Federal Model for Health Insurance? Not

California’s Pacific Advantage, PacAdvantage, purchasing pool for small businesses just went out of business. This smorgasbord of offerings has shrunk over the years to where, as PacAdvantage’s president told the San Francisco Chronicle, “we don’t have a product to offer to our members.”

It’s not that there wasn’t clout behind PacAdvantage. As the Sacramento Business Journal explained of PacAdvantage’s sponsor:

Pacific Business Group on Health, headed by CEO Peter Lee, collectively purchases more than $5 billion in health-care coverage for more than 3 million enrollees and their dependents. It represents many of the Bay Area's and the West Coast's largest employers, including Bank of America, Bechtel Corp., the California State Automobile Association, Chevron Corp., McKesson Corp., Pacific Gas & Electric Co., Safeway Inc., Target Corp. and Wells Fargo & Co.
Despite its clout, it found it can no longer afford to offer this service to small employers.

The Contra Costa Times reports further:

Pacific Health Advantage, or PacAdvantage, said Friday that it will stop its pooled health insurance coverage to 6,200 small businesses in California at the end of the year because of the withdrawal of health plan providers from the program. The plans now cover a total of 116,000 people across California….Created as the Health Insurance Plan of California by the state in 1992 and taken over in 1998 by Pacific Business Group on Health, PacAdvantage is an independent, non-profit purchasing pool for small businesses with between 2 and 50 employees. It was intended to make health insurance more available and affordable and to ensure a choice of health plans for employees of small businesses.
At its peak, in 2002, its membership stood at 9,000 employers and 147,000 employees. But participation from insurers was voluntary, and under the weight of increasing health care costs and other unfavorable market pressures, they bailed out one after the other, Grgurina said

Basically, Pac Advantage participating insurers suffered from a combination of competition from more attractively priced benefits from carriers outside PacAdvantage, and rules within PacAdvantage that resulted in “adverse selection” shifting the more ill and their costs toward certain plans.

Some reformers tout the Federal Employee Health Benefits Program (FEHBP) as a model for expansion to all employers. However, that would require virtual elimination of other choices and slow innovation of benefit designs, as required would be forced participation in order to work. The FEHBP is the only choice available to federal employees, all 9-million of them.

Worthy of note is that the 3+-million employees of the Pacific Business Group on Health who sponsored PacAdvantage were not forced to participate in PacAdvantage, private corporations knowing better.

Expanding FEHBP to all the nation’s employees would create such enormous purchasing power, which along with inevitable government over-regulation and intrusions, that a combination of price controls and benefit mandates would accelerate the decline of choices and innovations. Customer information and service would also decline, as government employees are not subject to the extent of scrutiny and court correction as are private insurers. The role of agents as informed and influential intermediaries would be lost to customers. Lastly, it would drastically reduce the constitutional rights of the states to regulate the practices of insurance.

The Pacific Research Institute in 2001 noted some of the similar problems with FEHBP that PacAdvantage suffered:

The FEHBP has also experienced an exodus of plans in recent years. In addition to 17 national fee-for-service plans, there are a large number of health maintenance organizations (HMOs) that serve local areas. But the number of HMOs has dropped precipitously, from almost 400 in the mid-1990s to about 165 next year. HMOs have experienced more aggressive government regulation, which has increased their costs, and they have seen a decline in popularity.

According to a May 2000 report by the U.S. General Accounting Office, insufficient enrollments and noncompetitive premium rates have been the most frequently cited reasons for HMO withdrawals from the FEHBP. As a result, more federal employees have coalesced into higher-cost plans….

The FEHBP is also hurt by the imposition of defined benefits. The Office of Personnel Management (OPM), which oversees the program, and federal legislators have moved away from their previous hands-off approach by specifying benefits that all plans must cover….

Health plans in the FEHBP are financed through a modified version of a defined contribution, called “premium support.” The federal government contributes a maximum of 72 percent of the weighted average premium toward the federal worker’s chosen plan, but the amount decreases for low-cost plans because the government contribution is not allowed to exceed 75 percent of the premium for any particular plan.

At first blush, the 75-percent limitation sounds like a sensible cost-saving measure, but it reduces the incentive for federal employees to choose low-cost health insurance….By making the government contribution the same for any plan, federal employees would have the strongest incentive to shop wisely for their health plan.

Such problems are not unique to America, or to FEBHP. In Germany, which has a national health care plan that requires employee contributions toward required employer-coverage from a selection of insurers, the same issues occur, as this current Reuters report discusses:

Hans Juergen Ahrens, head of the national association of AOK insurers, told Reuters proposals for reforming Germany's €140 billion ($178.9 billion)-a-year health system would lead to more bureaucracy and higher costs than at present. He also questioned Social Democrat Health Minister Ulla Schmidt's vow to introduce in 2008 a new fund to gather and distribute health insurance contributions.

For those who posit a greater economic efficiency by the government, or lower administrative costs, the experience of the federal legal assistance program is instructive:

WASHINGTON (AP) - The federal program that provides legal help to poor Americans turns away half of its applicants for lack of resources. But that hasn't stopped its executives from lavishing expensive meals, chauffeur-driven cars and foreign trips on themselves.

Those advocating nationalized health care schemes primarily come from the ranks of some academics, whose own health plans are generally rich and supported by taxpayers and tuitions rising faster than inflation, or from government unions and others profiting from enlarged government employment and powers, or from those who can afford to pay for their own insurance but who try to shift the responsibility on to others. Seniors and the poor are already covered.

An recent op-ed in the Washington Post , “Federal Pay: Myth and Realities” points out that federal pay levels have increased at almost double the rate of private enterprise employees, and federal employees’ generous benefits are among the reasons.

The high level of federal pay is problematic in and of itself, but so is its rapid growth. Since 1990 average compensation for federal workers has increased by 129 percent, the BEA data show, compared with 74 percent for private-sector workers….the federal civilian workforce has become an elite island of secure and highly paid workers, separated from the ocean of private-sector American workers who must compete in today's dynamic economy.

Federal workers receive generous health benefits during work and retirement, a pension plan with inflation protection, a retirement savings plan with generous matching contributions, large disability benefits, and union protections. They often have generous holiday and vacation schedules, flexible hours, training options, incentive awards, flexible spending accounts, and a more relaxed pace of work than private-sector workers.
Perhaps the most important benefit of federal employment is extreme job security.

The above doesn’t even address the huge cost to taxpayers of the FEHBP, and the huge liabilities to future taxpayers of its retirement benefits. Subject for another column. But, to get a quick fix on the scope, the state of New York was just the first to issue a reckoning of its retiree health costs (free registration) counted by “the standards of the Governmental Accounting Standards Board in 2005, which requires large governments to apply the same accounting standards used for pension liabilities to payments and services provided for retirees other than pensions.”

The figure, which could reach $54 billion, was unveiled by Governor George Pataki's Budget Office this week, but does not change the obligation the state has to fund retiree health care. E.J. McMahon of the Empire Center for New York State Policy, a group that tracks the state's finances, warned the total cost for taxpayers could reach $200 billion when including local government retirees, the AP reported.

There are 125,000 retirees and 194,000 current state workers.

There are about 9-million federal employees, and many more millions of federal retirees.