Economic analysis of a basic allowance for health care for active duty and retired members of the armed forces

Abstract

In 2014, CBO reported health care expenditures consumed nearly 10 percent of the overall defense budget in 2012, up from 4 percent in 1990. Jansen, of the Congressional Research Service, noted in 2014 that moral hazard is considered one of the drivers of these increased costs; moral hazard results from lower out-of-pocket expenses. Adjustments to the administration of health benefits within DOD may reduce the DHP budget. Implementation of a basic allowance for health care (BAHC) for active duty dependents and retirees to use with a high deductible health plan (HDHP) and health savings account may provide incentives to use more cost-effective levels of care. The price elasticity of demand for health care is used to determine potential savings as the result of increased costs associated with the HDHP. The implementation of a BAHC is also examined from the point of view of the beneficiary to evaluate how they might respond to the changing incentives. This research found that while the plans are likely to invoke behavioral responses among beneficiaries and reduce moral hazard, unless they are widely adopted throughout the DOD they are unlikely to generate substantial cost savings as a percentage of current levels of spending.