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

Background

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 2018, those benefits are expected to cost the government (including the Postal Service) about $38 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.

Option

This option consists of two alternatives. Each alternative would replace the current premium-sharing structure with a voucher, which would be excluded from income and payroll taxes, starting in January 2021. Under the first alternative, the voucher would be updated each year by the projected rate of inflation as measured by the consumer price index for all urban consumers (CPI-U). The second alternative would index the voucher to the chained CPI-U, rather than the CPI-U.

According to the Congressional Budget Office's estimates, the voucher under the first alternative would cover roughly the first $6,500 of a self-only premium, the first $14,000 of a self-plus-one premium, or the first $15,000 of a family premium in 2021. CBO 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 CPI-U from 2018 through 2021. Each year, the voucher would continue to grow at that rate of inflation, rather than at the average rate of growth for FEHB premiums.

Because the chained CPI-U grows more slowly than the CPI-U, the value of the voucher under the second alternative would cover less of the premium than the first alternative. Relative to current law, CBO estimates that average contributions to FEHB premiums would be 3 percent lower in 2021 and 22 percent lower in 2028 under the CPI-U alternative and 3 percent lower in 2021 and 23 percent lower in 2028 under the chained CPI-U alternative.

Effects on the Budget

Under current law, FEHB premiums grow significantly faster than either measure of inflation in CBO's projections. (The expected rate of growth for FEHB premiums is similar to that for private insurance premiums, which the agency estimates on the basis of its projections of increases in disposable income and other factors that have historically been associated with growth in premiums.) Indexing the voucher to either measure of inflation would produce budgetary savings. However, in general, linking the voucher amount to an index that grows faster (as under the first alternative) would result in lower savings, and linking the voucher amount to an index that grows more slowly (as under the second alternative) would produce greater savings.

Mandatory Spending and Revenues. Both alternatives would affect mandatory spending and revenues. They would reduce mandatory spending for the FEHB program because the Treasury and the Postal Service would make lower payments for FEHB premiums for annuitants and postal workers. (That reduced spending includes estimated savings by the Postal Service, whose spending is classified as off-budget.)

In addition, both alternatives would have other effects on mandatory spending because some FEHB participants would leave the program. On the one hand, mandatory spending would increase if FEHB participants disenrolled from FEHB and enrolled in federally subsidized insurance provided by Medicare or the health insurance marketplaces established under the Affordable Care Act. (People whose contributions to employment-based health insurance exceed a specified percentage of income are eligible for subsidies through the marketplaces if they meet other eligibility criteria; by increasing enrollees' premium contributions, this option would boost the number who qualify on that basis.) On the other hand, mandatory spending would be further reduced if annuitants who are FEHB participants disenrolled from the program and either became uninsured or bought unsubsidized coverage in the marketplaces or from insurers outside the marketplaces. The net effect of those disenrolled FEHB participants on changes in mandatory spending would be small relative to the savings from the voucher, but the direction of the change is uncertain.

Revenues also would be affected because of changes in the number of people with employment-based insurance (obtained through a spouse, for example). 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. Those effects on revenues, however, would be minimal.

Overall, estimated changes in mandatory spending and revenues would reduce the deficit between 2021 and 2028 by $35 billion under the first alternative and by $37 billion under the second alternative.

Discretionary Spending. By reducing federal agencies' payments for FEHB premiums for current employees and their dependents, the first alternative would reduce discretionary spending by an estimated $29 billion from 2021 through 2028, provided that appropriations were reduced to reflect those lower costs. The second alternative would reduce discretionary spending by an estimated $31 billion from 2021 through 2028.

Uncertainty. The largest source of uncertainty in the estimate of savings over the next 10 years is CBO's estimate of how the growth of FEHB premiums under current law would compare with general inflation, as measured by either the CPI-U or the chained CPI-U. The difference between the FEHB premium and the voucher amount is a major contributor to the budgetary effects under both alternatives.

Other Effects

An advantage of both alternatives is that they 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, both alternatives 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.

Both alternatives also could have several drawbacks. First, because the value of the voucher would grow more slowly over time than premiums would, participants would eventually pay more for their health insurance coverage. 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.