Defense Health Care: Continued Management Focus Key to Settling  
TRICARE Change Orders Quickly (30-APR-01, GAO-01-513).		 
								 
Under TRICARE, the Department of Defense's (DOD) managed care	 
program, military-operated hospitals and clinics are supplemented
by contracted civilian services. Since the inception of TRICARE, 
DOD has made numerous modifications to these contracts via	 
contract change orders. Since July 1997, when (GAO) reported that
DOD was taking steps to improve its change order process, a	 
backlog of change orders has continued to grow. In this report,  
GAO evaluated (1) the status of the change order backlog and how 
DOD addressed it, (2) factors that contributed to the growth of  
the backlog, and (3) DOD's new initiative to improve the change  
order process. As of June 30, 2000, the number of change orders  
issued had almost tripled, while the number of unsettled change  
orders had more than doubled since July 1997. Despite		 
recommendations to devote high-level attention to managing	 
improvements to the change order process, this was not done.	 
Until recently, none of TRICARE Management Activity's (TMA)	 
numerous initiatives effected much improvement to the process or 
reduced the backlog. The current small backlog is the result of  
recent concerted effort, not better management over time. TMA's  
new Change Management Process (CMP) appears to address many of	 
TMA's problems with change orders. However, past initiatives have
made similar promises and delivered little when they were	 
abandoned or eclipsed by higher priorities. The high volume of	 
change orders now or soon to enter the new CMP makes it 	 
imperative that TMA management closely monitor the process to	 
prevent future backlogs.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-513 					        
    ACCNO:   A00796						        
  TITLE:     Defense Health Care: Continued Management Focus Key to   
             Settling TRICARE Change Orders Quickly                           
     DATE:   04/30/2001 
  SUBJECT:   Contract modifications				 
	     Contract oversight 				 
	     Defense cost control				 
	     Funds management					 
	     Health care programs				 
	     Managed health care				 
	     Defense Health Program				 
	     DOD Change Management Process			 
	     DOD Defense Reform Initiative			 
	     DOD Future Years Defense Program			 
	     DOD Military Health Services System		 
	     DOD TRICARE Program				 
	     Medicare Program					 

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GAO-01-513

Report to the Chairman and Ranking Minority Member, Subcommittee on Military
Personnel, Committee on Armed Services, House of Representatives

United States General Accounting Office

GAO

April 2001 DEFENSE HEALTH CARE

Continued Management Focus Key to Settling TRICARE Change Orders Quickly

GAO- 01- 513

Page i GAO- 01- 513 TRICARE Change Order Management Letter 1

Appendix I Scope and Methodology 22

Appendix II Prior Initiatives to Address Change Order Problems and Their
Outcomes 24

Appendix III GAO Contact and Staff Acknowledgments 27

Tables

Table 1: MCS Contractors, Regions, and Date of Initial Award 4 Table 2:
TRICARE Change Orders by MCS Contractor, Region, and

Settlement Status on May 1, 1997, and on June 30, 2000 9 Table 3: TRICARE
Change Orders Issued by MCS Contractor and

Region as of May 1, 1997, and June 30, 2000 12

Figures

Figure 1: Percentage of Change Orders by TRICARE Manual, May 1, 1997, and
June 30, 2000 6 Figure 2: Change Orders Issued by Month, May 1997 - June
2000 13 Contents

Page ii GAO- 01- 513 TRICARE Change Order Management Abbreviations

ADP automated data processing BPA Bid Price Adjustment CNA Center for Naval
Analysis COTS Change Order Tracking System DHP Defense Health Program DLA
Defense Logistics Agency DOD Department of Defense IGCE independent
government cost estimate IPT Integrated Program Team IS information systems
MCS managed care support REA Request for Equitable Adjustment TMA TRICARE
Management Activity

Page 1 GAO- 01- 513 TRICARE Change Order Management

April 30, 2001 The Honorable John M. McHugh Chairman The Honorable Martin T.
Meehan Ranking Minority Member Subcommittee on Military Personnel Committee
on Armed Services House of Representatives

Under TRICARE, the Department of Defense?s (DOD) managed care program,
military- operated hospitals and clinics are supplemented by contracted
civilian services. To date, DOD has awarded seven managed care support (MCS)
contracts to administer health care in 11 geographic regions. Since the
inception of TRICARE, DOD has made numerous modifications to these contracts
via contract change orders. These changes were made for a variety of
reasons, such as the addition of new benefits or changes in administrative
processes. In recent years, DOD?s management of the change order process has
resulted in a large backlog of outstanding change orders. The cost
associated with this backlog as well as its growth has been an ongoing
source of congressional concern. Until recently, DOD directed its MCS
contractors to implement change orders prior to negotiation and payment.
Therefore, DOD?s backlog of unsettled changes orders generally consists of
change orders for which the MCS contractors have not received payment.
Because DOD?s estimates for change order costs have typically been lower
than MCS contractors? proposed costs, the unsettled change orders could
represent a significant future liability for the Defense Health Program
(DHP) if they are settled at higher amounts than DOD estimated.

In July 1997, we reported that DOD was taking steps to improve its change
order process, and we recommended that DOD continue providing the high-
level management attention it had recently begun to use to implement change
order process improvements. 1 However, the backlog continued to grow. On
July 1, 2000, DOD began a short- term initiative to negotiate and pay for
all of its outstanding change orders. In addition, DOD has begun to use a
new process for issuing and settling change orders.

1 Defense Health Care: Actions Under Way to Address Many TRICARE Contract
Change Order Problems (GAO/ HEHS- 97- 141, July 14, 1997).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 513 TRICARE Change Order Management

Your Subcommittee raised questions about whether the change order process
had, in fact, improved and about DOD?s ability to effectively manage the MCS
contracts. Specifically, you asked us to update the 1997 report and provide
information on (1) the status of the change order backlog and whether DOD
reduced it, (2) factors that contributed to the growth of the backlog, and
(3) DOD?s new change order process.

To address these objectives, we analyzed data from DOD?s Change Order
Tracking System and interviewed officials of DOD?s TRICARE Management
Activity (TMA), which solicits, awards, and oversees the MCS contracts. We
also met with the MCS contractors to obtain their views on problems with
change orders and potential process modifications. We did our work from July
2000 through March 2001 in accordance with generally accepted government
auditing standards. (For a further description of our scope and methodology,
see app. I.)

As of June 30, 2000, TMA?s backlog of unsettled change orders had more than
doubled- from 223 to 562- since our July 1997 report. Despite TMA?s
concurrence with our earlier recommendation to continue providing highlevel
management attention to needed process improvements, TMA management did not
remain consistently focused on the change order process. Furthermore, the
initiatives it implemented had limited effectiveness in reducing the
backlog. On July 1, 2000, TMA initiated a short- term, ambitious effort to
eliminate the backlog by making the settlement of change orders a management
priority both internally and with the MCS contractors. By February 2001, TMA
had eliminated most of the backlog, which resulted in settlements of about
$900 million for current and prior fiscal years. This short- term effort,
while successful, was prompted by the need to prepare for sweeping program
changes, including expanded benefits for retired military beneficiaries who
are Medicareeligible, legislated by the Floyd D. Spence National Defense
Authorization Act for Fiscal Year 2001 (P. L. 106- 398). Because the total
cost of these settlements had not been included in the current- year defense
budget, these costs contributed to about $500 million of the overall DHP
funding shortfall for fiscal year 2001, which TMA estimates at $1.4 billion.

TMA had issued 1, 091 change orders to its TRICARE contracts as of June 30,
2000- more than triple the amount we reported in July 1997. However, because
the pace of settlements lagged far behind the number of change orders
issued, TMA?s backlog continued to grow. Because the change order process
involves a number of sequential tasks, recurring delays with steps in this
sequence (such as cost proposal submissions by MCS Results in Brief

Page 3 GAO- 01- 513 TRICARE Change Order Management

contractors and reviews by TMA), slowed the overall process and ultimately,
payments to the MCS contractors. By June 30, 2000, TMA had met its goal to
settle change orders within 180 days of issuance less than 20 percent of the
time. TMA?s staffing problems further impeded its ability to settle change
orders in a timely manner. For instance, TMA had a major reorganization and
staff reduction under the 1997 Defense Reform Initiative. In addition, TMA
had problems with the high turnover of its Contract Management staff, who
are responsible for issuing and settling change orders. The resulting
knowledge gaps and reduced resources left TMA unable to make significant
progress in settling change orders to eliminate the backlog.

Recently, TMA began using a new change order process requiring potential
changes to be reviewed, approved, and prioritized by senior- level TMA and
military services officials. Furthermore, change order costs are to be
negotiated and settled before changes are implemented. TMA officials told us
that the new approval and prioritization process for new changes will help
control the number of change orders issued by ensuring that all the changes
issued are necessary and that the most important changes are implemented
first, based on the availability of funds. In addition, negotiating and
settling change orders before implementation will help TMA ensure that
sufficient funding is available to pay for the changes, which will help it
avoid future funding shortfalls. However, it is premature to evaluate the
effectiveness of this process because TMA has not yet issued any change
orders under it. Given TMA?s past experience with change order initiatives,
it is imperative that TMA closely monitor its new process.

We are recommending that the Secretary of Defense ensure that the new change
order process receives the consistent high- level management attention
necessary to succeed and, as part of this effort, monitor the new process
and take corrective actions if problems, such as a growing backlog, develop.
We requested comments from DOD, but none were provided.

DOD?s primary medical mission is to maintain the health of its 1.6 million
active duty service personnel and to provide health care for them during
military operations. DOD also offers health care to 6.7 million nonactive
duty beneficiaries, including dependents of active duty personnel, military
retirees, and dependents of retirees. Under TRICARE, DOD provides health
care to its eligible beneficiaries through military- operated hospitals and
clinics worldwide and supplements this care with civilian providers.
Background

Page 4 GAO- 01- 513 TRICARE Change Order Management

DOD contracts with MCS contractors to administer its TRICARE program on a
regional basis. The MCS contractors? responsibilities include claims
processing, customer service, and developing and maintaining an adequate
network of civilian providers.

Since 1994, DOD has awarded seven MCS contracts covering the 11 TRICARE
regions. These contracts were awarded for a base period and 5 option years.
2 (See table 1.) Four of the MCS contracts have used all of the option years
and three of these have been extended for an additional 2 years. A fourth
contract?s extension is under way. TMA anticipates that all of its MCS
contracts will eventually be extended.

Table 1: MCS Contractors, Regions, and Date of Initial Award MCS Contractor
Region name and number Date of initial

award

Health Net Federal Services a Northwest/ 11 September 1994 Health Net
Federal Services Southwest/ 6 April 1995 Health Net Federal Services Golden
Gate, Southern California, and

Pacific/ 9, 10, and 12 August 1995 Humana Military Healthcare Services
Southeast and Gulf South/ 3 and 4 November

1995 TriWest Healthcare Alliance Central/( formerly 7 and 8) June 1996
Anthem Alliance b Mid- Atlantic and Heartland/ 2 and 5 September

1997 Sierra Military Healthcare Services Northeast/ 1 September

1997 a Health Net Federal Services, formerly Foundation Health Federal
Services, changed its name in

February 2001. b In April 2001, DOD announced that Humana Military
Healthcare Services acquired Anthem Alliance

and will assume responsibility for the Mid- Atlantic and Heartland Regions.
Source: TMA.

TMA, within DOD?s Office of the Assistant Secretary of Defense (Health
Affairs), is responsible for administering the MCS contracts. TMA?s
contracting officers have the ultimate responsibility for contract
administration, including the issuance of change orders. Contracting

2 The base period, which varies by contract, consists of a transition
period, ranging from 6- 9 months, and the early months of health care
delivery.

Page 5 GAO- 01- 513 TRICARE Change Order Management

officers are assigned to each MCS contract and are supported by other TMA
staff as well as by the Lead Agents. 3

Change orders may result from new laws or regulations, or from DOD
initiatives. The most recent data available, which were in our 1997 report,
showed that one- third of all TRICARE change orders resulted from new laws
or regulations, while the remaining two- thirds were self- initiated. TMA
officials told us that they were unable to provide updated statistics for
our current review because the data are maintained by several different
departments and would require significant effort to compile.

Most changes are incorporated into the MCS contracts by issuing the change
order as an amendment to the applicable TRICARE program manual: the Policy
Manual, the Automated Data Processing (ADP) Manual , or the Operations
Manual . Policy changes include the authorization of new benefits or changes
in the administration or payment of current benefits. ADP changes involve
modifications to how data are created, maintained, or reported, as well as
changes to systems requirements. Operations changes include those involving
the administration of the TRICARE program, such as revisions to home health
care billing procedures. Changes can also be classified as ?multiple,?
meaning they involve modifying two or more of the manuals. Changes
classified as ?other? fall outside these categories. Examples of such
changes are the authorization of travel costs incurred by the MCS
contractors for government training and orders directing MCS contractors to
report information about ongoing provider fraud investigations. Similar to
our 1997 report, we found that as of June 30, 2000, the Operations Manual
was modified most frequently, followed by the Policy Manual , as shown in
figure 1.

3 An administrative organization called a Lead Agent is designated for each
of the TRICARE regions to coordinate health care provided by all military
treatment facilities in the region. Lead Agents can issue change orders that
are small in scope. However, we included in our review only those change
orders issued by TMA.

Page 6 GAO- 01- 513 TRICARE Change Order Management

Figure 1: Percentage of Change Orders by TRICARE Manual, May 1, 1997, and
June 30, 2000

Note: The percentage for each year total more than 100 percent because some
change orders modified more than one manual. In May 1997, 30 percent of
change orders affected multiple manuals, and in June 2000, 35 percent of
change orders affected more than one manual.

Source: TMA?s Change Order Tracking System.

Most change orders affect all of the MCS contracts. For example, if TMA
issues a change to the TRICARE program, such as a new benefit, all of the
MCS contracts must be changed. Each change order, even for the same change,
has to be negotiated separately with each MCS contractor because the cost of
the change can vary by geographic region and the number of beneficiaries a
contract covers.

The Federal Acquisition Regulation, the Defense Federal Acquisition
Regulation Supplement, and other internal DOD guidance set forth the
requirements governing the administration of change orders. The

Percentage 0 10

20 30

40 50

60 Policy Manual ADP Manual Operations

Manual Other r

May 1, 1997 June 30, 2000

Page 7 GAO- 01- 513 TRICARE Change Order Management

requirements include time frames within which contractors should submit cost
proposals to the government as well as guidance as to the time frames within
which change orders should be settled.

All change orders have been issued by TMA as unilateral changes, which means
that they were implemented before their costs were negotiated and settled.
The process of issuing and settling change orders involved many steps. When
a change was identified for the TRICARE program, TMA defined its
requirements, solicited comments about the change from the MCS contractors,
and obtained an independent government cost estimate (IGCE), which was used
to obligate, or set aside, funds for the change order. Then, the change
orders were issued to the MCS contractors for implementation. MCS
contractors were asked to submit a cost proposal within 60 days. When it
received the proposal, TMA performed technical reviews and cost analyses of
the information and then negotiated with the MCS contractor to determine the
final price. Change order settlements can result in payments to the MCS
contractors, savings to TMA, or no cost to either party. TMA?s goal for
settling change orders is 180 days from issuance.

TMA is also responsible for formulating the DHP budget request, which
encompasses costs for MCS contracts, including change orders. TMA prepares
both a current- year budget and a budget for the Future Years Defense Plan,
which represents the estimated appropriation needs for the budget years for
which funds are being requested and at least 4 years after. TMA also
maintains the accounting system used to obligate and disburse funds for
change orders.

In our July 1997 report we cited a series of actions TMA had under way to
address change order problems and reduce the backlog, such as hiring a
management consulting firm to recommend improvements. In that report, we
recommended that TMA continue providing high- level management attention to
implement needed improvements to the process. However, TMA?s actions failed
to make a measurable improvement to the process, and by June 30, 2000, the
number of unsettled change orders had peaked at 562- more than double what
it had been at the time of our previous report. Realizing that they had to
?clear the books? in order to prepare for sweeping program changes that
would result from the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001 (P. L. 106- 398), TMA officials began an ambitious effort
on July 1, 2000, to eliminate the backlog by the end of the calendar year.
As of February 2001, TMA?s change order backlog totaled 121- a reduction of
78 percent in 7 months. Change Order

Backlog Recently Reduced

Page 8 GAO- 01- 513 TRICARE Change Order Management

To reach this goal within the short time frame, TMA modified its normal
change order process, negotiating with its MCS contractors about $900
million in global settlements for the current and prior fiscal years that
included change orders as well as other contract adjustments. Because the
total cost of these settlements had not been included in the current- year
defense budget, these costs contributed to about $500 million of the overall
DHP funding shortfall for fiscal year 2001, which TMA estimates at $1.4
billion.

According to our 1997 report, the initiatives TMA was implementing to
address change order problems included engaging a consulting firm to prepare
IGCEs for individual change orders, establishing a new requirement that all
proposed change orders be reviewed and approved by Health Affairs before
issuance, and hiring a management consulting firm to review and recommend
improvements to the process. In that report, we stated that while it was too
soon to determine the effectiveness of these efforts, they could bring
needed discipline to the system by helping to ensure the need for, cost of,
and timely settlement of change orders. However, for a variety of reasons
that included a major staff reorganization and reduction, TMA management did
not remain consistently focused on change order improvements, and these
initiatives either were not fully implemented or had limited success.
Furthermore, TMA did not always have data available to measure the impact of
these specific initiatives on the change order process. (See app. II for a
list of the initiatives and their outcomes.) These initiatives
notwithstanding, between July 1997 and June 30, 2000, the backlog more than
doubled to 562 (see table 2) although the percent of unsettled change orders
decreased from 62 percent to 52 percent. Past Initiatives Had

Limited Effectiveness

Page 9 GAO- 01- 513 TRICARE Change Order Management

Table 2: TRICARE Change Orders by MCS Contractor, Region, and Settlement
Status on May 1, 1997, and on June 30, 2000

Status of all change orders on May 1, 1997 a Status of all change orders

on June 30, 2000 MCS Contractor/ region Settled Unsettled Total Settled
Unsettled Total

Health Net Federal Services/ 11 56 56 112 138 76 214 Health Net Federal
Services/ 6 30 46 76 104 78 182 Health Net Federal Services/ 9, 10, and 12
29 47 76 104 80 184 Humana/ 3 and 4 19 52 71 85 82 167 TriWest/ Central
(formerly 7 and 8) 0 22 22 56 72 128 Anthem/ 2 and 5 b 29 72 107 Sierra
Military Healthcare Services/ 1 b 13 96 109

Total 134 223 357 529 562 1,091

a Data from GAO/ HEHS- 97- 141, July 14, 1997. b These contracts had not
been awarded on May 1, 1997.

Source: TMA?s Change Order Tracking System.

On July 1, 2000, TMA initiated an ambitious, short- term effort, referred to
as Mobilization, to settle its 562 open change orders as well as other
contract adjustments by the end of the calendar year. 4 TMA officials stated
that clearing the backlog was necessary in order to prepare for changes
mandated in the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001 (P. L. 106- 398) that would result in significant program
changes, including expanded health care and pharmacy benefits for military
retirees who are age 65 and older. In addition, TMA officials recognized
that they needed to reimburse MCS contractors for implementing past change
orders that had not been negotiated and paid. To help achieve this goal, TMA
increased the technical support for its

4 TMA?s initiative also included the settlement of all outstanding Requests
for Equitable Adjustment (REA), claims, and Bid Price Adjustments (BPA).
REAs are submitted by MCS contractors to redress unforeseen changes in
contract conditions that subsequently increased their expenses. Claims
usually result from the inability of TMA and the MCS contractor to agree on
an REA. BPAs are regularly scheduled reviews of the operating conditions of
the contract, with subsequent adjustments to the contract price, which may
either increase or decrease the contract price. Change Order Backlog

Mostly Eliminated Under Recent Settlement Effort

Page 10 GAO- 01- 513 TRICARE Change Order Management

Contract Management staff by using 14 staff on contract from the Center for
Naval Analysis (CNA), who were originally slated to analyze and evaluate the
proposals submitted in response to TMA?s solicitations for the next round of
TRICARE contracts, which had been postponed. These additional staff were
used primarily to help with change order proposal reviews by providing
technical and pricing expertise. TMA also hired an information systems
consulting firm to help review proposals and increased the numbers of other
contracted staff who support Contract Management.

TMA worked with its MCS contractors to make this initiative a priority by
setting deadlines for the cost proposal submissions, which are needed to
negotiate and settle the change orders. TMA officials soon realized,
however, that reviewing and negotiating individual change orders would be
too time- consuming to meet its 6- month goal. To expedite negotiations, TMA
sent a team of contract staff to each MCS contractor to negotiate global
settlements, which included all change orders that had not yet been settled
under this effort, as well as REAs, claims, and other outstanding contract
adjustments. As of February 8, 2001, TMA had completed payments to four of
its five MCS contractors and had made partial payments to the fifth MCS
contractor. 5 Through this effort, TMA settled all but 71 change orders.
According to TMA, some change orders were not settled under this effort
because it lacked information or disagreed with the MCS contractors about
settlement terms. The 71 change orders, combined with the 50 change orders
issued after July 1, 2000, resulted in a backlog of 121 by February 2001.

As of February 2001, TMA estimated a DHP funding shortfall of about $1. 4
billion for fiscal year 2001. This shortfall amount includes about $500
million of the negotiated settlement amounts from TMA?s Mobilization
initiative as well as other DHP requirements, such as the direct care system
of military treatment facilities and the National Mail Order Pharmacy. 6 TMA
officials indicated that this shortfall would have to be

5 As of April 16, 2001, TMA had completed payments to the fifth MCS
contractor for all but 5 of the change orders that were negotiated during
this effort. 6 TMA?s funding shortfall estimate of $1.4 billion includes
costs associated with the MCS contract settlements as well as other MCS
contract costs; other private sector care benefits, such as the National
Mail Order Pharmacy; the direct care system; and statutory requirements,
including start- up costs for some of the new benefits for beneficiaries,
who are age 65 and older. Amounts Budgeted for

Change Orders Insufficient to Cover Negotiated Settlement Costs

Page 11 GAO- 01- 513 TRICARE Change Order Management

satisfied through either an emergency supplemental budget request for fiscal
year 2001 or a reprogramming of DOD funds. Negotiated settlements from the
Mobilization initiative totaled about $900 million for current and prior
fiscal years. 7 However, it is not possible to identify the amounts related
specifically to change orders for each of the MCS contracts because the
change orders and other contract adjustments were jointly settled.
Furthermore, the total cost of this effort is difficult to determine because
the settlements also affected future- year costs. 8 TMA officials stated
that future- year cost estimates will be included in the President?s Budget
for Fiscal Year 2002.

In 1997 we reported that TMA was not budgeting separately for change orders,
and we cautioned that settling TRICARE?s backlog of change orders could be
very costly. We noted that the MCS contractors? estimates to settle only a
portion of the open change orders at the time totaled $423 million, yet TMA
estimated that settling all open change orders would cost $38 million. At
the time of our 1997 report, TMA officials told us that they were developing
a methodology to include change order costs in their budget. That
methodology, developed in 1998 and first employed in fiscal year 1999, was
to use 3 percent of TMA?s annual adjusted MCS contract costs as an estimated
budget for change orders. Using this methodology, the amount in the fiscal
year 2001 budget for change orders is approximately $90 million. However,
since TMA has negotiated settlement amounts for most of its change order
backlog and has a clearer picture of change order costs, TMA officials plan
to review the adequacy of the 3 percent budget estimate.

The high volume of change orders issued and the consistently slow pace of
settlements allowed the backlog to grow. Although TMA?s goal is to settle
change orders within 180 days after issuance, it had met this goal less than
20 percent of the time as of June 30, 2000. In July 1997 we reported an
average settlement time of 340 days and an average age per unsettled change
order of 273 days. By June 30, 2000, both averages had increased: settlement
time had risen to 499 days and the age of unsettled change

7 This amount does not include settlements for some claims, which are still
being negotiated. Also, these settlements affected BPA amounts for current
and prior fiscal years. These additional amounts have yet to be finalized.

8 Future- year costs increased, in part, because the settlements included
changes to health care costs and factors used in BPAs. Many Factors

Contributed to the Change Order Backlog

Page 12 GAO- 01- 513 TRICARE Change Order Management

orders reached 547 days- 1ï¿½ years. Settlement delays occurred because of the
slow submissions of cost proposals by the MCS contractors, the subsequent
slow reviews of the proposals by TMA, and TMA?s periodic problems with
obtaining funds for payment. TMA contract staffing shortages and high
turnover further impeded the process.

As of May 1, 1997, TMA had issued 357 change orders to its TRICARE
contracts, with an average of 71 per contract; as of June 30, 2000, change
orders totaled 1,091 and averaged 156 per contract. Since our 1997 report,
TMA awarded two additional MCS contracts, whose change orders resulted in a
25 percent increase to the overall number issued. Table 3 compares the
number of change orders issued for each TRICARE contract and region for
these time periods.

Table 3: TRICARE Change Orders Issued by MCS Contractor and Region as of May
1, 1997, and June 30, 2000

MCS Contractor/ region All changes issued as of May 1, 1997 a All changes
issued

as of June 30, 2000

Health Net Federal Services/ 11 112 214 Health Net Federal Services/ 6 76
182 Health Net Federal Services/ 9, 10, and 12 76 184 Humana/ 3 and 4 71 167
TriWest/ Central (formerly 7 and 8) 22 128 Anthem/ 2 and 5 b 107 Sierra
Military Healthcare Services/ 1 b 109

Total 357 1,091

a Data from GAO/ HEHS- 97- 141, July 14, 1997. b These contracts had not
been awarded on May 1, 1997.

Source: TMA?s Change Order Tracking System.

Figure 2 shows that the rate of issuance for change orders since May 1,
1997, has varied substantially by month. The number of change orders issued
each month from May 1, 1997, through June 30, 2000, varied from a low of 3
during July 1998 to a high of 80 during September 1998. An average of 19
change orders were issued each month during this time period. TMA Continued
to Issue

Hundreds of Change Orders

Page 13 GAO- 01- 513 TRICARE Change Order Management

Figure 2: Change Orders Issued by Month, May 1997 - June 2000

Source: TMA?s Change Order Tracking System.

The change order process has consisted of sequential steps, such as the
submission of cost proposals by the MCS contractors, the subsequent proposal
reviews by TMA, and ultimately, payment by TMA, if needed, for settlement.
Delays in completing these steps slowed settlements. Furthermore, long-
standing contract staffing problems, including both limited numbers and high
turnover, diminished the contract staff?s overall knowledge base and impeded
its ability to handle the heavy workload.

To begin the change order negotiation and settlement process, TMA must
receive an adequate cost proposal from the MCS contractor. TMA asks MCS
contractors to submit a cost proposal within 60 days from receipt of the
change order, but TMA does not often receive them within this time frame. As
of June 30, 2000, TMA had not received proposals for 381 of the 562
unsettled change orders (68 percent)- 90 percent of which were older than 60
days. In addition, we found that it took an average of about 9 months from
change order issuance to proposal submission. One of the most common reasons
MCS contractors cited for slow proposal submission was that they believe TMA
does not always provide sufficient specifications for them to appropriately
price out the costs of the changes. We cited this same problem in our 1997
report. As a result, MCS contractors said that during the implementation of
the change they must spend time clarifying the details and scope of the
change. One MCS Process Impediments and

Staffing Problems Allowed the Backlog to Grow

Slow Proposal Submissions

90 0 10

20 30

40 50

60 70

80 Change Orders Issued

May June

July Aug.

Sept. Oct.

Nov. Dec.

Jan. Feb.

Mar. Apr.

May June

July Aug.

Sept. Oct.

Nov. Dec.

Jan. Feb.

Mar. Apr.

May June

July Aug.

Sept. Oct.

Nov. Dec.

Jan. Feb.

Mar. Apr.

May June

1997 1998 1999 2000

Page 14 GAO- 01- 513 TRICARE Change Order Management

contractor told us that TMA?s insufficient specifications leaves many items
open to contractor interpretation, and therefore the MCS contractor?s
efforts and corresponding costs sometimes vary significantly from TMA?s
expectations.

Another reason some contractors gave us for slow proposal submissions is the
time it takes to collect relevant data for determining the total cost of the
change. This process involves obtaining information from various internal
departments, which can include systems and actuarial personnel, as well as
from subcontractors, such as those used in processing health care claims.
Also, two of the MCS contractors stated that if the benefit is new and
unique, they prefer to gather actual costs because it is hard to predict the
extent to which beneficiaries will use the benefit. Another factor that
delays proposal preparation is TMA?s issuance of additional changes to
previous unsettled change orders. 9 This complicates proposal preparation
because it is difficult to determine where to assign costs- to the original
or to the subsequent change.

In order to meet TMA?s goal to settle change orders in 180 days, it has 120
days after proposals are submitted to review, negotiate, and settle them.
However, as of June 30, 2000, the average time between proposal submission
and settlement was 295 days. A number of factors contributed to this delay.
One was that when a proposal is received, the TMA contracting officer may
need to obtain multiple cost evaluations, including health care, information
systems (IS), operations, and possibly a Defense Contract Audit Agency
audit. 10 These evaluations usually are not performed by TMA?s Contract
Management staff but by consultants or other TMA staff. The logistics of
obtaining timely evaluations from these different sources can be time-
consuming, and negotiations cannot proceed until the appropriate evaluations
are complete. 11

An audit or review that results in the revision of a proposal also adds to
the settlement time. Furthermore, as time passes, data in the proposal may

9 TMA does not maintain data showing the frequency with which this occurs.
TMA officials estimated that about half of their large dollar change orders,
those over $500, 000, fall into this category (about 5 percent of all change
orders).

10 TMA asks the Defense Contract Audit Agency to audit all proposals over
$500, 000 and others upon the request of the TMA contracting officer. 11 TMA
has not maintained data on the difficulties or time spent in obtaining
proposal reviews. Slow Proposal Reviews

Page 15 GAO- 01- 513 TRICARE Change Order Management

need to be updated. There is no standard length of time for which a proposal
is considered current, and either TMA or the MCS contractor may initiate
these updates. MCS contractors also may choose to revise their proposals if
additional information becomes available that affects the cost of the change
order.

If TMA determines that a proposal is inadequate, the MCS contractor must
make the necessary changes and resubmit it for review. According to TMA, an
adequate proposal must meet the requirements of the Federal Acquisition
Regulation. TMA told us that some of the more common reasons a proposal must
be revised are that it does not provide sufficient detail on costs and that
it does not include adequate supporting documentation. TMA officials said
they rarely issue formal notices of inadequacy and prefer to resolve
problems informally in a collaborative approach. As a result, even though
TMA officials told us that proposals are frequently inadequate, they have
not maintained statistics to demonstrate this.

TMA officials acknowledged that contract staff exercise a fair amount of
judgment in determining the adequacy of a proposal. For example, one
contracting officer may find a proposal adequate, while another, who prefers
more detailed cost data, may not. This can be a problem for MCS contractors
if the TMA contract official they work with changes. One MCS contractor
expressed frustration when proposals it submitted were initially considered
adequate, then inadequate, and then adequate again, as their TMA contracting
officer changed. Another MCS contractor told us it generally experienced an
influx of inadequate proposals when new and inexperienced TMA staff were
assigned to its contract. Once these staff became familiar with the MCS
contractor?s proposal format, fewer proposals were returned as inadequate.

All of the MCS contractors told us that once they and TMA agreed upon a
payment amount, there was sometimes a lengthy delay before they received the
official settlement paperwork allowing them to bill TMA. As a result, the
change order backlog can include change orders that have been negotiated but
not paid. Although TMA does not maintain statistics showing the length of
time between negotiation and payment, MCS contractors told us that in some
instances they waited many months after negotiation to receive the final
settlement paperwork. For example, one MCS contractor waited 9 months for
settlement paperwork, and another said it waited 6 months. Insufficient
Funding Delays

Payment

Page 16 GAO- 01- 513 TRICARE Change Order Management

TMA officials acknowledged that one of the primary reasons for delays has
been insufficient funding. After negotiation, TMA officials prepare
settlement paperwork and coordinate with Resource Management staff, who
perform budgeting and accounting functions, to determine whether adequate
funding is available. If it is not, TMA must wait until additional funding
is obtained before sending paperwork to the MCS contractor. Delays also can
occur if there is a problem with any of the numerous steps that must be
completed in sequence after negotiation before the MCS contractor can be
paid. Once TMA determines it has adequate funding, it sends the settlement
paperwork to the MCS contractor for signature. The MCS contractor signs and
returns the paperwork to TMA, where it is signed and returned to the MCS
contractor, who may then bill TMA. TMA officials told us that they are
required to pay the bill within 30 days of receipt.

In 1997, TMA officials stated that the backlog was caused in part by a
shortage of staff as well as TMA?s decision to allocate existing resources
to the higher priority work of awarding the TRICARE contracts. Until
recently, TMA officials continued to cite staff shortages as a problem
contributing to the growth of the change order backlog. These officials
stated that the continuation of this shortage was partially due to the
Defense Reform Initiative that began in late 1997 and resulted in both a
reorganization and an overall staff reduction of about 20 percent. TMA also
had difficulty obtaining staff with certain areas of expertise needed to
review MCS contractors? proposals. For example, TMA did not have adequately
trained staff who were dedicated to perform information systems technical
evaluations of proposals for approximately 1ï¿½ years from January 1999 to
June 2000. 12 Without these evaluations, proposals with IS data could not be
satisfactorily negotiated and settled. To avoid future staffing
difficulties, TMA officials told us that they intend to retain some of the
contracted staff who assisted them with Mobilization. In addition, TMA is
currently conducting an internal assessment of current and future workload
requirements to better align its resources, which could affect staffing
levels. Therefore, TMA officials told us that they are not sure how many
contracted staff will be used in the future.

Another problem was the turnover among TMA?s contract staff- with staff both
leaving and shifting among contracts. TMA officials stated that staff

12 An IS technical evaluation would be used to determine whether the costs
incurred by the MCS contractor in making systems changes were appropriate.
Staffing Problems

Page 17 GAO- 01- 513 TRICARE Change Order Management

turnover is primarily due to staff shortages, which results in more work
being distributed among fewer staff, leading to burnout. TMA officials
stated that their experienced contract staff are highly marketable and can
readily obtain other jobs for higher pay. Turnover of contract staff has
been a long- standing problem for TMA. A 1998 Defense Logistics Agency (DLA)
procurement management review of contracting activities at TMA reported that
since January 1995, the turnover of contracting staff was high- about 33
percent over 3 years- and morale was low. The DLA report stated that these
problems were due, in part, to staff burnout resulting from the change to
managed care contracts, the sometimes hectic work pace, and the lack of
program managers to make decisions and focus priorities. TMA concurred with
the findings in that report.

The DLA report also said that contract staff need a minimum of 18 months of
TRICARE experience to properly learn about MCS contracts. Therefore, high
turnover of contract staff compromises the overall knowledge level about
contracts as well as the specific business operations of the MCS
contractors, which can delay change order settlements. For example, a few of
the MCS contractors said that by the time they reached final negotiations,
the TMA contract staff they initially worked with were no longer there, and
they had to spend time educating the new staff about past actions on the
change order.

In May 1999, TMA began revising the change order process with the goals of
reducing the backlog and facilitating the effective management of future
change orders. The resulting streamlined Change Management Process is
intended to address the fundamental problems with change orders, such as
controlling the number issued by ensuring that the changes are necessary and
by making certain that money is available to fund them. The new process
includes the creation of the Change Management Board, an executive- level
body charged with reviewing, approving, and prioritizing new changes.
Although the Change Management Board began meeting in January 2000, it is
premature to evaluate the effectiveness of the new process because no change
orders have yet been issued under it.

Under the revised process, TMA?s Program Executive Officer assigns each
potential change order to a Program Manager, who is responsible for all
activities associated with it. 13 The Program Manager?s initial task is to

13 The Chief Operating Officer for TMA serves as the Program Executive
Officer. Effectiveness of New

Change Management Process Unknown

Page 18 GAO- 01- 513 TRICARE Change Order Management

determine whether the potential change is ?operational? or ?significant.?

Operational changes are those that cost less than $500,000 per MCS contract
and include administrative modifications, such as annual updates of provider
reimbursement rates, ADP system updates, and routine modifications such as
the clarification of current requirements. Operational changes are not
reviewed by the Change Management Board for approval and proceed directly to
negotiation and implementation.

Significant changes include benefits that represent a major program shift or
changes with a financial impact over $500,000. For such changes, the Program
Manager establishes an Integrated Program Team (IPT) consisting of a cross-
section of personnel including senior TMA, military services, and Lead Agent
officials and others as needed. The IPT is responsible for determining
specifically how a new change will be implemented and for estimating the
cost of implementation to the MCS contracts, if applicable. Although the
amount of time needed to determine these details may vary, TMA officials
estimate that the IPT?s portion of the process could take 6 to 12 months.
Within this time period, the IPTs have specific milestones to meet, such as
receiving approval of an implementation plan from the Change Management
Board.

The Change Management Board is composed of senior officials of both TMA and
the Armed Services. 14 The Board reviews proposed changes and determines
which ones will become change orders. Approved changes are prioritized for
negotiation and implementation on the basis of their importance and the
availability of funds. Some approved changes will be delayed if funding is
not available and thus may be included in the next year?s budget. For
example, the Board may approve 20 change orders with total estimated costs
of $34 million. However, if only $20 million is available to fund these
changes, only changes with the highest priority will be implemented
immediately.

TMA?s new Change Management Process allows for change orders to be issued
either unilaterally, as they were previously, or bilaterally, which means
that the changes are negotiated before implementation. TMA?s goal is to
issue all of its contract changes bilaterally. As with the previous

14 Members of the Change Management Board include the Program Executive
Officer, who serves as the Chairperson; the Deputy Surgeons General; the
Deputy Director of Medical Readiness, Joint Chiefs of Staff; the Director of
Resource Management; the Director of Acquisition Management and Support; and
the Director of Information Management, Technology and Reengineering.

Page 19 GAO- 01- 513 TRICARE Change Order Management

process, contract changes issued bilaterally must have an adequate proposal
with the requisite reviews before negotiations begin. Because the entire
bilateral process may take over a year, any delays with proposal submissions
and reviews would delay not only settlement but also implementation. To
avoid such delays, in the new Change Management Process, TMA and MCS
contractor officials will work together to develop the proposal, eliminating
the more time- consuming consecutive steps of proposal submission and
review. 15 When possible, TMA plans to have negotiation teams that can be
deployed to the MCS contractors? locations to jointly develop proposals and
negotiate costs, with the goal of leaving with signed bilateral agreements.

Changes now going through the new process include one for the National
Enrollment Database, which is to be issued bilaterally; TMA expects it to be
issued in spring 2001. Twenty- three other changes are pending approval by
the Board and will not be considered until funding is available. These
include the expansion of the mammography benefit and elimination of the
preauthorization requirement for beneficiaries with other health insurance.
In addition, the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001 (P. L. 106- 398) contained mandates that resulted in 22
changes not yet in the process, including the elimination of copayments for
family members under TRICARE Prime as well as the extension of TRICARE Prime
Remote for family members. 16 Other mandates in this act include the
recently added benefits for military retirees who are Medicare- eligible-
TRICARE Senior Pharmacy and TRICARE for Life, both of which will be issued
bilaterally. These 46 changes, when applied to all seven contracts, could
create a total of 322 change orders. 17

According to TMA officials, potential advantages of the new process include
better control over the volume of change orders issued by prioritizing
approved changes for issuance. In addition, TMA should be able to better
manage its financial resources by issuing changes bilaterally

15 TMA calls this streamlined step Alpha Contracting. 16 TRICARE Prime is
DOD?s managed care program. TRICARE Prime Remote provides active duty
members with a specialized version of TRICARE Prime when they are assigned
to duty stations in areas not served by the military health care system.

17 TMA officials indicated that because some of the mandated changes are
outside the scope of the current MCS contracts, they may use a different
contracting mechanism to change the contracts, such as sole- source requests
for proposal.

Page 20 GAO- 01- 513 TRICARE Change Order Management

because it will know the costs of changes before implementation and can
ensure that funds will be available to pay for them. Potential benefits to
contractors include better- defined specifications and assurance of timely
payments.

Although the bilateral process appears to be a step in the right direction,
it may not work for some changes because sufficient lead- time may not be
available. For example, congressionally mandated changes may have
implementation dates that this process cannot meet because the amount of
lead- time will not be sufficient. According to TMA, the unilateral change
order process can still be used under such time constraints.

As of June 30, 2000, the number of change orders issued had almost tripled,
while the number of unsettled change orders had more than doubled since our
last report. Although we recommended in that report that DOD devote high-
level attention to managing improvements to the change order process, this
was not consistently done. As a result, until recently, none of TMA?s
numerous initiatives effected much improvement to the process or reduced the
backlog. The current small backlog is the result of a recent concerted
effort, not better management over time. TMA?s new Change Management Process
appears to address many of TMA?s problems with change orders by controlling
the volume of issuance, using a more collaborative negotiation process, and
settling costs before implementation. However, past initiatives that
appeared promising ultimately delivered little in terms of preventing or
reducing the backlog. The high volume of change orders soon to enter the new
Change Management Process makes it imperative that TMA management closely
monitor the process to prevent future backlogs.

We recommend that the Secretary of Defense direct the Assistant Secretary of
Defense (Health Affairs) to monitor the new Change Management Process on a
continuous basis and take immediate corrective action if problems, such as a
growing backlog, are identified.

We requested comments from DOD, but none were provided. Conclusions

Recommendation for Executive Action

Agency Comments and Our Response

Page 21 GAO- 01- 513 TRICARE Change Order Management

We are sending copies of this report to the Honorable Donald H. Rumsfeld,
Secretary of Defense, and relevant congressional committees. Please contact
me on (202) 512- 7101 if you or your staff have any questions concerning
this report. Another GAO contact and staff acknowledgments are listed in
appendix III.

Stephen P. Backhus Director, Health Care- Veterans? and

Military Health Care Issues

Appendix I: Scope and Methodology Page 22 GAO- 01- 513 TRICARE Change Order
Management

Our objectives were to update the 1997 report and provide information on (1)
the status of the change order backlog and whether DOD reduced it, (2)
factors that contributed to the growth of the backlog, and (3) DOD?s new
change order process.

To provide information on the status of the change order backlog and whether
DOD reduced it, we analyzed a copy of TMA?s Change Order Tracking System
(COTS) dated January 8, 2001. This file contains data about all change
orders that have been issued by TMA to the five MCS contractors. With this
database, we identified change orders that had been issued and settled on
August 1, 1996, May 1, 1999, and June 30, 2000. We also used this database
to identify the number of change orders issued since May 1, 1997, the number
that had an independent government cost estimate (IGCE), and the average
number of days between change order issuance and proposal submission. We
compared these data with the corresponding data from our 1997 report to
assess the difference.

We also interviewed and obtained documentation from TMA about its prior
initiatives to address change order problems, its Mobilization effort, the
funding shortfall, and the number of unsettled change orders as of February
2001. We also assessed how TMA estimates, budgets, and accounts for change
orders by obtaining studies and supporting documentation used to estimate
costs, tracing estimated costs to the budget, and reviewing accounting data
from fiscal year 1997 through fiscal year 2000. In addition, we interviewed
and obtained documentation from each of the five MCS contractors about prior
initiatives to address change order problems, and the Mobilization effort.
We also interviewed and obtained supporting documentation from the TMA
consultant who prepares budget estimates and IGCEs.

To provide information on factors that contributed to the previous growth of
the backlog, we used the January 8, 2001, COTS database to calculate the

 average amount of time needed to finalize all change orders settled by
June 30, 2000;

 average age of unsettled change orders as of June 30, 2000;

 number of change orders issued each month between May 1, 1997, and June
30, 2000;

 number of proposals that had been submitted as of June 30, 2000;

 average amount of time from change order issuance to proposal submission;
Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 23 GAO- 01- 513 TRICARE Change Order
Management

 average number of days between proposal submission and change order
settlement as of June 30, 2000; and

 number of change orders issued since May 1997 that had an IGCE. We
compared these data with the corresponding data from our 1997 report to
assess the difference.

We also interviewed and obtained documentation from TMA about the number of
change orders issued, the pace of settlements, the process TMA uses to
settle change orders, factors affecting the pace of proposal review, and
reasons why payments to MCS contractors are delayed. In addition, we
interviewed the five MCS contractors about how they process change orders,
factors affecting the timeliness of proposal submission, and delayed
payments from TMA. We met with officials of the Defense Contract Audit
Agency and Defense Contract Management Agency to determine their roles in
the change order process.

We were not able to determine whether change orders resulted from new laws
or regulations or whether they were self- initiated because TMA does not
regularly maintain these data. TMA officials stated that they were unable to
provide this information in time for this report because the data are filed
in several different departments and would require significant effort to
compile.

To provide information on DOD?s new change order process, we interviewed
officials from TMA and obtained documentation that described this new
process. We also discussed the new process with each of the MCS contractors
to obtain their views. We did our work from July 2000 through March 2001 in
accordance with generally accepted government auditing standards.

Appendix II: Prior Initiatives to Address Change Order Problems and Their
Outcomes

Page 24 GAO- 01- 513 TRICARE Change Order Management

At the time we issued our 1997 report, TMA had begun numerous efforts to
improve the change order process and expedite settlements. 1 These
initiatives and their outcomes include the following:

 TMA assembled a team of contract specialists in August 1996 to expedite
the settlement of change orders for all MCS contracts. TMA told us that the
team was focused on reducing the change order backlog to a manageable and
consistent level- a goal of 100 to 150 open change orders- by early 1999.
However, by May 1999, when the team was disbanded, the backlog had grown
from 197 to 408 change orders. TMA officials explained that this approach
did not work for several reasons, including staff shortages.

 In November 1996, TMA engaged a consulting firm to prepare independent
government cost estimates (IGCE) for new change orders instead of making
?guesstimates? or basing cost estimates on contractors? informal estimates.
While this was a needed improvement, it was not expected to have an impact
on the timeliness of the process since the IGCE is obtained before the
change order is issued. Since our 1997 report, approximately 90 percent of
the change orders issued had an IGCE. IGCEs are an important financial
management tool because they serve as the basis for determining the amount
of funds to be obligated for the change orders. Inaccurate estimates could
result in either the underobligation of funds, which would result in the
need for additional funding, or overobligation, which would unnecessarily
obligate funds that could be used for another DHP program activity.
According to TMA?s consultant who prepared the estimates, differences
between IGCEs and proposal amounts occur for many reasons. For example, the
MCS contractors may use different actuarial assumptions than TMA?s
consultant. Differences can also result from the time delay between the
preparation of the IGCE, which is developed shortly before the change order
is issued, and the contractor?s proposal, which may be developed many months
later and include actual costs. As of June 30, 2000, we found that it took
an average of about 9 months from issuance to proposal submission. TMA?s
analysis found that IGCEs were generally lower than both the MCS
contractors? proposed costs and settlement amounts.

 In March 1997, TMA established a new requirement that all proposed change
orders be reviewed and approved by Health Affairs before issuance. The
review was to evaluate each order?s effects on the health

1 Defense Health Care: Actions Under Way to Address Many TRICARE Contract
Change Order Problems (GAO/ HEHS- 97- 141, July 14, 1997). Appendix II:
Prior Initiatives to Address

Change Order Problems and Their Outcomes

Appendix II: Prior Initiatives to Address Change Order Problems and Their
Outcomes

Page 25 GAO- 01- 513 TRICARE Change Order Management

care system, its costs, and the availability of funds. In short, the Deputy
Assistant Secretary, Health Services Financing, was to evaluate the need for
each change order and decide whether to implement it. However, under the
reorganization prompted by the Defense Reform Initiative, this
responsibility was transferred to the Director of Military Health Systems
Operations, who created a Change Management Board consisting of senior
Service and TMA officials. Although TMA officials said that the Board
reviewed and approved change orders before issuance, they could not provide
us data to assess the impact of these reviews on the numbers of change
orders issued.

 In March 1997, TMA hired a management consulting firm to review and
recommend improvements to TMA?s change order process, specifically, ways to
help reduce the current backlog and to prevent future backlogs. However,
after reviewing a draft of the firm?s report, TMA officials discontinued the
study because they were already aware of the consultant?s principal finding-
that the change order problems were caused by high volume and a lack of
discipline within the process. Nevertheless, some of TMA?s subsequent
initiatives mirrored the report?s recommendations, such as the use of
predetermined milestones and the establishment of a centralized review board
to evaluate changes before they are issued.

 TMA notified contractors to begin submitting overdue (beyond the 60- day
post- issuance requirement) proposals for low- cost or no- cost change
orders. Contractors were told that proposals not received within 30 days
could be unilaterally settled by TMA, meaning that TMA would pay the price
it deemed appropriate. TMA officials told us that they periodically prompted
MCS contractors to submit cost proposals for particular change orders and
that the MCS contractors responded, obviating the need for TMA to settle any
change orders unilaterally. However, these officials did not have data to
illustrate the outcome of this and similar initiatives.

 When we issued our July 1997 report, TMA was developing provisional
payment procedures, which were implemented in January 1998. These procedures
allow MCS contractors to bill TMA on a monthly basis for costs incurred to
implement changes, which is contingent upon the receipt of an adequate cost
proposal. TMA makes provisional payments at the lesser of 100 percent of
incurred contractor costs or up to 75 percent of the amount TMA has
obligated for the change. If incurred costs are greater than obligated
amounts, TMA requests a Defense Contract Audit Agency audit to validate the
additional costs. TMA will then pay up to 75 percent of the validated costs.
Despite TMA?s effort to pay contractors in a more timely manner, MCS
contractors told us that the provisional payment process is cumbersome and
slow, especially when their incurred costs are greater than TMA?s funded
amounts. TMA officials said that the biggest

Appendix II: Prior Initiatives to Address Change Order Problems and Their
Outcomes

Page 26 GAO- 01- 513 TRICARE Change Order Management

obstacle to MCS contractors? receipt of provisional payments is the
submission of an adequate proposal.

Appendix III: GAO Contact and Staff Acknowledgments

Page 27 GAO- 01- 513 TRICARE Change Order Management

Michael T. Blair, Jr., (404) 679- 1944 Bonnie Anderson, Mario Artesiano,
Rathi Bose, Cynthia Forbes, Linda Garrison, Elizabeth T. Morrison, and Dayna
K. Shah made key contributions to this report. Appendix III: GAO Contact and
Staff

Acknowledgments GAO Contact Staff Acknowledgments

(101644)

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