Federal Government as Sponsor of Employee Health Benefits Program

Because it has been both cited and criticized as a model for national health policy for the last two decades and because it is the country's largest employment-based program, a note on the history of the Federal Employees Health Benefits Program (FEHBP) is in order (Somers and Somers, 1977b; Fleming, 1973, cited in Enthoven, 1989; Enthoven, 1978, 1988a, 1989; Moffit, 1992). FEHBP was established in 1959 so that the federal government could compete more effectively with private employers to recruit and retain a productive work force (CRS, 1989, especially Appendix B). Until that time, only a fraction of federal agencies sponsored health plans, although between 1947 and 1959 some 30 bills had proposed creation of a program.

The FEHBP program was unusual in that its congressional sponsors wanted to encourage competition and employee choice among health plans. It provided for three types of plans: (1) governmentwide plans, including both a service benefit plan (Blue Cross and Blue Shield) and an indemnity plan; (2) employee organization plans (several of which were already in place by 1959); and (3) comprehensive medical plans such as prepaid group practices. By 1961, there were already 55 approved options, and there are over 300 today. Initially, the government paid 40 percent of a plan premium (rather than the 33 percent proposed by the Bureau of the Budget and the Civil Service Commission), subject to certain minimums and maximums. The contribution formula was revised in 1971 so that the government contribution would equal 60 percent of the average of the premiums of the six big FEHBP high-option plans, not to exceed 75 percent of any specific plan premium.

FEHBP remains unusual in two particular respects. One is the large number of choices provided. All employees have at least 20 plans to choose among, and those in urban areas may have more than 30 options. The program is also unusual in that the fee-for-service plans are all privately insured rather than self-insured by the government. Thus they compete with HMOs on the same "at risk" basis. As discussed in Chapter 5, FEHBP has had significant problems with biased risk selection that are in considerable measure a function of its wide-open multiple-choice structure.


Between 1920 and 1965, many of the basic elements of today's strategies for managing health benefit costs were identified, even if they were not persuasively articulated or successfully applied.19 These elements include


Much of this section appeared in IOM (1989).

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