Once again, it was a sad day for federal employees. After months of starts and stop, delays and confusion, last Friday the federal Office of Personnel Management was granted still another delay in court in conducting an "open season" for federal workers to choose health benefits coverage. The reasoning behind OPM's arbitrary actions will continue to come to light as they are challenged in the courts and on Capitol Hill, but some people are beginning to wonder whether OPM is in step with the Reagan administration's stated positions on encouraging competition in the country's health care system.
The federal employees' health program is the world's largest single purchaser of health care. More than 3 million people each year must choose among over 100 health care coverage options, with competition often fierce among the various carriers. Because of the size and relative simplicity of administering this national program, the open season has often been termed an "ideal laboratory" for testing consumers' ability to make informed choices in health care coverage. In fact, most of the current proposals being considered on Capitol Hill to inject more competition into the health care system--including those being considered by the Reagan administration--have some roots in the proposal based on the federal employees' plan advanced by Stanford University Prof. Alain Enthoven several years ago.
Enthoven in 1977 first advanced the theory that the federal employees' program is a national model for consumer choice in health care, a theory adopted or altered by a host of competition advocates in the years since. As the Enthoven theory goes, given the choice, consumers will opt for coverage by cost-effective plans if they are made to bear out-of-pocket the excessive costs of expensive plans. Thus, efficient plans will thrive and costly plans will have to become more efficient or be forced out of business.
The federal employees' program is admittedly mired this year in an almost unprecedented cost problem, with some enormous increases by some carriers. According to OPM Director Donald Devine, the average premium increase proposed by the six plans upon whose rates the federal contribution is based was 30 percent, thereby requiring a 30 percent increase in the federal contribution to all plans. But this 30 percent average masked a very important fact, namely that only two or three of the so-called "Big Six" presented OPM with greatly increased rates. Two of the six plans, health maintenance organizations, submitted rate increases of 14.31 percent and 15.16 percent, respectively. And importantly, no HMOs were asked to make benefit reductions in the first round of cuts. Thus OPM clearly failed to deal appropriately with the carriers on the high side of the average to reduce their highly inflated premium proposals. But instead, all carriers were eventually asked to cut benefits, although at least two of the comprehensive plans (HMOs) actually proposed a rate reduction in their original submissions.
Several of the Big Six now claim unexpectedly large cost overruns from the federal program. One, Blue Cross, with 1.8 million subscribers, expects losses of $250 million to $400 million due to excessive utilization of covered services. To protect itself, Blue Cross included in its 1982 contract an option to withdraw altogether from the federal program if open season were conducted. However, a federal district court's last- minute restoration of benefits and premiums cut by OPM personnel may have persuaded the carrier to stay in the program. In the meantime, a federal appeals court has agreed to hear the benefit cut issue next week and has granted a stay of the lower court's order. For the moment, no open season.
If the competition theory has merit, this is a good time to test it. Federal workers will be faced with a dramatic increase in their out-of-pocket costs for the high-cost carriers. If the competition theory is valid, then these out-of-pocket differentials should prompt wholesale shifts to less expensive plans. And this should be good for the health care system as a whole.
It is a particularly exciting time for HMOs. Long touted as competitive models, HMOs are now in a favorable premium situation even with comprehensive benefits. This is an undeniable marketing advantage, one which HMO marketing officials are obviously eager to exercise. OPM's earlier decision to tamper with the market by locking federal employees into a no-choice situation would have hampered growth by HMOs in a critical market. This would have been bad not only for federal employees, but also bad for HMOs and the health care market generally, if you subscribe to the prevailing theories about health care competition.