Will Choice-Based Reform Work for Medicare? Evidence from the Federal Employees Health Benefits Program

Over the past several decades, the Medicare program has experimented with providing Medicare beneficiaries health plan choices through its managed care program. As a result of the Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003, the health plan choices available to Medicare beneficiaries expand dramatically. Beginning in 2006, Medicare enrollees are allowed to choose from regional preferred provider organizations (PPO), in addition to the more established health maintenance organization (HMO) plans and traditional fee-for-service (FFS) Medicare. These plans will not be Medicare supplemental plans, but will be the primary payer for all Medicare covered services. Medicare beneficiaries will also be allowed to choose among competing prescription drug plans. In addition to increased plan choices, the MMA has also introduced means testing into Medicare by increasing premiums for Medicare part B (physician services) for the highest income beneficiaries and by allowing low-income beneficiaries to enroll in prescription drug plans at reduced or zero premiums (O'Sullivan et al. 2004). As the name of the MMA implies, the stated purpose of this legislation is to improve the benefits offered to Medicare beneficiaries while simultaneously attempting to control costs by introducing plan competition and cost-conscious decision making by consumers into the system. One of the major models for this legislation was the Federal Employees Health Benefits Program (FEHBP), which provides health benefits for almost nine million federal employees, retirees, and their dependents. FEHBP is often held up a “successful” federal health care program, which has managed to modernize its benefit structure while moderating premium increases (Butler and Moffit 1995). In fact, the original House version of the MMA explicitly called for “FEHBP-style reform” in Medicare starting in 2010 (HR1 2003). Similar to what is envisioned for the Medicare program, FEHBP enrollees have a choice of several relatively open-network PPO plans that have premiums which are experienced rated nationally over their FEHBP enrollment. Depending on location of residence, enrollees also have a choice of several traditional closed-network HMO plans, and a smaller number of point-of-service (POS) plans, which share many features of HMOs but will pay for care outside of the plan's network. The federal government pays 75 percent of the plan premium up to a predetermined cap, thereby requiring enrollees to pay more out-of-pocket for higher premium plans. While the FEHBP is mentioned as a model for Medicare reform, there is no empirical evidence that shows how out-of-pocket premiums and plan benefits affect the choice of health plans for the Medicare population in the FEHBP. In order for such a “choice based” reform to succeed, a necessary condition is that consumers are responsive to premiums and benefits in making their plan selection. The purpose of this study is to examine how differences in out-of-pocket premiums and benefits influence plan choice among older enrollees in the FEHBP. Although there is a large body of research examining health plan choice among the nonelderly, very little is known about the applicability of these results to the elderly. The specific questions we address in this study are How sensitive are enrollees to differences in plan premiums? How much are consumers willing to pay for open provider networks? How much are consumers willing to pay for plan benefits? How are plan choices affected by consumer income? Do older enrollees make these choices differently than younger enrollees? These questions are important because the changes to Medicare increase the number of plan choices to enrollees, but also require enrollees to pay greater premiums for greater benefits, choose among open-network and closed-network plans, and ties out-of-pocket premium payments to enrollee income. How consumers react to such choices is vitally important to understanding the impact of these reforms. Our hypotheses in this study are straightforward; first, we expect that choice of plan will be negatively related to the out-of-pocket premium. Second, holding premiums constant, plan choice will be positively associated with greater plan benefits. Third, older persons will be less likely to choose managed care plans, because plans with more open provider networks will provide more freedom to continue seeing providers with whom they have established relationships. Finally, we expect willingness to pay for plan benefits to vary with income. If plan benefits are a normal economic good, higher income persons will be willing to pay more for better benefits.