemented elsewhere, either by private employers or state or federal governments. These reforms would yield savings of at least $500 million annually for taxpayers and additional savings for federal employees.