They are instead paying him a $12.5-million buyout.
This makes the 37-year-old Lee a free agent.
The Phillies declined Cliff Lee's $27.5M option. He will officially become a free agent after missing all of 2015. pic.twitter.com/EdCMlpuA5d— Baseball Tonight (@BBTN) November 3, 2015
The 2008 Cy Young Award winner missed all of 2015 after tearing a flexor tendon in spring training.
Lee started only 13 games in the 2014 season due to the elbow strain.
His record is 143-91 with a 3.52 ERA in 13 seasons.
ESPN contributed to this report.