[Senate Hearing 109-387]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-387
 
                    THE PRESENT AND FUTURE COSTS OF
                   DEPARTMENT OF DEFENSE HEALTH CARE,
         AND NATIONAL HEALTH CARE TRENDS IN THE CIVILIAN SECTOR

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON PERSONNEL

                                 of the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 21, 2005

                               __________

         Printed for the use of the Committee on Armed Services


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                      COMMITTEE ON ARMED SERVICES

                    JOHN WARNER, Virginia, Chairman

JOHN McCAIN, Arizona                 CARL LEVIN, Michigan
JAMES M. INHOFE, Oklahoma            EDWARD M. KENNEDY, Massachusetts
PAT ROBERTS, Kansas                  ROBERT C. BYRD, West Virginia
JEFF SESSIONS, Alabama               JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine              JACK REED, Rhode Island
JOHN ENSIGN, Nevada                  DANIEL K. AKAKA, Hawaii
JAMES M. TALENT, Missouri            BILL NELSON, Florida
SAXBY CHAMBLISS, Georgia             E. BENJAMIN NELSON, Nebraska
LINDSEY O. GRAHAM, South Carolina    MARK DAYTON, Minnesota
ELIZABETH DOLE, North Carolina       EVAN BAYH, Indiana
JOHN CORNYN, Texas                   HILLARY RODHAM CLINTON, New York
JOHN THUNE, South Dakota

                    Judith A. Ansley, Staff Director

             Richard D. DeBobes, Democratic Staff Director

                                 ______

                       Subcommittee on Personnel

              LINDSEY O. GRAHAM, South Carolina, Chairman

JOHN McCAIN, Arizona                 E. BENAJAMIN NELSON, Nebraska
SUSAN M. COLLINS, Maine              EDWARD M. KENNEDY, Massachusetts
SAXBY CHAMBLISS, Georgia             JOSEPH I. LIEBERMAN, Connecticut
ELIZABETH DOLE, North Carolina       DANIEL K. AKAKA, Hawaii

                                  (ii)

  
?



                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

The Present and Future Costs of Department of Defense Health Care, and 
           National Health Care Trends in the Civilian Sector

                             april 21, 2005

                                                                   Page

Coburn, Hon. Tom A., a U.S. Senator from the State of Oklahoma...     1
Chu, Hon. David S.C., Under Secretary of Defense for Personnel 
  and Readiness; Accompanied by Hon. William Winkenwerder, Jr., 
  M.D., Assistant Secretary of Defense for Health Affairs........     8
Blumenthal, Dr. David, M.D., Director, Institute for Health 
  Policy, Massachusetts General Hospital, Boston, Massachusetts..    28
Galvin, Dr. Robert S., M.D., Director, Global Health Care, 
  General Electric Company.......................................    33
Hosek, Susan D., Senior Economist and Co-Director Center for 
  Military Health Policy Research, RAND Corporation..............    39

                                 (iii)


                    THE PRESENT AND FUTURE COSTS OF
 DEPARTMENT OF DEFENSE HEALTH CARE, AND NATIONAL HEALTH CARE TRENDS IN 
                          THE CIVILIAN SECTOR

                              ----------                              


                        THURSDAY, APRIL 21, 2005

                               U.S. Senate,
                         Subcommittee on Personnel,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:42 p.m. in 
room SR-232A, Russell Senate Office Building, Senator Lindsey 
Graham (chairman of the subcommittee) presiding.
    Committee members present: Senators Graham and E. Benjamin 
Nelson.
    Other Senators present: Senator Coburn.
    Committee staff member present: Leah C. Brewer, nominations 
and hearings clerk.
    Majority staff members present: David M. Morriss, counsel; 
and Diana G. Tabler, professional staff member.
    Minority staff member present: Gerald J. Leeling, minority 
counsel.
    Staff assistants present: Nicholas W. West and Pendred K. 
Wilson.
    Committee members assistants present: Meredith Moseley, 
assistant to Senator Graham; and Eric Pierce, assistant to 
Senator E. Benjamin Nelson.

    OPENING STATEMENT OF SENATOR LINDSEY O. GRAHAM, CHAIRMAN

    Senator Graham. This hearing will come to order. I will 
defer my opening statement. Would you like to make an opening 
statement?
    Senator Ben Nelson. I'll defer as well, Mr. Chairman.
    Senator Graham. We know Senator Coburn's time is valuable, 
and we appreciate him coming to the committee, Senator Doctor 
Coburn, I very much appreciate you coming and offering your 
views on how we can better deliver military health care to our 
force in a more efficient, responsible manner.
    So, Dr. Coburn, thank you for coming.

STATEMENT OF HON. TOM A. COBURN, A U.S. SENATOR FROM THE STATE 
                          OF OKLAHOMA

    Senator Coburn. Mr. Chairman, and Senator Nelson, thank you 
for giving me the opportunity to talk about something that's 
very dear to my heart, and that's caring for patients. It 
doesn't matter whether they're in the military or anywhere 
else.
    We're faced with a dilemma in our country. If I may, I'm 
just going to speak off the cuff here for a minute.
    This country is going to spend $2.3 trillion this year on 
health care. It's the highest percentage of any nation in the 
world as far as the percentage of gross domestic product (GDP). 
We're going to spend 40 percent more per person on health care 
than anybody else does in the world, and yet we're not 
healthier. When we talk about care for our veterans and care 
for our military, this same thing applies. We're at 8 percent 
of the Pentagon's cost for care for our military today. It's 
going to go to 10, and it's probably going to go higher, if in 
fact, we don't start addressing health care in general in this 
country, and specifically the care for those people who serve 
our country.
    I would put forward to you, the people who deserve the best 
care in this country are our military and our veterans--not the 
worst care. By that, I'm not saying that they have received the 
worst care. But I'm convinced that we need to have a new 
paradigm, in terms of how we look at health care.
    The first question we need to ask ourselves is, how do we 
do this better? Spending this much money, can't we do it 
better? There's a lot of areas in which we can do better.
    In preparing for this testimony, I asked the military to 
give us what the percentage was paid on TRICARE in terms of 
profits to the Health Maintenance Organizations (HMOs). They 
don't know that answer, and I understand that they may not know 
that answer, but I think that's an important thing because, 
when you look at the $2.3 trillion that we're spending, about 
$300 billion of it is pure profit that goes into insurance, 
managed care, and everything else. Out of that $2.3 trillion, 
$700 billion never goes to help anybody get well. That's a 
tragedy in this country, when we have 40 million Americans that 
don't have any health insurance, their coverage is coming to 
the emergency room (ER), which is burdening our ERs. We have to 
do better.
    I want to talk about TRICARE a little bit. I didn't qualify 
for TRICARE, nobody in Muskogee, Oklahoma qualified for 
TRICARE, because the HMO only allowed people in Tulsa to 
participate. So, if you were a military family--I delivered the 
children of many military families--you had to drive 60 miles 
to get TRICARE.
    Senator Graham. Why was that?
    Senator Coburn. Because the HMO didn't decide they wanted 
to have any more people in their network, even though my group 
and my partners were well-qualified. What happens is, the 
Services break down--for health care to be available, it has to 
be accessible, and to say you have to drive a distance to be 
able to attend that is wrong. That doesn't mean that the people 
running TRICARE made a mistake, it means that the system under 
which we're operating, where they're trying and they're doing 
the best they can to save dollars is wrong.
    Take Austin Heart Hospital out in Kileen, Texas, and in 
Temple, Texas you have Scott White. At Scott White, less than a 
third of the doctors are qualified under TRICARE. Scott White 
is one of the best hospitals in the southwest area, and yet, 
when somebody in the military needs help, Austin Heart Hospital 
takes care of them because they're hooked up to TRICARE, but in 
Temple, Texas, Scott White didn't for those particular reasons. 
So, here you have a specialty hospital, which pays taxes on 
their investment and everything else, and here you have a 
government-subsidized hospital with no taxes and no profit, and 
they don't, as a general rule, accept TRICARE. I'm not going 
after them, I'm just using this as an example to say that we 
have a health care system that's broken, and it's broken for 
our military, and it's broken for everybody else. By focusing 
on it, I think there's probably five or six things you should 
hear from me.
    I think there are five things that have to happen in this 
country before we're going to fix the problems for military 
health care and everyone else, and I don't believe you can fix 
the problems for military health care or veteran's health care 
until you address these five issues.
    There isn't any emphasis on prevention in this country. 
Grandma's right--an ounce of prevention is worth a pound of 
cure, and let me just give you two examples.
    We now know, through repeated studies, that children who 
are exposed to high fructose corn syrup that comes from 
Nebraska and Oklahoma, have twice the lifetime risk of diabetes 
as children who ate the same things sweetened with sugar beet 
or cane sugar. Now, if that's true, why wouldn't we immediately 
make sure everyone in the country knew that? Where's the 
mechanism for them to know that? Where's the prevention that is 
out there to teach the American people what they need to know 
about making healthy lifestyle choices? Where's the leadership? 
What I'm proposing to you is we need to have leadership on 
prevention in this country.
    The second example I will give you is this: There are now 
good studies that say you can cut your risk of colon cancer in 
half if you're an adult, which is 189,000 cases a year. It's 
the second leading cause of death in this country from cancer. 
We can cut that in half by taking three over-the-counter 
medicines: Caltrate D, folic acid, and an aspirin--but yet how 
many people in America know that? That is a legitimate role for 
the Federal Government under which it's totally failing in 
terms of prevention today.
    Prevention is undermined also because we don't pay for 
prevention care when we go to practitioners or providers. I 
don't care whether it's a nurse practitioner or a doctor, 
there's no recognition in the current procedural terminology 
(CPT) codes for true prevention, counseling and treatment, and 
that's a key part of any future solution to health care. If you 
look at the numbers in 2060, half of the dollars that are going 
to be spent in Medicare are going to be for diabetes alone, so 
if we could cut the rate of diabetes in half, you could cut 
half the cost of Medicare in 2060. We have a $43 trillion 
unfunded liability in Medicare alone. That's going to balloon 
up every year as our population ages, and we don't do things on 
the basis of prevention.
    The second thing we need to do is we need to improve the 
quality of care by practitioners. The way we do that is to 
reward good behavior, and punish bad behavior economically. You 
do that through best practices, and Information Rx. You put the 
patient in the game, you make them participate in knowledge of 
what is good for them and what is not good for them. The way 
you do that is by cutting, if they'll participate in the 
Information Rx stuff, they need to know to lessen the risk, 
then you make it less costly for them. If the doctor 
participates on the basis of best practices, you make it more 
rewarding.
    We don't need a government mandate that says you have to do 
this, that, and the other. What we need is to use that common 
thing--greed can resolve technological difficulties and natural 
human behavior, incentivizing to do the right thing, and we 
don't have that now.
    The benefit from that will be better care, less cost, more 
satisfied providers, and more satisfied patients. Where it has 
been done in two trials right now, the cost of health care in 
the first year alone went down 32 percent. The outcomes were 
far improved, the practitioner satisfaction was higher, and the 
patient satisfaction was higher.
    The third thing we need to do is to have competition at 
every level in medicine, and that means every stakeholder has 
to give. That means you need to be able to look at a doctor and 
say, ``Is he good, or isn't he?'' That means doctors need to be 
weighted, that means the poor doctors need to get out, the good 
doctors need to get better, and they need to get rewarded for 
being better, and we put them into the game for improving 
quality. We know all of that information now, the doctors are 
worried about, ``How do you make that, when I have outliers or 
patients that are complicated?'' You only compare them to other 
people that have patients that are complicated, but the fact 
is, the medical profession is going to have to be rated and 
charged by community, so they can decide who they want to go 
to. That's fair, it happens in every other area of life, so 
there is no problem with that, and that will spur better 
competition, higher level of excellence and performance, and 
less waste.
    The fourth thing we need to do is to have a truly 
competitive drug market. We don't have that today, but that's a 
topic for another hearing. But the fact is, Americans subsidize 
the drugs for the rest of the world and they subsidize the vast 
majority of the research for the rest of the world. The 
administration does not do a good job of protecting their 
intellectual patents and their intellectual property, and we 
need to do that. We also need to demand that there are 
competitive markets here, and I can give you plenty of proof 
that there's not if I get the opportunity.
    Finally you have to reconnect the patient into the game by 
making them have to make a discretionary decision on whether or 
not they're going to utilize the health care system. You cannot 
do that unless you incentivize preventative care at the same 
time, which means you have to create a basis that everybody 
gets a comprehensive exam on a timely basis, so they will not 
ignore prevention and care, and risk screening. You can 
incentivize, and I'll give you a great example. In my office, 
as soon as medical savings accounts were set up, we created 
medical savings accounts, the vast majority of the employees 
that were in my office have $3,000 or $4,000 in their medical 
savings account, above the level of their deductible. In other 
words, even if they had a catastrophic event, they still have 
$3,000 or $4,000 left in it, which gives them discretion on 
where to spend it. Do they want to spend it on eyeglasses for 
their kid, or do they want to get braces on their child? Or do 
they want to have a test that maybe they don't need? The other 
thing that happens is they don't just take the price at which 
it's offered, they say, ``Hey, I'm paying cash for this, what's 
your best price?''
    I can give you examples of how, when you put the market 
economy into it, a $25,000 procedure just a month ago on a 
patient in my office, we got done for $2,800 by him negotiating 
to pay cash. You can see the cost savings are out there. 
Remember, we have a lot of facilities and we're not utilizing 
them. If you start utilizing this capital investment in a way 
that tonight, running magnetic resonance imaging (MRI) scans at 
night, doing ultrasounds at night, where we take this capital 
investment, but we're not using it at other periods of time, 
we're going to save tremendous amounts of money.
    I believe that we ought to have competition in the mix, and 
I believe that we ought to allow the consumer to drive that, 
and that also goes for the military consumer. I will go back to 
what I said, that they ought to have the best care there is, 
but the way to get that is not to throw money at it and not to 
micromanage it like a Soviet-style bureaucracy, but let what we 
use in the rest of the country to allocate scarce resources, do 
the same thing in the military. We can do it. You can't just do 
it in the military, we have to do it everywhere because we're 
not going to have the funds for the military--whether it's for 
health care or future defense of our country--if we don't fix 
health care anyway. So, we have to look at this as not just 
fixing military health care, we have to look at it as fixing 
health care in total.
    The last thing that I would tell you if I was in the 
military--and I served my country--whether I was a veteran 
today or an Active-Duty military or retiree, if you gave me a 
card and told me to go where I want, and let me negotiate it, 
you would be giving me the service back that I gave my country. 
You can do that in a competitive framework and probably save 
money, if you use Medicare reimbursement as the rate, and I'll 
tell you why. Because most of us want to care for the military 
and their families, we recognize their contribution to our own 
freedom, and our own benefit that we derive from that 
contribution. I would tell you that if you set that up 
tomorrow, and you ran all the numbers that they run on TRICARE 
today and ran it through at Medicare rates, you would save 
several billion dollars in health care costs for the military, 
and you would get as good, or better, care.
    With that, I'll answer any questions you might have.
    Senator Graham. Thank you, that was very compelling, 
Senator Coburn. Let's say that we had this card, and you 
reimbursed at Medicare rates, what kind of availability 
problem, if any, would you have among physicians?
    Senator Coburn. I don't think so, if they're military. 
Again, I think it goes back to the idea that we have an 
obligation to serve. Run a test on it, put it into an area, 
say, ``Here's your card, you're eligible, here's the deal, 
we've made a commitment to cover you, let's see what it will 
save.''
    Senator Graham. What is your view from a physician's point 
of view about TRICARE, in terms of its efficiency? Is it 
something that you would like? What is your view of the 
physician community's view of TRICARE?
    Senator Coburn. I don't think it's any different than any 
other HMO program we see. We see micromanagement that costs 
time in the doctor's office, it interferes with care, and that 
is not TRICARE, that's all of them. The point is, we will never 
have enough resources to manage it tightly enough, and remember 
you're dealing with people that can find the holes. They're not 
really dummies, or they wouldn't have made it through medical 
school and residency. They're going to find the holes. They're 
going to find another hole, you're going to plug a hole, 
they're going to find another hole, and you're going to plug 
another hole. All of that is money that is spent that should be 
going to help people who don't have health care today. They're 
not bad. The other thing is, management of health care systems 
is profit-driven for the managers, but not for anybody else. 
They make more money if they spend less money. Is that what we 
really want?
    Senator Graham. Senator Nelson?
    Senator Ben Nelson. Well, thank you, Dr. Coburn. Senator 
Coburn, as you look at the whole system, what do you think we 
can do here--the administration has selected Social Security, I 
don't have a quarrel with that--but what can we do without this 
being driven from the top down, as well as from the legislative 
side as well? We can't take the entire health care system on 
just in this committee. Do you have any thoughts about how we 
might address all of it?
    Senator Coburn. I'm presently working on a total health 
care reform bill for the whole country that is based on the 
principles of quality, accessibility, availability, 
competition, and accountability. But competition is the key. 
Competition is a very controversial subject up here today. Take 
competition of specialty hospital versus the non-specialty 
hospitals for example. That's a big fight up here right now. 
It's a big fight because you have tax paying specialty 
hospitals who pay real estate taxes and income taxes, against 
subsidized hospitals who don't want them, but what's the 
outcome? The outcome is, the quality is far superior, the cost 
is far less, and the patient satisfaction is far superior.
    So, here we have competition, and what's happened, where 
you see a specialty hospital in town, where you don't, where 
they're competing, the costs aren't coming down at the 
government-subsidized hospital, because they have to compete. 
The quality starts going up. The outcomes start improving. Why? 
Because they have to compete for the patients. So, I believe, 
we wipe the slate clean, we sit down and every stakeholder has 
to talk about how they get it. The large corporations in this 
country are spending a ton of money for health care. They're a 
big stakeholder, they want to see these costs go down. These 
two towns where we're running the system now, a 30-percent 
reduction in the cost with better care, without having anything 
to do with drug prices and without having anything to do with 
tort system. There is no impact on those two--and they've 
dropped the cost by a third. That's in Oklahoma, and the same 
system is being replicated in a couple of places in Virginia. 
If it will work there, it will work anywhere. But it's based on 
the incentive of, ``How do I get paid more?''
    The whole physician complex is falling apart in this 
country. This year at the University of Maryland, I believe, 
they have no one going into obstetrics/gynecology (OB/GYN) for 
their residencies. Johns Hopkins is half full, and that's true 
across the country. Only 60 percent of the slots were filled in 
obstetrics in this country. In other high risk areas, there's 
no one going into it. Doctors are retiring at 50 years of age 
because they're through fighting the system, and it's not just 
liability, it's not just the tort system, they're tired of 
fighting with the management companies that tell them, 
answering the phone call from somebody on a computer screen 
whose never put their hand on a patient, saying ``Here's what 
you have to do.''
    That is what we're approaching now, trying to control the 
costs. We're trying to control the costs, but doctors aren't 
great. But we have real problems in terms of continuing medical 
education, but if you tie quality outcomes to payment and best 
practices, guess what's going to happen? You're going to have 
people enjoying their work again, not retiring, spending more 
time with the patient. The average time in the private sector, 
when you walk into a doctor's office before you're interrupted 
by the doctor is 7.9 seconds. Why? Because they're feeling--the 
only thing a doctor has is time--that's the only thing they 
have to sell. As their revenues have gone down and the costs 
have gone up, what they're trying to do is cram in more 
patients, which is going to lead to poorer quality. The worst 
thing it does is to undermine the art of medicine. People, a 
lot of times, don't understand what that is. Medicine is 60 
percent science and 40 percent art, and anyone who has been 
trained over the last 50 years in this country up to about 1990 
knows that.
    Now, we're training a different type of doctor today, who 
does tests, and it's a clinical situation rather than a total 
care type situation. Look the adage in medicine, ``If you'll 
spend the time with your patients, your patients will tell you 
what's wrong with them.'' We're not spending any time with our 
patients. That is one of the reasons that malpractice errors 
are up. They're incentivizing doctors not to spend time with 
their patients, rather than to spend time and listen and ask.
    Quality is going to go down, and it's going to continue to 
decline, so we're losing our most experienced doctors that are 
leaving, retiring, or quitting. We're having people who come in 
now that are committed to a 40-hour workweek, rather than 
taking care of folks, and we're seeing that this whole thing is 
going to implode. So I believe we have to wipe the slate clean 
for the stakeholders in the room, and rewrite the look of this 
and use what we have done to allocate scarce resources in the 
past in this country, which is competitive modeling.
    Senator Graham. There's a lot to think about. Well done, we 
really appreciate it, and we'll try to incorporate some of your 
ideas to improve health care for veterans and our Active-Duty, 
Guard, and Reserve people.
    Senator Coburn. Give them real choice based on quality.
    Senator Graham. Thank you very much, Tom. Dr. Chu?
    Thank you for your attendance today, both of you. Senator 
Nelson, do you have a statement you would like to make?
    Senator Ben Nelson. First, Mr. Chairman, I want to thank 
you for holding the hearing. Obviously, health care is vital to 
all Americans and certainly very vital to our military and to 
our retirees. I appreciate the fact that you're holding this 
hearing. We want to make sure that we not only have it 
available, but we have the best health care available. We just 
heard Senator Coburn give us a primer on what we need to do. 
I'm looking forward to Dr. Chu and Dr. Winkenwerder and their 
responses to some of what we have been told, but also laying 
out the health care for veterans and for our Active-Duty, 
Guard, and Reserve units at the present time. So thank you very 
much, Mr. Chairman, thank you gentlemen.
    Senator Graham. Thank you, Senator. I will defer any 
comments, and look forward to hearing from both of you.

 STATEMENT OF HON. DAVID S.C. CHU, UNDER SECRETARY OF DEFENSE 
   FOR PERSONNEL AND READINESS; ACCOMPANIED BY HON. WILLIAM 
  WINKENWERDER, JR., M.D., ASSISTANT SECRETARY OF DEFENSE FOR 
                         HEALTH AFFAIRS

    Dr. Chu. Thank you, Mr. Chairman and Senator Nelson. It's a 
privilege to be here this afternoon, to be joined by my 
colleague, Dr. Winkenwerder, Assistant Secretary for Health 
Affairs. We have a joint statement that I hope you will be 
willing to accept for the record. Let me, if I might, offer a 
few introductory comments, and then turn to Dr. Winkenwerder to 
talk specifically about the cost of the current program, which 
is the focus of your request, and our forecast about the likely 
future cost of the current program.
    As you appreciate, the Defense Health Program is the 
vehicle by which Congress and the country provides the 
financial resources to the military health system, and that 
system in turn has two significant responsibilities. First, to 
care for those who wear the country's uniform, particularly 
when they are deployed in missions supporting our national 
interest, currently, and especially in the Central Command area 
of operations; and second, that same system provides a benefit. 
It provides medical care not only to the uniformed person, but 
also to his or her family and importantly, to those who have 
retired from military service under the TRICARE program.
    I think you are familiar with how we have transformed 
medicine for deployed forces. In the past, we used to take the 
medical care system forward and treat patients in theater. We 
have completely reinvented that system, with the operations in 
Afghanistan and Iraq, in which the emphasis now is on 
stabilizing the patient there, and bringing him or her promptly 
back to a safe haven where he or she can receive the best 
possible definitive care. I think their testimony endorses that 
choice. It allows--among other things--the family to be at 
their bedside during the recovery period which, as we all 
appreciate, is very important to the eventual healing.
    We recognize that the personnel system for those that 
return from theater needs to be at the same high level of 
functioning. That is one of the reasons we have opened this 
joint operation center for the severely wounded, as a capstone 
of the individual service programs to deal with the personnel 
needs of the injured service man and woman.
    Let me spend a few minutes speaking to the benefit mission, 
if I might, of the military health system. As you appreciate, 
this is a benefit that grew up over the decades. If you look 
back to the second World War, just before that war and the 
period immediately afterwards, it was a benefit provided de 
facto, often without statutory foundation, all on a space-
available basis. Indeed it was the fact that space was not 
available to all dependents of Active-Duty servicemembers--at 
least as I understand the history--that led Congress in 1956 to 
enact the statute that authorized the CHAMPUS program, or a 
third party payer type classic insurance program in the 
Department. That evolved over the years with legislation. In 
the mid-1980s, Congress authorized what is now the TRICARE 
program, which provides three different levels of benefit, 
depending upon the family's, or retiree household's choice.
    I'm impressed at how far TRICARE has come. I had the 
privilege of serving this Department just before it was 
inaugurated. I remember the early days of the program. In the 
early days, the program was not well-regarded by our 
beneficiary population. Only a third--less than a third--of the 
population was willing to rate it 8 or higher in quality, on a 
scale of 1 to 10, with 1 low and 10 high.
    Today that number is well over half of our beneficiaries--
so they rate it. In fact, we're being paid, in an interesting 
way, an enormous compliment--others seek to join this program: 
Congress has authorized that through TRICARE for Life for those 
retirees over 65 years of age and otherwise restricted to 
Medicare under previous statute. Now we have the TRICARE 
Reserve Select Program, which importantly is due to the 
leadership of members of this committee, and forged, really by 
this committee in last year's authorization conference, which 
we have just started, and we're looking forward to bringing to 
fruition.
    In short, we have come a long way. At the same time, that 
progress has brought with it substantial cost. There are a 
variety of factors that drive this cost, and Dr. Winkenwerder 
is going to touch on those factors, but in the end--in the end, 
the most important factor affecting the cost of medical care in 
the Department of Defense (DOD) is what we decide are the 
benefit parameters for our military service personnel and our 
retired military personnel.
    Thank you, Mr. Chairman.
    Bill.
    Dr. Winkenwerder. Thank you, David. Mr. Chairman and 
distinguished members of the subcommittee, thank you for the 
opportunity to discuss the Military Health System.
    We have submitted broader comments for the record, but what 
I would like to do is take time here today to speak 
specifically to the rising cost and the expenditure, and those 
attendant issues. This issue is of vital importance to 
Congress, as I think Senator Coburn so eloquently said. It's 
also of importance to our health care beneficiaries, to the 
DOD, and to the future of our Nation.
    I'm referring to the rising cost of our health care 
program, and the trends that we see taking shape in military 
medicine, and therefore the sustainability of our military 
health benefit.
    As Senator Coburn just said, increased health costs are not 
unique to the military health system. It's a national concern 
and we're struggling with it. I commend you for taking this on, 
because it's an issue that some people do not want to take on. 
For the Military Health System, our goal is to provide world-
class health care for those who have served and continue to 
serve our country. Let me just say, the DOD is firmly committed 
to protecting the health of all servicemembers, and all of our 
beneficiaries, now numbering more than 9 million. We are 
determined that we will always have an outstanding health 
benefit, and one that provides outstanding quality care.
    Expenses for the Defense Health Program are growing 
rapidly, and some have noted and has been in the press 
recently, our program has essentially doubled in size in just 
the past 4 years, from about 18 billion, to 36 billion this 
year. It now appears that our total budget is likely, if the 
current trends continue--and we don't see any reason, pending 
any change that they wouldn't continue--that this will exceed 
$50 billion within 5 years. If these current trends continue, 
we estimate that by fiscal year 2010, approximately 70 percent 
of our health budget will be spent for retiree health care.
    The facts show that our expansion of health benefits, such 
as those for our senior retirees underlies this growth, and 
that growth could put today's operations and sustainment at 
risk. Expansion of the benefit has also led to an increase in 
pharmacy costs, our total pharmacy program has increased 500 
percent since 2001, approaching $6 billion this year. We are 
now implementing the new TRICARE Reserve Select Program for 
guardsmen, reservists, and their families. We believe this is a 
needed benefit that properly recognizes those who have served, 
who may require support during their transition to and from 
Active service, and we urge Congress to allow us to implement 
this new benefit before making further new changes.
    I want you to know the Department has acted to better 
manage limited resources, and I'll talk about just a couple of 
the things we've done. We are implementing performance-based 
budgets and prospective payment, we are improving our pharmacy 
program with the uniform formulary, and using Federal pricing 
for our retail pharmacy network, as we have for our mail-order 
and military treatment facility outlets. Our new TRICARE 
contracts, in fact, address Senator Coburn's comments, are 
designed to leverage private sector methods to control 
purchased health care costs.
    Still, management actions alone, even dramatic ones in my 
judgment, will not stem the rapid growth in our spending, and 
that is because benefit expansion and rising utilization are 
the driving forces in sending these costs upward. Our benefit 
structure has not kept pace with changes in the private sector, 
or in the industry, and enrollment fees and cost shares have 
not increased in 10 years. Cost differences between TRICARE and 
employer-based private plans, or even Federal employee plans, 
which are excellent plans, those differences have grown. For 
example, the Federal employees' cost during the period of 1999 
to 2004, that 5-year period, have increased 57 percent, for 
example, for Kaiser Permanente in the mid-Atlantic, in this 
local region, and 87 percent for Blue Cross Standard. While 
those same cost shares have remained absolutely unchanged for 
TRICARE. This has persuaded a growing number of our 
beneficiaries to drop their private coverage, and to fully rely 
upon TRICARE. The low out-of-pocket costs and outstanding 
benefits are driving, I believe, that nearly all of our 
retirees will rely on TRICARE, rather than their employer-based 
plans, in just a few years.
    Simply put, we face a tremendous challenge with a benefit 
design that does not always reward efficiencies of care, and 
that is increasingly out of step with employer plans. Many in 
the private sector have turned to disease management and 
changes in benefit design, and while others have turned to 
Health Savings Accounts (HSA), or consider Health Savings Plans 
that reward individuals who manage their spending, and we too 
believe that we must find a solution that will enable us to 
sustain a fiscally sound health program for all of our 
beneficiaries over the long term.
    We will continue to benchmark our program with the private 
sector, to ensure an optimal balance between innovation and the 
need to sustain ongoing commitments to our beneficiaries. We 
will work closely with the leadership of the DOD and with you, 
Mr. Chairman, and with the committee as we seek viable options 
to contain costs, while ensuring an outstanding health benefit.
    Let me just close in saying, the mission of the U.S. 
military has always been to defend our country and the freedoms 
in place by our Nation. Many servicemembers have devoted their 
entire careers to serving our Nation, 20 to 30 years or more, 
some have served bravely in combat--we can never thank them 
enough for their dedicated service. What we can do is offer the 
best medical care possible to these patriots and to their 
families. We've made a commitment to provide them exceptional 
care while on Active Duty, and in retirement, just as they made 
the promise to defend our freedoms. We will deliver.
    Mr. Chairman, the military health system has a great 
mission, it is a precious national asset, and I'm honored with 
the opportunity to lead it, and with that I say thank you, and 
we would be glad to answer your questions.
    [The joint prepared statement of Dr. Chu and Dr. 
Winkenwerder follows:]

    Joint Prepared Statement by Hon. David S.C. Chu and Dr. William 
                              Winkenwerder

    Mr. Chairman, distinguished members of this subcommittee, thank you 
for the opportunity to discuss the Military Health System (MHS). Today, 
the Armed Forces of the United States have more than 275,000 service 
men and women deployed around the world in support of our national 
military commitments, including those serving in Afghanistan and Iraq. 
The Department of Defense (DOD) is firmly committed to protecting the 
health of these and all servicemembers, before, during and after their 
deployment and to our other health care beneficiaries, who now number 
more than 9 million.
    When we assumed our positions in the DOD, we faced the tragic 
events of September 11, and our Nation was about to embark on the 
military campaign in Afghanistan against the Taliban and al Qaeda. 
Then, within a very short period, our country suffered suspected 
internal anthrax attacks against Members of Congress, the media and 
others. From those events, we found that the country had a very limited 
supply of anthrax and smallpox vaccine, and limited means to detect a 
domestic attack by such bioweapons. Also during that period following 
September 11, there was neither a Department of Homeland Security (DHS) 
nor a Northern Command, and almost no concept of ``interagency'' 
collaboration. Efforts to improve intelligence gathering and analysis 
had barely begun.
    Internationally, Saddam Hussein and his brutal sons, other Baathist 
henchmen, and terrorists were relatively free to come and go as they 
pleased, and to carry out attacks on innocent people in the Middle East 
and elsewhere around the world.
    In short, the world had arrived at a very dangerous point in time.
    In many respects during that period, we were just beginning to 
understand the scope and nature of our new enemy. In just a little more 
than 3 years, the United States has met several stern tests--tests of 
will, conviction and sacrifice. We have come a long way. Today, there 
are many signs of success and hope. Clearly, we are seeing the 
beginnings of a new and perhaps hopeful future for the Middle East. As 
an example of this change, we have seen Palestinians democratically 
elect a leader for Palestine who is now working with the Israelis; a 
democratically elected government in Afghanistan that continues its 
path of rebuilding a bright future for its citizens; and, for the first 
time in more than 50 years, more than 8 million Iraqi citizens, in 
defiance of insurgents, recently voted to begin the developmental 
process of creating an elected government. We are also beginning to see 
positive changes in countries such as Lebanon, Pakistan, Libya, and 
Saudi Arabia. Terrorists are on the run and finding fewer and fewer 
places to hide. In Afghanistan and Iraq, and elsewhere, the United 
States has killed or captured thousands of terrorists and we continue 
to face a vicious and malignant insurgency--a mix of old regime 
loyalists and new fanatics. We do not stand alone, but are engaged with 
many other countries in this international fight. Although Iraq is 
still a battleground, it continues its rebuilding efforts, not only the 
result of the war, but also to repair more than 30 years of designed 
neglect by Saddam Hussein.
    Not long ago, Dr. Winkenwerder had the opportunity to visit 
servicemembers and our medical staffs who are so hard at work in 
Afghanistan, and to compare the conditions found there now to what he 
observed there just 2 years ago. He reported that morale was high and 
the performance of our people--superior. We know you too salute the 
extraordinary efforts of these honorable troops who truly are serving 
our Nation so well. During his time in Afghanistan, Dr. Winkenwerder 
also had the opportunity to meet with President Hamid Karzai. Without 
question, he found him an outstanding leader who, with our help and the 
help of other allies, continues unparalleled progress toward creating a 
better life for his country and its citizens.
    Throughout all of these world events since September 11, 2001, the 
leadership of the U.S. military has had a clear and consistent message 
to our men and women in uniform--we will take care of you because you 
are facing dangers and hardships daily as you go about the task of 
carrying out our Government's missions, protecting Americans, and 
advancing the cause of freedom and democracy in the world. Throughout 
the DOD, the men and women of the Military Health System contribute 
every day to the care and comfort of our servicemembers. These medical 
professionals, from the doctors and scientists to nurses, technicians 
and medics work around the clock keeping America's military fit, safe, 
healthy, and protected so that it can carry out its mission--a mission 
that, perhaps, has never before been as complex, challenging, or far-
reaching as we find today. At the same time, these medical 
professionals also are defining, preparing and participating with 
others at the national level in improving the Nation's medical 
emergency preparedness should the unthinkable happen. As some have put 
it, we are the ``go-to team'' on the other end of that 911 phone call 
when local, State, or other Federal assets are overwhelmed.

                     MILITARY HEALTH SYSTEM FUNDING

    Before describing our military health activities, we would like to 
address our Defense health funding situation and highlight initiatives 
to manage costs. Defense Health Program (DHP) costs continue to rise 
due to increased utilization of the MHS. The fiscal year 2006 DHP 
funding request is $19.8 billion for Operation and Maintenance (O&M), 
Procurement and Research, Development, and Test and Evaluation 
Appropriations to finance the MHS mission. We project total military 
health spending to pay for all health-related costs including personnel 
expenses, and retiree health costs, to be $33 billion for fiscal year 
2006. To fund this growth, the O&M Appropriation submission is 11 
percent more than the fiscal year 2005 appropriated amount. This 
funding growth is the result of benefit changes for our beneficiaries, 
to include the Reserve components, increased health care costs in the 
private sector, and the decision of MHS-eligible beneficiaries, mainly 
our retirees, to drop private insurance coverage and rely upon TRICARE.
    The Department has taken several actions to better manage 
resources. The MHS is implementing performance-based budgeting, 
focusing on the value of services delivered rather than using old cost 
reimbursement methods. We are introducing an integrated pharmacy 
benefits program that uses a standardized formulary that is clinically 
and fiscally sound. Federal pricing of pharmaceuticals in the TRICARE 
retail pharmacy program will help significantly to contain costs. 
Quality management programs continue to ensure that care provided is 
clinically appropriate and within prescribed standards.
Performance-Based Budgeting
    With this budgeting approach, we intend to base Military Treatment 
Facility (MTF) budgets on workload output such as hospital admissions, 
prescriptions filled and clinic visits, rather than on historical 
resource levels such as number of staff employed, supply costs, and 
other materials. We are in the first year of a planned 4 year 
transition to this new prospective payment system which will provide 
incentives and financial rewards for efficient management.
Integrated Pharmacy Benefits Program
    The redesign of our pharmacy programs into a single, integrated 
program, beginning in June 2004, simplifies and allows us to more 
effectively manage this $5.5 billion program. We are standardizing 
formulary management, achieving uniform access to all medications, 
enhancing portability, and involving beneficiaries in formulary 
decisionmaking. We will promote the use of more cost-effective products 
and points of service. Application of Federal pricing for the retail 
pharmacy benefit will allow the DOD to obtain manufacturer refunds for 
medications obtained through our broad retail network. We currently use 
Federal pricing for mail order and MTF pharmacy services.
Quality Management Programs
    We continue to improve the quality of care delivered throughout the 
MHS, employing sound management practices and metrics to ensure 
appropriateness of care. We monitor the health of our population using 
Healthy People 2010 goals as a benchmark, and we measure the quality of 
care provided using Joint Commission on Accreditation of Health Care 
Organizations Oryx indicators.
    Our new health care contracts use best-practice principles to 
improve beneficiary satisfaction and control private sector costs. 
Civilian contract partners must manage enrollee health care and can 
control their costs by referring more care to MTFs. In concert with 
these new contracts, and the implementation of the prospective payment 
system, we need the flexibility to flow funds between MTFs and the 
private sector. Currently, MTF revised financing funds are in the 
private sector budget activity group. Restricting the movement of DHP 
funds does not allow MTFs to use these revised financing funds to 
increase productivity and workload without prior-approval 
reprogramming. We appreciate the congressional intent to protect direct 
care funding. However, the current restrictions on funding adversely 
affect MTFs as well as care in the private sector. We urge you to allow 
the MHS to manage our funds as an integrated system. Funds must be 
allowed to flow on a timely basis to where care is delivered. We seek 
your help in restoring this much needed management flexibility.

                      BATTLEFIELD MEDICINE SUCCESS

    Today, military medicine is saving hundreds of lives that 
previously would have been lost on the battlefield. Better training, 
advanced equipment, and talented and dedicated soldiers, sailors, 
airmen, and marines also contribute to this success. Fewer than 2 
percent of wounded servicemembers who make it to a source of medical 
care die of their wounds. This is the lowest figure in the history of 
warfare. On its own, this milestone is a remarkable accomplishment. It 
was achieved due to the proficiency and professionalism of our medical 
personnel who have advanced battlefield medicine and medical 
transportation to new levels of capability. Our people are also doing 
an extraordinary job preventing illnesses and maintaining health. This 
progress is mirrored in our disease and non-battle injury rates that 
are only about 4 percent in Iraq--which also are the lowest in military 
history; this 4 percent is about 50 percent less than that experienced 
during the 1991 Gulf War.
    Despite these historically low rates, the DOD continues to seek 
even better ways to care for our servicemembers. We have new programs 
and initiatives, for example, to take care of the severely wounded. 
While servicemembers are surviving injuries in record numbers, we now 
must treat and care for those severely injured as we help them return 
to productive lives. Among these new programs are the Assistive 
Technology Centers for amputees at Walter Reed and Brooke Army Medical 
Centers, and others such as the Army's Disabled Soldier Support System 
(DS\3\). General Bill Fox, Commander of Brooke Army Medical Center, the 
Army Vice Chief of Staff, and the Sergeant Major of the Army, opened 
the Brooke Amputee Care Center this January. The aim of this Care 
Center is to return patients to their ``highest possible level of 
activity.'' It does so by incorporating a full range of amputee care at 
one site, including services for orthopedics, rehabilitation, 
occupational therapy, physical therapy and prosthetics. It also offers 
these servicemembers quick access to social work and Department of 
Veterans' Affairs (VA) counselors, when needed. The Walter Reed and 
Brooke centers also provide an opportunity for additional research in 
rehabilitation and prosthetic design. Walter Reed Army Medical Center, 
the Department's first amputee care center, has cared for more than 200 
troops from operations in Iraq and Afghanistan. The combined effort of 
the Centers' staffs is remarkable and it's just amazing to see these 
health professionals attain their goals of returning seriously injured 
servicemembers to a ``tactical level of athleticism,'' including such 
activities as running track, bicycling, wall-climbing, and rappelling. 
It is also satisfying to see the optimism and ``true grit'' of our 
injured and wounded warfighters as they meet the challenges of their 
particular situation.

                    IMPROVING MENTAL HEALTH SERVICES

    During the past decade, we have learned valuable lessons. Among 
these are identifying and gaining a better understanding of the health 
effects of deployments and operations; we are happy to report that the 
DOD has made great progress in these important areas. To date in the 
current conflict, servicemembers have completed more than 1 million 
pre- and post-deployment health assessments. Nearly 90 percent of this 
information is collected and transmitted to the United States 
electronically. This information helps us to improve follow-up care and 
treatment, ensures our people get the care they need, and assists the 
Department with its medical planning efforts.
    War is always a difficult undertaking. Stress, uncertainty, 
separation from loved ones, daily risk of death or bodily harm and, 
frankly, witnessing of horrible events--take a mental toll on many of 
our servicemembers. These mental health issues strike even our 
strongest and most brave. This is a challenge we must meet--and we 
believe we are doing so in a concerned, straightforward and timely 
fashion. The DOD today has a better understanding than ever before of 
the effects of combat and other rigors of war on our servicemembers. In 
recent years, the military services began deploying combat stress 
control teams at the unit level and using them far forward in combat 
zones. These specialized teams do a fantastic job; they are making a 
real difference. They are part of the forward edge of our health care 
continuum, which extends back to include post-deployment health 
assessments, family support services, and reintegration into home life.
    Another lesson that we've learned is that the period of highest 
risk for mental and family readjustment problems may be weeks after 
someone returns home. With this in mind and in consideration of the 
potential for physical health issues to arise once servicemembers 
return, we recently directed an additional post-deployment health 
assessment--a follow-up program that expands upon our previous efforts. 
We recognize that no one who goes to war remains unchanged. However, 
not everyone is affected in the same way and not everyone has mental 
health or readjustment issues. But, some, a minority, do have health 
issues, and their health is our concern. This new effort will include a 
short interview questionnaire to be filled out by all servicemembers--
including reservists and guardsmen, 3 to 6 months after they have 
returned home. Once they complete the questionnaire, servicemembers may 
be referred to a health care provider to discuss issues of concern and 
obtain needed assistance. The intent of this program is to help 
determine the health status or personal situation of the servicemember 
with a focus on discovering any readjustment issues or problems. To get 
to the heart of issues, counselors will ask such questions as: ``How 
are you doing?'' ``How is your family?'' If things are not well, we 
want our servicemembers to know that help is available. We believe that 
with this new disciplined and caring process, we can reach those who 
may need help and make a real difference where it is needed. There 
remains a common, general public perception in our country--a stigma--
regarding the need for mental health services. We believe that through 
this new, follow-on reassessment tool, we reduce this ``stigma'' as an 
issue or barrier to needed care.

                        MILITARY VACCINE PROGRAM

    In this war on terrorism, the Department has had programs to 
protect our servicemembers against the threat of Smallpox and Anthrax, 
which we believe to be two potential bioterrorism weapons of concern. 
To date, we have vaccinated more than 1.3 million DOD members against 
Anthrax and over 700,000 for Smallpox. These programs have an 
unparalleled safety record and are setting the standard for others in 
the civilian sector. Our Anthrax program currently is on hold, the 
result of a Federal district court judgment last October. We worked 
with the Department of Health and Human Services, the Food and Drug 
Administration (FDA), and the Court to restart this important program, 
and I am optimistic that shortly we will return to providing our 
servicemembers this vital protection. Our servicemembers deserve the 
protection the Anthrax vaccine provides.

                              BIO-THREATS

    We want you and the world to know that the Department is at the 
forefront of science, research and development for medical 
countermeasures to biological threats, and for sensors, detectors and 
surveillance systems to protect all of us from a chemical or biological 
or radio-nuclear attack. For example, just 3 years ago, the Pentagon 
had a research idea--an environmental detection system to detect 
airborne pathogens. Today, this vital protection system, known as 
Biowatch, has been installed in more than 30 cities throughout the 
Nation, including Washington DC. Additionally, the President's Project 
BioShield program provides nearly $6 billion to develop an effective 
stockpile of protective vaccines and drugs. Similarly, we played a key 
role in developing the ``National Interagency Biodefense Campus'' 
(NIBC) at Fort Detrick, Maryland, to accelerate research on medical 
countermeasures. We are most pleased to recognize the outstanding 
leadership of Fort Detrick's Major General Martinez-Lopez in developing 
the NIBC. This project also involves close coordination with the 
Departments of Homeland Security and Health and Human Services and 
other Federal agencies.
    Finally, on the research front, the Department continues its work 
on other vaccines and measures that have great promise toward 
effectively combating such diseases as HIV/AIDS, tuberculosis and 
malaria. Not only do these efforts hold great potential with 
significant benefits to our servicemembers, but they can help in 
worldwide humanitarian efforts as well.

                        HUMANITARIAN OPERATIONS

    Natural disasters and humanitarian issues are constantly a 
challenge to the world. The Department's medical assets often provide 
unique capabilities not found elsewhere. The recent tsunami in South 
Asia was unprecedented in its devastation. A worldwide response 
developed very quickly to support those affected by that incredible 
disaster. In cooperation with many other nations and multi-national 
groups, the U.S. has been a major contributor to the relief efforts. 
Once again, the Department and the MHS demonstrated substantial and 
unique capabilities of support for humanitarian operations; we helped 
make a major difference to the people of South Asia. Dr. Winkenwerder 
had the opportunity to observe part of DOD's effort when he recently 
visited Indonesia and our crew aboard the U.S.N.S. Mercy, our hospital 
ship that also is hosting a number of non-government agencies providing 
humanitarian aid and support. He was very impressed with those 
operations and we find it encouraging, especially the precedent of 
partnering the U.S. military and Federal Government with non-government 
organizations to provide much needed care. The result has been 
strengthened good will and trust between our Nation and those we 
assisted.

                MEDICAL ETHICS AND DETAINEE HEALTH CARE

    In the shadow of these great accomplishments, and the outstanding 
reputation of U.S. military medicine, have come allegations and reports 
that a few members of the military health care team may not have acted 
properly or met their ethical obligations. These allegations and 
reports are deeply disturbing to us and to the leaders of military 
medicine. We want you to know that these reports have been fully 
investigated (some investigations and findings are still pending) and 
our policies and guidance and training have been reviewed and, where 
needed, revised. We have been addressing these matters in a 
straightforward way, and making whatever improvements are needed. Our 
message to all levels of the military medical community is that, at all 
times, our people always must do the right thing and they must always 
act ethically. For the medical care provided to detainees under U.S. 
control, we will rely on the professional judgment of our medical 
staffs and ensure that the standards provided to detainees is 
comparable to that provided to U.S. members. Importantly, you should 
know that the lives of hundreds of insurgents and detainees have been 
saved by superior medical care and treatment provided by U.S. military 
personnel, often under the same trying conditions we find in treating 
our own people. We expect our military medical personnel to report 
suspected detainee mistreatment, including any mistreatment noted 
during interrogation sessions. Investigations are ongoing and should we 
discover violations, we will hold people accountable. Currently, the 
Army and Joint Chiefs of Staff are addressing several recommendations 
from the various reports and investigations regarding medical issues 
for detainees in Iraq and Afghanistan. Additionally, over this last 
year, military leaders in Iraq have made numerous improvements 
regarding medical care of detainees. For example, the MTF at Abu Ghraib 
has been expanded to include a 210-person, 52-bed field hospital. Above 
all, our policies, simply stated, require that all detainees be treated 
humanely. U.S. law and policy condemn and prohibit torture, and U.S. 
personnel are required to follow this policy and applicable law.

                        HEALTHY CHOICES FOR LIFE

    We believe that the long-term, life-style choices people make can 
affect positively the readiness of our forces. To encourage these 
positive life-style choices, we have embarked on a new effort, one that 
reflects our commitment to fostering healthy lifestyles among our 
servicemembers and other beneficiaries of the Military Health System.
    It is clear that we must work harder and smarter to reduce the 
negative affects of unhealthy behavior choices. Indeed, the negative 
effects on our military community of destructive choices are a cause 
for concern. For example, according to DOD cost estimates, tobacco use 
by the Active-Duty Force generates a $1.6 billion annual expense in 
medical care. Combined with the adverse consequences of obesity and 
binge drinking, the health of our military population suffers 
significantly. Force readiness depends on the good health of members of 
our Armed Forces. Long-term success in efforts to promote healthy 
choices among our members and their families could be among our most 
valuable and enduring efforts.
    While individual health is a personal responsibility--developing 
and maintaining a healthy and fit force is everyone's responsibility. 
Our patients tell us that we--the Department--are their most trusted 
sources of advice in such matters. Knowing that, we believe we can help 
our military members and their families make a difference in their 
life-style choices.
    In that spirit, over the next 2 years, through a demonstration 
project called ``Healthy Choices for Life,'' we will focus on building 
healthier communities through education, intervention and treatment. We 
have an enthusiastic team of health professionals working with others 
in the Department to meet this challenge. Our goal is to significantly 
improve members' health through lifestyle changes, thus enhancing the 
readiness of the Armed Forces, and eventually reducing the cost to our 
military health system that adverse choices impose.

                   TRICARE, THE MILITARY HEALTH PLAN

    The TRICARE Program, our health care plan for our 9 million 
beneficiaries has now fully transitioned to new regional alignment and 
contracts, which include incentives for positive outcomes based on 
improved customer service. This transition was a momentous 
accomplishment and required dedicated work by a highly-motivated 
professional team. Today's contracts have a stronger customer service 
focus, apply best commercial practices, and support our MTFs--indeed, 
our military medical facilities remain at the core of our system.
    In spite of our efforts to manage more efficiently, total spending 
for the MHS, including the Retiree Accrual Fund, will reach $36 billion 
in 2005. Spending has essentially doubled in just the past 4 years! Our 
program growth is very rapid, and it appears likely to exceed $50 
billion within 5 years. Additionally, if current trends continue, over 
75 to 80 percent of that spending will be for individuals no longer on 
Active-Duty or their family members. The expansion of benefits, such as 
those for our senior retirees, contributes to the growing size of our 
budget. But, so do other program elements. For example, our total 
pharmacy program has increased five-fold, that's 500 percent since 2001 
and now stands at over $5 billion annually. Our leaders of military 
medicine must apply full attention and best management efforts to these 
matters. We have informed the Service Chiefs and Vice Chiefs, Service 
secretaries, and other department leaders, including Secretary 
Rumsfeld, of the facts about our spend patterns, cost trends, funding 
needs, how we are addressing cost increases, and more. Through these 
efforts, we have achieved a much better understanding about the 
financial aspects of our Defense health program and have received solid 
funding commitments. As a result of these exchanges, we are confident 
about the state of our program in the near term.
    However, looking to the medium to longer term, quite candidly, we 
are concerned. We face tremendous challenges with a benefit design that 
does not always reward the efficient use of care. Further, we are 
increasingly out of step with the benefit design approaches and trends 
of the private sector. We must address these issues, engage in 
constructive dialogue, and do what is right for our current and our 
future generations. My primary goal is to ensure the military has a 
high quality, yet affordable, health benefit program for the long term.

                      SHARING INITIATIVES WITH DVA

    We continue to explore new avenues of partnership with the VA. Our 
executive council structure serves as the setting in which the DOD 
jointly set strategic priorities, monitor the implementation of those 
priorities and ensure that appropriate accountability is incorporated 
into all joint initiatives.
    The Joint Executive Council recently reviewed and updated the Joint 
Strategic Plan (JSP) for fiscal year 2005 which includes goals and 
objectives for the year, as well as performance metrics in the 
following areas:

         Leadership commitment and accountability
         High quality health care
         Seamless coordination of benefits
         Integrated information sharing
         Efficiency of operations
         Joint contingency/readiness capabilities

    We have worked closely with the VA to initiate the demonstrations 
projects required by the National Defense Authorization Act of Fiscal 
Year 2003, as well as the Joint Incentive Fund (JIF) projects required 
by the same legislation. Seven demonstrations are now underway, twelve 
incentive fund projects are in varying stages of initiation and 56 new 
JIF proposals have been submitted for review.
    We are especially pleased with our work with the VA for the 
seamless, responsive, and sensitive support to soldiers and marines as 
they return to duty or transition from Active-Duty to veteran status. 
An important aspect of this transition is having the individual medical 
records available when a separated servicemember presents at a VA 
hospital for the first time. We made significant strides forward by 
transferring to DOD electronic health information of servicemembers who 
leave Active Duty to a central repository at the VA Austin Automation 
Center. Through this repository, VA clinicians and claims adjudicators 
have access to DOD laboratory results, radiology results, outpatient 
pharmacy data, allergy information, discharge summaries, consult 
reports, admission, disposition and transfer information, elements of 
the standard ambulatory data records and demographic data. To date, we 
have transferred this electronic health information on more than 2.9 
million separated servicemembers to this repository, and the VA has 
accessed more than 1 million of those records. We believe that this 
collaborative effort with the VA has been going extremely well and 
together, the DOD and VA are improving services to our veterans.

                   RESERVE COMPONENTS HEALTH BENEFITS

    At your direction, we are implementing the new TRICARE Reserve 
benefits that will ensure the individual medical readiness of members 
of the Guard and Reserve, and contribute to the maintenance of an 
effective Reserve component force. The Guard and Reserve are doing an 
outstanding job and they deserve an outstanding benefit. We will 
provide that for them. We have made permanent their early access to 
TRICARE upon notification of call-up, and their continued access to 
TRICARE for 6 months following Active-Duty service for both individuals 
and their families. We are implementing the TRICARE Reserve Select 
(TRS) coverage for Reserve component personnel and their families who 
meet the requirements established in law. TRS is a premium-based health 
care plan, at very attractive rates, available to eligible members of 
the National Guard and Reserves who have been activated for a 
contingency operation, on or after September 11, 2001. This program 
will serve as an important bridge as the Reserve and Guard members move 
back to other employment and the utilization of the private health care 
market.

                             THE WAY AHEAD

    As we begin the second 4 years of this administration, it is an 
appropriate time to contemplate the way ahead for our Military Health 
System. The mission is clear--to support our men and women fighting the 
global war on terrorism, the people who are helping to bring security 
and freedom to Iraq and Afghanistan, and to care for our Armed Forces 
wherever they serve around the world. Our top priorities for our health 
system today are simple. First, to continue to do our utmost to care 
for servicemembers who go in harm's way. Second, to ensure our health 
benefit remains intact, affordable and effective. We have challenged 
the leadership of the Military Health System to be creative and 
diligent in the pursuit of these missions and priorities. We will 
advance our programs to care for our deployed heroes--our returning 
wounded from Iraq and Afghanistan will have special focus. We have made 
great strides in this direction, but further improvements are possible.
    The Department continues to lead and cooperate with other Federal 
partners in the biodefense of our country and supporting the 
enhancement of emergency medical preparedness.
    We will follow through on our TRICARE governance implementation and 
together address remaining and emerging issues in our new framework. In 
key areas we have worked with our private sector partners to identify 
needed policy changes--and to soon implement these changes.
    We will work to complete the medical readiness review, and 
implement the final recommendations of the Base Realignment and Closure 
Commission to be released later this year.
    We will fully implement our strategic and business planning 
processes to ensure we effectively address readiness, capital needs, 
and changing infrastructure. These processes are not simply a window 
for us in Washington, but a productive way for MTFs, regional 
directors, and TRICARE managers to manage for the next 10 years or 
more.
    We will pursue higher levels of system efficiency and clinical 
effectiveness and deploy information technologies and management 
systems that support greater performance, clarity and accountability. 
We will implement critical new initiatives such as revised financing, 
prospective payment, diagnosis-related groups (DRGs), improved billing 
and coding, and the Composite Health Care System II (CHCS II).
    The MHS enjoys a position of national leadership with respect to 
information technology. Our electronic health record system is the most 
sophisticated and far reaching of any in the world. We are on track to 
implement it fully within the next 24 months. Today, on average, nearly 
20,000 patient visits daily are being captured by this new system. We 
have an opportunity, even an obligation, to lead--and so we will.

                    SUPPORT TO THE SEVERELY WOUNDED

    Each of the Services has initiated an effort to ensure that our 
seriously wounded servicemembers are not forgotten--medically, 
administratively, or in any other way. To facilitate a coordinated 
response, the Department has established the Military Severely Injured 
Joint Support Operations Center (JSOC). We are collaborating, not only 
with the military services, but also with other departments of the 
Federal Government, nonprofit organizations, and corporate America, to 
assist these deserving men and women and their families.
    A number of our severely injured servicemembers will be able to 
return to duty, thanks to their dedication and commitment, and the 
phenomenal quality of military medicine. Some, however, will transition 
from the military and return to their hometowns or become new members 
of another civilian community. These are capable, competent, goal-
oriented men and women--the best of our Nation. We will ensure that 
during their rehabilitation we provide a ``case management'' approach 
to advocate for the servicemember and his or her family. From the JSOC 
here in Arlington, Virginia, near the seat of government, to their 
communities across America, we will be with them. This will continue 
through their transition to the VA, and the many other agencies and 
organizations providing support to them. Our goal is to provide long-
term support to ensure that no injured servicemember is allowed to fall 
through the cracks.

                               CONCLUSION

    The military medical community has often been a powerful influence 
in building national relationships that foster freedom and liberty. 
Today, we also directly support our servicemembers who fight to help 
others secure their freedom. We face real challenges in the months and 
years ahead in this fight for freedom and liberty. Our Military Health 
System is truly a precious national asset, and we are most pleased to 
have the opportunity to help shape and lead it. The men and women of 
the MHS have worked very hard at research, to protect, to care for and 
to treat, to manage and to lead. The reason military medicine has 
succeeded and why it will continue to succeed goes beyond `hard work'--
it goes to the will and character of the American people. We are 
confident that our mission--caring for the uniformed servicemembers who 
keep this Nation safe and secure, and to care for their families--has 
no greater calling or cause!
    The DOD has made tremendous progress in force health protection and 
surveillance since the Gulf War, and quite a bit since the beginning of 
Operation Iraqi Freedom. The groundwork has been laid for even greater 
progress in the near future and we are firmly committed to continued 
improvement in protection for the health of our servicemembers and in 
the everyday care and support for all of our beneficiaries. The medical 
personnel of our combined services have our heartfelt appreciation and 
full support for their outstanding work.
    Thank you.

    Senator Graham. Thank you very much, there's a lot to 
ponder here. I've kind of flamed the debate for myself here a 
moment, a couple of things you said jumped out at me, Dr. 
Winkenwerder. You said by 2010, 70 percent of military health 
care will be consumed by retirees, if nothing changes. You also 
indicated that there has been zero increase in cost sharing in 
the TRICARE system, and compared that to other programs in the 
civilian sector where it's kind of 57 to 87 percent, is that 
right?
    Dr. Winkenwerder. Yes, sir.
    Senator Graham. What ideas do you have about changing that? 
How can we address that problem in a fair way?
    Dr. Winkenwerder. Well, to be candid, our first step has 
been to educate everyone, both within the Department, and we 
spend quite a lot of time doing that with our military 
leadership to make sure that we all have agreement that we have 
a problem. That is part of this process, and there are lots of 
different approaches, at least many. I think it is fair to say, 
as Senator Coburn said, providing a notion that people are sort 
of engaged with their health care.
    Senator Graham. Does Congress have to approve any 
increases, is that the way the law is structured now?
    Dr. Winkenwerder. For certain aspects, yes, and for others, 
we would currently control the authority to do so. But I would 
just say that it would be our view that any change that we want 
to make would be best done in cooperation, and in consultation 
with you, and certainly with others.
    Senator Graham. About best practices? I understand your 
testimony to be that some of your new contracts are going to 
incorporate a best practice requirement.
    Dr. Winkenwerder. Yes, that's correct.
    Senator Graham. Does it have any financial incentive?
    Dr. Winkenwerder. Yes it does.
    Senator Graham. Similar to what Dr. Coburn suggested?
    Dr. Winkenwerder. We are currently, with the new contracts, 
using financial incentives to improve what some people call the 
administrative processes, timeliness of claims, payment 
accuracy of claims payment, answering phone calls, being 
responsive, and even satisfaction of the beneficiaries, and 
that has certainly gotten people's attention here in the first 
6 months of the contract. The next phase, we do not have this 
in the current contracts, but I think Senator Coburn makes a 
very good point. He's exploring how to incentivize good 
clinical performance, that is, the right kinds of practices 
within health care.
    Senator Graham. Do you have any suggestions about a HSA 
component to TRICARE that would be unique to the military? Do 
you have any ideas along those lines?
    Dr. Chu. Let me, if I could, answer that. I've asked that 
the DOD look at that issue, just as a matter of simple justice. 
We offer it now to our civil employees in the Department, and 
Dr. Winkenwerder is one of them, I might add. It is not 
straightforward, and much as Dr. Winkenwerder indicated, as far 
as other health care benefit plans, I think we want to do this 
in partnership with Congress if we're going to proceed. We 
could do some parts of the necessary steps with authority that 
the Secretary of Defense has, but we cannot necessarily do all 
of it.
    Senator Graham. Let me understand what you just said, Dr. 
Chu, if you're a DOD civilian you'll have a self savings 
account opportunity?
    Dr. Chu. Congress gave the entire nation--and with that 
statute also Federal civil employees, and that included of 
course DOD civil employees. We're looking hard at how to offer 
such an option on a voluntary basis, again, your choice, to 
military households.
    Senator Graham. I will now recognize Senator Nelson.
    Senator Ben Nelson. The legislation, Dr. Chu, you're 
talking about authorizing civilian employees does not, 
apparently, extend to the military? Do you think that was an 
oversight on our part, or is this something we have learned 
since?
    Dr. Chu. I think it reflects the fact that the military 
benefit is culled out in statute, a separate set of statutes, 
and governed by those statutes. So if we were going to offer a 
thoughtful HSA plan, from the research we've done thus far--and 
we're not finished with that review--we would probably need 
some additional statutory authority. There are also some 
significant administrative issues, about how you run a system 
like ours with two very different plans like this in place at 
the same time.
    Senator Ben Nelson. You would have a ``QuadCare'' or 
something like that, you would have to have another plan, I 
mean, keeping it symmetrical, of course, to deal with that. 
There would be a different kind of plan because obviously you 
would have high deductibles in place, et cetera. It might not 
be a bad idea to try and explore to see if that kind of a 
system would work for the military as well, perhaps a pilot 
project or something, would that be appropriate?
    Dr. Chu. That is one way to proceed, yes sir.
    Senator Ben Nelson. If you had your druthers what would be 
a way to proceed?
    Dr. Chu. I would first like to complete our due diligence 
as to what are the constraints and issues you would have to 
confront successfully in order to mount a good program. It may 
be that if it is voluntary, you could offer it on a broad basis 
to start with, and that the pilot would really consist of 
seeing how many people were interested in an option of this 
sort, but we've not reached that point yet.
    Senator Ben Nelson. Mr. Chairman, I neglected to ask to 
have my full statement placed in the record.
    Senator Graham. Absolutely.
    [The prepared statement of Senator Ben Nelson follows:]

            Prepared Statement by Senator E. Benjamin Nelson

    Thank you for holding this hearing, Mr. Chairman. Health care is a 
vitally important aspect of serving in the military. When we send our 
young men and women into combat, we know that some will be injured and 
wounded. When that happens, we owe it to them to ensure that we provide 
them with the very best health care available. At the same time, 
servicemembers and their families also have health care needs that must 
be met. Quality health care is one of the most important quality of 
life benefits that we provide to our servicemembers and their families.
    At the outset, I want to commend the military's health care 
professionals for the incredible medical care they are providing to 
troops wounded in Iraq and Afghanistan. Many seriously wounded soldiers 
and marines who would have died on the battlefield in earlier conflicts 
are alive today because of the world-class medical care they received. 
They were kept alive by highly-skilled medics who provided immediate 
care, enough to keep them alive until they could be evacuated to 
facilities where highly sophisticated, cutting edge, care was 
available. As I understand it, seriously wounded soldiers and marines 
are quickly moved from the combat zone to the Landstuhl Regional 
Medical Center in Germany where they are stabilized, then evacuated to 
the United States, where they receive the very latest in medical care. 
Our military health care system is the very best there is, and we 
intend to keep it that way.
    Providing this health care is expensive, and the cost grows each 
year. Cost of health care is not an issue that is limited to the 
military--the cost of health care is a major issue that our society is 
grappling with. I recently met with Dr. Winkenwerder who expressed the 
Department of Defense's (DOD) concern about future medical cost growth, 
which could reach $50 billion in 5 years. We in Congress share that 
concern. The DOD and Congress need to work together to control military 
health care costs, but we must do so in ways that do not cut benefits 
or degrade the quality of care provided to those who are wounded while 
fighting our wars.
    I join the chairman in recognizing one of our own, Senator Coburn, 
to get his insights on efficient delivery of health care and how it 
might apply to the Defense Health Program (DHP). I look forward to the 
testimony of Secretary Chu and Dr. Winkenwerder about how the DHP is 
functioning and any ideas they have for improvements. I am anxious to 
hear from the experts on our last panel on their insights into national 
health care trends and what they portend for the DHP.
    Thank you Mr. Chairman. I look forward to the testimony from our 
witnesses.

    Senator Ben Nelson. I do want to compliment you, Dr. Chu, 
on what's been done with the care of our wounded personnel and 
soldiers and those who have been wounded in Iraq and certainly 
in Afghanistan. I've toured Landstuhl and seen what you've been 
able to do in stabilizing and getting to that base for the 
appropriate kind of care. Certainly our soldiers and all who 
are engaged in this conflict certainly have a lot better care. 
The obvious casualty numbers are lower than they would 
otherwise be, and I certainly want to commend you and all the 
military and the civilian personnel who have made this 
possible, to save lives, and to save as much of the health as 
they can of those who have been wounded.
    Dr. Chu. Thank you, sir--a great credit to the men and 
women in the field who are doing that hard work as we speak.
    Senator Graham. Thank you.
    One last line of inquiry, when you talk about expanding 
TRICARE, or about TRICARE just in general, do you get a lot of 
input from the community that is being serviced? I have a 
billing statement here, and this is anecdotal, but it's just 
used to illustrate a point where the service for the TRICARE 
patient was $4,557 for some institutional care, and TRICARE 
paid $8,475.81. They paid twice what the bill was requested, 
and we've been told that the code allowed that much payment for 
the service, and no one thought to see if it actually came 
under the code. This, I'm sure, happens in all managed care 
systems, but our next panel has been very direct in their 
testimony to the committee about waste and inefficiency. What 
efforts, if any, do we have ongoing to look at problems like 
this, to better police TRICARE and to make sure that before we 
reform the benefits schedules, which I think we have to do, 
that we look at bringing more efficiencies to the table, and 
find out where our money is going?
    Dr. Winkenwerder. Well, thank you for that question, that's 
a great question. I can tell you that nothing bothers me more 
than to know that either someone has taken advantage of our 
program, and therefore of the military, and our beneficiaries, 
and the United States taxpayers, or that mistakes were made 
that waste peoples' money. We have a number of audit programs 
in place to try to prevent that type of incident. I'd be 
interested in looking into that incident, to make sure we can 
follow up on it. We want to make sure that we pay what we're 
supposed to pay and that we don't pay what we're not supposed 
to pay, and this goes to a variety of situations.
    Senator Graham. How do your reimbursement rates compare to, 
say, Medicare?
    Dr. Winkenwerder. Typically, we're right at our standard, 
which is the same as Medicare pays now. Our contractor health 
plans that we work with such as Humana, Tri-West, and 
Healthnet--those are the big three--are free to negotiate 
something that might be less than that, but it will depend upon 
the area of the country. In some areas, they may pay more than 
that, because of the negotiation, but I do want to refer back 
to Senator Coburn's concern about the access. We have had some 
issues in access, and we attended to those. We have a very 
large network nationally, with over 212,000 physicians, but if 
you go to certain pockets in certain local areas it is 
possible, yes, that there could be problems.
    But, we've instituted a new process of doing this, at the 
beneficiary groups' suggestion. There are 20 areas in the 
country every year that go out and survey the medical providers 
and the doctors, to ask if they're taking TRICARE, and if 
they're not, why, and what's going on, and that's been very 
valuable to encourage our contractor partners to say, ``Look, 
we need to expand, we need to make sure that we have sufficient 
providers here.'' The long and the short of it is, at least one 
measure is asking our beneficiaries themselves about how 
satisfied they are with access, and it is not decreasing, it's 
actually improving, slightly, a few percentage points. I think 
that is a good news story. But it doesn't mean that there 
aren't problems.
    Senator Graham. What are your audits about waste and 
inefficiency showing? What are they telling us?
    Dr. Winkenwerder. I would have to get back to you with a 
specific report on that, and I would be glad to do that.
    [The information referred to follows:]

    TRICARE has multiple controls in place to ensure accurate payment 
of claims and appropriate expenditure of taxpayer dollars.
    One of these controls is the requirement for prepayment review. The 
contractors use this strategy to prevent payment for questionable 
billing practices. Providers are placed on prepayment review as part of 
the administrative actions taken by the contractors. This process 
allows for a close review of the services rendered and often requires 
the suspect provider to submit medical documentation to support billed 
services. In calendar year 2004, prepayment review resulted in a cost 
savings of $7.3 million.
    Another control is TRICARE's rebundling software, a commercial 
software package used by all managed care support contractors. The 
software is designed to detect and correct the billing practice known 
as unbundling, fragmenting or code gaming. This practice involves 
separate reporting of the component parts of a procedure instead of 
reporting a single code which includes the entire comprehensive 
procedure. An example of an improper billing that is detected with this 
software is in billing for a hysterectomy. A proper code for a 
hysterectomy would be represented by a 58150 which would reimburse at 
about $2,700. An unbundled billing would contain multiple line items 
and codes such as lysis of adhesions, exploratory surgery, dilation and 
curettage, tying of tubes, coming out to over $7,500. This practice is 
improper, has been condemned as inflationary by professional medical 
groups and is a misrepresentation of the services rendered. Every claim 
is run through this system of checks and balances. This product does 
not set coverage or benefit policy--it merely audits the claims prior 
to payment for appropriate coding. Rebundling software has saved 
millions of dollars in erroneous payments each year. During calendar 
year 2004, $95 million in fraudulent/abusive billings were stopped 
across all contracts.
    TRICARE also mandates that each contractor have a fraudulent claims 
investigation unit or anti-fraud unit to identify and investigate any 
pattern of suspicious or any potential fraudulent billings. Artificial 
intelligence software is also a contract requirement to facilitate data 
mining to identify questionable billing practices. In calendar year 
2004, there were $6 million in fraud judgments for TRICARE. Another 
$2.29 million were identified for administrative recoupment.
    TRICARE has established a cost recovery contract as well to 
determine the extent of potential overpayments to providers for 
Medicare Cost Report periods during calendar years 1992-1997. The audit 
identified $32 million for recoupment involving 2,160 hospital 
providers. Tricare Management Activity (TMA) is in the process of 
establishing the next round of cases, consisting of an estimated 550 
new cases with a net value of approximately $7.3 million. This contract 
is administered by TMA's Contract Operations Division.
    An employee at TRICARE has developed a retrospective auditing tool 
that is required to be used by all managed care support contractors. 
The software has identified and accounted for almost $100 million in 
recoupments or offsets nationally since 1996.
    The areas I've covered briefly represent just some of the many 
additional controls TRICARE has in place to ensure fiscal 
responsibility--controls in addition to the strong contract performance 
requirements and financial disincentives for erroneously paid claims.

    Dr. Winkenwerder. I know we regularly recover money into 
the more than tens of millions--it's probably well over a $100 
million a year--in this type of activity, so it is an important 
source of cost avoidance that we keep our eye on, and that we 
set targets to ensure that we're not being taken advantage of.
    I will say one other thing about our administrative costs, 
and that is that--because I'm familiar, having worked with Blue 
Cross/Blue Shield in the past--that our administrative costs as 
a percentage of a total health care dollar are lower than just 
about any health plan that I'm aware of in the past. Some of 
that is because we don't have to spend dollars on marketing, or 
advertising, and I think our size also gives us some economy of 
scale, so we actually have a pretty good administrative cost 
structure. That is not to say we can't drive it down, we're 
trying to drive it down through more electronic claims, and 
electronic commerce and that type of thing, but I did want to 
just make that one point.
    Dr. Chu. If I could add, Senator, on this question of 
auditing, just for the reasons you're implying--we have a very 
strong partnership with the Department's Inspector General (IG) 
on this front. It is a very vigorous program of review. Second, 
on the question of efficiency, that's the reason Dr. 
Winkenwerder recommended, and we have adopted, this prospective 
payment system for our own treatment facilities, that we staff 
and run ourselves. In the past they would be paid on inputs, 
depending on the number of people on staff. It's largely 
backward--looking in terms of budgeting, based on what you have 
last year, and then what you anticipate for next year. In the 
future--this is a 4-year transition--but in the future they'll 
be paid based on the anticipated work load by diagnosis, and 
they'll be paid, essentially, those same Medicare rates that 
anybody else would pay, and what that is, is already identified 
for us inside the Department. Some of our hospitals look very 
good, and they would make a ``profit'' if they were in the 
private sector. Some of our hospitals probably have some 
significant work to do to bring themselves up to the standard, 
and that's the purpose of this 4 year transition.
    Senator Graham. That's terrific, Senator Nelson, anything 
more?
    Senator Ben Nelson. Dr. Chu, under laws that we've passed 
the last couple of years, the Reserves, and the families, have 
become eligible for this military TRICARE benefit, up to 90 
days prior to mobilization in order to make sure--among other 
things--that the military personnel are ready to go. Now, the 
Reserve Officer's Association reports complaints that units are 
being ordered to Active-Duty using group orders, and when they 
attempt to enroll in TRICARE, they're told that they need an 
individual order to enroll. But, they don't get individual 
orders until they arrive at the mobilization station. We seem 
to have an impossible situation, where you can't quite get 
there with what was intended. So, even though they are 
eligible, they just can't get individual orders until they 
actually report for Active-Duty, is there anything we can do? 
Or were you aware that we are running into this sort of a snag?
    Dr. Chu. I had not heard of that until your staff mentioned 
it earlier this afternoon. We'd be delighted to look into that 
and make sure we get the situation put on the right footing.
    [The information referred to follows:]

    The Service/Reserve component personnel activities are currently 
recording eligibility for TRICARE coverage for Reserve component 
members and their family members in the Defense Enrollment Eligibility 
Reporting System (DEERS) when the Reserve component issues delayed 
effective-date Active-Duty orders, up to 90 days before the member is 
scheduled to report to Active-Duty. The DEERS transaction by the 
personnel activities is all that is required for the member and their 
family members to be covered by TRICARE; action by the member is 
neither required nor possible to get TRICARE.
    Nonetheless, eligibility for TRICARE coverage as recorded in the 
DEERS by personnel departments is frequently confused with enrollment 
into TRICARE Prime as a result of an enrollment application submitted 
by a beneficiary to the TRICARE regional contractor. (TRICARE Prime is 
an option similar to civilian HMOs that names a primary care provider 
for each eligible beneficiary who will serve as his or her Primary Care 
Manager.) Eligibility in DEERS, not orders, is the prerequisite to 
TRICARE Prime enrollment. DOD policy was revised last year to ensure 
that mobilizing Reserve component members do not apply for enrollment 
into TRICARE Prime until reaching their final duty station where a 
Primary Care Manager can be named for them. However, their eligible 
family members are welcome to apply for enrollment into a TRICARE Prime 
program as soon as they become eligible in the DEERS depending upon 
local availability.
    In my memoranda of January 7, 2004, and February 11, 2005, to the 
Assistant Secretaries of Military Departments for Manpower and Reserve 
Affairs, I provided guidance on recording eligibility in DEERS for 
National Guard and Reserve members, and their eligible dependents. The 
guidance directed the Services to provide electronic files to DEERS of 
eligible members who have been issued either an individual mobilization 
order or are on a unit alert order with approved annex identifying 
individuals to whom individual mobilization orders will be issued. 
While guidance has already been published that should preclude the 
reported problem, I will reissue guidance to reinforce the need to 
record eligibility in DEERS, with the appropriate effective date, as 
soon as an approved order has been issued.

    Senator Ben Nelson. Obviously sometimes putting in place 
something that directs something like this to get done runs 
into a hurdle, or runs into a snag, and this is clearly one of 
those situations, because it's not intended to do what was an 
unintended result, which I hope we can resolve.
    Dr. Chu. Yes, sir, and if your office can provide details 
of which units thought they were so disadvantaged, that would 
help us track it down more quickly.
    Senator Ben Nelson. We'd be happy to do that. Now Dr. 
Winkenwerder, I have a little bit of questioning about mental 
health counseling. It's always going to be an issue we deal 
with when it comes to health care. One question as it relates 
to servicemember health care, and another as it relates to 
families, dependents.
    Apparently, a recent Army study found that incidents of 
major depression, generalized anxiety, and post-traumatic 
stress disorder (PTSD) were significantly higher after combat 
duty in Iraq or Afghanistan. Obviously, we know that many who 
need that kind of care don't necessarily seek it because of the 
stigma that's attached to it. In March of this year, you issued 
a memorandum to the Assistant Secretaries for all of the 
Services, directing them to extend the Pentagon's current post-
deployment health assessment process to include a reassessment 
of global health, and then with a specific emphasis on mental 
health, to occur 3 to 6 months post-deployment. Do you know 
what has happened as a result of your directive?
    Dr. Winkenwerder. Yes, Senator, thank you for asking that 
question. This is an area that has been a real concern for me 
and a real priority.
    We're placing people in difficult situations, in stress, in 
combat and it goes on. Group after group, and it's a tough 
situation, so I think we're doing a number of things. We have 
Combat Stress Control Teams in theatre, who focus on 
identifying mental health concerns right up front, immediately 
after deployment. This latest step that we've taken that really 
came as a suggestion from our front line people--it wasn't an 
idea that came out of my office said, ``Look, we really think 
we need to have everybody go through this sort of screening 
procedure, with a questionnaire and a face-to-face interaction 
at about 3 months, because that's when it seems like we're 
seeing some family adjustment problems, or some social 
problems, or anger or alcohol, and we can really help people if 
we do this,'' and I asked them, I said, ``Do you think we 
should make it mandatory?'' The answer was ``yes.''
    So, in the Services, many times--I think you know having 
served on the Armed Services Committee when we tried to put a 
big new program like this into place--there's some resistance 
and so forth, people really welcome this idea, and so I just 
was briefed on it this week. We're on schedule, we believe, to 
implement this starting in June. It will roll out over the 
summer months, and it will be a permanent thing from now on, so 
we'll look forward to finding out what we've learned from this. 
We will also be reaching out to the guardsmen and reservists, 
even people who have separated, we're going to contact them by 
phone or by e-mail or by whatever means possible to make sure 
we make contact.
    Senator Ben Nelson. I think that's an excellent approach, 
and I hope that you will keep us advised as to how it turns 
out. I have one further question on this as it relates to the 
family members. Apparently there's some challenge with certain 
families, and civilian health care providers don't accept 
TRICARE, and so you end up with some people who are stranded 
without the TRICARE available to help them on some of the 
mental health counseling they need. Are you aware of that, and 
is there anything that has been done to date?
    Dr. Winkenwerder. I would have to take that specific 
concern and get back to you on it.
    [The information referred to follows:]

    One of the most important things that TRICARE can do is to help 
beneficiaries locate a provider who will treat them. The TRICARE 
Regional Offices, along with the regional Managed Care Support 
Contractors, can find a TRICARE authorized provider for beneficiaries.
    Admittedly, we have access to care challenges particularly in rural 
areas. Through TRICARE Standard, the fee-for-service coverage option in 
TRICARE, we serve about 2.5 million beneficiaries under age 65, many of 
whom live in rural areas. TRICARE Standard is an important component of 
the TRICARE triple option benefit that provides more freedom of choice 
of provider at a somewhat higher cost than TRICARE Prime or TRICARE 
Extra. TRICARE Standard has worked well for Active-Duty families, 
retirees, and their families for over 35 years, and the Department is 
committed to enhancing and improving it. Unlike TRICARE Prime, with its 
uniform access requirements for enrollees, TRICARE Standard access 
varies from place to place, depending on proximity of military health 
care and the extent of the local civilian health care system.
    Moreover, we are pleased with recent survey results which show that 
providers are accepting TRICARE patients. In accordance with Section 
723 of the National Defense Authorization Act for Fiscal Year 2004, DOD 
conducted a survey of physicians in 20 market areas around the U.S. 
regarding their acceptance of new TRICARE patients. Beneficiary groups 
identified these areas as having the greatest anecdotal evidence of 
access problems. These areas included over 11,000 physicians located in 
Anchorage, AK; Boise, ID; Colorado Springs, CO; Fredericksburg, VA; Las 
Vegas, NV; Rochester, NY; Atlanta, GA; Bainbridge Island, WA; Buffalo, 
NY; Cheyenne, WY; Fayetteville, TN; Greensboro, NC; Jackson, MS; 
Laurel, MS; Meridian, MS; Philadelphia, PA; Portland, OR; Princeton, 
NJ; Utica, NY; and Williamsburg, VA. Survey data showed that most 
doctors were accepting new TRICARE patients. Since these areas 
represented the locations where there were beneficiaries' greatest 
concerns about access to care, the results suggested that we do not 
have major problems with access.
    We will continue, however, to work hard to find ways to improve 
access to care for TRICARE Standard users. The surveys required by 
Section 723 of National Defense Authorization Act for Fiscal Year 2004 
will continue over the next few years, and we should get additional 
important information to help focus our efforts.
    In addition, to address immediate needs for counseling, 
servicemembers may access the Department's Military OneSource, a 
program designed to help servicemembers and their families deal with 
issues such as personal and family readiness, emotional well-being, 
addiction and recovery, and parenting and child care. Through Military 
OneSource, master's level consultants are available 24 hours a day, 7 
days a week, 365 days a year. Anyone may call to speak with a 
consultant, or they may go online to access information or to e-mail a 
consultant. Consultants are available to discuss confidential issues 
relating to emotional and mental health.
    Finally, in locations where there may be inadequate access to 
network providers, members and their dependents may seek care from any 
authorized TRICARE mental health care provider. If members are enrolled 
in TRICARE Prime or TRICARE Prime Remote Active Duty Family Member 
(TPRADFM), and they are referred to a non-network provider, TRICARE may 
pay up to the legal liability amount (Champus Maximum Allowable Charge 
(CMAC) plus 15 percent). If not enrolled in Prime or TPRADFM, members 
and their dependents may use TRICARE Standard. For reservists and their 
dependents under the Reserve Demonstration, TRICARE will waive their 
Standard deductible and pay 115 percent of CMAC to nonparticipating 
providers.

    Dr. Winkenwerder. I have not been informed that, that at 
least, is a broad issue, but we would be glad to look into it.
    Senator Ben Nelson. We'll try to get you some more 
information on that. Finally, I think in fiscal year 2001, the 
National Defense Authorization Act required the DOD to conduct 
a demonstration project, authorizing licensed mental health 
counselors to practice independently, and I think back in March 
27, 2003, you provided a letter in which you stated that the 
Department will submit its final report to Congress in March 
2005. We might have missed the March date. Do you have some 
idea?
    Dr. Winkenwerder. Yes, sir, I know that report is coming to 
my office right now. I literally just began to read it. It is a 
big report. I wanted to make sure I really understood it well 
before we reported back to you, but it should be to you within 
a couple of weeks.
    Senator Ben Nelson. Can we count on that for summer 
reading, maybe? [Laughter.]
    Dr. Winkenwerder. Yes, plenty of time for summer reading.
    Senator Ben Nelson. Thank you.
    Senator Graham. One last question, what is the 
administrative cost of TRICARE?
    Dr. Winkenwerder. I can't give you a precise number, but it 
is in the single digits. But some of it depends upon how you 
define administrative costs. Let me just say, for example, the 
cost to have Surgeons General of the Army, Navy, and Air Force 
and the TRICARE office--not all of that is administration, some 
of that is what you would call ``Leadership'' or ``Direct 
Support'' to the troops--and if you're talking about the 
purchased care aspects, the TRICARE networks and so forth, 
again it is well below a 10-percent number. The typical number, 
again, in the private sector that I'm familiar with is around 
12, 13, 14 percent, so we think we're several percentage points 
below that.
    But I'm a believer that, again, as I said, as more and more 
electronic commerce and more and more efficient ways of doing 
things are derived, we ought to be able to drive that number 
down continually. So, we look to do that.
    Senator Graham. Thank you. Anything Dr. Chu?
    Dr. Chu. No, sir. Thank you very much.
    Senator Graham. Thank you, you've been very helpful. Our 
next panel? Thank you both.
    We want to thank you all very much for coming today and 
your patience, it's been a very good hearing thus far,
    I appreciate your participation. Dr. Blumenthal, Dr. Galvin 
and Ms. Hosek? Thank you all for coming, and if you don't mind, 
for the record, just introduce yourself and your organization, 
and we'll start with Dr. Blumenthal and take testimony.
    Dr. Blumenthal. My name is David Blumenthal, I'm a 
practicing general internist and also Professor of Medicine and 
Health Care Policy at Harvard Medical School, and also direct 
an Institute for Health Policy at Massachusetts General 
Hospital in Boston.
    Dr. Galvin. I'm Dr. Robert Galvin, Director of Global 
Health Care for General Electric.
    Ms. Hosek. Susan Hosek, I'm a Senior Economist at RAND, and 
I am co-Director of RAND's Center for Military Health Policy 
Research.
    Senator Graham. Again, we're very lucky to have you all, we 
appreciate it, Dr. Blumenthal?

 STATEMENT OF DR. DAVID BLUMENTHAL, M.D., DIRECTOR, INSTITUTE 
  FOR HEALTH POLICY, MASSACHUSETTS GENERAL HOSPITAL, BOSTON, 
                         MASSACHUSETTS

    Dr. Blumenthal. Mr. Chairman, Senator Nelson.
    It's a privilege to be here and to share my views on the 
military health system and the cost problems you're facing. I 
will summarize my remarks and request that the full text be 
submitted for the record.
    I'm not an expert on the military health system, I study 
other aspects of the health care system, but it is my 
understanding in listening to the testimony today, it's 
confirmed that the military is now venturing into joining the 
problems that the rest of our health care system is dealing 
with, and I would like to focus on those with the hope that it 
provides some lessons for your efforts to deal with the 
military's particular issues.
    The area I would like particularly to concentrate on is the 
one that I think is most relevant to TRICARE for Life, your 
programs for older retirees, those over 65, because they--in 
many ways--constitute for the rest of the American health care 
system, the biggest challenge that we face, that is, older 
Americans, and the burden of illness that they live with. The 
challenge is how to get value for our money for expenditures 
for an aging population that is living longer with chronic 
illness and has ever greater and more complicated opportunities 
for treatment, with more bio-medical information and technology 
to treat them. That is both our blessing, and from a financial 
standpoint, our curse.
    I don't think there are any magic or silver bullets here. I 
think you're in for a long struggle as the rest of us are, and 
the rest of our health care system. There are no simple 
solutions. This is a campaign that has to be waged over a long 
period of time with many efforts at trial and error and 
experimentation.
    Let me talk a little bit about the sources of cost 
increases as I perceive them, for elder Americans. As you are 
well aware, the Medicare Program experiences very marked cost 
increases year to year. These in the earlier years of this 
decade have ranged from 6 to 11 percent annually, and that's 
about how they've run through most of the history of the 
Medicare program. As you well know, Medicare beneficiaries have 
considerable burden of co-payments, so co-payments are not an 
instant solution to the containing health care costs.
    When you think about the cost of this population I think 
you should think about three things. First of all, you should 
think about chronic illness, a second thing you should think 
about is technology, and the third thing you should think about 
is opportunities for improvement in the area of chronic 
illness. It is chronic illness that is overwhelmingly the cause 
of higher costs for our older population.
    If you look at the Medicare program, Medicare beneficiaries 
with five chronic conditions cost 15 times as much per year as 
those with no chronic conditions--15 times. Those with five 
chronic conditions account for two-thirds of all Medicare 
expenditures. If you have five chronic conditions, that portion 
of our Medicare population that has five chronic conditions----
    Senator Graham. Is that per person?
    Dr. Blumenthal. Two-thirds altogether, and 96 percent of 
Medicare spending goes to individuals with one or more chronic 
condition. The second point I wanted to make is about 
technology. If you look at why expenditures are increasing year 
to year on these patients with chronic conditions, the reason 
is we're doing more and different things for them. One example 
of these more and different things, which is well known to the 
public, is coronary angioplasty and stinting for narrowed 
coronary arteries, the kind of procedure that Vice President 
Cheney has gone through. We didn't have that 20 years ago. It 
saves lives, and it's expensive, and we pay for it, and ought 
to pay for it.
    Another example is a new way of screening for a condition 
called abdominal aneurysm, which is the swelling of a major 
artery in the stomach, and if it bursts, it is almost certainly 
fatal. We now screen for that and can operate on it, and 
prevent its bursting and save lives. We didn't know how to do 
that, just a few years ago. So these things are available to 
us. It's very hard to say ``no'' to them, and the march of 
technology is very hard to turn back once it gets going.
    A third point that I want to mention has to do with 
opportunities for improvement, and I think my colleagues will 
say more about that. The first thing is that Medicare has 
obvious inefficiencies, and perhaps the most clear example of 
that, or illustration of that is the fact that our country pays 
twice as much for the care of an older person in Baton Rouge or 
Miami each year than it does in Oregon or Minneapolis. So twice 
as much in one place than another with no evident explanation 
to the illness of the beneficiary, and no evident impact on the 
outcome of the beneficiary. That differential implies there's 
opportunity for cost saving.
    The other point I want to make is that we can treat our 
elderly patients better than we do. There's obvious evidence 
that they don't often get the care they need.
    There are opportunities for quality improvement, and 
Senator Coburn referred to those, and I think my colleagues 
will also refer to them--what are some ways in which we might 
think about dealing with these, both the opportunities and the 
problems?
    I want to say that all of these are partial solutions and 
they are hopeful aspects of the health care system, but much 
remains to be learned about them. One is through health 
information technology, this has been a very important aspect 
of the President's program. I think it offers opportunities to 
conserve funds and improve quality if implemented, and the 
military already, I think, has made a major effort to do that 
within their military health system.
    A second is a program or set of programs called Disease 
Management, which aim to bring--for the chronically ill--a 
whole bunch of services together and mobilize them, organize 
them and apply them in a timely and effective way. There's a 
lot of experimentation with that going on in the Medicare 
program right now, and the military system should track and 
learn from those experiments.
    You heard something about pay for performance, I think Dr. 
Galvin, in particular, will say more about that. You've heard 
something about reporting publicly about the quality of care 
and performance, and Dr. Galvin will say more about that as 
well. I consider that a promising strategy.
    Finally, I think the military has something to learn about 
the Veterans' Health Administration (VHA). The VHA has 
undergone a remarkable transformation in the last 10 years in 
terms of both the quality and efficiency of care that it 
provides. It suggests that in some respects and in some 
settings, organized systems of care have major advantages in 
caring for the chronically ill elderly. I think this is a very 
important undertaking that you're engaged in, trying to bring 
efficiency into your military health system while preserving 
the benefits, and maximizing the health of the armed services 
and their retirees. I am grateful as an American that you're 
involved in this, and look forward to answering any questions 
you may have.
    [The prepared statement of Dr. Blumenthal follows:]

               Prepared Statement by Dr. David Blumenthal

    Mr. Chairman, members of the Subcommittee on Personnel, it is a 
pleasure and a privilege to appear before you today to discuss the 
current status of the Military Health System (MHS) of the United States 
Armed Forces. My name is David Blumenthal. I am a practicing general 
internist in Boston, Massachusetts, as well as Professor of Medicine 
and Health Care Policy at Harvard Medical School and Director of the 
Institute for Health Policy at Massachusetts General Hospital and the 
Partners Health System, also in Boston. I also direct the Harvard 
University Interfaculty Program for Health System Improvement.
    Like all Americans, I recognize the critical importance of the MHS 
to maintaining a strong national defense. Nothing is more vital to the 
readiness of our Armed Forces than caring promptly and well for the 
illnesses and injuries sustained by the men and women who volunteer to 
serve. Furthermore, given the uncertainties associated with obtaining 
health insurance in our civilian sector, the assurance of retiree 
health coverage provides an increasingly important tool for recruiting 
qualified individuals to our volunteer military. Therefore, the 
interest of this subcommittee in the health of our MHS should be 
welcomed by all Americans.
    Before proceeding, I want to make clear to the subcommittee that I 
am not an expert on the MHS, and for that reason, I do not intend to 
comment directly on its accomplishments and challenges. Rather, what I 
propose to do is highlight some on-going trends in the U.S. health 
system generally that may be relevant to thinking about the MHS. From 
my limited understanding, developments in the civilian health system of 
the U.S. are becoming more important to the MHS since an increasing 
number of beneficiaries of the MHS are receiving care outside military 
facilities. This is particularly true, I believe, for one very 
important group: military retirees over 65 who are eligible for the 
Medicare program, and are now able to enroll in TRICARE for Life (TFL). 
The involvement of the MHS in caring for Medicare-eligible Americans 
means that the Department of Defense (DOD) is getting to know up-close 
and personally some of the most difficult problems facing the Medicare 
program and the American health care system generally: how to get value 
for expenditures on the care of an aging population that is living 
longer with chronic illness in an age of exploding medical knowledge 
and technology. This is a challenge facing not only the MHS and the 
U.S. health care system, but every industrialized country around the 
world, and it is the challenge on which I would like to focus my 
remarks today.
    To eliminate any possible suspense, let me go right to the bottom 
line. There are no silver bullets, no shining examples of success, for 
dealing with the increasing costs associated with the care of Americans 
generally and older Americans in particular. The MHS has entered 
territory where, to use military analogies, the fight will be waged 
foxhole by foxhole over the long term. Don't expect any brilliant 
maneuvers, any Inchon-style landings, to sweep away the problem of 
increasing health care costs for the elderly. Rather, to get the best 
value for the dollar in its new commitment to older military retirees, 
the DOD will be forced to experiment, innovate, try and often fail--
unless it chooses to give up territory by reducing its involvement in 
the care of this demanding population group.

                   COSTS OF CARE FOR OLDER AMERICANS.

    Though I will not dwell on the benefits of care for older Americans 
in the U.S. today, I would like to balance my subsequent remarks by 
noting the enormous progress that our health care system and its health 
care professionals have made in improving the health and health care of 
Americans generally and older Americans in particular. Indeed, the 
availability of those benefits--seen in increased life expectancy for 
the over 65, reduced rates of disability for that population, increased 
survival from particular illnesses like cardiovascular disease and 
stroke--is what makes the cost challenge so difficult. If the benefits 
were not so clear and palpable, it would be easier simply to reduce our 
investments in health care for this population. Furthermore, if those 
benefits did not exist, it would be less distressing to note another 
problem that plagues our civilian health care system: its failure, 
despite all that we spend, to provide beneficial services to many older 
Americans who need them.
    The costs of care within the Medicare program have increased 
steadily since the program's inception in 1965. In the first 3 years of 
this decade, growth rates in spending ranged from 6 to almost 11 
percent annually. Several salient observations about the costs of care 
for older Americans within our civilian health care sector should be 
kept in mind as the executive branch and Congress consider approaches 
to containing costs within TFL.
    First, the costs of care in the United States generally, and for 
older Americans in particular, reflect overwhelmingly the costs of 
caring for chronic illnesses, such as high blood pressure, heart 
disease and cancer. I would expect that TFL's costs will reflect this 
same phenomenon. The care of individuals with chronic conditions 
accounts for 78 percent of health expenditures in the United States. 
Individuals with more than one chronic condition account for a hugely 
disproportionate share of national health care spending. Patients with 
more than 5 chronic conditions have annual average health care bills 
that are 15 times that of individuals with no chronic conditions. Those 
with more than one chronic condition account for 96 percent of Medicare 
spending; those with more than five account for two thirds. Thus, there 
is no way to find a solution to the cost problems of TFL without 
improving the way we care for the chronically ill elderly military 
retiree.
    Second, when we drill down to find out why costs are increasing for 
Americans--and especially those with chronic illnesses--we find that 
about 50 percent of the annual increase in costs can be attributable to 
doing more and different things for patients. The remaining 50 percent 
result from inflation generally, from incremental inflation in the 
medical sector (so called medical inflation), and from the aging of the 
population. What does doing more and different things mean? Let me give 
you some concrete examples from the care of patients with 
cardiovascular disease.
    One example is the use of angioplasty and the placement of stents 
in the coronary arteries of patients who have narrowing of those 
arteries. We now routinely perform this procedure for patients in the 
midst of heart attacks. Twenty years ago, there were no stents. Only 
recently has it become clear that using them in the midst of a heart 
attack saves lives. The procedure is extremely expensive, but it 
produces clear benefits.
    Another example is screening for so-called abdominal aortic 
aneurysms, which are weaknesses in the walls of one of the main 
arteries that carries blood pumped from the heart to other organs of 
the body. Such aneurysms can burst suddenly, and the result is massive 
internal hemorrhage and almost certain death. It is now clear that by 
screening older patients for these aneurysms and operating on them when 
we find them, we can prevent their rupture and save lives. We didn't 
know this 10 years ago. The cost is very large.
    A third example of doing more and different things is screening 
older Americans for cancer of the colon using colonoscopies. Twenty 
years ago, colonoscopies were done only when patients displayed 
symptoms of possible illness. Now they are done every 10 years for 
everyone over 50, and more frequently if people have a family or 
personal history of colon cancer or polyps.
    I could give you many other examples of changes in health care 
practice that have contributed to the growing costs of caring for older 
Americans, especially those with chronic illness. The point is that 
care costs more in part because, as economists would say, the product 
we are buying has changed: it is a more complex and in certain ways 
higher quality product than it was 10 or 20 years ago.
    A third general point to keep in mind about trends in health care 
for older Americans is that it needs improvement, and that this is 
likely to be the case for the care purchased on behalf of TFL 
beneficiaries as well. There are at least two ways in the health of 
older Americans falls short.
    The first way is that it is wasteful. Despite all the positive 
things I have noted about health care of our elderly, it is quite clear 
that it could be delivered at lower cost. This is most apparent in the 
huge variations in health care expenses per capita in different 
geographic regions of the United States. Medicare spends more than 
twice as much each year to take care of older Americans in Miami or 
Baton Rouge than it does in Eugene, Oregon or Minneapolis. There is 
absolutely no evidence that these differences in spending make the 
elderly in Baton Rouge healthier than in Minneapolis--indeed, there is 
some evidence to the contrary. The best predictor of Medicare spending 
per capita seems to be not the intrinsic health needs of patients but 
the number of doctors and hospitals in the community.
    The second way in which the health care of older Americans could be 
improved is by making sure that they get the best care we know how to 
provide. Many studies demonstrate that the quality of health care 
provided older Americans is deficient. Heart attack victims often don't 
get the drugs they should; diabetics don't get their blood sugar tested 
or their eyes examined regularly; patients with asthma, depression or 
heart failure don't get indicated medications.
    This, then, is the new terrain in which the MHS must wage its 
campaign to care for TFL beneficiaries: a health care system that is 
dominated by the needs of the chronically ill, that is doing more and 
better things for them than ever, but at the same time, is in many ways 
wasteful and plagued by quality deficiencies. The question that TFL 
must address, like many other stakeholders, is how to care for this 
demanding population in a way that preserves the best aspects of our 
private health care system while improving on its problems.

               IMPROVING HEALTH CARE FOR OLDER AMERICANS

    As I have already indicated, we do not have a stockpile of proven 
weapons for accomplishing this demanding set of objectives. What we 
have is some interesting ideas and some ongoing experiments. Some of 
these ideas are powerful; some of the experiments are promising. The 
MHS also seems well positioned to take advantage of some of these ideas 
and experiments.
    The first idea--already well on its way to widespread testing--is 
greater reliance on information technology to improve quality and 
reduce costs of care for all patients, including the older chronically 
ill. Health information technology (HIT) is a health care priority for 
the current administration because of its promise to improve the 
coordination and integration of health care, and thereby, to prevent 
waste and improve quality of services. The evidence supporting the 
benefits of HIT is far from complete or conclusive, but the technology 
has a compelling logic that makes the current emphasis justified. The 
MHS already has a robust HIT system for the facilities it operates, and 
this gives it an advantage in providing care within those facilities to 
TFL patients. This is one of several reasons that directing TFL 
beneficiaries to MHS owned and operated health care settings makes a 
good deal of sense.
    A second idea is to mobilize resources effectively in the care of 
chronically ill patients through several promising strategies. One is 
the use of so-called disease management techniques. These involve a 
variety of tools: reminders to patients, reminders to doctors, the 
creation of community-based support systems for involving families in 
the care of chronically ill patient, greater reliance on home care, and 
the use of information technology. The goal is to weave them into a 
coordinated plan of attack for making certain the chronically ill 
patients get the right care at the right time, nothing more, and 
nothing less. The Medicare program has embarked on an unprecedented 
national experiment to test the value of disease management programs. 
TFL should watch that experiment closely and be prepared to learn from 
its lessons. Indeed, the TFL may want to launch its own experiments 
tailored to its own special circumstances.
    Still a third idea is the pay for performance strategy, which my 
colleague on this panel, Dr. Robert Galvin, will discuss in detail. 
This is another approach that is both untested and compelling in its 
intuitive appeal. Medicare is also experimenting extensively with this 
approach, and it would be worthwhile for the MHS to develop similar 
efforts that are adapted to its own circumstances. In this regard, 
another experiment that TFL should watch closely is under way in the 
United Kingdom. In its new contract with the Nation's general 
practitioners, the British National Health Service has promised to 
increase payments to GPs by up to 30 percent if they meet specified 
quality goals. The effects of this program on the costs as well as the 
quality of care will be extremely interesting to watch.
    A fourth idea, related to the third, is public reporting of quality 
and cost performance by health care providers. The limited evidence 
concerning quality reporting suggests that it stimulates some health 
care organizations and providers to examine their own quality and 
efficiency, and that the result may be improved performance in certain 
respects.
    A fifth idea is to try, as the MHS is already, to care for as many 
patients as possible within its own health care facilities. There are a 
number of reasons for doing this. One reason is the example of the 
Veterans Health Administration (VHA) which is increasingly 
demonstrating that a large, centralized, public health care system can 
deliver services to chronically ill patients in ways that are higher in 
quality and at least as efficient as the fee for service system. The 
MHS may be able to replicate the success of the VHA in caring for older 
patients. Another example of the potential advantages of organized 
systems of care in managing the problems of older, chronically ill 
Americans is the Kaiser Permanente System, which has pioneered in a 
number of reforms to improve the efficiency and quality of care, 
including HIT and disease management.
    These initiatives, approaches and programs offer some hope that TFL 
and other stakeholders in the U.S. health care system can manage the 
central health care problem of our time: providing the older 
chronically ill the benefits of modern health care services in an 
affordable way. Achieving victory in this struggle will require as much 
ingenuity and perseverance, and perhaps more, than any other mission 
facing the Armed Forces of the United States. But it is well worth the 
effort.
    Thank you for your attention. I would be pleased to answer any 
questions you may have.

    Senator Graham. Dr. Galvin?

   STATEMENT OF DR. ROBERT S. GALVIN, M.D., DIRECTOR, GLOBAL 
             HEALTH CARE, GENERAL ELECTRIC COMPANY

    Dr. Galvin. Mr. Chairman, thank you. Senator Graham, 
Senator Nelson, I appreciate the opportunity to tell you how 
leading employers in the private sector are managing their 
health care costs. I mentioned my formal title before and what 
I do at GE is somewhat similar to Dr. Winkenwerder's role with 
DOD, but on a smaller scale. It's oversight of the design, 
operations, and financial performance of the health benefits we 
offer our employees plus looking after their overall health.
    I was impressed, trying to think through how I could 
contribute today--and excuse my voice by the way, my cold 
hasn't healed--at how similar some of the challenges are 
between DOD and GE because we have highly-trained, well-
educated work forces, and the healthier they are, the more 
productive they are. I think the military is the same way. 
Second, despite our size and our profitability, and the size of 
your budget, these health care costs hurt, they squeeze, and 
it's a very significant pressure that we have to deal with all 
the time. Third, and probably most significant, is the daunting 
challenge of trying to reign in these excess costs while 
keeping people happy, while doing the right thing in terms of 
benefits and not alienating our work forces. These are 
significant challenges.
    Let me say at the outset, that unfortunately I don't have 
the answer. We certainly have not found the answer to this set 
of challenges but I'm going to share with you today a couple of 
ideas we have tried to implement and which I think have been 
positive.
    I would say right off the bat that one thing we have 
learned is how critically important communication is. Whenever 
we have to make benefit choices, whenever we have to make 
decisions that aren't uniformly popular, what we have found is 
that the more we can do face-to-face communication, the better 
it goes. I think that one of the most important lessons that 
former CEO Jack Welch taught was that when you repeated your 
message to the point where you were tired of hearing yourself 
talk, that meant you were about half-way towards getting your 
message across. Because health care is always personal, the 
more we can communicate about charges that address cost 
increases, the better off we are.
    Health care costs are rising rapidly today for many 
reasons. As benefit managers on the employer side are trying to 
manage these costs, we tend to separate the causes of cost 
increases between those we can't do much about--technology, 
aging--and those where we think good management can make a 
difference.
    I'm going to focus on two of those today--benefit design, 
which I'll go over quickly, and then how we can use procurement 
to address waste in the health care system that you've heard 
described in previous testimony.
    There are several other areas that drive costs, and by not 
discussing them I don't mean to give them short shrift. 
Population health, as Senator Coburn was talking about, Senator 
Graham, you spoke about on the financial control issue, which 
is a very big issue in a complicated trillion dollar plus 
system, but given that I have limited time, I'm going to go 
ahead and focus on the two aforementioned areas.
    On the benefit design issue the private sector has a 
saying, that ``benefit design is destiny.'' We spent a lot of 
time thinking about benefit design, because it is like the 
blueprints of a house, and essentially, what you do with your 
benefit design, the cost sharing, and the richness of your 
design, is going to very much dictate your experience. Now, you 
can still control it after you've done this, but we spent a lot 
of time thinking about it, and we really look at three areas.
    The first area is satisfaction, because by definition 
health benefits are supposed to be ``a benefit.'' It is 
supposed to lead to satisfied employees, so we do annual 
satisfaction surveys, we take them very seriously. I, as the 
leader at GE, spend about an entire day every 6 months reading 
through the individual comments that people make, and it turns 
out that a lot of people that take the time to write are 
unhappy, but I think you learn a lot about how to have more 
people more satisfied.
    A second issue which is very important is the relative 
value of the design versus what else people can get, the 
richness or value. We always term that as ``No good deed goes 
unpunished,'' and what I mean by that is, in the impulse to be 
very generous and to give great benefits, and to not have 
people pay much, we end up creating two difficulties.
    The first involves an insurance term known as adverse 
selection, which means basically that people who have a greater 
need for medical care will seek the richer, most generous plan. 
Lots of employers, like GE, eventually have gone to the extent 
of saying to our employees, ``If you could get coverage through 
us now, for example, and choose not to, then you're going to 
pay us a fee for the year.'' But, it's, I think, pretty 
significantly happening, although I'm no expert in the military 
health system, in this new retiree plan that you have.
    The second feature is cost-sharing. We know very clearly 
that the use of health services is ``elastic'' and evidence is 
actually very good, it came out of RAND a long time ago, that 
the less people pay for services, the more they use. Now, 
conversely, the more they pay, the less they use. You do have 
to be very careful in health care because if you charge too 
much, some of the stuff they don't do is the stuff they need 
for chronic diseases. But we pay a lot of attention to this.
    The overall feeling in the private sector is that the 
sharing between the employer and the employee should be 
somewhere around 70 percent employer, 30 percent employee. We 
do a lot of benchmarking to make sure that happens. We do 
updates of cost sharing at GE, we collectively bargain every 3 
years, but many companies without collective bargaining 
obligations do it every year. It's not a way of penalizing the 
beneficiary but simply saying, to keep this viable, we need to 
maintain this ratio.
    I'm going to move from benefit design because we've talked 
about it before and I'd like to address procurement, and how we 
can address waste in the health care system. I think Senator 
Coburn and Dr. Blumenthal mentioned it, but over the last 5 
years, the Institute of Medicine and others have come up with 
some startling findings, particularly startling to those of use 
who grew up in this health care system, and consider it the 
best anywhere, which is about half the time, people aren't 
getting treatments they need to get. About 30 percent of the 
tests that are ordered and procedures that people are getting 
are probably not necessary, and probably don't yield value. 
That, very interestingly, as Dr. Blumenthal mentioned, not only 
are there differences between States for the same outcome, how 
many services are used, we see it in the same towns. In every 
major market that we're in we can look and see that some 
hospitals----
    Senator Graham. Do best practices address this?
    Dr. Galvin. Yes, they do, and I'm going to get into pay for 
performance, which I think is all about best practices. The 
impacts of getting to best practices are real. If you take the 
couple of billion dollars we're spending at GE, or the $36 
billion you spent and take the 30 percent waste--they could 
even cut that in half--there's a lot of money out there. So, I 
think the question to us is what do we do about getting at that 
waste. The Institute of Medicine (IOM) had a lot of reasons, 
and Dr. Blumenthal mentioned one of them, which is information 
technology, and they're all very important. One of the ideas 
that I think is particularly relevant to organizations like GE 
and the military and Congress is that they felt that there was 
a failure of procurement, that the people purchasing these 
health care benefits were not holding the system accountable, 
and were not being clear about what it was we wanted from the 
system. This is not necessarily just the health plan, this is 
in claims statement. This isn't whether there are enough 
doctors, this is actually about what's happening in terms of 
what procedures are being done, and how much things cost.
    So, we took that on a number of employers, started 
something called the Leapfrog Group, which is a non-profit 
corporation. There are about 150 employer members, as is 
Medicare, and we decided we were going to try to figure out how 
to apply procurement processes to make things better. What we 
decided was to include in our contracts with health plans, as 
the three that TRICARE has, two features that we were going to 
make a condition of doing business with us, and then we were 
going to measure contract administration to make sure it would 
be done.
    The first feature is transparency. Transparency simply 
means that we ought to have publicly available information 
about the performance of doctors and hospitals. It's remarkably 
the case that we have very little today. I should say that 
there isn't a lot of scientific proof that if that kind of 
information is available, that waste will necessarily go away 
and quality will get better, but on the business side, we 
believe if you can't measure something, you can't manage it, 
and we think there's enough validity in this idea to move 
forward on this. Some interesting data from our own population 
is that only 35 percent of GE employees are going to hospitals, 
when we measured them, that are the best and most efficient. 
That means 65 percent of our employees aren't going to these 
facilities. When we asked our employees, ``If we gave you 
information what would you do?'' Eighty percent of them said 
they would use that information to change providers, but in 
many of these handwritten notes that accompanied the survey, 
they said, ``But I don't have any information.'' So that was 
part of the importance of transparency.
    The second feature that we put in contracts pay for 
performance. As Senator Coburn mentioned, there's no connection 
between performance and payment on our current payment system. 
The best hospital doing bypass surgeries get paid by Medicare 
exactly the same as the worst hospital doing bypass surgeries. 
I think it is a cardinal rule in procurement that you get what 
you pay for.
    We started a program with a number of large employers 
called Bridges for Excellence, where physicians that do better 
get rewarded for treating chronic conditions, as Dr. Blumenthal 
mentioned. I have a couple of more points, and then I will end. 
There's a lot of interest in this, Mark McClellen, the 
administrator of Medicare favors these ideas as do Medicare 
Payment Advisory Commission (MedPAC) and the House Ways and 
Means Subcommittee on Health. In closing, let me say that we 
have an opportunity to actually make the system better. Better 
benefits design is one thing, but I think also procurement, 
which the military knows very well, and we at GE do, is 
important. Now the DOD has been a Leapfrog member, as far as I 
know they haven't included that language in their contracts 
with health plans, and I would encourage that as a way to get 
things better. Thank you.
    [The prepared statement of Dr. Galvin follows:]

               Prepared Statement by Dr. Robert S. Galvin

    Senator Graham, Senator Nelson, and distinguished subcommittee 
members, I appreciate the opportunity to share with you today how 
leading employers in the private sector are addressing the problem of 
rising health care costs. My name is Robert Galvin, and my title is 
Director, Global Health, for General Electric (GE). In this position I 
am responsible for the design, operations and financial performance of 
the health benefits GE offers its employees, family members, and 
retirees as well as for the overall health of this population. Our 
population totals about a million people with an annual expenditure 
exceeding $2 billion.
    The challenges that the Military Health System (MHS) and a company 
like GE face in addressing health care costs are actually quite 
similar, outside of the direct care you provide. We both have highly 
trained workforces and keeping them healthy is critical for the optimal 
functioning of the operation; also, despite our relative sizes, rising 
health care costs represent significant pressure on our budgets; and 
third, both of us face the daunting challenge of trying to restrain 
excessive health care costs while not alienating our workforces or 
delivering them a less-than-outstanding health benefit in the process.
    Let me say at the outset that we have not found a ``silver bullet'' 
to solve these challenges. What we have found is that a combination of 
flawless execution of purchasing basics plus a willingness to be 
innovative, using purchasing clout to address fundamental problems in 
our health care system, yield the optimal results. Probably our most 
important learning is that because tough decisions are often necessary, 
and health care is always `personal,' a sense of trust between those 
making decisions on benefits and those who use the benefits is 
critically important. We have learned that constant, candid 
communication is the key--and that when we believe we have communicated 
enough, we are probably only half the way there.
    In my testimony today, I will focus on issues pertaining to the 
actual management of costs from the point of view of the purchaser. 
Other panel members will focus on the broader policy issues and trends 
facing the U.S. health care system or the actual details of the 
Military Health System.
    Health care costs are rising rapidly today for many reasons. 
Employers find it useful to distinguish between those causes over which 
we have little control, e.g. increased costs due to advances in 
technology and an aging population, and those over which we believe 
sound management practices can have an influence. Two areas have the 
biggest impact.

          (1) Benefit Design
          (2) Using Procurement to Address Waste in the Health Care 
        System

    Although several other areas are important, e.g. population health, 
financial controllership, etc., due to my limited time today, my focus 
will be on the two aforementioned topics.

                             BENEFIT DESIGN

    Designing the health benefit is a very important function. At GE, 
our philosophy is to: (1) protect people from the financial 
consequences of catastrophic illness; (2) offer coverage for medical 
services that are evidence-based, including preventive services, and to 
(3) maintain a reasonable level of cost sharing. We monitor our design 
in two ways: we perform annual satisfaction surveys to make sure we are 
meeting the needs of our employees; and we use an outside benefits 
consulting firm to benchmark the value of our design. Because we 
operate in very competitive markets, we need to offer a rich enough 
package to attract and retain employees but not so rich that we put 
ourselves at a competitive disadvantage with respect to our cost base.
    An unintended consequence of having too rich a benefit package is 
that beneficiaries will drop other coverage available to them and 
preferentially choose the richest plan. Several large employers have 
now added a substantial fee for employees who could get other coverage, 
e.g. through a spouse, but choose to go with the richer plan offered by 
the large employer. The richness of your TRICARE for Life plan, though 
designed with the best intentions, could suffer from this unintended 
consequence.
    Cost sharing is a key feature of health benefit design. 
Benchmarking data show that for most large employers, the desired split 
between company and employee payment is 70 percent/30 percent. This 
means that, overall, the company pays for 70 percent of the bill and 
the employee pays the other 30 percent. Having a reasonable amount of 
cost sharing is critical because there is well-accepted evidence that 
the demand for health services is elastic: very low payments by 
consumers lead to predictable increases in the amount of services used. 
On the other hand, higher payments lead to the use of fewer services, 
and some of the avoided services may have been necessary ones. It is 
not in anyone's best interest for these services to be reduced. Finding 
the right amount of overall cost sharing is an ongoing challenge.
    It is worth noting that those employers who have a very low level 
of cost sharing are the ones facing the greatest problems with health 
care increases.
    Although increases in cost sharing are never enthusiastically 
received, most companies devote significant resources to educate 
employees about rising health care costs and to explain why a 
reasonable amount of cost sharing is, indeed, reasonable. These 
companies have found that with the right explanations, their workforces 
are willing to accept reasonable changes.

               ADDRESSING WASTE IN THE HEALTH CARE SYSTEM

    A series of startling findings about the quality and efficiency of 
the health care system have emerged over the past 5 years. Experts from 
the Institute of Medicine (IOM) and the RAND Corporation have 
discovered that:

         Overall, adults receive only about 55 percent of 
        recommended care;
         Unnecessary procedures and services accounts for over 
        30 percent of health spending; and
         There is wide variation on performance between doctors 
        and hospitals.

    The quality shortfalls have real consequences: the IOM found that 
up to 100,000 preventable deaths occur in our hospitals annually. 
Looking at just the waste, what this means to a company like GE is that 
several hundred million dollars may be spent on unnecessary services. 
So even with a state-of-the-art benefit design, we are still spending a 
lot of money unnecessarily. If you apply the same percentage to the 
annual spend of the MHS, you will get a very high number.
    Why is there such waste and variation in quality in our health 
system, long lauded as ``the best in the world?'' A series of papers 
published by the Institute of Medicine over the past decade concludes 
that there are multiple reasons for our system performance. For 
purposes of today's testimony, let me focus on one of these: the fact 
that those who purchase health care have not demanded more and have not 
held the system accountable for what it delivers.
    The IOM recommended that purchasers of health care use their buying 
clout to drive changes in two areas: first, transparency, i.e. pushing 
for the public release of performance measurement of doctors and 
hospitals, and second, payment reform. One of the significant changes 
over the past decade is that metrics have been developed that can 
measure quality at the level of doctors and hospitals. While it is true 
that these measures are still being perfected, most private sector 
employers believe that they are accurate enough for public release. 
Although there is little scientific data to cite, it is common sense in 
the business world that what is measured is managed, and that making 
public the performance of doctors and hospitals will spur improvement. 
Health services experts have continuously demonstrated that there are 
significant differences between doctors and hospitals in how well and 
how efficiently they deliver medical care. Our analysis shows that in 
every major market that GE has employees the same level of quality is 
available at prices that differ by 30-40 percent. Our data shows that 
only 35 percent of our hospital admissions occur at hospitals that 
score highest on both cost and efficiency. When we ask our employees, 
over 80 percent say they want this kind of information and will use it 
to make decisions about who to see and where to go for treatment.
    Our payment system to doctors and hospitals is such that 
reimbursement is divorced from performance. In Medicare hospitals that 
perform superbly at a specific procedure are paid identically to those 
with much lower performance. The same is true for doctors. Again, 
although there is no clear scientific proof that paying for performance 
will increase quality and efficiency, it is a cardinal rule of 
procurement that you get what you pay for. Several large employers have 
developed a program called Bridges-to-Excellence, which rewards 
physicians who demonstrate the highest quality. Although researchers 
are currently evaluating this program, actuarial models predict 
substantial savings for employers and significant bonuses for high-
performing physicians.
    GE believes that there are substantial savings available from 
making performance available to the public and changing the payment 
system. The Pacific Business Group on Health, a private sector 
purchasing coalition based in California and representing 3 million 
covered lives, reported on research findings which showed that up to 17 
percent of premium could be saved if employees and family members chose 
to see those providers with the best performance scores. Actuarial 
modeling in the Medicare program, and presented in testimony at recent 
hearings at the Way and Means Subcommittee on Health, suggests that 
with relatively little movement of patients to high-scoring doctors and 
hospitals, savings of 3-4 percent in the Medicare program are possible. 
These themes of transparency and pay-for-performance are strongly 
supported by Mark McClellan, CMS Administrator, as well as by Med PAC.
    How would health care purchasers go about catalyzing this kind of 
change? The answer: through the procurement process. Several years ago, 
a number of private and public sector purchasers formed the Leapfrog 
Group, now 150 members strong, to bring about this kind of change in 
health care purchasing. The Leapfrog Group's strategy is for each of 
its members to insist on transparency and pay-for-performance in its 
contracts with health plans. If enough purchasers include this language 
in their contracts, health plans will then change their contracts with 
doctors and hospitals, insisting on data release and paying for 
performance. Though the Department of Defense (DOD) has been an ex-
officio Board member of Leapfrog, TRICARE has not included the 
aforementioned language in its health plan contracts.
    The findings on waste and variations in quality refer to the 
private sector health care system. The MHS has its own doctors and 
hospitals, and I am not aware of data related to their performance. 
However, I am aware of the performance data from the Veterans Hospital 
Administration (VHA) health system, which has transformed itself over 
the past 10 years into a system that produces the highest quality of 
any system in the United States. The VHA outperforms the private sector 
delivery system consistently by 15-20 percent on quality measures and 
probably by that much on efficiency. In the absence of the kind of 
culture change and investment in information technology that the VHA 
has undergone, it is unlikely that the MHS delivery system performs as 
well. However, to the extent that the MHS commits itself to VHA-level 
improvement, or that military personnel use the VHA health system, it 
is likely that substantial savings, and improvements in quality, are 
possible.

                                SUMMARY

    In summary, the issue of health care costs is of great importance 
to private sector employers. The Human Resource Policy Association, the 
trade association representing the Senior Human Resource professionals 
for the largest 200 companies, has made healthy care its number one 
priority. This Association is promoting the practices I have outlined 
in my testimony today.
    The Military Health System and GE face many similar challenges. 
Although state-of-the art benefit design, aggressive procurement and 
working with the delivery system to improve value has not solved the 
health care cost problem, it has certainly made health care more 
affordable and arguably has helped improve care. Given TRICARE's size, 
if it were to adopt the Leapfrog health plan language and implement the 
Bridges-to-Excellence program, I believe that the DOD could not only 
impact its own health costs, but contribute substantially to the 
improvement of the entire U.S. health care system.
    Thank you for asking me to be with you here today.

    Senator Graham. Thank you very much.
    Ms. Hosek.

 STATEMENT OF SUSAN D. HOSEK, SENIOR ECONOMIST AND CO-DIRECTOR 
  CENTER FOR MILITARY HEALTH POLICY RESEARCH, RAND CORPORATION

    Ms. Hosek. I, too, am honored, and it's a pleasure to be 
here this afternoon. I've been at RAND for over 30 years, and 
during all that time, I spent at least part of my time studying 
the military health system. It's really astonishing to me to 
see the changes that have occurred over that period. Dr. Chu 
mentioned the program started out as space-available care and I 
came onto the picture as an observer and a student some time 
after that. But, it's really remarkable the changes that have 
occurred.
    I'm going to talk about three issues this afternoon. I'm 
going to make some comments on cost, and the cost trends that 
the DOD is experiencing. Then I'm going to talk about benefit 
design. I'm going to discuss it in the specific context of 
TRICARE and focus, in particular, on under age 65 retired 
beneficiaries, where I think there may be some opportunities 
for some cost savings.
    Finally, I'm going to talk about the organizational 
structure. Various people, but especially Dr. Galvin, has 
talked about better management of the system and that the 
organization of the military health system today is probably 
not ideal for carrying out those kinds of management 
initiatives in the future. I will come to that at the end of my 
talk.
    We've heard a lot about cost growth. One of the exercises I 
did in preparing for this presentation was to take a look at 
the Congressional Budget Office's information on costs in the 
military health system, going back over the past 15 years, and 
compared those with the civilian sector. In both cases what you 
see is a 4-percent per year increase after adjusting for 
inflation, and that adds up pretty quickly.
    What's interesting about it is that the U.S. health care 
system has experienced that kind of real cost growth for more 
than five decades, so this has been going on for a long time. 
It's pinching ever harder, but this is not a new phenomenon. As 
others have mentioned, the military health system is simply 
experiencing the same cost growth as everyone else, not just in 
the United States, but in other countries as well.
    Now, as you've heard, civilian employers have been reacting 
to this cost growth. If you look at all civilian employers, you 
see a rather pronounced trend towards shifting higher fractions 
of health care costs to employees, and that's taken several 
forms.
    One form is increasing premiums, increasing cost sharing, 
and importantly reducing or eliminating retiree health 
benefits, which was an important part of the military benefit. 
The result is that today TRICARE is a very attractive health 
plan compared to most employer health plans. As Dr. 
Winkenwerder mentioned, there's substantial evidence that the 
beneficiaries are noticing this, and that more of them are 
turning to TRICARE instead of an employer option for their 
health care.
    There's a very obvious reason why every retiree under 65 
who's working might prefer TRICARE to their employer plan, and 
that's the premium contribution. If you look at all employer 
health plans, and this information came from the Kaiser Family 
Foundation Survey that's done every year, there's an annual 
average contribution by the employee to enroll in the employee 
plan of over $2,600 a year. TRICARE currently charges nothing 
for the extra, or standard, $460 premium contribution for 
retirees, and TRICARE hasn't changed since the 1990s when the 
program was implemented. We don't actually know how many 
retirees have given up employee health coverage in order to use 
TRICARE. That's something that I know that Drs. Chu and 
Winkenwerder are quite interested in finding out more about. 
But we can get an idea, looking at some relatively recent 
survey data on military retirees. I focused on those who are 
under 65 and working full-time.
    Now, if they weren't military retirees and didn't have 
access to TRICARE, we know from other studies that almost all 
of these people would be covered by employer health insurance. 
Yet 35 percent of them are paying the $460 to enroll in TRICARE 
Prime and fully two-thirds of them are getting at least some of 
their care from the military health system. So even this group 
of people whom you might expect to be most reliant on employer 
plans, are in fact, increasingly reliant on TRICARE, and it's 
easy to understand why.
    Now, the problem is, this results in a situation where 
there's a high cost to DOD, but most of the benefit is not 
accruing to the beneficiary, it is, in fact, accruing to the 
employer. Dr. Galvin may be benefiting from some of this. Now, 
what can we do about this? Well, one obvious solution is to 
increase the TRICARE premium contributions and make them more 
comparable, but that would be a huge benefit cut, and I suspect 
it would be rather difficult to do, especially right now. There 
may be other ways to approach this.
    Dr. Galvin mentioned that they actually penalize employees 
for using their plan when they could be using another one. What 
I'm going to suggest you think about is the opposite of that, 
which is compensating military retirees under age 65 who 
participate in their employer health plan for the out-of-pocket 
costs that they face in those plans. This could take the form 
of a Health Savings Account, and so we come back to that idea. 
It could also take other forms.
    Senator Graham. Excuse me, if you're under 65 and you're 
working with GE, you would pay what? If you would go with GE?
    Ms. Hosek. You would set up a Health Savings Account, so 
these would be presumably tax-exempt dollars, and the retiree 
would use those to cover their out of pocket costs in their 
employer plan. Now, this would be a voluntary option, so they 
could stay in TRICARE or they could stay with their employer 
plan, but they would get some coverage for their out of pocket 
costs. It's just a way of using a carrot approach.
    Senator Graham. I'm sorry, go ahead.
    Ms. Hosek. There are other benefits you could offer. 
Currently there's no benefit for long-term care, and that's one 
option. Another would be to increase the retirement annuity 
slightly so there are a number of ways you could do this. The 
basic idea, though, is to essentially make a deal with the 
retirees to help them out with their costs.
    We don't have enough information to figure out today 
exactly what an option would look like, how many retirees 
would, in fact, be interested in it, and whether the department 
would really save all that much money. The reason for being 
worried about the cost savings is that if you have a benefit 
like this, it's also going to be used by the retirees who 
currently are using their employer health plan, and not using 
TRICARE at all. So, you have some people who are using TRICARE 
instead of their plan and you're going to make money on them, 
but then you're going to lose money on the people who are going 
to do the opposite.
    So the question is, where do you come out in the end? There 
seems to be enough potential here, especially if the 
projections about growing reliance on TRICARE are correct, that 
it would be worth some effort, I think, to figure out whether 
this would work.
    There are some other changes that could be made in 
benefits, one that has been brought up many times in the past 
is charging a clinic fee for use of military clinics. Visits to 
military clinics are currently free. Retirees pay $12 per visit 
if they're in Prime and use a civilian provider. The idea would 
be just to take that $12 fee and also implement it in the 
military facilities, at least for the retirees. As it turns 
out, some of my colleagues that ran into this study fairly 
recently that looked at the civilian HMO that implemented a 
similar fee, and indeed there's a decrease in utilization, but 
the cost savings were actually relatively modest.
    Whether that would really be an important change I don't 
know. The area where there is more promise is in the cost 
sharing for pharmaceutical drugs. TRICARE charges $3 for a 
generic drug, and $9 for a brand name drug. If the beneficiary 
goes to the retail pharmacy network, a typical employer health 
plan charges more like $10 for the generic drug and $20 for the 
brand name drug. Others of my colleagues, as it happens, have 
looked at what happens when you increase pharmaceutical co-pays 
by about that order of magnitude, and they found that 
pharmaceutical costs are reduced by one third, which is a very 
substantial savings.
    Much of the decreased utilization, but not all of it, is 
for drugs that have very close substitutes over the counter, 
such as antihistamines, and pain relievers. So this may be a 
promising option. I would point out that if that change is 
made, and not implemented for military pharmacies, what's going 
to happen is, a lot of people who have been going to the retail 
pharmacies will try to go to the military pharmacies, and you 
will save less.
    Senator Graham. Could you finish your statement in about 3 
minutes, do you think?
    Ms. Hosek. I can. Then you would save more. I would just 
like to make some very brief comments about the organizational 
changes. We've heard a lot about possible management 
initiatives that could be cost savings. Right now the military 
system is operated through four chains of command. We did a 
study a few years ago where we looked at the civilian sector 
and tried to draw lessons for the military system. What we 
found is that the military system lacks the clear lines of 
authority and accountability that all leading civilian health 
care organizations have. So we drew a number of specific 
conclusions about how the system might be reorganized so that 
it would hopefully be better able to manage TRICARE. We paid a 
little attention to readiness, but not a lot, in that study. 
There is consideration now of establishing a joint medical 
command, and we took a look at that. That may be a good idea, 
but unless other changes are also made, it is unlikely that a 
joint medical command will be sufficient for the purpose, and 
that's all I have.
    [The prepared statement of Ms. Hosek follows:]

                 Prepared Statement by Susan Hosek \1\

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    \1\ The opinions and conclusions expressed in this testimony are 
the author's alone and should not be interpreted as representing those 
of RAND or any of the sponsors of its research. This product is part of 
the RAND Corporation testimony series. RAND testimonies record 
testimony presented by RAND associates to Federal, state, or local 
legislative committees; government-appointed commissions and panels; 
and private review and oversight bodies. The RAND Corporation is a 
nonprofit research organization providing objective analysis and 
effective solutions that address the challenges facing the public and 
private sectors around the world. RAND's publications do not 
necessarily reflect the opinions of its research clients and sponsors.
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    Chairman Graham and distinguished members of the subcommittee, 
thank you for inviting me to testify today on present and future costs 
of defense health care. It is an honor and pleasure to be here.
    My testimony will briefly discuss cost trends in Defense health 
care and then focus on two areas in which the Department of Defense 
(DOD) might consider making changes: (1) TRICARE benefit design and (2) 
organizational structure of the Military Health System (MHS).

                    DEFENSE HEALTH CARE COST TRENDS

    Through TRICARE, DOD provides a comprehensive health benefit to 
Active-Duty personnel and their dependents. With the addition of 
TRICARE for Life (TFL), this is now a lifetime benefit for those who 
make the military a career. A continuous benefit is now being offered 
to reservists who have been called to Active Duty since September 11, 
2001. The health benefit grew out of a policy of granting dependents 
and retirees eligibility for care in military treatment facilities 
(MTFs) when they had space available after caring for Active-Duty 
members. With the establishment of an employer-based health system in 
the U.S., a defined health benefit replaced space-available access for 
under-65 beneficiaries and CHAMPUS was established to finance any care 
military providers couldn't handle. TRICARE modernized the delivery of 
the benefit by integrating management of MTF care and CHAMPUS-financed 
civilian care by adding an HMO option (Prime) and a PPO option (Extra) 
to the Standard fee-for-service option, partnering with civilian 
health-care companies, and improving access to care. Today, TRICARE 
compares favorably with civilian health plans on many measures, and 
military members clearly consider it to be an important element of 
their compensation package and a visible marker of the support and 
appreciation for their service to the Nation.
    Like all public and private payers, DOD has experienced 
unrelenting, significant growth in the costs of its health benefit. 
DOD's inflation-adjusted per capita health-care costs increased just 
under 4 percent per year from 1988 to 2003 (excluding costs for TFL). 
This is approximately the same real rate of increase experienced in the 
civilian sector during the same 15-year period. Moreover, this has been 
the long-term rate of increase in health costs for the past 5 
decades.\2\ So DOD's health system is simply on the same path as the 
U.S. health care system overall.
---------------------------------------------------------------------------
    \2\ Growth in Medical Spending by the Department of Defense, 
Congressional Budget Office, 2003; Cutler, D.M., M. McClellan, et al., 
``What Has Increased Medical-Care Spending Brought?,'' American 
Economic Review, Vol. 88, No. 2, Pg. 132-136, 1998.
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    Can anything be done to curb cost growth in the future? Civilian 
employers have resorted to benefit cuts to control costs, shifting some 
costs to their employees and hoping that higher cost sharing will 
induce lower spending. Economic research has consistently shown that 
increases in health costs are offset by lower wages in the civilian 
labor market.
    In contrast to the private sector, DOD has expanded its benefits in 
recent years, eliminating almost all cost sharing for Active-Duty 
personnel and their family members if they are enrolled in Prime and 
adding TRICARE for Life to supplement Medicare coverage for 
beneficiaries over age 65. As I describe below, TRICARE today is a more 
attractive option than employer health plans for most of the 
beneficiaries who are eligible for both DOD and civilian employers' 
health plans. Most of these beneficiaries are military retirees who 
have a second career (and their spouses), but some Active-Duty spouses 
are also eligible for civilian-employer health benefits. If current 
trends continue, DOD risks becoming the primary insurer for all of its 
beneficiaries, picking up an even higher share of costs that would 
otherwise be covered by employer health plans. When costs merely shift 
from employers to DOD, the cost to DOD increases but there is little 
change in the value of the benefit to servicemembers.
    Health services researchers agree that the long-run trend toward 
higher health care costs largely reflects advances in medical 
technology, but there is little evidence on the health payoff from 
these advances. A recent RAND study found that approximately half of 
the health care delivered in the U.S. is inappropriate.\3\ Medicare and 
other major payers are exploring new mechanisms for targeting health 
care dollars on a more appropriate mix of services. DOD's current 
organizational structure, with its parallel management structures in 
the Office of the Secretary of Defense and the Services, is not ideal 
for undertaking this kind of complex health management initiative.
---------------------------------------------------------------------------
    \3\ McGlynn, E.A., S.M. Asch, et al., ``The Quality of Health Care 
Delivered to Adults in the United States,'' New England Journal of 
Medicine, Vol. 348, No. 26, Pg. 2635-2645, 2003. The study evaluated 
the quality of care for a random sample of adults living in 12 
metropolitan areas. It measured performance on 439 indicators of 
quality of care for 30 acute and chronic conditions as well as 
preventive care. Overall, participants received 54.9 percent (95 
percent confidence interval, 54.3 to 55.5) of recommended care.
---------------------------------------------------------------------------
                     DESIGN OF THE TRICARE BENEFIT

    Overall, TRICARE benefits compare favorably with benefits in 
private-sector plans. Cost sharing is about the same for downtown 
office visits and MTF care is free; TRICARE premiums and TRICARE 
pharmaceutical cost sharing are lower. For beneficiaries who are 
eligible for employer benefits, the big difference is in the premium 
contribution required for TRICARE versus their employer's plan. 
Differences in beneficiary cost sharing for covered services are 
smaller and the services covered are fairly similar.
    The average annual premium contribution for family coverage in 
employer plans was $2,661 in 2004, and there was little difference 
between HMO and non-HMO plans. TRICARE requires no premium 
contribution, except for retirees who elect to enroll in Prime, the HMO 
option.\4\ Family coverage cost them only $460 in 2004--the amount 
established when TRICARE was implemented almost a decade ago. This 
difference in premium cost will continue to grow over time unless 
TRICARE premiums are increased.
---------------------------------------------------------------------------
    \4\ The new TRICARE Reserve Select program requires a premium 
contribution of $2,796.
---------------------------------------------------------------------------
    Undoubtedly as a result of this ``premium gap,'' relatively few 
TRICARE beneficiaries employed in the private sector are covered by 
employer health plans. Currently, DOD surveys do not support estimates 
of how many beneficiaries are foregoing employer insurance for which 
they are eligible. But we can infer that this behavior is probably 
widespread by looking at military retirees who are under age 65 and 
working full-time. In 2002, 72 percent of these retirees worked for 
employers providing health insurance. Among those with access to an 
employer health plan, 35 percent paid to enroll in TRICARE Prime and 62 
percent sought care through some TRICARE option.
    Focusing on families, when a military beneficiary gives up employer 
insurance and uses TRICARE, the employer saves about $7,200 a year and 
the employee saves over $2,000. DOD assumes both costs. So much of the 
DOD benefit accrues to the employer instead of the retiree. Eliminating 
or reducing the TRICARE premium gap for under-65 retirees and 
dependents would induce more retirees to participate in their employer 
plans, but it would represent a significant benefit cut and lead to the 
possibility that some military retirees without access to employer 
benefits would become uninsured.
    A more promising approach is to offer a new benefit that retirees 
can choose in lieu of TRICARE and use to cover premiums and out-of-
pocket costs in employer plans. This new benefit might take the form of 
a Health Savings Account. Making a simplistic calculation, DOD can 
cover the $2,000 premium contribution and make $7,000 on the exchange. 
But some retirees who forego TRICARE now will take advantage of this 
new benefit, offsetting at least some of the cost savings from prior 
TRICARE users. There are other benefits that could be offered to induce 
beneficiaries to enroll in and rely on their employer plans. More 
information is needed to determine whether any of these approaches 
would realize significant savings, how retirees would react to the 
idea, and how to design the most cost-effective approach for both DOD 
and retirees. The potential of this general approach is such that an 
investment in information and analysis is warranted.
    As I indicated earlier, out-of-pocket costs for getting care from 
civilian providers are similar in TRICARE and other employer plans. For 
example, the typical HMO plan charges a $15 visit fee whereas TRICARE 
Prime has no fee for active-duty dependents and a $12 fee for retirees 
and their dependents. Most non-HMO employer plans also rely on a visit 
fee--typically $20 for a provider under contract to the plan--which is 
likely to be just below what the 15-20 percent cost sharing costs 
beneficiaries in Extra.\5\ But TRICARE only charges for care delivered 
by civilian providers; MTF care is free of charge. Introducing a 
copayment for MTF visits has been suggested before and while it would 
reduce outpatient utilization, overall cost savings are likely to be 
modest.
---------------------------------------------------------------------------
    \5\ Information on employer plans comes from Employer Health 
Benefits: 2004 Annual Survey, Kaiser Family Foundation and Health 
Research and Educational Trust, 2004.
---------------------------------------------------------------------------
    However, employer plans typically charge twice what TRICARE does 
for prescription drugs. TRICARE charges $3 for a generic drug and $9 
for a brand-name drug, whereas employer plans typically charge $10 and 
$20, respectively. Also, as with other services, many military 
beneficiaries have access to free prescriptions in the MTFs. A recent 
RAND study showed that people are highly responsive to the price they 
pay for prescriptions.\6\ Updating prescription copayments to employer-
plan levels would likely lead to noticeable cost savings in TRICARE, 
provided that the copayments applied to prescriptions filled by the 
MTFs, not just civilian pharmacies.
---------------------------------------------------------------------------
    \6\ Increasing the price from $5 to $14 for a generic drug and from 
$10 to $20 for a brand-name drug reduced spending by 33 percent. The 
largest decreases were for drugs that have close over-the-counter 
substitutes; higher prices caused smaller reductions in the use of 
drugs that don't have substitutes and are important in controlling 
chronic illness. Joyce, G.F., J.J. Escarce, et al., ``Employer Drug 
Benefit Plans and Spending on Prescription Drugs,'' JAMA, Vol. 288, No. 
14, Pg. 1733-1739, 2002, Goldman, D.P., G.F. Joyce, et al., ``Pharmacy 
Benefits and the Use of Drugs by the Chronically Ill,'' JAMA, Vol. 291, 
No. 19, Pg. 2344-2350, 2004.
---------------------------------------------------------------------------
    To summarize, the TRICARE benefit is more attractive than the 
benefit offered by most civilian employers and, as a result, many 
retirees appear to be relying on TRICARE instead of their employer's 
plans. Rather than reduce TRICARE benefits to private-sector levels, it 
may be possible to induce retirees to take full advantage of any 
employer benefits for which they are eligible by offering to offset 
their higher out-of-pocket costs. This would ensure that DOD's spending 
on health care benefited its beneficiaries, rather than their 
employers. Some modest changes in cost sharing for care may also be 
worth considering.

               ORGANIZATION OF THE MILITARY HEALTH SYSTEM

    The second area where changes could impact trends in costs is the 
organization of the Military Health System. My comments on organization 
are based on a 2001 RAND report on creating a joint medical command and 
organization of the military health system more generally.\7\ This 
study drew on organizational models from the civilian sector and within 
the DOD to develop and assess organizational alternatives. Although we 
paid careful attention to the evidence on effective organizational 
approaches, we also considered how the coordination required between 
operational medical support and providing TRICARE services might be 
accomplished under the alternatives we identified.
---------------------------------------------------------------------------
    \7\ Hosek, S.D. and G. Cecchine, Reorganizing the Military Health 
System: Should There Be a Joint Command?, RAND Corporation, MR-1350-
OSD, 2001.
---------------------------------------------------------------------------
    Consistent with basic principles of organizational design, civilian 
health care organizations consolidate authority and responsibility in 
single market managers, who report through a regional chain of command 
to corporate management. Since experience has shown that there can be a 
conflict of interest, management of the health plan is separated from 
management of the providers when they are not separately owned.\8\ 
Accountability is maintained through the strategic planning and 
evaluation processes, which set specific financial and non-financial 
goals. Management information systems are tailored to support planning 
and evaluation, and strong incentives are established and aligned with 
goals.
---------------------------------------------------------------------------
    \8\ In the Military Health System, TRICARE is the health plan and 
the MTFs are providers.
---------------------------------------------------------------------------
    TRICARE management has taken steps that reflect these standard 
private-sector practices. However, we concluded that a single chain of 
command for TRICARE management, separate from the MTF command 
structure, would create the clear lines of authority and accountability 
that characterize the private sector. Arguably, the same principles 
might apply in operational medicine as well, but our study did not 
investigate the management challenges associated with the readiness 
mission. We did consider how readiness considerations might alter our 
conclusions about organizational effectiveness for the benefits mission 
(TRICARE).
    We identified four alternative organizational structures that 
consolidate authority over some or all of the system. The first 
alternative would consolidate TRICARE authority within the current 
structure by modifying resource management and accountability. The 
resources used to deliver care to TRICARE beneficiaries would flow 
through TMA to a group of local market managers, who would reimburse 
the Services for MTF care and the contractors for civilian care. TMA 
and its local market managers would be accountable for overall TRICARE 
outcomes and the Services would be accountable for the care they 
provide. The other three alternative structures establish a joint 
medical command, but they differ in how they structure the command. One 
establishes a joint command over the organizational structure I just 
described. Another maintains three Service component commands, each 
responsible for medical readiness activities within its Service and for 
managing all health care provided for its defined population. TMA would 
be largely disbanded under this scheme. A third joint command 
alternative organizes two joint chains of command, one for readiness 
and the other for TRICARE. The MTFs would be managed through the 
TRICARE chain. All of these organizational schemes, including the 
current one, require development of an efficient mechanism for shifting 
personnel and other resources between readiness and TRICARE.
    We could not be certain which of these alternatives would out-
perform the others. But we could conclude that any of the alternative 
organizations we identified, which would consolidate authority over 
TRICARE resources and establish clear accountability for outcomes, 
should out-perform the current organization, which lacks these 
characteristics. We further concluded that establishing a joint medical 
command over the current structure, without making these other 
organizational changes, likely would not be as effective. In short, we 
concurred with at least a dozen other major studies of military health 
care organization, conducted over six decades, that more consolidated 
management would be advantageous but we also recommended a package of 
changes that would reflect best organizational practices.

                               CONCLUSION

    Outside TRICARE for Life, the long-term trend in Defense health 
costs reflects the trend in health costs in the U.S. and many other 
countries. In light of the persistence of this trend over many decades, 
it can be expected to continue into the future. But there are potential 
opportunities to shift the cost line downwards. Asking beneficiaries to 
pay when they get care would lead to decreased utilization and costs, 
but high cost sharing would also represent a benefit cut--a difficult 
action to contemplate now. Adding new benefit options that would offer 
beneficiaries the option of using employer health plans without 
incurring substantially higher premium costs could result in gains for 
both beneficiaries and DOD. As the U.S. health system continues to 
search for ways to curb costs and/or improve health outcomes, DOD 
should reconsider its health care organization so that it can readily 
adapt new approaches and create some itself.
    Thank you for the opportunity to contribute to the debate regarding 
Defense health care costs. I am happy to answer questions from the 
subcommittee.

    Senator Graham. Thank you all, that was very informative. 
To pick your brain quickly, the bottom line is our co-cost 
sharing aspects of TRICARE have virtually been flat. We have a 
unique problem in the sense that there's a promise being made 
to retirees about health care. It seems to me that we're going 
to have to look at re-designing that promise in the future, and 
without looking at that, this is just going to continue to get 
out of hand.
    Do all of you agree from what we've heard today that the 
efforts for best practices, that they're implementing as far as 
administration, you get paid more if you return phone calls, if 
you do things expeditiously, that there could be additional 
savings if we went to the best practices, in terms of actually 
delivering health care?
    Dr. Blumenthal. I certainly think you could get more value 
for your dollar and I think you could probably save some 
administrative expenses, so you would have a more satisfied 
clientele in the military health system. The implementation of 
a best practice is certainly much to be sought in the clinical 
side, and there are some areas where we have pretty clear 
knowledge of what to do and we can do it a lot better, so I 
think we could make some progress. It's not 100 percent sure 
you'll save money by doing things right, a lot of people hope 
and expect that, they ought to do them right, just because it's 
the right thing to do, but I don't think you could necessarily 
be assured that you will fight your way out of this cost 
problem by paying for performance.
    Dr. Galvin. I concur with that. I think in the first 
generation that we thought about this it was just best 
practices. I think we now recognize that sometimes doing it 
right saves money and sometimes it doesn't, but we recognize 
that doing it right and being the most efficient at it always 
saves money, versus the other. So all of our paid for 
performance is around not only including best practice, or 
doing the right thing, but that you have to be the one who's 
doing it the most efficiently. I think you have to integrate 
efficiency into the quality and then you do save money.
    Ms. Hosek. I would like to just issue a caution here. The 
military system has two different pieces. It has the in-house 
system and it has the contracted care, and I think it is quite 
a challenge to figure out how to get both of those lines up and 
marching in the right direction. The TRICARE contracts can 
certainly put in pay for performance kinds of measures, but you 
also have to pay attention to what's going on in the direct 
care system as well, and make sure that the two are well-
coordinated.
    Senator Graham. Health Savings Accounts (HSAs) have been 
mentioned several times. What is the panel's general consensus 
about a HSA component?
    Dr. Blumenthal. Let me talk about this from the standpoint 
of the chronically ill population which, as I indicated, 
accounts for a lot of the escalating costs and a lot of the 
absolute costs. Think about somebody who has high blood 
pressure and heart problems. They spend a lot of money every 
year on health care and they're going to blow through whatever 
their $1,000, $1,500, $2,000 HSA is every year. So, it doesn't 
make any sense for them to purchase it. I think it is a good 
buy for a relatively healthy population, but I don't think it's 
a solution to the problems that face our chronically ill 
population.
    Dr. Galvin. We disagree on that one. Let me be clear, first 
of all, I'm not speaking on behalf of GE, we negotiate our 
benefits through collective bargaining, we do not have HSAs and 
if we ever were to get them we would do it through bargaining, 
so I just want to be clear.
    Personal opinion, though? I think HSAs have a lot of 
promise, I think they have some issues when it comes to the 
chronically ill, and I have already seen some developments in 
the market that these kinds of plans are going to mature and 
get better and better as the market works on them. I think 
HSAs, with the amount of information we have on quality and 
efficiency today, are not going to be nearly as good as HSAs 
with the kind of information that people can make the choices 
that Senator Coburn was talking about with real data. So, I 
think we need to do those at the same time.
    Ms. Hosek. With the HSA, the military has an opportunity to 
possibly look at some options there that would operate a bit 
differently, perhaps, then some of the plans that are out there 
and elsewhere, rather than leaving the big gap between the HSA 
and the catastrophic insurance that Dr. Blumenthal is concerned 
about. It may be possible to integrate an HSA option with other 
aspects of the military compensation system, so that you, 
again, use the carrot approach to induce people to save money 
on their health care costs, rather than using the approach of 
taking it out of their pocket if they don't.
    One way, for example, is to fully fund the HSA, but then 
allow them to roll the money over, at least on some partial 
basis, to other uses, and that would provide the incentive to 
save money without putting people at risk for large out-of-
pocket expenditures. There are a lot of things you may be able 
to do. It's a very flexible approach, potentially, so there may 
be ways to adopt it.
    Senator Graham. Senator Nelson?
    Senator Ben Nelson. Thank you, Mr. Chairman. I'm intrigued 
by many of the comments that would show a common trend. Ms. 
Hosek said that approximately half of the health care is 
inappropriate, is that accurate?
    Ms. Hosek. I think I was referring to exactly the same 
study Dr. Galvin was.
    Senator Ben Nelson. Dr. Galvin noted 30 percent of 
unnecessary procedures, and Dr. Blumenthal, you referenced the 
fact that there were huge differences in the cost of health 
care, depending upon what region you may find yourself in. If 
we were to close the gap in each and every one of those 
situations, how would we do it? I'll start with you, Dr. 
Blumenthal. How would we go about closing the gap, reducing the 
differential, the unnecessary procedures, and inappropriate 
care?
    Dr. Blumenthal. Well, let me put the arithmetic aside, 
because I think that 30 percent inefficiency in our system is 
due to administrative cost, and now 30 percent is due to 
inappropriate care.
    Senator Ben Nelson. That would be appropriate to come back 
and identify that as well.
    Dr. Blumenthal. We could get down to zero for our health 
care budget pretty soon, which would be a great buy. But, I 
think that we've struggled with exactly this question for 
decades. This is the critical question in health care for the 
military and for the entire industrialized world. How do you 
decide what makes sense to pay for and what doesn't? How do you 
not infringe on the patient/physician relationship, and not 
alienate the patient and alienate the physician? The history of 
managed care is a history of infringing on the freedom of 
choice.
    Senator Ben Nelson. Well, even in western Nebraska we found 
it important to have people manage to find care, because of the 
availability of it, and the accessibility as well.
    Dr. Blumenthal. So, I think you have to put incentives in 
place at multiple levels. I'm not against patient cost-sharing. 
I think that makes some sense. I suspect the military has gone 
too far in taking the patient out of the equation. I think you 
have to have physicians and health care providers also have, as 
they say, some skin in the game, and pay them in some way that 
is consistent with the appropriateness. Stated differently, the 
quality of the care that they provide. I think the health 
insurer has to play a role, and the employer has to play a 
role, in this case you're talking about TRICARE in terms of 
creating the systems that provide the information the doctors 
need and the patients need to make correct choices. I think 
those are the areas in which we're working right now, but I 
would be misleading you if I contended that we knew exactly 
what would work, because we are struggling at every level to 
make this happen.
    Dr. Galvin. I agree, it is a complex question, and there is 
no clear answer, but I think it is true on its face that 
without transparency, without people--even their own doctors 
and hospitals--knowing how well they're doing, it's impossible 
to think that we get better. When I was in practice, and it's 
still true today for most physicians, we didn't know how many 
diabetics were in their practice. When a drug gets recalled we 
didn't know who's on it and who isn't on it. I have a back 
problem now, and I wanted to go seek care, and I'm pretty 
sophisticated about this stuff, but I couldn't figure out where 
I should go for this. I think transparency and public release 
of understandable information is a threshold issue. I think 
unless we cross that one, we can't even get close to it. Then 
it gets more complicated. I don't think transparency is 
complicated, I think that is a necessary condition.
    I think it is incentives and rewards. At GE we think pretty 
concretely ``you get what you pay for'' and if you're going to 
pay the same to do a fantastic job and the same to not do a 
very good job, it's hard to imagine that we can get on the road 
to getting the best practices we want. I agree with Dr. 
Blumenthal, they're not the answer, but I think they're 
important steps on the path.
    Ms. Hosek. I'm an economist and so I do believe in 
incentives, and I don't believe in regulation, which means that 
I think the pay-for-performance is a promising approach. It's 
not going to be easy to figure out how to do that, especially 
across the board for all the different kinds of care that are 
provided, and furthermore to keep it up to date, so that you're 
not paying for yesterday's performance, but you're paying for 
the right performance, based on current information. But, I 
think that is probably the promising way to go, and there are 
ways, I believe, of implementing a comparable system within a 
system like the military health care.
    Again, coming back to the direct care system, when you 
don't reimburse providers for providing care, you pay them a 
salary, but still, there are ways of rewarding those providers, 
and acknowledging their performance when they do well. So I 
don't see any reason--in fact, I know that at RAND, because we 
do a lot of health care research and we do a lot of military 
research--we've been intrigued for years by the opportunity to 
take advantage of the military health system to figure out how 
to do some of these things.
    Senator Ben Nelson. Well, as it relates to the economics of 
the military health care system versus private and outside non-
military, is there any differential there related to medical 
liability costs?
    Ms. Hosek. Yes, I think there actually is. Obviously the 
government is liable, but the liability is much less. Actually, 
military beneficiaries don't sue at anything like the rates 
that other people do. So, Dr. Winkenwerder, I'm sure, knows 
much more about that than I do. There are other restrictions, 
particularly in state law that don't apply to the military and 
licensing laws and that kind of thing. When I first came to 
RAND, I worked on physician assistants. The military was trying 
to figure out how to do it with active physicians, so they 
turned to physicians assistants and they were among the very 
leaders in the country in developing training programs and 
using those people in their clinics. So they've shown they can 
do this kind of thing.
    Senator Ben Nelson. Dr. Winkenwerder should be very much 
relieved that his problem will be lesser for him than it will 
be to solve the rest of the health care problems without 
medical liability issues as well.
    Thank you, Mr. Chairman.
    Senator Graham. Thank you all, thank you to the panel. At 
this moment, I would like to ask that testimony from the 
Reserve Officers' Association be placed in the record.
    [The prepared statement of the Reserve Officers' 
Association follows:]

         Prepared Statement by the Reserve Officers Association

    The Reserve Officers Association of the United States (ROA) is a 
professional association of commissioned officers of our Nation's seven 
Uniformed Services. ROA was founded in 1922 during the difficult years 
following the end of World War I. The founders of the ROA believed 
America was vulnerable to return to its pre-war unpreparedness. When 
chartered by Congress in 1950, the act established the objective of ROA 
to: ``. . . support and promote the development and execution of a 
military policy for the United States that will provide adequate 
national security.'' The mission of ROA is to advocate strong Reserve 
components and national security, and to support Reserve officers in 
their military and civilian lives.
    The Association's 75,000 members include Reserve and Guard 
soldiers, sailors, marines, airmen, and coastguardsmen who frequently 
serve on Active-Duty, voluntarily or involuntarily, to meet critical 
needs of the uniformed services. ROA's membership also includes the 
U.S. Public Health Service and the National Oceanic Atmospheric 
Administration. ROA is represented in each State with 55 departments 
plus departments in Latin America, the District of Columbia, Europe, 
the Far East, and Puerto Rico. Each department has several chapters 
throughout the State and is further divided into regional chapters. ROA 
has more than 550 chapters worldwide.

               DISCLOSURE OF FEDERAL GRANTS OR CONTRACTS

    The Reserve Officers Association is a private, member-supported, 
congressionally chartered organization. Neither ROA nor its staff 
receive, or have received grants, sub-grants, contracts, or 
subcontracts from the Federal Government for the past three fiscal 
years. ROA has accepted Federal money solely for Reserve recruiting 
advertisement in its monthly magazine. All other activities and 
services of the Association are accomplished free of any direct Federal 
funding.
Staff Contacts:
    Executive Director:
      Maj. Gen. Robert ``Bob'' A. McIntosh, USAFR (Ret.)202-646-7701,
    Legislative Director, Spouse and Family:
      Ms. Susan Lukas, 202-646-7710
    USNR, USMCR, USCGR, Health Care/MWR:
      Capt. Marshall A. Hanson, USNR (Ret.), 202-646-7713
    Army Affairs, Veterans:
      Maj. Gen. David R. Bockel, USAR (Ret.), 202-646-7717
    Air Force Affairs, Retirees:
      LT Col. James E. Starr, USAFR (Ret.), 202-646-7719

                              INTRODUCTION

    In answering the call-up, some 475,000 Reserves have been mobilized 
cumulatively since the issuance President Bush's issued Executive Order 
13223 on September 14, 2001, which authorized the activation of up to 1 
million military reservists for the global war on terrorism.
    Pre- and post-mobilization health care is being spotlighted with 
each wave of deployment. ROA thanks the Personnel Subcommittee for the 
chance to present testimony on behalf of the 1.2 million ready 
reservists most affected by medical readiness. Further we would like to 
thank each member of this committee for working with Department of 
Defense (DOD) and the associations to improve TRICARE coverage not only 
in quality but also in continuity; making pre- and post-mobilization 
coverage permanent, and also introducing TRICARE Reserve Select for 
most of those who have served in the global war on terrorism.
    We commend the support that your committee has provided to the 
young men and women who are deployed overseas, and stationed at home. 
We also believe that comprehensive care of the dependents of these 
young warriors allow the members of our armed services to better 
concentrate on their jobs. Most important is your recognition that a 
continuity of health care needs to extend into the Reserve Centers and 
Guard Armories to better complete this coverage.
    Health care readiness remains the number one problem when 
mobilizing reservists. Most Reserve component members shoulder the cost 
of their personal medical readiness. Because of the high cost of 
medical care, many Guard and Reserve members do not carry health care 
coverage. The Government's own studies show that between 20-25 percent 
of guardsmen and reservists are uninsured.
    With a growing percentage of Reserve component members being 
recalled to multiple deployments, a continuum of health care is 
becoming as important as pre- and post-deployment coverage.
Health Care
    The global war on terrorism is being described as multi-
generational by the leadership in the Pentagon. It will be a protracted 
engagement, which overwhelms the resources of the active Services. To 
compliment the Active-Duty Forces, the Guard and Reserve have accepted 
the task of warrior on numerous fronts. Over 55 percent of our Guard 
and Reserve Forces have already been called to do battle.
    The Reserve Officers Association believes that a continuity of 
health care for these young warriors and their families will allow the 
members of our armed services to better concentrate on their jobs, as 
the spouse who is left behind will better understand this benefit if it 
is unbroken. The side benefits will be a higher level of medical 
readiness, retention of Reserve component members, and an incentive for 
Active component members to transition in to the Reserve component at 
their end of contract.
Continuity of Medical Coverage
    As this conflict is expected to be long term, and Reserve component 
members are expected to be mobilized multiple times, the importance of 
continuity of health care becomes increasingly important and should be 
emphasized, as it will impact Reserve component members and their 
families. If soldiers or marines are worrying about their families 
while in the battlefield, the costs to the U.S. military will be more 
than just health care coverage.
    Pressures caused by higher health care costs have harmed recruiting 
and retention.
    When leaving Active-Duty, the loss of benefits causes many prior 
servicemembers to concentrate on their civilian career to recover those 
benefits. While cash bonuses may be in the short-term enticement to 
join the Guard or Reserve, cash alone doesn't provide a family security 
in an environment of frequent call-up.
    Guard and Reserve members are on call 24 hours a day, and are 
expected to meet the same physical, dental, and medical standards as 
their Active-Duty counterparts. Reservists are expected to pay for 
their own health club and medical coverage while in civilian status, 
where wages are growing slower than inflation. ROA believes the 
military standards to maintain physical readiness is a shared 
responsibility of both the DOD and the military member.
    Health insurance coverage varies widely for members of the Guard 
and Reserve. Some have coverage through private employers, others 
through the Federal Government, and still others have no coverage.
    The stress on maintaining a private-sector job and membership in 
the Guard and Reserves can be overwhelming. Add to this a job market 
where no longer are there ``jobs for life,'' management is flexible and 
ever changing, employees are expected to change along with the company 
and its operating environment, and companies are not stable entities 
with mergers, acquisitions, and attrition resulting from increased 
global competition.
    It's estimated that the average worker changes jobs 10 times and 
careers 3 times in a working lifetime. These changes in jobs occur 
every 2 to 3 years before age 30 and every 4 to 7 years thereafter. In 
between, gaps can occur in health coverage.
    Job seekers are very receptive to relocating for the right position 
or benefits. Surveys show that 50 to 60 percent of job applicants are 
willing to move. This number increases to as high as 94 percent for 
younger, entry level job seekers.
    Relocating to a new job disrupts Guard or Reserve continuity. Most 
will transfer into the Individual Ready Reserve (IRR) until their new 
life settles down, many never to emerge again.
    The number of people willing to relocate drops to only 19 percent 
when there are family ties to the community. If the Guard and Reserve 
can create this sense of community it should encourage retention. A 
continuity of health care would help.
    A continuity of health care can help build the sense of community 
between a Guard and Reserve member and the Reserves by providing 
stability. Roller coaster changes in family health care when a spouse 
changes Reserve status can be a traumatic and even confusing for family 
members. Enabling drilling members and their families to sign up for 
TRICARE would not only provide stability but also reassurance for the 
reservist when deployed.
Continuity Options

          ROA recommends authorizing access to TRICARE on a cost-share 
        basis, or premium cost-share for civilian health plans upon 
        activation.
    Option 1: Expanded TRICARE Access
    Drilling Guard and Reserve servicemembers would pay an annual cost-
share premium for TRICARE coverage for either themselves or their 
families. With activation of 30 or more days, and the government would 
assume all of the cost as it would for Active-Duty members. Once the 
de-mobilization process was complete, the drilling Guard and Reserve 
could return to a cost-share basis.
    The TRICARE access option is consistent with the DOD's ``seamless, 
integrated total force policy,'' as it would open TRICARE to G-R 
families and eliminates a ``structural barrier'' inhibiting true 
integration of the total force.
    ROA believe families would better support a career in the Reserve 
component, if health care were provided as a benefit. Spouses would 
make reservists think twice before quitting the Guard or Reserve and 
losing this benefit.
    Costs: a recent Government Accountability Office (GAO) report (GAO-
02-829, Defense Health Care, September 2002, hereafter, GAO Report) 
estimated that DOD's cost would be $7 billion over 5 years if 
reservists paid a premium similar to that paid by Active-Duty retirees 
under age 65 (TRICARE Prime).
    Option Two: Payment of Premiums for Employer or Personal Health 
        Insurance
    Guard and Reserve family members are eligible for TRICARE if the 
members' orders to Active-Duty are for more than 30 days; but some 
families would prefer to preserve the continuity of their own health 
insurance. Being dropped from private sector coverage as a consequence 
of extended activation adversely affects family morale and military 
readiness and discourages some from reenlisting. Many Guard and Reserve 
families live in locations where it is difficult or impossible to find 
providers who will accept new TRICARE patients.
    During both activation and during TAMP, DOD could contribute a 
premium payment that is not to exceed its TRICARE contribution. 
Payments could be made through direct deposit to employers or 
employers' heath care insurers. The Guard and Reserve members' families 
would be able to continue with the employer health insurance without 
disruption, and the administering by DOD would be simply to cut a 
check. Congress has directed GAO to explore this option.
    Health care is a key benefit. ROA surveyed the Fortune 500 
employers, and found that if any benefit was provided it was health 
care continuation first. This shows how important it is. If our 
patriotic employers recognize this, so should DOD.
TRICARE Reserve Select (TRS)
    Time and study has allowed ROA to recognize Congress' wisdom behind 
their creation of TRICARE Reserve Select. In creating a new form of 
TRICARE, they have also created a health care engine which can drive a 
continuity of health care.
    The beauty of this new model is that the premium based Standard 
TRICARE can be modified. It provides a basic health care for a standard 
cost. Different beneficiaries can now be included with TRS offered at 
different cost share premium packages.
    ROA recommends Congress explores cost-share coverage for:

        A. Unemployed
        B. Uninsured
        C. Drilling reservists
        D. Allowing gray-area reservists buy-in.
Concerns with TRS
    1. Uniformed Service Employment and Reemployment Rights Act 
        (USERRA)
    If the member elects coverage under TRS then they may lose their 
USERRA protections.
    USERRA allows Guard and Reserve members immediate re-enrollment in 
the employer's health benefit plan upon re-employment following Active-
Duty longer than 30 days, irrespective of whether the employee 
reservist elected to continue coverage during activation. Further it 
doesn't permit the employer to apply any plan exclusions or 
restrictions that would otherwise be inapplicable if not for the 
employee's entry into Active service.
    Should a Guard and Reserve member elect to continue TRS, or the 
180-day post-mobilization (TAMP) coverage after requesting 
reemployment, these USERRA protections are lifted. Except for that 
immediate day of re-employment, a Guard and Reserve member may be 
required to wait a specified period, on until the next open enrollment 
in order to continue the employer's health care coverage.
    2. Servicemembers Civil Relief Act (SCRA)
    SCRA (Section 704) also provides Guard and Reserve members with 
protection of reinstatement of health care insurance without exclusion. 
The insurance must have been in effect before such service commenced 
and terminated during the period of military service. An application 
under this section must be filed not later than 120 days after the date 
of the termination of or release from military service. Both TAMP and 
TRS exceed this 120 day period.
    3. Pre-existing Conditions: The Health Insurance Portability and 
        Accountability Act of 1996 (HIPAA)
    ``The length of time coverage can be denied for a preexisting 
condition under HIPAA is limited to no longer than 12 months (18 months 
if you are a late enrollee).
    This time can be reduced or eliminated if you were covered by 
previous health insurance (which qualifies under HIPAA as creditable 
coverage) and if there was not a break in coverage between the plans of 
63 days or more.''
    Should a member takes TRS, and the employer later requires a 
waiting period to transition back into the employers health care plan, 
a break of 63 days or longer would jeopardize pre-existing conditions. 
(See USERRA)

          ROA recommends changes to USERRA and SCRA to grant 
        eligibility to employer and private insurance following TRS 
        coverage.
Continuum of Service
    Several issues have emerged that should be watched.
    Length of orders: The Reserve components are notorious at producing 
types of orders or by adjusting an order's number of days to reduce 
cost. For example, a set of 179 day orders would limit a Guard and 
Reserve member to just one year because TRS is earned in 90 day 
segments.

          ROA Recommends prorating this benefit to allow partial years 
        to be earned.

    Any break in Select Reserve status invalidates the health care, but 
maintains the obligation. Should a Reserve component fail to implement 
the Service Agreement in a timely manner, the TRS could be forfeited. 
Many Select Reserve billet assignments are scheduled around a fiscal 
year.
The Service Agreement as an Obligation
    The TRS Service agreement should be viewed as a legal contract 
between the Guard and Reserve member and his or her Reserve component. 
Both sides are obligated to fulfill this contract, but there is some 
question as to when these obligations become binding.
    If a Guard and Reserve member chooses to cancel their TRICARE 
Reserve Select coverage, it does not eliminate their remaining 
obligation to serve for the duration of that contract. Similarly, if a 
Reserve component member is removed from a Selected Reserve billet, the 
government could be legally challenged. Uncertain is when these 
obligations begin.
    The Guard and Reserve member is by law required to apply for TRS 
before he or she is demobilized. The Final Service agreement must be 
signed 30 days before the end of TAMP. DOD has taken the position that 
Select Reserve obligation is binding from the first application.In 
contract law, a contract arises when an offer to make a contract is 
accepted. When the Guard and Reserve member's application is completed 
at the demobilization site, it is just an extended offer. This website 
even includes a disclaimer that a Select Reserve billet assignment is 
not necessarily available.
    The definition of a contract includes a promise to do something in 
exchange for money or goods, or a promise to do something in exchange 
for a promise to do something. Until the Reserve components can promise 
something in return for the offer of duty obligation, no contract 
exists. These promises becoming binding only when both parties sign the 
service agreement.
    Additionally, no contract is binding if it is signed under duress. 
Demobilization is a very stressful period, where Guard and Reserve 
members are not focusing on details, but are looking at getting home. 
The early application as required by law can't be viewed as a binding 
obligation.

          ROA recommends that the law be changed so that the Service 
        Agreement is signed by both parties 120 days after 
        demobilization rather than at demobilization.
Retention Tool or Benefit?
    It has been suggested that this new TRICARE for reservists will 
encourage retention and longevity. Knowing that it takes a tour of duty 
to qualify, reservists should be eager to serve once ever 6 years. This 
provides the predictability and periodicity that DOD feels is needed by 
both reservists and their civilian employers.
    An opposing view is that rather than retaining reservists, the new 
benefit will cause them to leave the Reserves. Both new health and 
education benefits are based on the ability to deploy. A year on, 4\1/
2\ year off rotation will place stress on both family and civilian 
employment. To keep needed benefits, a reservist will either have to 
focus on his/her civilian or Reserve career path. Pressures may 
preclude doing both.
Retention Concern
    As a Retention tool, not everyone is included. The Army, the Marine 
Corps, and the Navy have mobilized reservists out of the Individual 
Ready Reserve. Under current law, unless these Reserve component 
members are given an opportunity to join the Selected Reserve, they are 
not eligible to purchase TRS.
    All Services offer drilling for points without pay. These members 
are in the IRR. The Navy has Voluntary Training Units. The Air Force 
and Army have non-paid Individual Mobilization Augmentees (IMA). The 
Army also has a group within the IRR body that has agreed to 
mobilization during their first 2 years.
    ROA feels that IRR members should be eligible for TRS. They could 
qualify if they sign an agreement of continued service and complete a 
satisfactory year of training and satisfy physical standards. A 
satisfactory year could be defined either by points or by training 
requirements, as defined by each Reserve Chief.

          ROA recommends at a minimum the laws language be changed from 
        ``Selected reservists'' to ``Drilling reservists''.

    When Congress created TRS, ROA views it also created an earned 
benefit. By going to war, you should be eligible for health care 
benefits without obligation. One group, recalled reservists who are in 
Gray area retirement, will never qualify for TRS, as normally they are 
not eligible by policy or law to return to a drill status. TRICARE 
Reserve Select should be likened to a GI Bill entitlement rather than a 
retention tool.
Cost Limitations
    ROA recognizes the fact that there are cost prohibitions with DOD 
subsidizing a blanket TRICARE health plan for reservists.

          ROA encourages Congress to explore options to expand payment 
        sources should the new premium based TRICARE Standard program 
        be expanded to a wider Reserve population.

    As suggested this past year by the Senate, drilling reservists 
could be given an opportunity for an employer or other benefactor to 
buy-in to TRICARE at 72 percent of premium cost, rather than being paid 
by DOD.
    Additionally, gray-area reservists should be permitted a chance to 
buy-in to the same plan, paying full premium costs. Further, funding 
needs to be explored on how to help the unemployed and uninsured 
reservist.
    With innovative approaches Congress can provide reservists with 
continuous health care to optimize medical readiness and insure 
recruiting and retention.

          Reserve Officer Association feels that it is inappropriate 
        that drilling guardsmen and reservists are the only part-time 
        Federal employee not entitled to a health care plan. ROA 
        supports a continuum of health care from joining the Reserves 
        up to retirement.

    The hearing is adjourned.
    [Questions for the record with answers supplied follow:]

             Questions Submitted by Senator Saxby Chambliss

                          HEALTH CARE FUNDING

    1. Senator Chambliss. Dr. Chu and Dr. Winkenwerder, there is some 
concern that funding for medical care for our military personnel and 
their families, whether Active, Reserve, or retired, is increasingly 
competing for funding against other Department of Defense (DOD) 
programs. Some have questioned whether providing health care to our 
retired servicemembers has any positive effect on recruiting and 
retention. Others have argued convincingly that having a first-class 
health plan for retirees is a crucial selling point for recruiting and 
retaining soldiers. Senator Warner has been recently quoted as saying 
that ``There's no sense in buying modern weapons, unless you have 
healthy, intelligent people who can operate them and are willing to 
stay there.''
    There is much anecdotal evidence that health care benefits are 
highly valued by military personnel from new recruits to career 
personnel. What would be valuable to know is whether any studies have 
been undertaken to quantify to what extent there is a link between 
health care benefits and recruiting and retention. Has the DOD 
conducted any surveys of military personnel to determine to what extent 
health care benefits, for both those serving and after retirement, 
motivate servicemembers to join the military in the first place and 
reenlist for more service, and then stay until retirement and if so 
what effect do health care benefits have on recruitment and 
retention?1.
    Dr. Chu and Dr. Winkenwerder. If a servicemember is provided a non-
cash or in-kind benefit like health care, clearly the individual will 
be better off than before. This makes the military more attractive to 
potential recruits and induces some members to stay longer than they 
otherwise would. However, the issue is not whether some members will 
stay longer or others will join that would not have otherwise, the 
issue is what value do members place on these benefits? In other words, 
is the provision of health care beyond that necessary for readiness 
purposes an efficient way of accomplishing an increase in retention and 
recruitment? Although there are no studies that directly relate 
recruiting and retention to the provision of health care benefits, 
there are a number of theoretical and practicalreasons to believe that 
the value of health care benefits to the servicemember, especially 
those benefits provided to retired members, is less than the cost of 
providing the service. The basis for this statement is that the benefit 
is ``in-kind'' and deferred, that is, provided at some time in the 
future.
    By in-kind benefits we mean specific goods and services, like 
health care, that are provided to military members rather than cash 
compensation. While cash compensation offers complete flexibility in 
purchase decisions, in-kind benefits are tied to a specific good and, 
consequently, are of little or no value to the member if he or she does 
not use that service. Also, in-kind benefits are generally not tailored 
to the preferences of an individual servicemember and thus it is likely 
that family health care will not be valued or valued at a substantial 
discount by single members, by members that do not use health care 
services, and by members whose spouses have health care insurance from 
the spouse's employer. Because the service is not valued by some 
members, there is a wedge between the cost to the government of 
providing this service and the value that at least some of these 
members place on the service. Given the choice of ``x amount of 
dollars'' in health care or ``x amount of dollars'' in basic pay, many 
members would opt for the cash since the value to them of health care 
is less than the cash alternative; the larger the wedge the greater, 
the inefficiency. (See Deborah Clay-Mendez, Cash and In-Kind 
Compensation policies for a Volunteer Force: The U.S. Experience, June 
2004.)
    The present value to the servicemember of compensation that is 
received at some future date must be discounted by the member's rate of 
time preference. In other words, the value to a member of future 
benefits is the amount of money that the member will accept today in 
place of a dollar's worth of benefits to be delivered in the future. 
There is considerable evidence that servicemembers have a discount rate 
that is significantly higher than the value the government places on 
future benefits. According to Warner and Pleeter (American Economic 
Review, March 2001), the discount rate for an average enlisted member 
is in the range of 17 to 35 percent. If the discount rate were 17 
percent, a promise of $1,000 20 years in the future would only be worth 
$47 to the member today. If the discount rate were 35 percent, that 
same $1,000 would be worth $2.47 to the member. If the cost of 
providing future health care as reflected in the accrual rate for 
TRICARE for Life is about $6,500 per Active-Duty member and the 
discount rate is 17 percent, a 20-year old member who would start 
receiving these benefits at age 65, would value this benefit at $5.50. 
Benefits today are thus preferred to benefits in the future.
    In the August 2004, Status of Forces Survey, the Defense Manpower 
Data Center asked respondents how much more in retired pay the member 
would accept in lieu of TRICARE for Life. The average response for 
officers and enlisted was $3,804 per year only about 60 percent of the 
value of the service to be received. This is an example of a situation 
where the value of benefits received is considerably less than the cost 
of providing the benefit, in which case recruitment and retention would 
not be as high as the cash equivalent value of the benefit.

                    LICENSED PROFESSIONAL COUNSELORS

    2. Senator Chambliss. Dr. Chu and Dr. Winkenwerder, currently, 
TRICARE requires that physicians refer clients to and supervise mental 
health counselors who provide mental health services to its 
beneficiaries. This requirement is in contrast to TRICARE's policy of 
providing direct access to clinical social workers and marriage and 
family therapists. Mental health counselors, also called Licensed 
Professional Counselors (LPC), are professionals with masters or 
doctoral degrees in counseling or a related discipline who provide 
services along a continuum of care from diagnosis and treatment of 
mental illness to educational and preventative services to long-term 
care. Clinical training and licensing requirements for mental health 
counselors are comparable to the training of other master's level 
TRICARE providers including clinical social workers and marriage and 
family therapists. The DOD recently received the results of a pilot 
study that examined whether LPCs should be granted the same treatment 
that other health providers enjoy. What were the results of this study?
    Dr. Chu and Dr. Winkenwerder. The National Defense Authorization 
Act for Fiscal Year 2001 directed the Department of Defense to conduct 
a demonstration project under TRICARE that would allow beneficiaries to 
access licensed mental health counselors without the requirement for 
either physician referral or clinical supervision. The demonstration 
began 1 January 2003 and ended 31 December 2003. The demonstration 
consisted of a control arm and an experimental arm (access to licensed 
mental health counselors). The evaluation of the demonstration was 
focused on a comparison of utilization of services, cost of care, and 
outcomes. Upon completion of the demonstration, the TRICARE requirement 
for physician referral was reinstated.
    The RAND report ``Expanding Access to Mental Health Counselors--
Evaluation of the TRICARE Demonstration'' showed that with removal of 
the referral and supervision requirements patients were less likely to 
see a psychiatrist, and less likely to receive a psychotropic 
medication to treat their mental illness. There was also an increased 
frequency of inpatient hospitalization for mental illness in the 
demonstration area compared to the control area. Therefore, DOD is 
concerned that increased hospitalization may suggest poorer outpatient 
control of symptoms, resulting in higher, possibly preventable rates of 
admission. Access to Licensed Mental Health Counselors (LMHCs) 
practicing independently is more likely to result in substitution of 
type of provider, rather than increased access to mental health 
services. Without the requirement for physician referral and 
supervision, there is significant risk that patients will unwittingly 
incur out-of-pocket costs for non-medical counseling services that are 
not covered by TRICARE.
    Additionally, Medicare and the Department of Veterans' Affairs (VA) 
require physician supervision of mental health counselors. DOD is 
unaware of other health insurance plans that authorize independent 
practice. A major concern is the lack of national or uniform standards 
of accreditation relating to educational requirements for obtaining a 
degree, a lack of agreement in the profession on recognition of a 
national certification body or exam, and the differences in 
requirements among the states to obtain a license. We assure quality of 
care through rigorous requirements for academic and professional 
credentials, relevant experience and licensure and periodic 
recertification. For psychiatrists, psychologists, social workers, 
clinical nurse specialists, and marriage and family counselors, these 
standards are derived from well-established bodies of accreditation. 
LMHCs have a wide range of standards, licensure, and certification 
requirements which makes it difficult to endorse independent practice 
that will result in comparable high quality mental health care across 
our system. Given differences among States in curricula, accreditation, 
and supervised post-graduate practice, the Department has ongoing 
concerns about the TRICARE program's ability to maintain a uniformly 
high quality of care across geographic areas.

    3. Senator Chambliss. Dr. Chu and Dr. Winkenwerder, what are the 
DOD's plans to change TRICARE policy in order to provide more 
streamlined access to mental health care providers particularly when 
the requirement for mental health care services is expected to increase 
as a result of combat operations in Iraq and Afghanistan?
    Dr. Chu and Dr. Winkenwerder. Both in our military treatment 
facilities as well as in our TRICARE network, our beneficiaries have 
direct access to mental health services. This means they can go 
directly to see a mental health provider who does need a referral from 
a physician to be an authorized provider for up to eight sessions; 
without the need for a referral from their primary care manager.
    We have initiated several changes to improve this basic benefit. 
Pre-clinical care is now also offered through our DOD-wide work-life 
program called Military One Source. The One Source program offers up to 
six free, confidential counseling sessions per person and includes 
marriage and family counseling, personal problem solving, and everyday 
life events counseling, which are not TRICARE benefits. If a 
diagnosable health concern arises that exceeds the scope of the One 
Source program, the counselor will personally facilitate a referral to 
a military health system health care provider to ensure continuity of 
care. While not a health care program, the One Source system increases 
access to care by offering an easy method for entry, decreases 
potential misinformation and the perceived stigma that can be 
associated with mental health care, and increases information and 
education about mental health care and its benefits.
    Special programs facilitate access for servicemembers who have 
served in operational or combat deployments. First, Pre-deployment 
Health Assessments provide an opportunity for each servicemember to 
identify any mental health concerns before deployment. Immediately upon 
return, our servicemembers receive a Post-Deployment Health Assessment 
which allows them to identify mental health symptoms or to request a 
visit with a health care or mental health care provider or family 
counselor, even if they do not currently have symptoms. In addition, 
servicemembers receive a medical threat debriefing and benefits 
briefing which assists them in identifying potential health concerns 
that may emerge in the future and where to seek care if those concerns 
present. Once they return to their home station, they participate in a 
deployment support and education program, which includes a family 
reunion and reintegration component to assist in facilitating access to 
health care for family members.
    Our newest point on the deployment cycle continuum of care is the 
Post-Deployment Health Re-Assessment (PDHRA) program. This program is 
scheduled to begin implementation in June of this year. It will provide 
a repeat assessment of returning servicemembers at the 3 to 6 month 
period after their return from an operational deployment along with 
education and outreach for deployment health concerns, with a specific 
focus on mental health issues. This global health assessment will also 
include a mental health assessment and will again provide increased 
access to mental health care based on reported health concerns or at 
the request of the individual even if they have no current symptoms or 
concerns.
    In the coming year, DOD will be implementing an annual Periodic 
Health Assessment (PHA) that will address both physical and mental 
health conditions for every servicemember, not just those who deploy. 
This process will assist in identifying mental health concerns and 
conditions that may be associated with the potentially high stress 
levels of those who serve in garrison. The PHA will also be available 
to retirees and to family members.
    Over the past 2 years, DOD has implemented several clinical 
practice guidelines that assist our health care providers in delivering 
state of the art care for mental health issues. They include the Post-
Deployment Health Evaluation and Management Clinical Practice 
guideline, which is mandated for implementation in all military 
treatment facilities. Guidelines especially relevant to mental health 
include major depression, acute stress and post-traumatic stress, 
substance use disorder, and medically unexplained or ill-defined 
conditions.
    Several initiatives are designed to bring mental health care to the 
forces rather than waiting for conditions to present in a traditional 
clinical setting. The Operational Stress Control and Readiness (OSCAR) 
program in the Marine Corps has embedded mental health providers into 
line units to provide ready access to preventive stress management 
resources. The Air Force Behavioral Health Optimization Program embeds 
behavioral health providers into primary care settings, increasing easy 
access to care and reducing the potential stigma of seeking care 
through a traditional mental health clinic.
    Finally, for those individuals diagnosed with Post-Traumatic Stress 
Disorder (PTSD) as a result of combat who are not effectively treated 
through other clinic settings, we have established a specialized care 
program. While located at Walter Reed Army Medical Center, the program 
services the entire military community. It provides intensive 
rehabilitative care for chronic ill-defined conditions and PTSD through 
a 3-weekday hospital program.

                         TRICARE RESERVE SELECT

    4. Senator Chambliss. Dr. Chu and Dr. Winkenwerder, TRICARE Reserve 
Select (TRS) provides our Reserve component personnel with an excellent 
health insurance option at a relatively lost cost. For each 90 day 
period of consecutive service, Reserve component personnel receive a 
whole year of TRS coverage. So if a reservist is mobilized for 2 years, 
he would earn a health care benefit that will last for 8 years as long 
as he remains in the Selected Reserve. However, if that reservist is 
mobilized again, say 4 years into his 8th year benefit for a period of 
180 days, he would not earn another 2 years of eligibility because his 
``new'' benefit would run concurrently with his ``old'' benefit. This 
situation could occur because the law states that the benefit will 
start the day after the 180-day demobilization coverage ends. As it 
stands, the language of the law does not seem to encourage volunteerism 
in our Reserve Forces. What are your thoughts on changing this 
provision in TRS so that the benefits would run consecutively rather 
than concurrently?
    Dr. Chu and Dr. Winkenwerder. DOD is implementing the TRICARE 
Reserve Select program in accordance with the statutory requirements. 
As noted, a period of accrued TRS eligibility will continue to run even 
if the TRS coverage is in suspense because the reservist is in another 
period of Active-Duty service. The member may qualify for another 
period of TRS benefits based on the additional Active-Duty service, but 
this would not extend the period of coverage earned in the prior 
activation. If Congress were to revise the statutory requirements so 
that earned periods of eligibility run consecutively, this would extend 
the time period of eligibility for reservists activated more than once. 
In order to take advantage of the extended time period, reservists 
would need to commit to continued service in the Selected Reserve.

    [Whereupon, at 3:24 p.m., the subcommittee adjourned.]

                                 
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