Austin Frakt on Medicare Advantage and Walton Francis on the FEHBP

by Reihan Salam

Because I know Austin Frakt is committed to offering fair-minded analysis, I was surprised by his latest column for Kaiser Health News on Rep. Paul Ryan’s proposed Medicaid reform. Frakt accepts Paul Krugman’s claim that Rep. Ryan’s plan will simply mimic the Medicare Advantage program. But of course one of the most effective and accurate criticisms of Rep. Ryan’s Roadmap is that it is not terribly detailed. And Medicare Advantage isn’t the only model we have of a federal health program that offers premium support rather than a defined benefit. The Federal Employee Health Benefits Plan is another more successful example, at least until a series of misguided reforms of the tax treatment of FEHBP plans passed in 2000. Walton Francis has described the virtues of FEHBP in his book Putting Consumers in Charge:

In an unplanned natural experiment between two fundamentally different program designs, the federal government has operated two major health insurance programs side by side for nearly fifty years: Medicare and the Federal Employees Health Benefits Program (FEHBP). Until a recent government decision to place it in the same tax-preferred status as most private-insurer health insurance, the FEHBP consistently outperformed Medicare in cost control; it still outperforms Medicare in service, benefit generosity, fraud prevention, and protection from catastrophically high health care expenses. 

The Medicare Modernization Act sought to incorporate some of the virtues of the FEHBP into the Medicare Advantage program, but these efforts haven’t been as successful as we might have hoped for a variety of reasons. Frakt is right to identify a political economy problem:

Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technicallyand politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.

This is an important point. Yet Francis suggests that the original FEHBP was able to resist these pressures:

* The FEHBP offers federal employees the opportunity to choose among different private insurance plans through market-based competition. Medicare, in contrast, relies on thousands of pages of statutory and regulatory requirements that dictate almost every design and operational detail. Over 4,000 civil servants run Medicare, while fewer than 200 are needed to administer the FEHBP, a $40 billion program that spends more money than some cabinet departments. 

* In contrast to original Medicare, fraud is almost nonexistent in the FEHBP and the new competitive Medicare programs because private plans are far more effective than bureaucracy at preventing and eliminating fraud. Preventing fraud benefits private plans directly, an incentive absent from publically administered programs.

* The original Medicare program attracts rent-seeking private interests that leverage billions of dollars through lobbying activities and manipulation of Medicare payment rates. The FEHBP is virtually immune from such assaults because plan competition, not the government, sets benefits and rates. [Emphasis added.]

It could be that Francis is overselling the virtues of the pre-2000 FEHBP. But it should go without saying that Medicare reformers can and should pay careful attention to the lessons of the original FEHBP, and that critiques of a shift to premium support ought to at least acknowledge the program’s long and mostly successful track record.