Expanding FEHBP Plan Options

Background and Proposal

As the largest employer in the United States, the federal government manages the largest employer-sponsored health insurance program. The Federal Employee Health Benefits Program (FEHBP), which offers health insurance to both active and retired federal workers, currently covers over 8 million individuals. The FEHBP is administered by the Office of Personnel Management (OPM), which contracts with health insurance companies to provide a portfolio of health insurance options in the program. Currently, OPM has the authority to contract with health insurance products that fall into three categories: a nationwide fee-for-service (FFS) benefit plan, employee association plans, and regional health maintenance organization (HMO) plans. All plans offered must fit within the description and requirements of these categories.[1]

In an attempt to grant OPM greater freedom in offering a variety of health insurance products, the Obama Administration included in the President’s FY2015 Budget a proposal (referred to as the Proposal throughout this report) to allow OPM to contract with a fourth category of insurance that includes any “additional health plan types.” Through this category, OPM can contract with insurance companies to offer virtually any commercial health insurance products that the organization sees fit to include in the FEHBP.[2]

Analysis

The Center for Health and Economy (H&E) uses a plan-choice micro-simulation to model the FEHBP. Using contract data from OPM, we calibrate plan choices in the program according to 4 plan types: FFS, HMO, consumer-driven health plans (CDHP), and high-deductible health plans (HDHP).[3]  These plan types represent the major distinctions to consumers but do not match exactly with the contract categories of the program—employee association plans are designed as either HMO or FFS plans; CDHPs and HDHPs are specialized subsets of each category. The premiums and cost-sharing characteristics for each plan type are set according to the most popular plans in each category.

The characteristics and number of new plans that would be offered under the Proposal is uncertain. As the administrator of the program, OPM will choose to admit plans into the FEHBP if it is in the interest of the federal government and the program’s beneficiaries, and it is difficult for H&E to model what those choices will be. H&E examines the impact of including preferred provider organization (PPO) plans.[4] The Proposal is not limited to PPOs; OPM would be able to contract with any sort of health insurance plan design that meets the FEHBP requirements. Rather than attempting to forecast the plan mix of newly entering plans, H&E considers the likely scenario that OPM begins to include PPO plans—popular in the non-government, employer-sponsored market. Specifically, H&E considers one probable outcome as well as two alternative scenarios distinguished by the prevalence of especially expensive PPO plans.

All scenarios consider the introduction of PPO plans with relatively moderate- to low-cost premiums. As OPM is unlikely to offer plans that differ widely in actuarial value, plan variation is distinguished primarily by provider networks, tiered access, and other non-cost sharing characteristics. H&E assumes that these plans achieve 10 percent “penetration” throughout the analysis period. The appropriate interpretation of this assumption is to imagine 100 percent penetration as the fully matured integration of PPO plan designs in the FEHBP. Because the plan design categories in the program have not meaningfully changed since its inception in 1959, the current plan offerings in each category are the result of decades of experience for both OPM and the participating insurance companies. In the event that a new category is established, H&E expects OPM to proceed cautiously in introducing additional plans. The assumption of 10 percent penetration is based on low annual churn of FEHBP enrollees, including new hires and plan changes, as well as the expectation that OPM will introduce a limited number of PPO plans in limited geographic areas—PPO plans are less viable in areas with fewer providers.

In the case of expensive PPO plans—expensive plan designs in the commercial, employer-sponsored market—H&E expects less penetration. These plans are less common in the commercial market, more sensitive to the supply of providers, and could be vulnerable to adverse selection problems in the FEHBP. H&E assumes that generous PPO plans will be introduced at half the rate of the moderate- and low-cost plans—5 percent penetration. However, because of high preferences for high-value plans among FEHBP beneficiaries, total program spending is sensitive to the prevalence of generous and expensive plan options. In order to provide a range of scenarios, H&E provides an appendix with alternate possibilities: highly expensive PPO plans are not included at all in the plan expansion or are included at the same level as moderate- and low-cost plans—10 percent penetration. The potential premiums for various PPO plan designs are estimated using the Medical Expenditure Panel Survey – Insurance Component.

Impact on Plan Choice

Total enrollment in the FEHBP program is not likely to be drastically altered by allowing OPM to contract with new plan designs. Expanding the set of options that employees choose from can have the effect of increasing participation—employees are more likely to find an option that coincides with their preferences. However, in the case of the FEHBP, we expect this effect to be negligible.

Instead, the new plan options will carve out market share from the beneficiaries of existing plans. Because of the preferences for high value plan options and the similarity between PPO and FFS plan designs, the enrollment in entering PPO plans is sensitive to whether OPM decides to offer high-value PPO plans. In every scenario, the majority of PPO market share is projected to come from FFS enrollees, followed by enrollees in regional HMOs.

Impact on Federal Budget

Changes in the FEHBP plan mix will affect the federal budget in two primary ways. The most direct impact on total program spending is caused by changes in the insurance payments made by the federal government to insurance companies. But the federal budget can also experience non-negligible changes in income tax revenue through the tax-exclusion for employer-sponsored health insurance—changes in average health insurance payments among active federal employees alter the income tax base.

In each case, savings occur when FEHBP beneficiaries choose to enroll in health insurance plans that are either less expensive for the federal government or for themselves, the former affecting direct program spending and the latter affecting income tax revenues. Notably, in the Proposal, outcomes that increase federal tax revenue are associated with take-home wage increases. Because the budgetary impact is driven by consumer choice, the savings are sensitive to the plans admitted to the program by OPM and in particular the inclusion of generous PPO plans. Under current law, the federal government pays 72 percent of the weighted average FEHBP plan cost, up to a maximum of 75 percent of the plan premium. Including more expensive plans in the program will have the effect of both raising the average plan cost and more frequently paying the maximum contribution. Alternatively, if OPM focuses on adding lower-cost PPO plans to the program, the federal budget will see savings both through lower payments to insurance plans and diversion to less expensive health insurance plans.

Uncertainty in H&E Projections

As with all economic forecasting, H&E estimates are associated with substantial uncertainty. While the estimates provide good indication on the nation’s health care outlook, it is not likely that the policy environment will remain unchanged throughout our ten-year analysis period. And even if no major legislative action occurs, there still exists a wide range of possible future scenarios. For instance, there is uncertainty regarding how OPM will proceed if given this new authority. There are significant administrative and regulatory hurdles to admitting new plans into the FEHBP which could hinder early enrollment. Alternatively, enthusiasm among participants and administrators for new plan types could encourage higher take-up. H&E does not make any assumptions regarding enrollment acceleration in early years other than the “penetration” rate described in the Analysis section. Instead, the appendix includes results under two alternative penetration assumptions, as an indication of how sensitive the results are to OPM decision-making.

This analysis is also limited in its scope. H&E primarily models the effects of plan selection and the resulting impact on average premiums, enrollment, and the federal budget. The Proposal is also likely to have competitive effects in certain markets, possibly leading to lower premiums among all plans. However, this analysis does not offer any insight into the prevalence or magnitude of those effects. Allowing OPM greater flexibility to provide health insurance products could also affect the adoption of novel plan designs and payment models. Any impacts on the health insurance market resulting from changes in market innovation is not included in these results.

Results

Table 1. Enrollment By Plan Type (thousands)

2015

2016

2017

2018

2019

2020

2021

Current Law Current Plan Types

8,240

8,270

8,320

8,360

8,410

8,460

8,510

FFS

6,700

6,800

6,800

6,800

6,900

6,878

6,895

HMO

1,340

1,310

1,270

1,210

1,150

1,075

989

CDHP

80

90

110

120

130

153

176

HDHP

80

120

160

210

270

355

454

New Plan Types[5]

0

0

0

0

0

0

0

Total Enrollment[6]

8,240

8,270

8,320

8,360

8,410

8,460

8,510

Plan Expansion Current Plan Types

8,240

8,270

7,770

7,780

7,800

7,810

7,830

FFS

6,700

6,800

6,380

6,390

6,390

6,390

6,380

HMO

1,340

1,310

1,150

1,090

1,030

950

870

CDHP

80

90

90

100

120

130

150

HDHP

80

120

150

200

260

340

440

New Plan Types5

0

0

550

580

620

650

690

Total Enrollment6

8,240

8,270

8,320

8,360

8,410

8,470

8,520

 

Table 2. Percent Change in Enrollment[7]

2015

2016

2017

2018

2019

2020

2021

Current Plan Types

0%

0%

-7%

-7%

-7%

-8%

-8%

FFS

0%

0%

-6%

-6%

-7%

-7%

-7%

HMO

0%

0%

-9%

-10%

-11%

-11%

-12%

CDHP

0%

0%

-11%

-11%

-12%

-14%

-15%

HDHP

0%

0%

-6%

-5%

-5%

-4%

-4%

 

Table 3. Budgetary Impact (millions)

Seven-Year Total

2015

2016

2017

2018

2019

2020

2021

Source of Funds[8]
Income Tax Revenue

0

0

5

5

5

5

5

26

Use of Funds[9]
Government FEHBP Contributions

0

0

-289

-328

-366

-401

-430

-1,815

Total Budgetary Impact

0

0

-294

-333

-372

-407

-435

-1,841

 

Table 4. Average Premiums

2015

2016

2017

2018

2019

2020

2021

Current Law  Total Premium Family[10]

17,600

18,500

19,500

20,400

21,400

22,300

23,300

Single

8,000

8,500

8,900

9,400

10,000

10,500

11,100

Tax Adjusted Employee Contribution Family10

5,000

5,200

5,400

5,600

5,700

5,900

6,100

Single

2,200

2,300

2,500

2,600

2,700

2,800

3,000

Plan Total Premium Family10

17,600

18,500

19,300

20,300

21,200

22,200

23,200

Expansion Single

8,000

8,500

8,800

9,300

9,800

10,300

10,800

Tax Adjusted Employee Contribution Family10

5,000

5,200

5,300

5,500

5,700

5,900

6,000

Single

2,200

2,300

2,400

2,500

2,700

2,800

2,900

 

Table 5. Percent Change in Average Premiums

2015

2016

2017

2018

2019

2020

2021

Total Premium Family10

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-2%

-2%

-2%

-2%

-2%

Tax Adjusted Employee Contribution Family10

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-2%

-2%

-2%

-2%

-2%

 

Appendix – Results Under Alternative Scenarios

A1. Enrollment By Plan Type (thousands)
 

2015

2016

2017

2018

2019

2020

2021

Current Law Current Plan Types

8,240

8,270

8,320

8,360

8,410

8,460

8,510

FFS

6,700

6,800

6,800

6,800

6,900

6,900

6,900

HMO

1,340

1,310

1,270

1,210

1,150

1,070

990

CDHP

80

90

110

120

130

150

180

HDHP

80

120

160

210

270

360

450

New Plan Types[11]

0

0

0

0

0

0

0

Total Enrollment[12]

8,240

8,270

8,320

8,360

8,410

8,460

8,510

Alternative 1[13] Current Plan Types

8,240

8,270

7,610

7,630

7,650

7,670

7,690

FFS

6,700

6,800

6,260

6,270

6,280

6,280

6,280

HMO

1,340

1,310

1,110

1,050

990

920

840

CDHP

80

90

90

100

120

130

150

HDHP

80

120

150

200

260

340

430

New Plan Types10

0

0

710

740

770

800

830

Total Enrollment11

8,240

8,270

8,320

8,360

8,410

8,470

8,520

Alternative 2[14] Current Plan Types

8,240

8,270

7,990

8,000

8,020

8,040

8,060

FFS

6,700

6,800

6,540

6,540

6,550

6,550

6,540

HMO

1,340

1,310

1,210

1,150

1,080

1,010

920

CDHP

80

90

100

110

130

140

160

HDHP

80

120

150

200

260

340

440

New Plan Types10

0

0

330

360

390

430

460

Total Enrollment11

8,240

8,270

8,320

8,360

8,410

8,470

8,520

 

Appendix 2. Percent Change in Enrollment[15]

2015

2016

2017

2018

2019

2020

2021

Alternative 1[16] Current Plan Types

0%

0%

-8%

-9%

-9%

-9%

-10%

FFS

0%

0%

-8%

-8%

-8%

-9%

-9%

HMO

0%

0%

-13%

-13%

-14%

-15%

-15%

CDHP

0%

0%

-12%

-13%

-14%

-15%

-16%

HDHP

0%

0%

-6%

-6%

-6%

-5%

-4%

Alternative 2[17] Current Plan Types

0%

0%

-4%

-4%

-5%

-5%

-5%

FFS

0%

0%

-4%

-4%

-4%

-5%

-5%

HMO

0%

0%

-5%

-5%

-6%

-6%

-7%

CDHP

0%

0%

-5%

-6%

-6%

-7%

-7%

HDHP

0%

0%

-4%

-4%

-4%

-3%

-3%

 

A3. Budgetary Impact (millions)

Seven-Year Total

2015

2016

2017

2018

2019

2020

2021

Alternative 1[18] Source of Funds[19]
Income Tax Revenue

0

0

3

3

3

3

2

14

Use of Funds[20]
Government FEHBP Contributions

0

0

-201

-225

-246

-263

-273

-1,209

Total Budgetary Impact

0

0

-204

-228

-249

-266

-275

-1,223

Alternative 2[21] Source of Funds19                
Income Tax Revenue

0

0

6

7

7

8

8

36

Use of Funds20
Government FEHBP Contributions

0

0

-321

-367

-415

-461

-503

-2,066

Total Budgetary Impact

0

0

-328

-374

-422

-468

-511

-2,103

 

A4. Average Premiums

2015

2016

2017

2018

2019

2020

2021

Current Law Total Premium Family[22]

17,600

18,500

19,500

20,400

21,400

22,300

23,300

Single

8,000

8,500

8,900

9,400

10,000

10,500

11,100

Tax Adjusted Employee Contribution Family22

5,000

5,200

5,400

5,600

5,700

5,900

6,100

Single

2,200

2,300

2,500

2,600

2,700

2,800

3,000

Alternative 118 Total Premium Family22

17,600

18,500

19,400

20,300

21,200

22,200

23,200

Single

8,000

8,500

8,800

9,300

9,800

10,400

10,900

Tax Adjusted Employee Contribution Family22

5,000

5,200

5,300

5,500

5,700

5,900

6,000

Single

2,200

2,300

2,400

2,600

2,700

2,800

2,900

Alternative 221 Total Premium Family22

17,600

18,500

19,400

20,300

21,200

22,200

23,200

Single

8,000

8,500

8,800

9,200

9,700

10,200

10,800

Tax Adjusted Employee Contribution Family22

5,000

5,200

5,300

5,500

5,700

5,900

6,000

Single

2,200

2,300

2,400

2,500

2,600

2,700

2,900

 

A5. Percent Change in Average Premiums

2015

2016

2017

2018

2019

2020

2021

Alternative 1[23] Total Premium Family[24]

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-1%

-1%

-1%

-1%

-1%

Tax Adjusted Employee Contribution Family24

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-1%

-1%

-1%

-1%

0%

Alternative 2[25] Total Premium Family24

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-2%

-2%

-2%

-3%

-3%

Tax Adjusted Employee Contribution Family24

0%

0%

-1%

-1%

-1%

-1%

-1%

Single

0%

0%

-2%

-3%

-3%

-3%

-3%

 

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[1] At its inception, FEHBP included another plan category—a nationwide indemnity insurance plan. The plan option suffered from adverse selection problems in the late 1980s and withdrew from the program. A new insurer could enter the market under this category, but it would be very difficult to establish the required national network.

[2] Rules and regulations governing employer-sponsored health plans under the Affordable Care Act and the FEHBP will still apply.

[3] Consumer driven health plans refer to a variety of plan designs, the most common of which are health reimbursement arrangements.

[4] The fee-for-service benefit plans currently available through the FEHBP have many similar plan characteristics to commercial preferred provider plans. While H&E accounts for these similarities in the analysis, the FFS and PPO designations are used in the text for clarity between current and new plan types.

[5] In this analysis, H&E considers high, moderate, and low-cost preferred provider organization plans as probable new plan types.

[6] Total enrollment estimates may not equal the sum of all other enrollment due to rounding. Total enrollment estimates may differ from slight changes in program participation.

[7] Change in enrollment for all current insurance categories is negative, representing the diversion to new plan types. Because enrollment in the new plan types are currently zero, percent change of new plan type enrollment is not applicable.

[8] Positive values denote increases in revenue; negative values denote decreases in revenue. Due to rounding, totals may not add to the sum of each year.

[9] Positive values denote increases in spending; negative values denote decreases in spending. Due to rounding, totals may not add to the sum of each year.

[10] Beginning in plan year 2016, the FEHBP will also include a self-plus-one coverage option. This analysis does not estimate plan premiums for self-plus-one coverage.

[11] In this analysis, H&E considers high, moderate, and low-cost preferred provider organization plans as probable new plan types.

[12] Total enrollment estimates may not equal the sum of all other enrollment due to rounding. Total enrollment estimates may differ from slight changes in program participation.

[13] Alternative 1 assumes that expensive PPO plans are included in the FEHBP at the same rate that moderate- and low-cost plan designs.

[14] Alternative 2 assumes that expensive PPO plan designs are not included in the FEHBP.

[15] Change in enrollment for all current insurance categories is negative, representing the diversion to new plan types. Because enrollment in the new plan types are currently zero, percent change of new plan type enrollment is not applicable.

[16] Alternative 1 assumes that expensive PPO plans are included in the FEHBP at the same rate that moderate- and low-cost plan designs.

[17] Alternative 2 assumes that expensive PPO plan designs are not included in the FEHBP.

[18] Alternative 1 assumes that expensive PPO plans are included in the FEHBP at the same rate that moderate- and low-cost plan designs.

[19] Positive values denote increases in revenue; negative values denote decreases in revenue. Due to rounding, totals may not add to the sum of each year.

[20] Positive values denote increases in spending; negative values denote decreases in spending. Due to rounding, totals may not add to the sum of each year.

[21] Alternative 2 assumes that expensive PPO plan designs are not included in the FEHBP.

[22] Beginning in plan year 2016, the FEHBP will also include a self-plus-one coverage option. This analysis does not estimate plan premiums for self-plus-one coverage.

[23] Alternative 1 assumes that expensive PPO plans are included in the FEHBP at the same rate that moderate- and low-cost plan designs.

[24] Beginning in plan year 2016, the FEHBP will also include a self-plus-one coverage option. This analysis does not estimate plan premiums for self-plus-one coverage.

[25] Alternative 2 assumes that expensive PPO plan designs are not included in the FEHBP.