-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-1061R		

TITLE:     Financial Management: Department of Defense Regulations 
Establishing Methods to Calculate Amounts To Be Transferred from 
Department of Defense Medicare Eligible Retiree Health Care Fund

DATE:   08/30/2002 
				                                                                         
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GAO-02-1061R

   GAO- 02- 1061R Health Care Fund Regulations (DOD) United States General
   Accounting Office

   Washington, DC 20548

   August 30, 2002 The Honorable Carl Levin Chairman The Honorable John
   Warner Ranking Minority Member Committee on Armed Services United States
   Senate

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

   The Honorable Donald H. Rumsfeld The Secretary of Defense

   Subject: Financial Management: Department Of Defense Regulations
   Establishing Methods to Calculate Amounts To Be Transferred from
   Department of Defense Medicare Eligible Retiree Health Care Fund

   This report addresses a legislative mandate to report on regulations
   issued by Department of Defense (DOD) to cover transfers from a new fund
   created by the Congress to finance the cost of expanded health care
   programs* benefits for Medicare- eligible uniformed services 1 retirees
   and their eligible dependents. These health care programs include pharmacy
   benefits and coverage of the deductible portion of Medicare benefits.

   The Floyd D. Spence National Defense Authorization Act (NDAA) for Fiscal
   Year 2001 (as amended by NDAA for Fiscal Year 2002, and codified 10 U. S.
   C. Section 1111,

   et. seq. (2002)) established in the U. S. Treasury the Department of
   Defense Medicare Eligible Retiree Health Care Fund (the Fund). Beginning
   on October 1, 2002, the Fund will finance DOD*s liabilities under the
   uniformed services retiree health care programs for Medicare- eligible
   beneficiaries. The legislation requires (1) the Secretary of Defense to
   establish by regulation the method( s) for calculating amounts

   1 These regulations currently only apply to DOD, but provisions exist for
   making them applicable to other uniformed services, such as U. S. Coast
   Guard, for their future participation in the Fund. For the purpose of this
   letter, DOD*s uniformed services retirees will be referred to as military
   retirees.

   GAO- 02- 1061R Health Care Fund Regulations (DOD) Page 2 to be transferred
   periodically from the Fund to applicable appropriations that incur

   the programs* costs and (2) the Comptroller General to report to the
   Secretary of Defense and to Congress on the adequacy and appropriateness
   of these regulations within 30 days of receiving them from the Secretary.
   2 Our objectives were to determine (1) whether the Secretary of Defense
   issued regulations that satisfy Congress* criteria for making these
   transfers from the Fund and (2) whether DOD*s regulations are adequate and
   appropriate, with respect to the method( s) they prescribe for calculating
   the amounts of such transfers.

   Results in Brief

   As required by the law, regulations establishing the methods for
   calculating transfers from the Fund to finance eligible health care costs
   were issued in July 2002, in sufficient time to begin making transfers
   upon activation of the Fund on October 1, 2002. The regulations describe
   the procedures for transferring amounts from the Fund to reimburse the
   applicable appropriations from which the costs of military retiree health
   care programs provided at military treatment facilities (MTFs) and other
   non- DOD providers are to be paid.

   DOD regulations for establishing the methods for calculating transfers
   from the Fund appear to be adequate and appropriate and provide a
   framework for the transfers to be implemented upon activation of the Fund.
   Whether there will be any implementation problems or the degree of these
   problems will be unknown until DOD has some experience in the Fund*s
   operation.

   Under these regulations there are to be daily transfers from the Fund to
   cover amounts disbursed to non- DOD providers, such as civilian health
   care providers and retail pharmacies, based on claims transactions. One
   challenge that DOD will face in paying non- DOD providers is to mitigate
   the risk of improper payments.

   The regulations also provide the methodology for calculating transfers to
   cover the cost of MTF care to the intended beneficiaries. Because MTFs*
   cost accounting systems do not presently have the capacity to record or
   generate cost data on a per patient basis, aggregated cost and patient
   clinical data are to be used for the calculation. In this regard, based on
   our and the DOD Inspector General*s prior work, the reliability of the
   underlying cost and patient clinical data could limit DOD*s ability to
   reliably assign costs and bill DOD for services to DOD Medicare- eligible
   retirees and their eligible dependents.

   Scope and Methodology

   To satisfy the mandate, we reviewed the DOD regulations issued in July
   2002. We also reviewed the documentation supporting the regulations and
   analyzed the methods of calculating the amounts to be transferred from the
   Fund, and discussed them with cognizant DOD officials. We obtained oral
   comments from DOD on a draft of this letter and have incorporated its
   views as appropriate. We performed our work

   2 We received the regulations on August 1, 2002.

   GAO- 02- 1061R Health Care Fund Regulations (DOD) Page 3 in July and
   August 2002, in accordance with generally accepted government auditing

   standards.

   Background

   DOD provides care to military services retiree Medicare- eligible
   beneficiaries through a combination of direct care at its MTFs and care
   purchased from non- DOD providers, such as civilian providers. In addition
   to inpatient and outpatient treatment, those beneficiaries also qualify
   for pharmacy benefits.

   Starting October 1, 2002, all health care costs of DOD Medicare- eligible
   retirees and their eligible dependents provided at MTFs will be covered by
   the Fund. Payments to civilian providers for health care for these
   beneficiaries will be covered by the Fund as a supplemental payer;
   Medicare will be the primary payer. The pharmacy benefit cost, less any
   copay at retail pharmacies or National Mail Order Pharmacy (NMOP) will be
   covered entirely by the Fund. To obtain health care benefits from civilian
   providers, retail pharmacies and NMOP, the Medicare- eligible
   beneficiaries must 3 be enrolled in Medicare Part B. 4 In addition, the
   Fund will be available to cover administrative costs of the uniformed
   services retiree health care programs, such as claims processing.

   Contributions to the Fund will be from two sources. Based on an actuarial
   calculation, the Department of the Treasury will contribute amounts from
   the General Fund for the costs of health care benefits attributable to
   military service rendered prior to October 1, 2002, and DOD from its
   appropriation will contribute for health care benefit costs accruing after
   that date. Under this arrangement, Treasury will fund the costs for all
   current retirees and their dependents, and that portion of the future
   retiree health care benefits of current active military members and their
   eligible dependents for military services prior to October 1, 2002. 5
   DOD*s appropriation will fund the costs of Medicare- eligible retiree
   health care associated with all military service after October 1, 2002,
   for those currently in the military services and future entrants and their
   eligible dependents.

   Treasury*s contribution from the General Fund to the Fund is to be based
   on its actuarial liability, amortized over a number of years yet to be
   determined. DOD is to calculate its share of the contribution to the Fund
   based on the monthly end strength of each service and actuarially
   calculated per- capita rates for both full- time and parttime personnel.
   It will transfer its contribution to the Fund monthly from its existing
   Military Personnel appropriation accounts or from other applicable
   accounts. DOD

   3 Medicare- eligible beneficiaries who were age 65 or older as of April 1,
   2001, the start date for pharmacy benefit for the new program, were
   *grandfathered* and are not subject to this requirement. 4 Medicare is a
   combination of two programs, Part A (Hospital Insurance) and Part B
   (Supplementary

   Medical Insurance). Part A coverage is usually provided automatically to
   Medicare- eligible beneficiaries, whereas Part B coverage is optional and
   subject to monthly premium payments by beneficiaries. 5 Treasury will also
   contribute to the Fund to cover amounts reflecting any future changes in
   health

   care benefits and actuarial assumptions, and any resulting actuarial gains
   and losses.

   GAO- 02- 1061R Health Care Fund Regulations (DOD) Page 4 estimated the
   present value of the total long- term liability of the Fund as of

   September 30, 2002, to be $451 billion. 6

   Adequacy of Fund Regulations

   DOD*s regulations satisfy the legislative criteria for transfers from the
   Fund and appear to be adequate and appropriate and provide a framework for
   the transfers to be implemented upon activation of the Fund. Until DOD has
   some experience in the Fund*s operations, whether there will be any
   problems with fund transfers will be unknown.

   DOD*s July 2002 regulations governing Fund operations are comprised of a
   DOD Directive and a DOD Instruction. 7 The Directive 8 requires that
   health care for Medicare- eligible beneficiaries be funded in accordance
   with the law establishing the Fund, sets out policies, and assigns
   responsibilities for implementation. The Instruction 9 implements the
   Directive and provides details on the operations and management of the
   Fund, including the procedures for making contributions to and transfers
   from the Fund.

   The new regulations require transfers from the Fund to cover health care
   program costs to be made using the health care and financial management
   systems and processes currently in place at DOD. All transfers from the
   Fund must be made from the new Treasury account to the existing Defense
   Health Program appropriations from which DOD*s costs of non- DOD provider
   or MTF care are presently paid.

   The regulations require the validation of civilian provider daily claims
   costs to ensure that only costs attributable to Medicare- eligible
   beneficiaries have been paid. Also, after fiscal year- end, the amounts
   transferred from the Fund for MTF care are to be compared to actual costs
   and patient clinical data for that year.

   Payments for Health Care Purchased from Non- DOD Providers The DOD
   regulations specify that daily transfers will be made from the Fund to
   cover civilian provider and retail pharmacy benefit costs based on daily
   claims transactions attributable to Medicare- eligible beneficiaries.
   Funds are to be transferred monthly to cover payments to National Mail
   Order Pharmacy providers. All claims processing costs are to be
   transferred from the Fund on a biannual basis. For the Uniformed Services
   Family Health Plan (USFHP), 10 funds are to be transferred biannually to

   6 This amount includes $388 billion for pre- October 1, 2002, service
   liability, which Treasury is responsible for funding, and $63 billion for
   post October 1, 2002, service of current active military members, which
   DOD is responsible for funding. 7 This is consistent with DOD policy and
   practice, as set out in DOD Directive 5025.1, subject: DOD

   Directives System, July 27, 2000. 8 DOD Directive 6070. 1, subject: DOD
   Medicare Eligible Retiree Health Care Fund, July 17, 2002.

   9 DOD Instruction 6070. 2, subject: DOD Medicare Eligible Retiree Health
   Care Fund Operations, July 19, 2002. 10 DOD has contracts with network
   providers under the Uniformed Services Family Health Plan. The

   provider is paid a fixed amount based on enrollment estimate and per-
   person monthly capitation and assumes total financial risk for higher than
   expected costs.

   GAO- 02- 1061R Health Care Fund Regulations (DOD) Page 5 cover the
   contract- specific capitation rates for Medicare- eligible retirees and
   their

   eligible dependents enrolled in USFHP. One challenge that DOD will face in
   paying civilian providers is to mitigate the risk of improper payments.
   DOD presently pays for the health care services for its military members
   and their dependents provided by the civilian health care sector under
   certain circumstances. Therefore, it has the payment structure in place
   for paying civilian providers* claims. Because the new program will likely
   substantially expand the volume of health care services obtained from
   civilian providers, DOD needs to be aware of known vulnerabilities so it
   can assess any increased risk of improper payments. This risk could be
   substantial, as shown by U. S. Department of Health and Human Services*
   Inspector General study that reported about 6.3 percent of Medicare- fee-
   for- service claims were paid improperly in fiscal year 2001. 11
   Overpayments to civilian providers under the Medicare program administered
   by Health and Human Services have been on our high- risk list since 1990.
   12

   Payments for Health Care Provided in Military Treatment Facilities
   Transfer amounts for MTF care are to be calculated annually based on most
   recently reported fiscal year costs and patient clinical data, and are to
   be distributed by DOD and the military departments to MTFs using DOD*s
   current budget execution process. The instruction does not specify how
   frequently transfers will be made from the Fund to DOD or when
   distributions will be made to the MTFs.

   A major challenge in paying for care provided at MTFs is that their
   existing cost accounting systems do not have the capacity to record or
   generate cost data for each patient. 13 As a result, the calculation of
   transfer amounts for MTF care is not based on patient level cost and is
   not age, sex, or individual patient specific for costs. Instead, the
   regulations call for transfer amounts to be calculated annually based on
   recently reported fiscal year aggregated cost for all MTF activities and
   aggregated patient specific clinical data, extracted from individual
   patient records, for Medicareeligible patients treated in each facility.
   According to DOD officials, DOD plans to develop itemized billing for
   individual patients.

   In addition, the reliability of the underlying cost, patient clinical and
   demographic data to identify Medicare- eligible patients to be used to
   calculate the estimated amounts to be transferred from the Fund is
   questionable. We and the DOD Inspector General have previously reported 14
   that underlying MTF costs, as well as patient

   11 Office of the Inspector General, Department of Health & Human Services,
   Improper Fiscal Year 2001 Medicare Fee- for- Service Payments, A- 17- 01-
   02002 (Washington, D. C.: Feb. 15, 2002). 12 U. S. General Accounting
   Office, High- Risk Series: An Update, GAO- 01- 263 (Washington, D. C.:
   Jan.

   2001) 13 U. S. General Accounting Office, Medicare Subvention
   Demonstration: DOD Costs and Medicare

   Spending, GAO- 02- 67 (Washington, D. C.: Oct. 2001). 14 U. S. General
   Accounting Office, U. S. Government Financial Statements: FY 2000
   Reporting

   Underscores the Need to Accelerate Federal Financial Management Reform,
   GAO- 01- 570T (Washington, D. C.: Mar. 30, 2001). Office of the Inspector
   General, Department of Defense,

   Beneficiary Data Supporting the DOD Military Retirement Health Benefits
   Liability Estimate, D2001- 154 (Washington, D. C.: Jul. 5, 2001); Office
   of the Inspector General, Department of Defense,

   GAO- 02- 1061R Health Care Fund Regulations (DOD) Page 6 clinical and
   demographic data used for calculating payments to these facilities are

   not reliable. For example, the cost data in MTFs* cost accounting system
   was not being reconciled to its source systems, the patient clinical data
   for outpatient visits was not reliable, and demographic data had
   ineligible, unable to be verified, or incorrect critical data. The net
   effect is that there are uncertainties about the numbers and type of
   patient care provided, which under the contemplated billing process could
   result in either under or over billing for the Medicare eligible client
   base. DOD has established a management improvement plan and implemented
   several recent initiatives designed to improve data quality. It is too
   soon to assess whether these actions have resulted in the needed
   improvements.

   - - - - We are sending copies of this report to the Chairmen and Ranking
   Minority Members of the Senate and House Appropriation Committees. We will
   also make copies available to others upon request. In addition, the letter
   will be available at no charge on the GAO Web site at http:// www. gao.
   gov.

   If you have any questions, please contact me at (202) 512- 8365 or solisw@
   gao. gov, or Linda P. Garrison, Assistant Director, at (404) 679- 1902 or
   garrisonl@ gao. gov. Key contributors to this letter were Shawn Ahmed,
   Francine Delvecchio, Francis Dymond, and Kristi Peterson.

   William M. Solis Director Defense Capabilities and Management

   Internal Control and Compliance with Laws and Regulations for the FY 1999
   Financial Statements for Other Defense Organizations- General Funds, D-
   2000- 103 (Washington, D. C.: Mar. 16, 2000).
*** End of document. ***