This is the time of the year when the FEHBLog receives comments. Because the FEHBlog is a lawyer who represents FEHB plans, he won’t comment any particular plans rates. He is willing to explain rate development.
All of the fee for service plans develop their rates based on experience rating. The carrier negotiates the rate with OPM. OPM adds a 4% load to the negotiated rate in accordance with the FEHB Act. The net to carrier premium is paid into a U.S. Treasury account. The carrier can draw down on that account to pay benefits, administrative expenses that the government is willing to reimburse up to an annual ceiling, and a service charge awarded by OPM under their plan performance assessment system.
The financing mechanism causes plans to build reserves when experience, meaning health care costs, is good and lower reserves when experience is bad. OPM requires a minimum level of reserves. Excess reserves can be use to moderate premium changes.
Because the reserves are held in the U.S. Treasury, the government enjoys the investment return on the reserves and if an experience rated carrier drops out of the FEHBP, its surplus plan reserves are distributed pro-rata among the remaining plans in the FEHBP.
HMO participating in the FEHBP can elect to use experience rating or community rating, which requires a separate blog post.