The Federal Employees Health Benefits (FEHB) program provides health insurance coverage to approximately 4 million federal workers and annuitants as well as to approximately 4 million of their dependents and survivors. In 2011, those benefits are expected to cost the government almost $41 billion (including amounts paid by the U.S. Postal Service). Policyholders are required to pay 25 percent of the premium for the lowest-cost plans available and generally a larger share for higher-cost plans; the federal government pays the remainder of the premium. Retired enrollees pay the same premiums that active employees pay, and the federal government typically shares in the cost of the premiums to the same extent for both groups. That premium-sharing structure provides some incentive for federal employees to switch from higher-premium to lower-premium plans, although the incentive is less than it would be if employees realized the full savings from choosing a less expensive plan. The premium-sharing structure also imposes some competitive pressure on plans to hold down premiums.
This option would offer a voucher for the FEHB program that would cover roughly the first $5,000 of an individual premium or the first $11,000 of a family premium beginning on January 1, 2013. Those amounts, which are based on the Congressional Budget Office's estimate of the government's average expected contribution in 2012, would increase annually at the rate of inflation as measured by the consumer price index for all urban consumers, rather than at the average weighted rate of change in FEHB premiums. According to CBO's estimates, indexing vouchers to inflation rather than to the growth of premiums would produce budgetary savings because FEHB premiums are predicted to grow significantly faster than inflation. (The expected cost growth in FEHB premiums is similar to expected growth in other private insurance premiums.)
This option would reduce discretionary spending by federal agencies (because of lower payments for FEHB premiums for current employees and their dependents) by an estimated $8 billion over the 2012-2016 period and by $42 billion over the 2012-2021 period, under the assumption that appropriations reflect the reduced costs. The option would also reduce mandatory on- and off- budget spending because of lower payments from the Treasury and the U.S. Postal Service for FEHB premiums for retirees. Estimated savings from those reductions would be roughly $6 billion over the 2012-2016 period and about $32 billion over the 2012-2021 period.
In addition, CBO anticipates, the option would cause some FEHB participants to leave the program and enroll in health insurance exchanges starting in 2014.1 As a result, health exchange subsidy costs would increase by $100 million over the 2012-2016 period and $500 million over the 2012-2021 period, and revenues would fall by about $30 million over the 2012-2016 period and about $150 million over the 2012-2021 period. Also, some FEHB annuitants could leave the program and enroll in Medicare Part D (the prescription drug benefit) to obtain drug coverage that they had previously had through the FEHB program. As a result, Medicare spending would increase by an estimated $100 million over the 2012-2016 period and $500 million over the 2012- 2021 period. Overall, the option would reduce mandatory spending, on net, by an estimated $6 billion over 5 years and almost $32 billion over 10 years.
Under this option, employees who selected plans that cost more than the voucher amount would pay the full additional cost of the plan. Therefore, this option would increase the incentive to choose lower-premium plans and would strengthen price competition among health care plans participating in the FEHB program. In particular, because enrollees would pay nothing for plans that cost as much as the value of the voucher, insurers would have a greater incentive to offer lower-premium plans whose cost approached or matched that value.
This option could have several drawbacks. First, because the federal contribution would grow more slowly over time than premiums, the option would reduce benefits. Participants would eventually pay more for their health insurance coverage; the FEHB enrollee premium contribution would increase by more than $2,000, on average, by 2021, CBO estimates. Some employees and annuitants who would be covered under current law might decide to forgo coverage altogether. For the most part, large private-sector companies currently provide health care benefits for their employees that are comparable to benefits that the government provides; under this option, government benefits could be less attractive than private- sector benefits, making it harder for the government to attract highly qualified workers. Finally, this option would cut benefits that many current federal retirees and federal employees looking ahead to retirement may believe they have already earned.