Putting Medicare Consumers in Charge: Lesson from the FEHBP (Aei Studies on Medicare Reform)

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. In Putting Medicare Consumers in Charge: Lessons from the FEHBP, Walton Francis analyzes the successes and failures of both programs and proposes reforms that will revive the FEHBP and improve Medicare.

Francis contends that the most needed reform for Medicare and the FEHBP is to reduce the tax preference for unlimited employee health care spending, a subsidy that swamps market incentives and engenders massive waste in the FEHBP and throughout the health care system. Although the debate on health reform has focused on tax subsidies as a source of financing, reducing the tax preference will save money by creating incentives for prudent shopping and prudent spending—what the Congressional Budget Office recently called "bending the curve" of runaway cost growth. Francis also considers redesigning health insurance to guarantee consumers coverage for needed medicine while offering them incentives to spend less on unneeded care. He finds that plan competition in Medicare has contributed substantially to reducing its costs, but is at risk from proposed budget cuts that may reduce this kind of plan competition.

This careful analysis of Medicare and the FEHBP is an invaluable guide for policymakers considering major health reforms while juggling the twin problems of runaway health care spending and looming Medicare insolvency.