Report: Medicare is a stronger insurance model than FEHBP

Medicare's relatively low overhead makes it a better model for a publicly run health insurance option for people without employer-provided coverage than the Federal Employees Health Benefits Program, a health care expert said on Wednesday.

"The Medicare program, as it's currently constituted, needs reform," said Jacob Hacker, co-director of the University of California-Berkeley School of Law's Center on Health, Economic and Family Security. "But I argue that a new public plan could embody many reforms and in doing so, could set a high standard for private plans."

Medicare sets a good example for such a plan because it controls costs better than any of its competitors, has produced quality improvements in service through cooperation with organizations such as the Veterans Health Administration and would set strong benchmarks for private health insurance providers, Hacker said in a briefing paper. He released the report in coordination with the Institute for America's Future, the think tank associated with the liberal advocacy group Campaign for America's Future; and Rep. Pete Stark, D-Calif., who chairs the House Ways and Means Health subcommittee.

FEHBP often has been held up as a standard-bearer for health insurance. During the Democratic presidential primary, Sen. Hillary Rodham Clinton, D-N.Y., proposed allowing uninsured Americans to purchase health insurance through the program as part of her plan for health care reform. At the time, Hacker said if such a strategy were implemented, it would require separate risk pools for federal employees and the general public to keep premiums from fluctuating.

But Hacker said on Wednesday that he had concluded Medicare does a better job of controlling costs than FEHBP. In the report, he noted that the Congressional Budget Office has pegged administrative costs of the public Medicare plan at less than 2 percent. In comparison, the plans in Medicare Advantage, which allows people to purchase private insurance through Medicare, have administrative costs of 11 percent. Preferred provider organization plans in FEHBP have overhead costs of 7 percent and health maintenance organization plans in the federal employee program devote between 10 percent and 12 percent of total expenditures to administrative costs.

FEHBP spending per participant also has increased faster than Medicare spending per enrollee, Hacker wrote. Between 1985 and 2002, spending per participant rose 7.3 percent annually in FEHBP, versus 5.8 percent in Medicare. Private health insurance spending grew 7.4 percent annually per enrollee during the same time period.

"The Federal Employees Health Benefits Program has frequently been invoked as a model for national reform, and indeed it provides one template for a national insurance exchange offering competing private plans," Hacker wrote. "It is not, however, a model of cost restraint when compared with Medicare."