Congress established a demonstration that allows beneficiaries of the Department of Defense (DoD) health benefits program, who also are Medicare-eligible, to enroll in the Federal Employees Health Benefits Program (FEHBP). The three-year demonstration began January 1, 2000. The DoD Office of Health Affairs is evaluating the costs and other effects of the demonstration. One source of cost effects may be risk selection, where beneficiaries who choose the FEHBP option are more or less costly than those who do not enroll. Health Affairs asked RAND to apply current theory and knowledge to identify how selection bias might occur as Medicare-eligible DoD beneficiaries enrolled in FEHBP plans under this demonstration, and to suggest an analytic approach to estimate the effects of selection on DoD costs. This report presents the results of that analysis. It describes the supplemental health benefits options available to Medicare beneficiaries in the demonstration sites, reviews the theoretical literature on risk selection, and develops hypotheses regarding risk selection that can be tested in the evaluation of the demonstration. It also suggests analytic methods for measuring selection and estimating the extent to which it may occur for enrollments in the FEHBP demonstration. The methods are designed to estimate (1) the extent to which adverse selection occurs in Medicare supplemental insurance enrollments for the DoD FEHBP demonstration, and (2) how much effect selection has on DoD health care costs for Medicare-eligible beneficiaries.
