Why FEHB Premiums Vary
The General Schedule (GS) employee and retiree share of the annual premium varies widely among plans. In national plans it ranges from about $1,500 to almost $4,500 for self only enrollment in 2025. What explains these vast premium differences?
First, plans vary in the kinds of enrollees they attract. Some plans attract families who expect higher expenses. Some have a disproportionate share of high-cost retirees who joined when premiums were lower and do not realize that their plan is no longer a good buy. Unfortunately, Federal agencies all too often neglect to encourage sensible Open Season choices, and employees and retirees are all too often dilatory about looking for savings. Despite repeated urging over the years, Congress has failed to address this problem, which could easily be accomplished by a technique called risk adjustment and long used by Medicare. Plans that face higher costs must cover those costs through higher premiums. Premiums in such plans exceed the fair value of their benefits.
Second, plans differ in the generosity of benefits they offer. Variations include coverage of different expenses; coinsurance, the percentage of each expense you pay; and deductibles, the amount you must pay before the plan will reimburse any expenses for a service. Plans with higher cost sharing can charge lower premiums. This is one reason the Consumer-driven plans have such low premiums.
Third, plans vary in how well they manage costs. A well-run HMO can reduce hospital costs by 25 percent or more compared to traditional insurance through case management. Fee-for-service plans review utilization and use panels of preferred providers. "Disease management" techniques are powerful tools to contain costs.
Fourth, cost sharing creates incentives for doctors and patients to be less wasteful. High deductibles discourage unnecessary visits, while 100 percent reimbursement of some services might encourage overuse of these "free" services. High Deductible and Consumer-Driven plans' premiums benefit somewhat from slightly younger and healthier enrollees, but mainly from their incentives to reduce unnecessary care. Also, the time and trouble to file claims for expenses slightly above the deductible discourages some enrollees from applying for them.
Fifth, variations in the proportion of enrollees with Medicare Parts A and B has a big effect on plan premiums, since Medicare is "primary" (pays first) for retirees, and covers over four-fifths of enrollee medical costs. Most HMO benefits are so good that retired enrollees often do not sign up for Part B, which puts these plans at a major disadvantage in keeping premiums low.
Sixth, the formula for sharing premium costs magnifies the differences in what you pay. For GS employees and annuitants, the government pays 75 percent of the overall cost of each plan, up to a maximum amount. This varies each year according to a complex formula. The maximum contribution in 2025 for GS employees and annuitants is about $7,800 for singles, $16,900 for self plus one, and $18,600 for families. There are separate formulas for employees of the SEC, FDIC, and several other agencies, with higher government shares. A few types of enrollees, such as former employees, get no government contribution and must pay the full premium.
Employees pay the entire premium amount above the government's 75% share. This employee share is far higher for the more expensive plans because the government contribution is capped by the all-plan average.
In summary, you pay modestly for insurance from a well-run plan, but you pay more for a plan's inefficiencies, its unusually generous benefits, or its disproportionate share of high-cost enrollees. Your ability to switch among plans during Open Season gives you a major tool for obtaining the best deal.