Benefit programs for military veterans, most of them run by the Department of Veterans Affairs (VA), include health care, disability compensation, pensions, life insurance, housing loans, education, training, and vocational rehabilitation. The Congressional Budget Office estimates that outlays for budget function 700 will total about $72 billion in 2007, including $35 billion in discretionary outlays.

In recent years, lawmakers have expanded health and education benefits for veterans, thus increasing spending on those programs. Medical care outlays, which are subject to appropriation, rose from roughly $22 billion in 2002 to almost $30 billion in 2006, an increase of 34 percent. Mandatory spending for education, training, and vocational rehabilitation benefits increased from $1.7 billion in 2002 to $2.6 billion in 2006. Most of the increases occurred in 2003 and 2004 because of larger caseloads and legislated increases in benefits.

Spending on disability compensation, a mandatory program, also increased significantly—by 40 percent over five years—from about $22 billion in 2002 (adjusted to reflect a shift in the date of the monthly payments) to about $31 billion in 2006. That growth resulted primarily from the increased caseloads arising from a push by VA to reduce a backlog of pending cases and from the addition of newly compensable diseases.

In 2005, almost 5 million veterans received medical care from the Department of Veterans Affairs (VA). Every VA patient is enrolled in one of eight priority care groups, as determined by income, disability status, and other factors. In January 2003, VA froze enrollment in Group 8, the lowest group, which consists of veterans who do not have service-connected disabilities and whose income is above both a VA income threshold and a geographic income index established by the Department of Housing and Urban Development. Currently, veterans in Priority Groups 6 to 8, the lowest priority groups, are charged copayments (and the health plans of any who have private insurance may be billed) for treatment of non-service-connected conditions.

This option would increase out-of-pocket costs for veterans in Priority Group 5—those who do not have service-connected disabilities and whose incomes are below a VA-defined threshold. This option is targeted toward the group that consumes the greatest share of VA medical resources each year: Priority Group 5 veterans constitute 36 percent of VA enrollees and consume 40 percent of VA medical resources. Currently, those patients pay no fees for inpatient or outpatient medical care, although those who earn more than the VA pension level ($11,000 or more per year, depending on whether the veteran has a spouse or dependents) pay $8 per prescription, up to an annual cap of $960. The Congressional Budget Office estimates that increased cost sharing for Priority Group 5 veterans will reduce discretionary spending for VA medical services by $616 million but will increase mandatory spending for Medicare and Medicaid by $51 million in 2008. Over the 10-year period from 2008 through 2017, this option would reduce discretionary outlays by $7.1 billion but would increase mandatory outlays by $586 million.

One rationale for this option is that increased cost sharing for Priority Group 5 veterans could reduce VA spending by making those veterans more cost-conscious in their demand for health care. CBO's assessment of the impact of introducing small fees assumed that those fees would be waived after a patient reached a monthly maximum for out-of-pocket payments.

An argument against this option is that it focuses on one of the poorest groups of veterans and leaves unchanged the out-of-pocket expense for those in lower-priority groups. Veterans in Priority Groups 6 to 8—a population that is expected to consume 13 percent of VA's medical resources in 2007—do make copayments for the services they receive and their insurance plans (if any) are billed, but the revenue from those two sources covers less than a quarter of the cost of their care. (Net of copayments, veterans in Groups 6 to 8 consume only 10 percent of VA medical resources.) Because the veterans in Groups 6 to 8 have more income, another argument against the option is that VA should concentrate first on recovering costs from them, although policy changes aimed at reducing the net cost of care for veterans in those lower-priority groups are unlikely to substantially reduce growth in VA medical spending.

Veterans who seek medical care from the Department of Veterans Affairs (VA) are enrolled in one of eight priority care groups defined by income, disability status, and other factors. Veterans in Priority Group 8 are those without service-connected disabilities whose income and assets are above both a VA means test threshold and a geographic income index established by the Department of Housing and Urban Development (HUD). Priority Group 7 veterans have no service-connected disabilities, and their incomes fall below the HUD geographic index but above the VA threshold. About 537,000 veterans are now in Priority Group 7; 1.7 million are in Priority Group 8. Veterans in those groups make copayments for their care, and if they have private health insurance, VA bills their health plans. However, those sources cover only about a quarter of the cost of their care. In 2006, the net cost to VA was over $2 billion, or about 9 percent of VA's total budget for medical care. When the priority system was established in 1999, the Secretary of Veterans Affairs was charged with deciding how many priority groups VA could serve each year; VA medical costs have grown nearly 75 percent since then. In 2003, new enrollment of Priority Group 8 veterans was cut off; those who were already enrolled remained in the program.

This option would close enrollment for Priority Group 7 veterans and disenroll all Group 7 and 8 veterans, thus curtailing VA spending for veterans who are not poor and who do not have service-related medical needs. To be eligible for VA medical services, a veteran would need to qualify for a higher-priority group by demonstrating a service-connected disability, by documenting income below the VA threshold, or by showing qualification under other criteria (such as Agent Orange exposure, Purple Heart or former prisoner of war status, Medicaid eligibility, or catastrophic non-service-connected disability). The Congressional Budget Office estimates that disenrolling all Priority 7 and Priority 8 veterans will reduce discretionary outlays by $2.2 billion in 2008 and by $4.7 billion from 2008 to 2012. That policy would also increase mandatory spending for Medicare by $1.9 billion in 2008 and by $3.9 billion from 2008 to 2012. The VA medical budget could be reduced by $2.2 billion in 2008, CBO estimates, while still providing the current level of services to veterans in Priority Groups 1 through 6.

CBO's estimate of federal savings for this option is affected by the assumptions it uses in its baseline projections of discretionary spending. In CBO's baseline projections, appropriations for the Veterans Health Administration (VHA) grow by about 3 percent per year over the next 10 years. If VA medical spending grew at that rate, VA could be forced to disenroll all veterans in Priority Groups 7 and 8 by 2010. Because those veterans would already be disenrolled, under the baseline assumptions, the net federal savings from this budget option would be zero from that date onward. However, VHA appropriations have grown at more than twice the baseline rate in recent years. If the Congress follows recent trends and appropriates higher amounts, VA would not have to disenroll Priority 7 and 8 veterans. In that case, the reduction in discretionary outlays from disenrolling veterans under this budget option would rise to $27.2 billion (not shown in the table) over the 10 years from 2008 through 2017, and the increase in mandatory spending for Medicare would rise to $21.3 billion over that period.

A rationale for this option is that almost 90 percent of Priority Group 7 and 8 veterans have other public or private health insurance coverage and receive only a portion of their care from VA. Those veterans could seek care from other sources. An argument against this option is that many of those veterans rely on VA as their primary medical care provider. Some will not have easy access to other services without substantial out-of-pocket expense, and many will turn to Medicare or other public programs. The result would be a relatively small net decrease in federal spending.

Subject to the availability of resources, veterans are eligible to receive long-term care in nursing homes operated by the Department of Veterans Affairs (VA). That care is made available primarily on the basis of the nature of the disability and the veteran's income. Under some conditions, a veteran may receive care at VA's expense in state-operated or privately run nursing care facilities. When veterans receive more than 21 days of care in VA nursing homes, VA can charge copayments to patients whose income meets a specific threshold and who have no compensable service-connected disabilities. In 2007, VA may collect up to $6 million for extended-care services, including nursing home care, the Congressional Budget Office estimates. Under current law, those collections are treated as offsets to discretionary spending that is subject to annual appropriation. CBO assumes in its baseline that those receipts are appropriated each year. Yet VA does not recover costs to the same degree as do state-operated nursing homes, which, according to the Government Accountability Office, can offset as much as a third of their operating expenses through copayments charged to veterans.

This option would authorize VA to revise its cost-sharing policies to recover more of the costs of providing care in its nursing homes. The department would strive to collect a minimum of 10 percent of the overall cost of providing care, but it could determine what type of copayments to charge and who would pay them. For example, it could apply the copayment to a broader category of veterans or require those veterans who make copayments to pay more. Recovering 10 percent of VA's operating costs would save $186 million in 2008 and about $1.1 billion over five years. Achieving those savings would require depositing the receipts in the Treasury rather than allowing VA to spend them.

One justification for this option is that patients in VA nursing facilities receive a more generous benefit than do veterans in non-VA facilities. Recovering more of the expense at VA facilities would make distribution of that benefit more equitable among veterans and across different sites of care.

However, beneficiaries in nursing facilities might be less able to make copayments than are beneficiaries who receive other types of care. In addition, a policy that allows VA to charge veterans with service-connected disabilities would be inconsistent with the standard reflected by other medical benefits that those veterans receive. In implementing this option, VA could continue to exempt those veterans; however, it would have to charge veterans with higher income but without service-connected disabilities even more to achieve the 10 percent recovery.

Approximately 2.7 million veterans who have service-connected disabilities receive disability compensation benefits from the Department of Veterans Affairs (VA). The amount of compensation is based on a rating of individual impairment that is intended to reflect the resulting reduction, on average, in the veteran's earnings capacity. Disability ratings range from zero to 100 percent (the most severe), and those who cannot maintain gainful employment and who have ratings of at least 60 percent are eligible to be paid at the 100 percent disability rate. Veterans who have disabilities rated 30 percent or higher and who have dependent spouses, children, or parents are paid special allowances because of their dependents. The Congressional Budget Office estimates that at least 51,000 more veterans with disability ratings below 30 percent will begin receiving compensation of $75 to $220 per month (plus a cost-of-living increase) each year from 2008 to 2017.

This option would, for all future cases, narrow eligibility for compensation to include only veterans with disability ratings of 30 percent or higher. The change would reduce federal outlays by $1.3 billion from 2008 to 2012.

A rationale for this option is that it would permit VA to concentrate spending on the veterans with the greatest impairments. Furthermore, the need for compensating veterans with the mildest impairments could be lessening. Many civilian jobs depend less now on physical labor than was the case in 1924, when the disability-rating system was devised. Medical care and rehabilitation techniques and technology also have made great progress. Thus, a physical impairment rated below 30 percent (for example, mild arthritis, moderately flat feet, or loss of part of a finger) might not substantively reduce a veteran's earning ability because it would not preclude work in many modern occupations.

One argument against this option is that veterans' compensation could be viewed as career or lifetime indemnification the federal government owes to people who become disabled to any degree while serving in the armed forces. Moreover, some disabled veterans might find it difficult to replace the income provided through the compensation payments.

Veterans are eligible for disability compensation if they receive or aggravate disabilities (excluding those resulting from willful misconduct) while in active-duty service. For the Department of Veterans Affairs (VA) to consider a disability as service connected, the service member need not have been performing military duties when the disability was incurred or exacerbated; for example, a qualifying disability can be incurred when a service member is on leave. The federal government also gives dependency and indemnity compensation awards to survivors when compensable disabilities cause or are related to a veteran's death. According to data collected by VA, in 2006 about 308,000 veterans received a total of approximately $1.3 billion in compensation payments for disabilities that, according to the Government Accountability Office, are generally neither caused nor aggravated by military service. Excluding diabetes mellitus, which VA has since determined to be service connected for certain Vietnam veterans, the conditions that trigger disability payments are osteoarthritis, chronic obstructive pulmonary disease (including chronic bronchitis and pulmonary emphysema), arteriosclerotic heart disease, Crohn's disease, hemorrhoids, uterine fibroids, and multiple sclerosis.

This option would end new compensation benefits for veterans with those seven conditions, saving $17 million in outlays in 2008 and $427 million between 2008 and 2012. Eliminating new compensation benefits for all veterans whose compensable disabilities are unrelated to military service would create significantly larger savings.

An argument in support of this option is that benefits should be paid only to veterans whose disabilities are directly related to military service. An argument against this option is that veterans' compensation benefits are payments the federal government owes to veterans who become disabled in any way during a period of military service.

Approximately 2.7 million veterans—about 1.9 million of them under age 65—receive compensation from the Department of Veterans Affairs (VA) for service-connected disabilities. The amount of compensation is based on a rating of an impairment's effect on a veteran's earnings capacity, on average, and disability ratings range from zero to 100 percent. Additional allowances are paid to veterans whose disabilities are rated 30 percent or higher and who have dependent spouses, children, or parents. Veterans with disabilities also may qualify for cash payments from other sources, including workers' compensation; private disability insurance; means-tested program benefits, such as Supplemental Security Income; and, for veterans under 65, Social Security's Disability Insurance (DI) program. About 132,000 veterans who receive disability compensation from VA also receive DI payments from the Social Security Administration. When Social Security beneficiaries are eligible for disability benefits from more than one source, ceilings usually limit combined disability benefits from public sources to 80 percent of a recipient's average predisability earnings. Those DI payments—after any applicable reduction—are adjusted periodically to reflect changes in the cost of living and in national average wages. Veterans' compensation payments for disabilities are not considered for that purpose, however, and thus do not apply toward limits. The same exclusion applies to means-tested benefits and to some benefits based on public employment.

This option would limit disability compensation for veterans who receive VA disability benefits and Social Security DI payments. Under the option, VA's disability compensation would be reduced by the amount of the DI benefit. Applying that change to current and future recipients of veterans' compensation would affect about 136,000 recipients in 2008, saving almost $1.7 billion that year and saving an estimated $9.2 billion between 2008 and 2012. Applying the change only to veterans who are newly awarded compensation payments or DI payments would affect some 2,700 recipients in 2008, saving $36 million in outlays that year and saving about $1 billion between 2008 and 2012.

A rationale for this option is that it would eliminate duplicate public compensation for a single disability. However, opponents view this option as subjecting veterans' disability benefits to a form of means-testing (VA benefits are considered entitlements). Moreover, to the extent that this option applied to current DI recipients, some disabled veterans would have their income reduced.

The Montgomery GI Bill (MGIB) provides education benefits for most members of the armed services who joined after July 1985. Participating service members agree to have $100 per month withheld from their pay for 12 months after they begin active duty. The original MGIB benefit was $400 per month for 36 months of full-time education (or the part-time equivalent). Because of cost-of-living adjustments (COLAs) and legislative changes, that benefit has increased over the years and currently stands at $38,700 ($1,075 per month). The total amount withheld from a member's pay, however, has remained constant at $1,200. Because the withholding has not changed, the cost of the benefit to the service member has fallen every time the benefit has increased. The original 36 months of benefits came to $14,400, just over 8 percent of which was withheld from the service member's pay. The current maximum benefit is nearly three times as large, and the same $1,200 withheld equals just over 3 percent. To restore the original proportion of withholding to benefit, that amount would have to be increased to $3,225. At the current rate of $100 per month, reaching that total would take more than 20 additional months.

This option would increase the total withheld to $3,240 ($135 per month for 24 months). Because service members have participated in the program at a nearly constant rate despite changes in benefits, the Congressional Budget Office assumes that participation will remain relatively constant under this option. CBO estimates that if it was implemented, this option would decrease net direct spending by $42 million in 2008 and by $1.3 billion over five years. To sustain the original withholding-to-benefit ratio, this option also considers an annual increase, after 2008, in the proposed monthly withholding in the amount of a COLA that is equal to the amount applied to the benefit. The adjustment would have no effect on federal spending on MGIB benefits in 2008, but it would reduce spending by an additional $73 million over five years, resulting in total estimated savings of $1.4 billion over that period.

A rationale for this option is that if an 8 percent participant contribution was appropriate when the program began, it should be appropriate today. Otherwise, as benefits increase, the government assumes an increasing proportion of the cost of a veteran's education benefits. Increasing the amount withheld annually by the same COLA applied to the benefit would prevent the withholding-to-benefit ratio from shrinking again.

Arguments against this option could include the questionable nature of increasing the financial burden on service members during a time of war. Moreover, education costs have outpaced the MGIB benefit, so beneficiaries are already paying a larger proportion of their tuition. Increasing the number of months of withholding or raising the amount withheld would shift even more of the cost from the government to the individual service member.