Contracting Authority. Rates charged under health benefits plans described by section 8903 or 8903a of this title shall reasonably and equitably reflect the cost of the benefits provided. Para (i), 5 USC 8902
No doubt about it. Health expenses are high, and getting higher. For seniors especially, the costs can be staggering.
In the Federal realm, when employees and retirees reach age 65, most of their health expenses are covered by Medicare. This is not a gift: they contributed to the Medicare fund all their working lives, with their contributions matched by their employer.
Prior to age 65, employees and retirees are covered by the FEHB – Federal Employees Health Benefits – program. This widely admired benefit pays 72-75% of the total premium for the feds’ health insurance. Available choices number well over 200, with 11 national, fee for service plans.
What happens to the FEHB coverage when a fed becomes 65 and eligible for Medicare? The FEHB coverage substantially ends, while Medicare becomes the primary payer. However, the FEHB premiums continue flowing to the insurance companies, unabated, while the Medicare fund pays most of the bills.
How about some numbers?
Walton Francis is a former fed who issues an annual book – Guide to Health Plans for Federal Employees – with good information and unbiased advice for feds. On page 190 of the 2018 edition, Francis provides data gathered by the Medical Expenditure Panel Survey (MEPS), from the Agency for Healthcare Research and Quality, of Health and Human Services.
Average annual health expenses for couples (i.e., self + 1) 65 and older are about $21,630. Please see the chart, below.
Using Blue Cross basic – the most popular FEHB option – as the exemplar, Uncle Sam pays annual premiums of $17, 233.80 per year to the insurance company for each couple. This is for all employees and retirees enrolled in Blue Cross basic as self + l, regardless of age or Medicare status.
Clearly, $17,233.80 is well short of the actual $21,630 expenses of those 65 and older. Fortunately, this is offset by the much lower costs of the younger insureds. Then there are the Medicare payments for the 65+ members…
Medicare pays most of their bills. Example: on a $100,000 hospital bill Medicare pays all but the $1,340 deductible. This is 98.6%. For doctor and other non-hospital expenses, Medicare pays 80%. Altogether, Medicare covers 90%, more or less, of these health bills.
Applying the Medicare payments, expenses for the 65+ cohort and the pool as a whole drop dramatically:
| Age group | Average Annual Expenses |
|---|---|
| Under 55 | $9,270 |
| 55 to 64 | $17,700 |
| 65+ | $2,163 (after Medicare payments) |
Note how there is no weighting of the above . If the under-55 annuitants were more than one third, the overall average would probably be lower, as it would be if the Medicare group were larger. To increase just the 55-64 group would actually increase the overall average, but not by much.
With each group being exactly one-third, the overall average expenses are $9,711, far short of the $17,233 Blue Cross is actually paid.
Conventional wisdom in the federal community is the surplus FEHB premiums paid by and for seniors (aka: the Medicare dividend) are applied to the entire pool, so everybody gets a lower premium. This belief is fully supported by the Office of Personnel Management (OPM).
However, comparing the $17,233 premium for self + 1 Blue Cross basic to the $9,711 average net costs, it is apparent this is not happening. On the contrary, it looks like the premium should be significantly lower.
In 2015, when the self + 1 level was introduced, there was a good deal of concern re: the slight decrease in premium relative to the self + family premium. It appears the problem was caused by the failure to apply the Medicare dividend to premium reduction.
Level of Expense
| Age | $0 | $1,000 | $3,000 | $6,000 | $12,000 |
|---|---|---|---|---|---|
| Under 55 | 1.0% 0 |
35% $350,000 |
18% $540,000 |
16% $960,000 |
16% $1,920,000 |
| 55-64 | 0.3% 0 |
12% $120,000 |
14% $420,000 |
17% $1,020,000 |
27% $3,240,000 |
| 65+ | 0.1% 0 |
6% $60,000 |
9% $270,000 |
14% $840,000 |
28% $3,360,000 |
| Age | $30,000 | $60,000 | $130,000 | Total |
|---|---|---|---|---|
| Under 55 | 12% $3,600,000 |
1% $600,000 |
1% $1,300,000 |
$9,270,000 |
| 55-64 | 24% $7,200,000 |
3% $1,800,000 |
3% $3,900,000 |
$17,700,000 |
| 65+ | 34% $10,200,000 |
5% $3,000,000 |
3% $3,900,000 |
$21,630,000 |
| $48,600,000 |
Source: Above expense levels, percentages, and sub-groups are from Guide to Health Plans for Federal Employees, by Walton Francis, page 190. The data was gathered by the Medical Expenditures Panel Survey, a Health & Human Services office.
Notes
- Percents do not add to 100, due to rounding.
- Each of the three above sub-groups contains 1,000 couples.
- The $48,600,000 grand total divided by 3,000 couples equals $16,200 expenses per couple.
- The payments by Medicare for the 65+ cohort would be about 90%. This cost shifting would, in turn, reduce the total costs for the 65+ enrollees to $2,163,000 and the grand total for the self + 1 pool to $29,133,000. Dividing the $29,133,000 by 3,000 yields a net cost per couple, post Medicare dividend, of $9,711.
- Blue Cross basic is the most popular of the national, fee for service plans. For 2018, the total one-year premium for one self + 1 enrollment, paid to Blue Cross, is $17,233.80. (This is retiree share plus Government.)
