The U.S. Postal Service (USPS) is likely to lose tens of billions of dollars over the next decade as the volume of first-class mail it handles declines. This month, a task force established by the Trump administration released a long-awaited report recommending changes to the USPS business model to improve the agency’s financial outlook. A major barrier to this goal is the large and growing cost of retiree health benefits, including unpaid funding of $43 billion that continues to grow. Sensible reforms can lower the USPS’s retiree health obligations but shouldn’t shift the burden to Medicare.
There are two major reasons for the fiscal crisis facing health coverage for postal retirees. First, the USPS has failed to implement accounting and financing standards for funding retiree health programs that are required for private-sector employees — and that were imposed on the USPS by Congress. As a result, there is insufficient funding to pay for retiree benefits on a permanent basis. Second, federal retirees (including those who retired from the USPS) are eligible for coverage under both Medicare and the Federal Employees Health Benefit Program (FEHBP), which provides health coverage for active and retired federal workers. The addition of FEHBP coverage to Medicare means that most federal retirees face no cost-sharing payments for many medical services. That drives up both the use of services and the cost of both programs.
Misleading Accounting
In 1990, the Financial Accounting Standards Board (FASB) issued a rule requiring private-sector employers to begin assessing their retiree health benefits on an accrual rather than a cash basis. With cash accounting, employers could promise ever-more generous retirement health coverage to their workers without showing any current costs or booking any liabilities. FASB’s rule, which went into effect in 1993, stipulates that private-sector firms must show in their audited financial reports the present value of retiree health benefits as these benefits are earned by current workers. In addition, firms are required to show on their balance sheets the accrued unfunded liabilities for retiree health obligations.
These changes had a profound effect on firm behavior. The number of large employers offering retiree health benefits fell from 40 percent in 1998 to just 18 percent this year. Even among firms continuing to offer retiree health benefits, it is likely that the benefits they offer are less generous than what occurred prior to the accounting change.
In 2004, the Governmental Accounting Standards Board (GASB) followed the lead of FASB and issued similar accounting standards for retiree health benefits sponsored by state and local governmental agencies.
In the Postal Accountability and Enhancement Act (PAEA) of 2006, Congress required the USPS to conform to the FASB and GASB accounting rules and gradually move toward an accrual-based approach for assessing and financing its retiree health obligations. The law created a new Retiree Health Benefits (RHB) Fund and specified a 10-year schedule of payments from the USPS to begin capitalizing the account and reducing the unfunded liabilities associated with health coverage for retired postal workers. The law required the USPS to continue making pay-as-you-go contributions for the employer portion of the costs associated with current FEHBP retirees through 2016. After 2016, payments for the employer costs associated with current and future retirees are to come from the RHB Fund.
In the years after the PAEA passed, the USPS’s long-simmering financial troubles deepened dramatically, particularly during the recession of 2007 to 2009. In response to its growing financial pressures and to preserve liquidity, the USPS’s leadership decided not to comply with the accrual funding requirements of the PAEA beginning with payments owed in 2012. Since then, the USPS has missed a cumulative total of $43 billion in retiree health benefit payments. Currently, the USPS has unfunded liabilities for retiree health benefits of $66.5 billion.
Double Coverage
Federal workers, including those working for the USPS, get their health coverage through insurance plans offered in the Federal Employees Health Benefits Program. Federal workers who retire can retain FEHBP insurance, and almost all federal retirees do so. Upon reaching age 65 they become eligible for Medicare but retain their right to stay enrolled in FEHBP insurance plans. They are automatically enrolled in Medicare Part A (which covers hospital services). They have the option to enroll in Medicare Part B (which covers physician and outpatient services) and Part D (prescription drug coverage), but only if they pay extra premiums. Because that coverage duplicates what is covered by FEHBP insurance, about 400,000 federal retirees (out of a total of 1.9 million retirees who are enrolled in both Medicare and FEHBP) decline to enroll in Part B while still remaining enrolled in Part A. Very few federal retirees sign up for Medicare Part D.
When retired postal workers are enrolled in both Medicare and FEHBP, Medicare serves as the primary insurance plan and the FEHBP plan “wraps around” Medicare. For those retirees enrolled in both Parts A and B, the combination of the two insurance plans reduces both their hospital and physician cost-sharing to zero, with the FEHBP insurance acting as if it were a maximalist Medigap plan.
From a purely dollars-and-cents viewpoint, double coverage is a poor purchase. The average federal retiree pays about $2,400 in premiums in 2019 for self-only coverage. The Medicare Part B premium in 2019 is $1,626. Because FEHBP insurance already makes generous payments to physicians, that additional $1,626 premium gains retirees only about $800 in reduced cost-sharing, on average.
Double coverage also helps drive up the cost of Medicare. Several studies have shown that combining Medicare with this kind of supplemental coverage leads to costs that are about 20 percent above what they otherwise would be if beneficiaries did not have the extra insurance. Beneficiaries paying no cost-sharing are less sensitive to the cost of services, are likely to use more services, and are less likely to look for less costly alternatives. We estimate that the combination of FEHBP insurance with Medicare increases overall costs by about $2,000 per enrollee, most of which is paid by Medicare.
Questionable Proposals
Proposals to address the USPS’s ongoing financial troubles have focused on ways to reduce the burden of pre-funding postal retiree health benefits without changing the perverse incentives caused by double coverage. One approach would change accounting rules to reduce or eliminate prefunding for retiree benefits. Another approach would shift costs to Medicare.
Postal unions argue that the primary source of the postal service’s problems is the congressional mandate to prefund retiree health benefits. They support ending those payments permanently by repealing the 2006 law. Alternatives include changing the way retiree benefit costs are calculated to reduce the required payments, increasing the risk (and potential return) of RHB fund investments, or crediting the RHB fund with accounting surpluses from other federal programs. Each of these proposals would undercut the sensible financing approach required by the PAEA.
Reverting to a pay-as-you-go approach to financing retiree health benefits would create a substantial risk that these costs would eventually get dumped on federal taxpayers. As the task force and many others have noted, the USPS has an uncertain financial future because of the declining use of first-class mail. The reason FASB requires accrual accounting for retiree health benefits is to prevent firms from making promises that they cannot keep. This same principle is equally valid for the Postal Service. To be self-sustaining, the USPS needs to be able to meet all of its legitimate business expenses, including retiree benefit commitments that its workers are earning today. If the Postal Service is falling behind financially, the answer is to fix its business practices to ensure revenue exceeds expenses, not to change the accounting rules by which its financial performance and exposure are measured.
There are also proposals being pushed in Congress to shift a portion of the USPS’s retiree health obligations onto the Medicare program by forcing all postal annuitants to enroll in Part B. While nearly all postal retirees are eligible for Part A of Medicare (by virtue of paying payroll taxes for at least ten years), about one-fifth of retirees decline to enroll in Medicare Part B, which is voluntary. Virtually no postal retirees elect to enroll in Part D because drugs are already well covered by their FEHBP insurance plans. Retirees who opt out of Parts B and D don’t have to pay the monthly premiums associated with this coverage.
The Postal Service’s retiree health costs would be lower if all postal retirees were forced to enroll in Parts B and D of Medicare, but Medicare’s costs would be higher. Indeed, the Congressional Budget Office has estimated that proposals which would require postal retirees to sign up with Parts B and D of Medicare would reduce the USPS’s health-care obligations by about $4.7 billion over ten years while raising Medicare’s costs by $10.7 billion. Overall, the CBO estimates that federal spending would increase by $4.5 billion over the coming decade.
Postal Service advocates say many private sector employers require their retirees to sign up with Medicare as a condition of getting retiree health coverage. The USPS would be conforming to this standard practice.
But the federal government is financially responsible for both Medicare and FEHBP, and it does not serve taxpayers well just to move costs from one program to the other — especially when the overall effect is to raise costs, not lower them. Medicare already has unfunded liabilities of $38 trillion. The program doesn’t need to take on more obligations that come with insufficient additional revenue.
Real Reform
Instead of shifting costs among payers, Congress should reform the combination of FEHBP coverage with Medicare so that costs are lower for the USPS, the federal government, and postal and other federal retirees too. That is a readily achievable objective because today’s dominant model — FEHBP-sponsored insurance wrapped around fee-for-service Medicare — fuels high costs. With secondary insurance paying all costs not covered by Medicare, postal and other federal retirees usually pay nothing more when they use more medical care, which encourages higher utilization of services.
The solution is to give postal and other federal retirees one insurance plan when they turn age 65, not two. The resources of Medicare and FEHBP should be combined in a way that allows federal retirees to pick from among competing plans offering high-quality coverage with premiums that are below what is charged today for those enrolled in both programs. Each retiree should be in one insurance plan responsible for all covered expenses, because that one insurer would have strong incentives to cut unnecessary costs to attract market share and enrollment.
There are different alternative options for reforming retiree coverage in this way, by directing all resources for coverage toward Medicare, or toward FEHBP, or toward a newly-designed option that relies on the administrative structure of FEHBP. Regardless, any of these reforms would be superior to current law because they would foster stronger incentives for keeping premiums as low as possible.
The easy way out for Congress would be to prop up the USPS by shifting some of its retiree health obligations onto taxpayers, or onto Medicare (which, over the long-run, is the same thing as shifting them to taxpayers). But that would not solve the real problem, which is that retiree health coverage for former postal and federal workers is unnecessarily costly because it is poorly designed. What’s needed is a sensible reform that reduces costs for everyone involved. That, and a serious look at the USPS’s business model to ensure it will allow the agency to fulfill its necessary role in a world dominated by digital communication.
Joseph Antos, Ph.D. is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute. James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute. Walton J. Francis is a Washington, D.C.-based health-care economist and the principal author of CHECKBOOK’s Guide to Health Plans for Federal Employees. They are the authors of “Providing High-Quality, Cost-Effective Health Coverage to Retired Federal Employees Age 65 and Older,” forthcoming from AEI.
