Critical Condition

Obama’s Plan to Reduce Drug Costs for Federal Workers: Price Fixing

One of the largest and most successful group-health-insurance programs in history, the Federal Employees Health Benefits Program (FEHBP), is based on consumer choice and competition. Its market-based character — hundreds of private health plans competing for the business of millions of individual consumers on a level playing field — is a welcome exception in the distorted health-care sector of America’s economy.

Incredibly, the Obama administration wants to surgically remove a key feature of the FEHBP: the competitive pricing and purchasing of prescription drugs. It would outlaw private-sector drug negotiation in the competitive market, and replace it with direct government purchasing of drugs for federal workers, retirees, and their dependents, roughly 8 million Americans.

On Oct. 14, Sen. Daniel J. Akaka (D., Hawaii) wrote the Joint Select Committee on Deficit Reduction (a.k.a. the super-committee), urging it to include the president’s recommendation, “because it would give OPM greater purchasing power and helps ensure lower prescription drug prices that will reduce costs not only for enrollees but also for the taxpayer.”

OPM’s direct purchasing of drugs, according to administration figures, would secure savings of just $1.6 billion over ten years. What’s the point? FEHBP’s annual cost is roughly $40 billion, and these savings would appear miniscule over a ten-year period. Of course, the issue is not now, and never has been, savings; the issue is centralized control over drug financing and delivery. Officially, the administration’s argument is that the government will “negotiate” a better deal for federal workers and retirees than private health plans in a competitive market.

There is one little problem. The government does not “negotiate” anything. The policy: Take it or leave it. You accept the government “price,” which is unrelated to consumer demand for the benefit, or you are excluded from the “market.” It’s another form of price fixing, pure and simple. Can you get savings that way? Well, Yes You Can! But only if you reduce the level of benefits you provide at the artificially low government price, which is what the Veterans Administration (VA) does today. Not surprisingly, roughly one third of the patients covered by the VA, which provides “cheap” or “free” drugs, are nonetheless enrolled in Medicare Part D, which provides a much broader range of competitively priced drugs.

Federal workers might not be so lucky. When crunch time comes to secure bigger savings, OPM will, like the VA, resort to a tougher drug formulary, which will reduce workers and retirees’ access to a broader range of prescription drugs and therapies. (Expect frenzied lobbying efforts to block formulary restrictions.) Today, if you are in the FEHBP and you don’t like a health plan’s drug coverage, you dump that plan and get a better one. Tomorrow, if Obama’s allies in Congress are successful, you will not have that option: You will get the restricted range of drug options that government officials decide to give you. That’s the way it’s done in Medicaid, for example, the poorly performing welfare program for the poor and the indigent.

Politically, if one is an ideological zealot for central planning, the attack on the FEHBP makes perfect sense. The FEHBP has been a successful model for the opposite: plan competition. For 2012, for example, FEHBP premium increases are projected to grow by 3.8 percent, while growth in private employer premiums is projected to be at least 5.4 percent, according to a September 2011 Mercer survey. While performance varies from year to year, the FEHBP enjoys historical superiority in cost control. Choice and competition work.

Like private-sector workers enrolled in comprehensive employer coverage, federal workers enjoy ample drug coverage. Because FEHBP also enrolls retirees, as well as an older active workforce, the demand for medical services is proportionately higher than that found in conventional employment plans covering younger workers. Older workers and retirees are often sicker, more likely to suffer from chronic conditions, and have higher rates of health-care spending than younger workers. So, of course, there is a higher demand for drug coverage. The administration estimates that drug payments represent 30 percent of FEHBP claims. Among retirees who are enrolled in Medicare Part A and B, FEHBP drug coverage is provided as supplemental coverage. Not only is that strong demand for drug coverage not surprising, recent research confirms that appropriate drug utilization can offset other health-care spending, reducing hospital costs.

This latest attack on competition in FEHBP is the prelude for yet another assault on Medicare Part D. That’s the ultimate target. In the FEHBP, just as in conventional employment-based insurance or in Medicare Part D, the common practice is for private health plans to negotiate with prescription-drug companies and secure drug discounts. In Medicare Part D, the Medicare Modernization Act of 2003 preserves these private market negotiations to ensure a system of competitive pricing. That private market delivery system has been an enormous success. According to Medicare’s Office of the Actuary, the competitive system of Part D has resulted in a reduction of its projected ten-year cost of over 41 percent.

The FEHBP is one of the few areas in health care that already does a good job of controlling costs, thanks to market forces. Meanwhile, the White House is doing a superb job of making a mess of the rest of the health-care system, accompanied by extravagant health-care promises that it cannot and will not keep. Federal workers would be best served if the administration kept its hands off the FEHBP.

— Robert E. Moffit is a senior fellow at the Heritage Foundation’s Center for Policy Innovation.


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