The Strange Relationship Between Medicare and FEHB

In one of Walton Francis’s more recent articles, he addressed an issue that has confused many and could use some clarity: the strange relationship between Medicare and the FEHB. On their own, both plans offer extensive health care coverage. But, together, as Francis puts it, they don’t “pair well,” and end up being most beneficial to the companies that provide health insurance and less beneficial to you, the person enrolled.

Francis calls this a “badly flawed and confusing system.”

If either one of these plans were so comprehensive, why would the other necessary at all?

The first thing to consider is Medicare Part A, which cannot be declined. 1.45% of your salary has been put towards the Medicare fund, which was matched by your employer, over the course of your working years. Once you reach the age of 65, Medicare kicks in automatically and starts to cover some of your expenses.

Although most people already paid into this fund through work, in 2019, any person who has not earned it this way must pay $422 a month.

Medicare is the primary payer if a retiree has both FEHB and Medicare. This means that Medicare is the one that pays out the benefits in full, regardless of any of the retired person’s other insurance programs. This is what they mean when they are referring to coordination of benefits.

So if that were the case, why do people have FEHB at all?

According to Francis, it is because most current and former federal workers have had FEHB throughout the entirety of their working careers, and to consider changing it or dropping it is alarming to most people. This thought pattern is reinforced by the OPM, who does not really disclose or discuss the actual value of Medicare.

The “Medicare dividend” is the difference in money that Medicare saves by having FEHB funds cover the expenses. This is why the OPM benefits from retired people’s retaining FEHB coverage while Medicare eligible.  It is cost-effective for them. This is the same reason they want people to buy in or keep their Medicare Part B coverage because that covers expenses that would normally fall to the FEHB.

Even though most people believe that this Medicare divided is the profit that is used to lower the premiums for everyone under the FEHB, there is not actually any data available that corroborates this. Even the OPM office replied “no comment” when asked about it.

To top it all off, there is a penalty if you do not enroll in Medicare Part B within the first eight months of eligibility. A 10% penalty for each year you could’ve, but didn’t, opt-in. Medicare’s “Medicare and You” document even states that if the eligible person didn’t sign up for Part B when first available, they can still sign up later and not have to pay a late enrollment fee.

The wording of this document (page 17 for reference) seems to be intentionally unclear, making it seem like there is little to no penalty for signing up late. And while this may seem like a godsend for people who did not enroll in Part B from the get-go, they need to remember that Medicare Part B does not supplement FEHB coverage, instead become the primary payer and replacing it. This is covered in Section 9 of the FEHB insurance booklet.

This then makes the FEHB the supplemental insurance, with the benefits provided therein much smaller than the ending cost. The point being that the premiums you’re paying for Part B are rarely worth it.

Medicare offers many things FEHB does not, and can make having FEHB benefits unnecessary. It is suggested that if you are a retired federal worker past the age of 65, reviewing “Medicare and You” should be a priority.

OPM may also extend to a federal retiree a buyout. OPM will pay for Medicare Parts B and D instead of FEHB. If the person retiring does not want that, then they continue on with their FEHB insurance unchanged. Regardless of that, it will not affect Medicare Part A benefits, and they will continue to be paid as they are now.

So to summarize, if you were to take into account your actual needs and adjust coverage to properly meet it:

People retired with Medicare will pay zero premiums on both FEHB and Medicare. Taxpayers will pay out less. OPM will be able to be run more efficiently, saving money for everyone across the board. And FEHB insurers will stop getting subsidized by Medicare recipients who are already covered elsewhere. As for current Medicare recipients, you should experience no major change, as your FEHB premiums were not increasing your coverage in any significant way.

Special thanks to Walton Francis whose perspective into this matter may one day lead to proper reform.