Defense Health Care: Across-the-Board Physician Rate Increases	 
Would be Costly and Unnecessary (24-MAY-01, GAO-01-620).	 
								 
This report describes the financial and management impact of	 
increasing physician reimbursement rates in the Department of	 
Defense's (DOD) TRICARE managed health care program. GAO found	 
that changing the TRICARE reimbursement rate nationally to the	 
70th percentile of billed charges would be costly, inflationary, 
and largely unnecessary. Such an increase could cost DOD and its 
beneficiaries an additional $604 million annually with most of	 
this being paid by DOD. In addition, an across-the-board increase
is unnecessary because the vast majority of military		 
beneficiaries are obtaining the care they need through military  
physicians and civilian physicians who accept TRICARE's 	 
reimbursement rates. Nevertheless, access is impaired in some	 
remote and rural areas. DOD's use of its existing authority to	 
increase reimbursement rates in one of those areas--rural	 
Alaska--has not encouraged civilian physicians to treat TRICARE  
beneficiaries.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-620 					        
    ACCNO:   A00945						        
  TITLE:     Defense Health Care: Across-the-Board Physician Rate     
             Increases Would be Costly and Unnecessary                        
     DATE:   05/24/2001 
  SUBJECT:   Health care cost control				 
	     Health care services				 
	     Managed health care				 
	     Medical services rates				 
	     Military budgets					 
	     Military personnel 				 
	     Physicians 					 
	     DOD TRICARE Program				 

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GAO-01-620
     
Report to Congressional Committees

United States General Accounting Office

GAO

May 2001 DEFENSE HEALTH CARE

Across- the- Board Physician Rate Increase Would be Costly and Unnecessary

GAO- 01- 620

Page i GAO- 01- 620 TRICARE Reimbursement Rates Letter 1

Appendix I Scope and Methodology 12

Appendix II Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges 15

Tables

Table 1: Access Indicators for Nonemergency Care, Before and After Rural
Alaska Rate Increase 8 Table 2: Rate Comparison for Anchorage, Alaska 15
Table 3: Rate Comparison for the Rest of Alaska 17 Contents

Page 1 GAO- 01- 620 TRICARE Reimbursement Rates

May 24, 2001 Congressional Committees The Department of Defense (DOD) offers
health care to its 8.3 million active duty personnel, retirees, and their
dependents through its managed health care program called TRICARE. About 75
percent of this care is provided through DOD medical centers, hospitals, and
clinics. Civilian physicians, hospitals, and clinics provide the remaining
care. Civilian physician care is provided through DOD contracted regional
networks or from nonnetwork physicians who are willing to accept TRICARE?s
reimbursement rates. DOD reimburses both network and nonnetwork physicians
using TRICARE?s established reimbursement rates, which generally equal
Medicare rates. However, prior to 1991, when the Congress directed DOD to
gradually move its rates to Medicare levels, DOD?s reimbursement rates had
been on average 50 percent higher than Medicare?s.

Military beneficiaries in some locations, such as rural Alaska, are having
difficulty obtaining care from civilian physicians, especially certain types
of specialty care, and some specialists are seeking reimbursements higher
than what TRICARE allows. In areas where access is impaired, DOD can
increase TRICARE rates to encourage physicians to treat military
beneficiaries. It has done this in rural Alaska because it determined the
problem was most severe there. However, continued congressional concerns
over beneficiary access to care led the Congress, in the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001 (P. L. 106398), to
require DOD to designate higher physician reimbursement rates in localities
where it determines that without payment of such rates access to health care
services would be severely impaired. Further, the act requires that we
determine and report on the financial and management impact of increasing
rates. This report describes (1) the potential cost increase if TRICARE?s
reimbursement rates were set nationally at the 70th percentile of physician-
billed charges rather than the current rate 1 and (2) whether

1 The act instructed us to report on the utility of limiting reimbursement
to 70 percent of usual and customary rates rather than DOD?s current
maximum. However, because industry and DOD representatives told us that
usual and customary is not universally defined or widely used, we agreed
with the committees of jurisdiction to use the 70th percentile of billed
charges as a substitute.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 620 TRICARE Reimbursement Rates

DOD?s use of existing authorities to increase rates has improved physicians?
willingness to accept TRICARE beneficiaries in Alaska.

To conduct our work, we interviewed representatives from DOD, physician and
beneficiary interest groups, DOD?s TRICARE civilian contractors, the Health
Care Financing Administration (HCFA), and the Department of Veterans Affairs
(VA). We also visited military treatment facilities in Alaska and analyzed
DOD?s databases to determine the effect of increased reimbursement rates on
health care access in Alaska and to estimate the cost of moving rates to the
70th percentile of billed charges. We conducted our work from September 2000
through April 2001 in accordance with generally accepted government
accounting standards. (See app. I for details on our scope and methodology.)

Changing the TRICARE reimbursement rate nationally to the 70th percentile of
billed charges would be costly, inflationary, and largely unnecessary. We
estimate that such an increase could cost DOD and its beneficiaries an
additional $604 million annually with most of this being paid by DOD.
Moreover, an across- the- board increase is unnecessary at this time because
the vast majority of military beneficiaries are obtaining the care they need
through military physicians and civilian physicians who accept TRICARE?s
reimbursement rates.

Nevertheless, access is impaired in some remote and rural areas. DOD?s use
of its existing authority to increase reimbursement rates in one of those
areas- rural Alaska- has not encouraged civilian physicians to treat TRICARE
beneficiaries. In February 2000, DOD increased its reimbursement rates for
rural Alaska by 28 percent, 2 yet the number of civilian physicians willing
to accept military patients in rural areas has not increased, nor has the
volume of patients seen. For nonemergency care, the number of civilian
physicians treating TRICARE beneficiaries actually fell by 14 percent after
the rate increase was implemented. DOD?s proposed regulations, which would
permit further rate increases in areas where access is severely impaired,
may alleviate access problems to some extent. However, some access problems
will likely continue in rural Alaska because of transportation difficulties,
negative attitudes towards

2 DOD estimates that the 28 percent increase returned reimbursement rates to
those in effect in rural Alaska in 1992 when DOD began lowering its
reimbursement rates to Medicare levels. Results In Brief

Page 3 GAO- 01- 620 TRICARE Reimbursement Rates

government programs, and the lack of some specialty physicians. We requested
comments from DOD on a draft of this report, but none were provided.

DOD has an annual health care budget of about $16 billion. The department?s
primary medical mission is to maintain the health of 1.6 million active duty
service personnel and provide them health care services 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. Until recently, DOD?s responsibility
for its over- 65 population was limited to providing space- available care.
3 However, with the advent of the TRICARE for Life program for these
beneficiaries in October 2001, DOD will assume additional responsibilities
for their care, including supplementing their Medicare entitlement to cover
Medicare cost- sharing and deductibles and to provide TRICARE benefits not
covered by Medicare. 4

About 75 percent of care under TRICARE is provided in military- operated
health care facilities worldwide with the remaining care supplied by
civilian physicians, hospitals, and clinics. TRICARE is a triple- option
benefit program designed to give beneficiaries a choice among a health
maintenance organization (TRICARE Prime), a preferred provider organization
(TRICARE Extra), and a fee- for- service benefit (TRICARE Standard). 5 In
all states except Alaska, TRICARE?s civilian contractors must create
civilian networks of physicians in designated locations for the Prime
option. Beneficiaries who do not enroll in Prime can use network physicians
to obtain care under TRICARE?s Extra option. During network development,
contractors recruit physicians, negotiate reimbursement rates, and verify
professional credentials. In Alaska, DOD is responsible for these tasks.

3 Currently, active duty and other beneficiaries enrolled in TRICARE?s
networks have priority for care at military treatment facilities. All
others- including the over age 65 population- are eligible for care at
military treatment facilities when space and professional services are
available.

4 The Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001 (P. L. 106- 398) establishes the TRICARE for Life program. 5
Beneficiaries are not required to enroll in the Extra option or to
exclusively use network physicians but may use network physicians on a case-
by- case basis. Under the Extra option, beneficiaries receive a discount
when they choose a physician from the contractor?s network. Background

Page 4 GAO- 01- 620 TRICARE Reimbursement Rates

To reimburse civilian physicians, DOD has established a fee schedule- the
CHAMPUS maximum allowable charge (CMAC) rates- which is the highest amount
DOD will pay civilian network physicians for providing medical services to
TRICARE patients. 6 The contractors may negotiate with network physicians to
accept a payment below the CMAC rate. Nonnetwork physicians are paid at the
CMAC rate, but they are allowed to charge TRICARE Standard patients an
additional fee, to ?balance bill? up to 15 percent above the allowed CMAC
rate. 7 The contractors directly reimburse network physicians or those
physicians who agree to accept the CMAC rate as payment in full. For those
physicians who balance bill, contractors reimburse the patients, who are
then responsible for ensuring that the physicians receive payment.

DOD is statutorily required to use HCFA?s Medicare fee schedule to set its
CMAC rates. 8 The Medicare fee schedule is developed by assigning relative
weights to medical procedures, reflecting the resources required to perform
them. The weights are multiplied by a dollar amount- the conversion factor-
to determine payments. HCFA annually calculates the conversion factor based
on a congressionally mandated formula designed to control overall spending
over time while accounting for cost factors. DOD?s CMAC rates are always at
least equal to the current Medicare physician fee schedule, although network
physicians may agree to accept reductions from CMAC amounts in exchange for
network referrals and the potential for increased numbers of patients.

In response to a series of public laws beginning with the Department of
Defense Appropriations Act, 1991 (P. L. 101- 511), DOD began reducing its
rates to Medicare levels by a maximum of 15 percent a year. This transition
is not quite complete and as of February 2001, 4 percent of the national
CMAC rates remained higher than Medicare?s rates. 9 Both

6 Prior to TRICARE, DOD provided civilian health care through the Civilian
Health and Medical Program of the Uniformed Services (CHAMPUS). Although
this program no longer exists, the term is still used when establishing
reimbursement rates.

7 If a TRICARE Prime patient is referred to a nonnetwork physician who
balance bills, then DOD, rather than the beneficiary, pays the additional
amount. 8 10 U. S. C. 1079( h).

9 The higher rates were on average about 5 percent higher than Medicare?s
rates, and they account for only 1 percent of services provided. We
determined that DOD?s methods for transitioning CMAC rates to the Medicare
payment level complied with statutory requirements. See Defense Health Care:
Reimbursement Rates Appropriately Set; Other Problems Concern Physicians
(GAO/ HEHS- 98- 80, Feb. 26, 1998).

Page 5 GAO- 01- 620 TRICARE Reimbursement Rates

Medicare and DOD adjust their national rates for geographic differences in
practice costs to develop locality- based rates. The Medicare and CMAC rates
are higher in Alaska than in any other area of the country.

In addition to making adjustments for geographical differences, DOD has the
authority to increase rates up to its estimated 1992 levels in areas where
access is impaired to encourage civilian physician participation. 10
Proposed regulations would permit DOD to establish a higher payment rate in
areas where adequate access to health care services is severely impaired.
These regulations also would allow DOD to reimburse network physicians up to
115 percent of the CMAC rate where necessary to ensure an adequate number
and mix of qualified network physicians in a specific locality. 11

A national across- the- board rate increase to a level such as the 70th
percentile of billed charges could cost DOD and its beneficiaries about $604
million annually. 12 Moreover, such a change is not needed because the vast
majority of beneficiaries are obtaining needed medical care through
TRICARE?s networks of civilian physicians, through other civilian physicians
who accept TRICARE Standard, or through military treatment facilities. Also,
DOD has the authority to increase rates on a locality basis as needed.

Based on our simulation, raising reimbursement limits to the 70th percentile
of billed charges could increase outlays for TRICARE civilian physician
services by about $604 million- about 60 percent above

10 Prior to 1992, when DOD began using a fee schedule for CMAC rates, CMAC
rates had been established by calculating the 80th percentile of physicians?
billed charges. The 28 percent rate increase that was authorized for rural
Alaska in February 2000 represents the average difference between 1999 CMAC
rates and 1992 CMAC rates in rural Alaska.

11 The proposed rule was published May 30, 2000 (65 Fed. Reg. 34423). The
final rule is expected later this year. 12 This estimate includes physicians
only. If other health care providers- such as nurse practitioners and
physical therapists- were included, potential costs would be higher. A
detailed discussion of our assumptions and methodology is contained in app.
I. Increasing Rates To

70th Percentile Of Billed Charges Would Be Costly, Inflationary, And
Unnecessary

Page 6 GAO- 01- 620 TRICARE Reimbursement Rates

reimbursements at the current CMAC rate. 13 The long- term effect of
increasing rates to the 70th percentile could be even greater as this system
would base future payments on current charges- encouraging physicians to
increase their charges now to receive higher payments in the future. Such
billing changes could force rates to spiral upwards- increasing each year at
a faster rate than the current policy- as was occurring prior to DOD?s move
to Medicare rates. In addition, changing the methodology for rate- setting
to a charge- based system- such as one based on the 70th percentile of
billed charges- would uncouple TRICARE rates from Medicare rates, which are
based on expenses and resources used by various physician specialties.

Furthermore, an across- the- board rate increase is not necessarily needed
to encourage physicians to treat military beneficiaries. In a June 1999
report to the Congress, DOD stated that its networks are generally adequate.
14 Also, 96 percent of the time, civilian physicians who treat TRICARE
beneficiaries accept the CMAC amount as payment in full- the highest level
in history. Further, DOD officials told us that beneficiaries? inability to
access care only existed within certain physician specialties. Moreover,
rate increases- regardless of their size- would not improve access in areas
where no physicians in a specialty practice. 15 Our March 2000 report
confirmed that DOD?s networks were generally adequate except for spotty
deficiencies in rural areas- particularly those that are considered
medically underserved and those with low managed care penetration. 16

13 According to DOD?s consultant responsible for setting CMAC rates,
beneficiary copayments and deductibles along with other health insurance
have historically been about 25 percent of CMAC rates. With the elimination
of copayments for active duty dependents enrolled in Prime as directed by
the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001
(P. L. 106- 398), DOD will be responsible for a greater portion of the
costs.

14 Department of Defense report to the Congress: TRICARE Head Injury Policy
and Provider Network Adequacy, June 17, 1999. 15 For example, according to a
DOD official in Fairbanks, the following specialties lack a civilian
specialist in the Fairbanks area: allergy, cardiology, endocrinology,
gastroenterology, infectious disease, neonatology, nephrology, nuclear
medicine, preventive medicine, rheumatology, colorectal surgery,
neurosurgery, and cardio- thoracic surgery.

16 Military Health Care: TRICARE?s Civilian Provider Networks (GAO/ HEHS-
00- 64R, Mar. 13, 2000).

Page 7 GAO- 01- 620 TRICARE Reimbursement Rates

DOD has processes in place to monitor and resolve access problems. DOD
assigns a lead agent in each region primary responsibility for monitoring
certain aspects of TRICARE contracts to ensure that network adequacy is
maintained. Contractors report on network adequacy to their respective lead
agents quarterly. As problem areas are identified, contractors work to
recruit additional physicians into their networks. Also, the commanders of
military treatment facilities work with contractors to resolve any problems
and sometimes are able to bring in additional military physicians to help
with the workload.

Visits to Alaska by DOD officials in 1999 highlighted access problems and
other care issues that had been under review by DOD since 1997. To address
these problems, in February 2000, DOD returned CMAC rates to estimated 1992
levels in rural Alaska- an increase of 28 percent above the current Medicare
rate. 17 At about the same time, the Coast Guard terminated its practice of
paying close to billed charges for active duty personnel stationed in rural
Alaska and began reimbursing at CMAC rates- a reduction for which the 28
percent increase did not fully compensate. Overall, beneficiary access to
care in rural Alaska has not improved since these rate changes.

Since the implementation of the across- the- board 28- percent rate increase
in rural Alaska, fewer Alaskan physicians have accepted TRICARE patients
even though DOD personnel reported that each physician had been notified of
the rate increase. (See table 1.) DOD data show that the number of those
physicians decreased more in rural Alaska, where rates were increased, than
in Anchorage, where rates remained at Medicare levels. Further, the number
of patient visits in rural Alaska has decreased, while the number of patient
visits increased in Anchorage. Overall, the number of Alaska physicians and
the number of TRICARE beneficiaries have essentially remained constant since
the rate increase.

17 DOD used its authority to grant special locality- based waivers for the
28 percent increase in rural Alaska. Rates in Anchorage remain at Medicare
levels. Proposed regulations will give DOD the authority to raise rates
beyond 1992 levels for network and nonnetwork physicians and to reimburse
network physicians up to 115 percent of CMAC in areas without an adequate
number and mix of qualified network physicians. DOD?s Increased

CMAC Rates In Alaska Have Had Little Effect On Patient Access To Care

Page 8 GAO- 01- 620 TRICARE Reimbursement Rates

Table 1: Access Indicators for Nonemergency Care, Before and After Rural
Alaska Rate Increase Anchorage Rest of Alaska March to August

1999 March to

August 2000 Percent

change March to

August 1999

March to August

2000 Percent change

Number of patient/ civilian physician encounters 6,296 6,634 5 6, 543 6,255
-4 Number of patients using civilian care 1,987 1,868 -6 2,758 2,695 -2
Number of civilian physicians treating TRICARE patients 417 380 -9 454 389
-14

Source: GAO analysis of DOD data.

While CMAC reimbursement rates in rural Alaska are now higher than
Medicare?s, access may not have improved because the rates are still low
compared to those paid by private insurers, VA, and the Indian Health
Service, which usually pay billed charges. For example, the rural Alaska
CMAC rates for 31 high- cost and high- volume procedure codes averaged 57
percent of a private insurer?s rates. (See app. II for a comparison of these
31 rates.) In addition, the number of civilian physicians treating patients
may have been affected by changes in the Coast Guard?s civilian physician
reimbursement rates. In early 2000 the Coast Guard, to get its reimbursement
rates in line with CMAC, began to reduce reimbursement- from close to billed
charges to CMAC rates- for the majority of civilian physicians treating its
1,700 active duty personnel stationed in rural Alaska. According to DOD
officials, some civilian physicians in rural Alaska are refusing to accept
Coast Guard patients because the 28 percent increase does not fully
compensate for the reduction from billed charges.

DOD?s increased reimbursement rates in rural Alaska also may have had little
effect on beneficiaries? access to care because of the unique challenges in
obtaining health care there. For example, a small number of physicians serve
a very large area, 18 roads are often impassable or nonexistent, and if
health care is not available locally, patients- private as well as military-
must be transported by air to other locations.

The Alaska Medical Association, DOD representatives, and a private insurer
told us that the high demand for health care services in Alaska

18 Alaska is about 19 percent as large as the size of the combined lower 48
states. About 1,128 physicians provided health care for this area in 1998,
about 1 physician for 506 square miles and about 1 physician per 545
residents. In comparison, the lower 48 states have about 1 physician per 4.
5 square miles and about 1 physician per 411 residents.

Page 9 GAO- 01- 620 TRICARE Reimbursement Rates

allows physicians to be selective in accepting patients. For example, the
private insurer in Alaska told us that it had to pay reimbursement rates at
or near physicians? billed charges to ensure access for beneficiaries.
Further, in discussions with private physicians and DOD and medical
association officials, it became apparent that Alaska?s culture of
selfreliance and independence contributes toward many physicians? reluctance
to become involved with government programs and managed care arrangements.
Alaska physicians also view TRICARE patients as transient and believe that
DOD should provide care for them through the military health system or pay
physicians? billed charges. While physicians also consider Medicare
reimbursements inadequate and sometimes refuse to accept them, they told us
they are more receptive to accepting Medicare beneficiaries because of
community obligations and long- standing relations with these patients.

Accessing health care- especially specialty care- for active duty personnel
and their family members stationed in remote areas is not a widespread
problem. In areas where access is a problem, one solution is to increase
reimbursement rates. Although DOD?s across- the- board rate increase in one
locality has not improved access to care, pressure remains for further
increases. However, DOD must be judicious about using such rate increases
because they will be costly. Problems with access to care are infrequent and
primarily related to specialty care, yet across- the- board increases would
raise rates for all types of physicians. Rate increases, targeted to
localities where access to care is severely impaired, may improve access to
care, but other problems such as the scarcity of physicians and
transportation difficulties are likely to remain. Responding to physician
demands to pay based on billed charges- a practice DOD abandoned in 1992
when its health care costs were spiraling upward- would not only increase
current program costs but also has the potential to further inflate
government outlays, as physicians would likely raise rates over time,
pushing TRICARE rates higher.

We requested comments from DOD on a draft of this report, but none were
provided.

We are sending copies of this report to the Honorable Donald H. Rumsfeld,
Secretary of Defense; appropriate congressional committees; and other
interested parties. We will also make copies available to others upon
request. Conclusions

Agency Comments And Our Response

Page 10 GAO- 01- 620 TRICARE Reimbursement Rates

If you or your staff have any questions about this report, please contact me
at (202) 512- 7111 or Michael T. Blair, Jr., at (404) 679- 1944. Lois L.
Shoemaker and William R. Simerl made key contributions to this report.

Stephen P. Backhus Director, Health Care- Veterans?

and Military Health Care Issues

Page 11 GAO- 01- 620 TRICARE Reimbursement Rates

List of Committees The Honorable John W. Warner Chairman The Honorable Carl
Levin Ranking Member Committee on Armed Services United States Senate

The Honorable Ted Stevens Chairman The Honorable Daniel K. Inouye Ranking
Member Subcommittee on Defense Committee on Appropriations United States
Senate

The Honorable Bob Stump Chairman The Honorable Ike Skelton Ranking Minority
Member Committee on Armed Services House of Representatives

The Honorable Jerry Lewis Chairman The Honorable John P. Murtha Ranking
Minority Member Subcommittee on Defense Committee on Appropriations House of
Representatives

Appendix I: Scope and Methodology Page 12 GAO- 01- 620 TRICARE Reimbursement
Rates

We obtained information on DOD?s procedures for setting its reimbursement
rates from DOD officials and DOD?s contractor that analyzes rate data.
Because DOD rates are based on Medicare rates, we interviewed a Health Care
Financing Administration (HCFA) official to determine how HCFA sets the
Medicare rates.

To determine the extent that military beneficiaries are unable to obtain
access to health care, we interviewed DOD officials and representatives from
both the National Military Family Association and the American Medical
Association. We also analyzed DOD participation data and our previous work
in this area.

To determine how increased DOD reimbursement rates would affect physicians?
willingness to treat military beneficiaries and to determine the basis of
physician complaints about CMAC rates and TRICARE, we spoke to members of
the local medical societies, private insurers, and VA personnel in Alaska.
To determine whether and how physicians? concerns were being addressed, we
interviewed local military officials and contractors as well as DOD
officials at TRICARE Management Activity.

To determine how military health care reimbursement rates compare to those
of other insurers, we selected six specialty areas for which DOD and
contractors in Alaska were having difficulties obtaining care- dermatology,
plastic surgery, otolaryngology, orthopedic surgery, gastroenterology, and
allergy. For each of these specialties we determined DOD?s six highest
volume and six highest overall cost procedures and identified a total of 31
high- cost or high- volume procedures. For these codes we obtained CMAC
reimbursement rates in Anchorage, Alaska, and rural Alaska. We compared
these rates with Medicare rates, private insurance rates, the VA average
amounts paid, and physicians? average billed charges for these high- cost or
high- volume procedures. We also calculated the CMAC rate as a percentage of
the private insurer?s rate.

To determine whether increased rates would improve access to care, we
studied the effect of DOD?s Alaska rate increase. We obtained DOD?s health
care service record file containing records of completed claims for health
care in Alaska that were processed from March 1, 1999 through October 31,
2000. We eliminated claims for emergency room care from these data. We
excluded these claims because the Emergency Medical Treatment and Active
Labor Act requires physicians to evaluate all patients who come for care and
treat emergencies regardless of patients? ability to pay for the care. We
analyzed data for both Anchorage and rural Alaska for care delivered from
March 1, 1999 through August 31, 1999, and Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 13 GAO- 01- 620 TRICARE Reimbursement
Rates

March 1, 2000 through August 31, 2000, a 6- month period before the rate
increase and a similar 6- month period after the February 2000 increase.
Because claims can be submitted for payment any time up to a year after care
is delivered, we allowed equal times for claims processing after each 6-
month period- calculating claims processed for the first 6 months by October
31, 1999, and for the second by October 31, 2000. For these periods and
locations, we determined the number of civilian physicians who treated
TRICARE patients, the number of TRICARE patients who were treated by
civilian physicians, and the overall number of TRICARE patient encounters
with civilian physicians. To eliminate duplicate provider records, we
manually matched each physician number in our data with DOD?s physician
file, a process that sometimes required a judgmental decision. Our work did
not provide information on the number of beneficiaries who were unable to
obtain civilian care following the rate increase. While we did not
independently verify the accuracy of the data, we conducted reliability
tests to ensure consistency of the data against documentation provided by
DOD.

To calculate the effect on costs of changing reimbursement rates from the
CMAC rate to the 70th percentile of billed charges, we enlisted the
assistance of DOD?s contractor responsible for determining annual CMAC
rates. We asked the contractor to use its database of civilian claims from
the period July 1, 1999 through June 30, 2000, to simulate total nationwide
payments of claims for physician services as if they were paid at the 2001
national CMAC rates. 1 Next, we asked the contractor to simulate the total
nationwide payments for these claims as if they had been paid at the 70th
percentile of physicians? billed charges calculated for the same period to
determine a national prevailing charge for each CMAC rate. The contractor?s
simulations were done on an individual claim basis, considering the actual
billed charge, for the best estimate of payment amounts, because DOD would
only pay the lesser of billed charges or the payment limitation. We
calculated the difference between the 2001 CMAC and the 70th percentile of
billed charges simulation to estimate the potential cost of increased
reimbursement authorities.

Our simulations were calculated with a national 70th percentile charge
rather than locality- specific 70th percentile charges. Results would have
differed if rates had been calculated at the locality level. Also, results

1 DOD used this database to calculate the 2001 CMAC rates. 70th Percentile
Cost

Simulation

Appendix I: Scope and Methodology Page 14 GAO- 01- 620 TRICARE Reimbursement
Rates

could differ because of physicians? negotiated discounts. Further, although
most of the claims had been processed at the time of our analysis, some had
not. Results could differ if these claims had been available for inclusion.

We performed our work from September 2000 through April 2001 in accordance
with generally accepted government accounting standards.

Appendix II: Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges

Page 15 GAO- 01- 620 TRICARE Reimbursement Rates

Table 2: Rate Comparison for Anchorage, Alaska Procedure code Procedure code

description Anchorage

Alaska CMAC

Alaska Medicare

(all of Alaska)

VA average paid FY00

(all of Alaska)

Private insurer (Anchorage

rate) Average billed

charge, July 1999 through

June 2000 CMAC as

percentage of private insurer?s rate

11100 Biopsy of skin $78.44 $78.44 $122.26 $152.12 $137.49 52 14060 Adjacent
tissue

transfer $721.39 $721.40 $1,852.25 $1,992.46 not available 36 17000
Destruction of first

benign lesion $56.82 $56.82 $95.02 $117.91 $103.42 48 17003 Destruction of
each

additional benign lesion

$14.99 $14.99 $96.84 $32.95 $89.71 45 19318 Breast reduction

mammaplasty $1,239.98 $1,239.97 not available $3,872.26 not available 32
19357 Breast reconstruction

with tissue expander $1,366.44 $1,366.44 not available $3,741.98 $6,909.00
37 19361 Breast reconstruction

with latissimus dorsi flap

$2,368.09 $1,576.18 not available $5,081.36 not available 47 19367 Breast
reconstruction

with free flap $1,939.18 $1,939.18 not available $5,745.02 not available 34
20610 Introduction or

removal/ major joint $83.51 $83.50 $136.74 $131.88 $160.14 63 27447
Arthroplasty, knee $1,855.68 $1,855.68 not available $5,914.55 $5,696.25 31
29881 Arthroscopy, knee,

surgical $704.25 $704.25 $1,839.02 $2,556.81 $2,530.50 28 43239
Gastrointestinal

endoscopy with biopsy

$277.87 $277.87 $656.92 $730.26 $771.15 38 43243 Gastrointestinal

endoscopy with injection sclerosis

$344.76 $344.76 $963.33 $1,045.06 not available 33 43244 Gastrointestinal

endoscopy with band ligation

$309.46 $309.46 $736.13 $852.62 $1,000.00 36 45378 Colonoscopy $383.65
$383.65 $789.90 $840.37 $795.73 46 45380 Colonoscopy with

biopsy $415.89 $415.90 $812.53 $986.84 $994.67 42 45385 Colonoscopy with

lesion removal $530.81 $530.81 $1,096.78 $1,287.32 $1,102.00 41 69436
Tympanostomy $171.32 $171.33 $432.83 $538.28 $633.33 32 88305 Surgical
pathology $86.97 $86.97 $273.24 $238.70 $223.97 36 95004 Allergy tests:

percutaneous $4.86 $4.86 $312.29 $11.21 $8.41 43 95024 Allergy tests:

intracutaneous $7.01 $7.00 $211.00 $16.63 $9.99 42 95115 Allergen

immunotherapy, single injection

$18.30 $18.30 $19.00 $43.00 $15.00 43

Appendix II: Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges

Appendix II: Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges

Page 16 GAO- 01- 620 TRICARE Reimbursement Rates

Procedure code Procedure code

description Anchorage

Alaska CMAC

Alaska Medicare

(all of Alaska)

VA average paid FY00

(all of Alaska)

Private insurer (Anchorage

rate) Average billed

charge, July 1999 through

June 2000 CMAC as

percentage of private insurer?s rate

95117 Allergen immunotherapy, two or more injections

$23.45 $23.46 not available $54.92 $12.50 43 95165 Supervision/ provision

of antigens $10.62 $10.63 $108.99 $17.74 $12.42 60 99202 Office visit/ new

patient: low to moderate severity

$71.28 $71.28 $87.75 $126.06 $97.04 57 99203 Office visit/ new

patient: moderate severity

$99.89 $99.89 $118.69 $171.98 $125.42 58 99212 Office

visit/ established patient: not severe

$38.83 $38.82 $60.99 $69.42 $63.41 56 99213 Office

visit/ established patient: low to moderate severity

$52.97 $52.97 $81.13 $98.93 $83.25 54 99214 Office

visit/ established patient: moderate to high severity

$81.56 $81.56 $117.52 $148.19 $131.65 55 99242 Office consultation:

low severity $103.22 $103.23 $137.25 $213.70 $171.02 48 99243 Office
consultation:

moderate severity $131.27 $131.26 $142.87 $275.87 $193.59 48 Average
percentage of private rate 44

Appendix II: Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges

Page 17 GAO- 01- 620 TRICARE Reimbursement Rates

Table 3: Rate Comparison for the Rest of Alaska Procedure code Procedure
code

description Rest of

Alaska CMAC

Alaska Medicare

(all of Alaska)

VA average paid FY00 (all of

Alaska) Private

insurer (Fairbanks

rate) Average billed

charge, July 1999 through

June 2000 CMAC as

percentage of private insurer?s rate

11100 Biopsy of skin $100.48 $78.44 $122.26 $160.77 $122.45 62 14060
Adjacent tissue

transfer $924.10 $721.40 $1,852.25 $2,105.80 $1,594.00 44 17000 Destruction
of first

benign lesion $72.79 $56.82 $95.02 $124.61 $95.08 58 17003 Destruction of
each

additional benign lesion

$19.20 $14.99 $96.84 $34.82 $36.56 55 19318 Breast reduction

mammaplasty $1,588.41 $1,239.97 not available $4,092.52 $3,361.46 39 19357
Breast reconstruction

with tissue expander $1,750.41 $1,366.44 not available $3,954.83 not avail
44 19361 Breast reconstruction

with latissimus dorsi flap

$3,033.52 $1,576.18 not available $5,370.40 not avail 56 19367 Breast
reconstruction

with free flap $2,484.09 $1,939.18 not available $6,071.80 $8,553.67 41
20610 Introduction or

removal/ major joint $106.98 $83.50 $136.74 $134.57 $133.94 79 27447
Arthroplasty, knee $2,377.13 $1,855.68 not available $6,250.98 $6,572.00 38
29881 Arthroscopy, knee,

surgical $902.14 $704.25 $1,839.02 $3,009.86 $2,422.80 30 43239
Gastrointestinal

endoscopy with biopsy $355.95 $277.87 $656.92 $829.84 $857.98 43 43243
Gastrointestinal

endoscopy with injection sclerosis

$441.64 $344.76 $963.33 $1,043.06 not available 42 43244 Gastrointestinal

endoscopy with band ligation

$396.42 $309.46 $736.13 $835.86 $1,093.00 47 45378 Colonoscopy $491.46
$383.65 $789.90 $932.11 $826.41 53 45380 Colonoscopy with

biopsy $532.76 $415.90 $812.53 $1,017.35 $1,038.92 52 45385 Colonoscopy with

lesion removal $679.97 $530.81 $1,096.78 $1,472.18 $1,415.50 46 69436
Tympanostomy $219.46 $171.33 $432.83 $538.28 $584.67 41 88305 Surgical
pathology $111.41 $86.97 $273.24 $219.78 $157.48 51 95004 Allergy tests:

percutaneous $6.23 $4.86 $312.29 $9.16 $8.19 68 95024 Allergy tests:

intracutaneous $8.98 $7.00 $211.00 $13.59 $10.53 66 95115 Allergen

immunotherapy, single injection

$23.44 $18.30 $19.00 $35.14 $35.05 67

Appendix II: Comparison of CMAC Rates with Private Insurers? and Other
Government Programs? Rates and with Billed Charges

Page 18 GAO- 01- 620 TRICARE Reimbursement Rates

Procedure code Procedure code

description Rest of

Alaska CMAC

Alaska Medicare

(all of Alaska)

VA average paid FY00 (all of

Alaska) Private

insurer (Fairbanks

rate) Average billed

charge, July 1999 through

June 2000 CMAC as

percentage of private insurer?s rate

95117 Allergen immunotherapy, two or more injections

$30.04 $23.46 not available $44.88 $19.54 67 95165 Supervision/ provision

of antigens $13.60 $10.63 $108.99 $14.50 $8.00 94 99202 Office visit/ new
patient:

low to moderate severity

$91.31 $71.28 $87.75 $132.86 $97.19 69 99203 Office visit/ new patient:

moderate severity $127.96 $99.89 $118.69 $181.26 $132.55 71 99212 Office
visit/ established

patient: not severe $49.74 $38.82 $60.99 $73.16 $60.06 68 99213 Office
visit/ established

patient: low to moderate severity

$67.85 $52.97 $81.13 $104.26 $81.60 65 99214 Office visit/ established

patient: moderate to high severity

$104.48 $81.56 $117.52 $156.18 $119.23 67 99242 Office consultation: low

severity $132.22 $103.23 $137.25 $174.64 $169.79 76 99243 Office
consultation:

moderate severity $168.16 $131.26 $142.87 $242.22 $227.41 69 Average
percentage of private rate 57

(101648)

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