Budget Options
December 8, 2016

Mandatory Spending Health Option 1

Function 550 - Health

Adopt a Voucher Plan and Slow the Growth of Federal Contributions for the Federal Employees Health Benefits Program

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlaysa 0 0 -0.5 -1.3 -2.1 -3.1 -4.1 -5.2 -6.5 -7.8 -4.0 -30.6
Change in Discretionary Spending                        
  Budget authority 0 0 -0.6 -1.2 -2.0 -2.8 -3.7 -4.6 -5.7 -7.0 -3.8 -27.5
  Outlays 0 0 -0.6 -1.2 -2.0 -2.8 -3.7 -4.6 -5.7 -7.0 -3.8 -27.5

This option would take effect in January 2019.

a. Includes estimated savings by the Postal Service, whose spending is classified as off-budget.

The Federal Employees Health Benefits (FEHB) program provides health insurance coverage to 4 million federal workers and annuitants, as well as to approximately 4 million of their dependents and survivors. In 2016, those benefits are expected to cost the government (including the Postal Service) about $35 billion. Policyholders, whether they are active employees or annuitants, generally pay 25 percent of the premium for lower-cost plans and a larger share for higher-cost plans; the federal government pays the rest of the premium. That premium-sharing structure provides some incentive for federal employees to choose plans with lower premiums, although the incentive is smaller than it would be if they realized the full savings from choosing such plans. The premium-sharing structure also imposes some competitive pressure on insurers to hold down premiums—but again, less pressure than would exist if employees paid the full cost of choosing more expensive plans.

This option would replace the current premium-sharing structure with a voucher, starting in January 2019. The voucher, which would be excluded from income and payroll taxes, would cover roughly the first $6,100 of a self-only premium, the first $13,200 of a self-plus-one premium, or the first $14,000 of a family premium. The Congressional Budget Office calculated those amounts by taking its estimates of the government’s average expected contributions to FEHB premiums in 2018 and then increasing them by the projected rate of inflation between 2018 and 2019 (as measured by the consumer price index for all urban consumers). Each year, the voucher would continue to grow at the rate of inflation, rather than at the average rate of growth for FEHB premiums. That would produce budgetary savings because FEHB premiums grow significantly faster than inflation in CBO’s projections. (The expected rate of growth for FEHB premiums is similar to the expected rate for private insurance premiums.)

By reducing federal agencies’ payments for FEHB premiums for current employees and their dependents, this option would reduce discretionary spending by an estimated $27 billion from 2019 through 2026, provided that appropriations were reduced to reflect those lower costs. The option also would reduce mandatory spending for FEHB by $32 billion because the Treasury and the Postal Service would make lower payments for FEHB premiums for annuitants and postal workers. (That number includes estimated savings by the Postal Service, whose spending is classified as off-budget.) In addition, the option would have some effects that increased mandatory spending. CBO anticipates that starting in 2019, the option would cause some FEHB participants to leave the program. Some of those participants would enroll in coverage through the health insurance marketplaces established under the Affordable Care Act (ACA), some would enroll in Medicare, some would enroll in employment-based coverage (through a spouse, for example), and some would become uninsured. As a result, marketplace subsidy costs would increase by $170 million, and Medicare spending would increase by an estimated $1 billion. Overall, the option would reduce mandatory spending by an estimated $31 billion from 2019 through 2026.

Revenues also would be affected by the option, but CBO expects that the net change would be negligible. Some of the people who became uninsured would pay penalties to the government, as the ACA specifies. That increase in revenues would be roughly offset because of changes that would take place in the number of people with employment-based insurance and changes in the costs of that insurance. Those changes would affect the share of total compensation that takes the form of taxable wages and salaries and the share that takes the form of nontaxable health benefits; taxable compensation would increase for some people and decrease for others.

An advantage of this option is that it would increase enrollees’ incentive to choose lower-premium plans: If they selected plans that cost more than the voucher amount, they would pay the full additional cost. For the same reason, the option would strengthen price competition among health care plans participating in the FEHB program. Because enrollees would pay no premium for plans that cost no more than the value of the voucher, insurers would have a particular incentive to offer such plans.

The option also could have several drawbacks. First, because the voucher would grow more slowly over time than premiums would, participants would eventually pay more for their health insurance coverage. In 2026, on average, participants would contribute more than $700 more for a self-only premium, $1,500 more for a self-plus-one premium, and $1,600 more for a family premium than they would under current law, CBO estimates. Some employees and annuitants who would be covered under current law might therefore decide to forgo coverage altogether. Second, many large private-sector companies currently provide health care benefits for their employees that are comparable to what the government provides. Under this option, the government benefits could become less attractive than private-sector benefits, making it harder for the government to attract highly qualified workers. Finally, the option would cut benefits that many federal employees and annuitants may believe they have already earned.