    Defense Health Care: Implementation Issues for New TRICARE
    Contracts and Regional Structure (27-JUL-05, GAO-05-773).

    The Department of Defense (DOD) provides health care through
    TRICARE--a regionally structured program that uses civilian
    contractors to maintain provider networks to complement health
    care provided at military treatment facilities (MTF). In 2004,
    DOD implemented extensive changes to its TRICARE contracts and
    regional structure. A committee report accompanying the Ronald W.
    Reagan National Defense Authorization Act for Fiscal Year 2005
    directed GAO to provide information on implementation issues for
    (1) the new TRICARE contracts and (2) the new regional structure.
    This report also provides information on the new management tools
    used to assess (3) contractors' performance and (4) program
    performance at the MTF and regional levels.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-773
        ACCNO:   A31298
      TITLE:     Defense Health Care: Implementation Issues for New
    TRICARE Contracts and Regional Structure
         DATE:   07/27/2005
      SUBJECT:   Contract costs
    	     Contract performance
    	     Cost analysis
    	     Cost control
    	     Defense procurement
    	     Department of Defense contractors
    	     Health care costs
    	     Health care programs
    	     Health care services
    	     Program management
    	     Service contracts
    	     Performance measures
    	     DOD TRICARE Program

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    GAO-05-773

         * Results in Brief
         * Conclusions
         * Recommendations for Executive Action
         * Agency Comments and Our Evaluation
         * GAO's Comments
              * Order by Mail or Phone

    Report to the Committees on Armed Services, U.S. Senate and House of
    Representatives

    United States Government Accountability Office

    GAO

    July 2005

    DEFENSE HEALTH CARE

    Implementation Issues for New TRICARE Contracts and Regional Structure

    TRICARE Implementation Issues TRICARE Implementation Issues TRICARE
    Implementation Issues TRICARE Implementation Issues TRICARE Implementation
    Issues TRICARE Implementation Issues TRICARE Implementation Issues TRICARE
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    GAO-05-773

    Contents

    Letter 1

    Results in Brief 4
    Conclusions 6
    Recommendations for Executive Action 8
    Agency Comments and Our Evaluation 8
    Appendix I Briefing on the Implementation of New TRICARE Contracts and
    Governance Structure 11
    Appendix II Comments from the Department of Defense and GAO's Response 88

    Abbreviations

    DEERS Defense Enrollment Eligibility Reporting System DOD Department of
    Defense EWRAS Enterprise Wide Referral and Authorization System MCSC
    managed care support contractor MTF military treatment facility RFP
    request for proposal TED TRICARE Encounter Data TMA TRICARE Management
    Activity TOL TRICARE On Line TRO TRICARE regional office

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    United States Government Accountability Office

    Washington, DC 20548

    July 27, 2005

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

    The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
    Minority Member Committee on Armed Services House of Representatives

    The Department of Defense (DOD) provides health care to over 9 million
    beneficiaries, including active duty personnel, retirees, and their
    dependents, through its TRICARE program, which is expected to cost $36
    billion in 2005. TRICARE beneficiaries can obtain health care through
    DOD's direct care system of military hospitals and clinics, commonly
    referred to as military treatment facilities (MTF), and through DOD's
    purchased care system of civilian providers. DOD uses managed care support
    contractors (MCSC) to develop networks of providers to complement care
    available in MTFs and to perform other customer service functions, such as
    claims processing. DOD's TRICARE Management Activity (TMA), under the
    Assistant Secretary of Defense for Health Affairs, is responsible for
    procuring, administering, and overseeing the health care delivery
    contracts for purchased care. Beginning in 1995, TMA implemented the
    TRICARE purchased care system through 7 health care delivery contracts
    that covered 11 geographic health care regions nationwide. We previously
    reported that the contracts' size, complexity, and prescriptive
    requirements limited innovation and competition among contractors.1

    1GAO, Defense Heath Care: Lessons Learned From TRICARE Contracts and
    Implicaions or the Future, GAO-01-742T (Washington, D.C.: May 17, 2001).

    In August 2002, TMA announced extensive changes to the next generation of
    TRICARE contracts that included consolidating the number of health care
    regions from 11 to 3 and correspondingly reducing the number of health
    care delivery contracts to 3. Additionally, some of the health care
    functions that had been included in the previous TRICARE contracts, such
    as retail pharmacy services and MTF appointments, were removed from the
    new health care delivery contracts. These functions were either separately
    awarded as national contracts or were given to the military services to
    manage. In designing the new contracts, TMA used a performance-based
    contracting approach that focuses on outcomes and gives the MCSCs latitude
    on how to achieve them-unlike the previous contracts that more
    specifically prescribed how MCSCs were to meet contract standards. To
    oversee MCSCs' performance under the new contracting approach, TMA
    developed management tools to ensure that specific program outcomes are
    achieved and to monitor MTF commanders' and beneficiaries' satisfaction
    with customer service.

    TMA and the military services also made substantial changes to the
    management and oversight of TRICARE's purchased and direct care systems
    through the joint development of a governance plan. This plan established
    a new, regional governance structure, including the creation of TRICARE
    regional offices (TRO) to manage each of the three TRICARE regions (North,
    South, and West).2 The TROs are each led by a director, who reports to the
    Deputy Director of TMA. According to the governance plan, TRO directors
    are considered the health plan managers for the regions and are
    responsible for managing the new contracts, including ensuring network
    quality and adequacy, monitoring customer satisfaction outcomes, and
    coordinating appointment and referral management policies. TRO directors
    are also responsible for supporting MTF commanders in their efforts to
    maximize the use of MTFs and for providing other assistance as needed.

    Through the governance plan, TMA and the military services established
    annual business plans as the primary management tools for overseeing the
    delivery of health care at the MTF and regional levels. MTFs are
    responsible for developing business plans that establish their
    capabilities and capacity and that provide financial and workload
    information. After each military service approves the MTF business plans,
    MTF commanders submit them to the TROs for inclusion in a single, regional
    business plan that also contains information about health care delivery in
    areas without MTFs. To oversee the delivery of health care and achieve
    optimal use of the direct care system, senior officials can use business
    plans to make informed decisions on what health care should be provided
    through the MTFs versus the purchased care system of civilian providers.

    2The governance plan also designated selected locations with more than one
    MTF as Multiple Service Markets. We did not include these markets in the
    scope of our review.

    The implementation of the new contracts and governance structure involved
    numerous transition activities that required careful planning and
    execution to ensure that the delivery of health care to beneficiaries was
    not disrupted. The Senate Committee on Armed Services, in a report
    accompanying the Ronald W. Reagan National Defense Authorization Act for
    Fiscal Year 2005, directed GAO to monitor the transition to the new
    contracts and governance structure supporting the TRICARE program and to
    provide an assessment of initial transition activities.3 In response, we
    examined

               1. issues that arose during implementation of the new TRICARE
               contracts and how they are being addressed,
               2. issues that arose during implementation of the new TRICARE
               governance structure and how they are being addressed,
               3. management tools established to assess MCSCs' performance and
               how these tools are being used, and
               4. management tools established to assess TRICARE program
               performance at the MTF and regional levels and how these tools are
               being used.

    To conduct our evaluation, we interviewed officials at the offices
    responsible for administering the TRICARE program, including TMA; the
    Offices of the Surgeons General for the Army, Navy, and Air Force; TROs
    and MCSCs for the North, South, and West regions; and beneficiary group
    representatives. We also reviewed TMA directives, organizational charts,
    guidance, manuals, and contract requirements. We evaluated the governance
    plan and organizational structure and reviewed the timelines and plans for
    the transition to the new contracts and governance structure. We analyzed
    business planning documents for each of the TROs and for selected MTFs for
    fiscal year 2005. We also reviewed the reports and tools that are being
    used to monitor MCSC performance, including customer satisfaction surveys
    that are administered to beneficiaries and to MTF commanders. We assessed
    the reliability of the data used in this report and determined that they
    were sufficiently reliable for our purpose. To assess the reliability of
    the data, we (1) confirmed with TMA and MCSCs that the data they provided
    included the elements that we requested and that these data elements were
    consistent with provided documentation and (2) conducted detailed
    interviews with TMA and MCSC officials to identify any limitations in the
    data. We conducted our work from December 2004 through July 2005 in
    accordance with generally accepted government auditing standards.

    3S. Rep. No. 108-260, at 351 (2004).

    On May 2, 2005, we provided your staff with a briefing on the preliminary
    results of this review. The purpose of this letter is to provide the
    published briefing slides to you, which appear as appendix I. The
    information in these slides has been updated to provide more current data.

                                    Results in Brief

    A range of issues arose during implementation of the new health care
    delivery contracts that affected the administration of the TRICARE
    program. These issues increased program costs and impacted operations but
    had a minimal impact on the delivery of health care to beneficiaries. For
    example, the transition to new contracts prompted a higher-than-expected
    volume of beneficiary calls, requiring MCSCs to use additional resources
    to reduce telephone hold times and minimize beneficiary inconvenience. In
    addition, other problems, including difficulties with computer systems,
    strained program operations. The most significant and costly issue was the
    nonavailability of the Enterprise Wide Referral and Authorization System
    (EWRAS) that TMA and the military services had been developing since 2001.
    EWRAS was expected to provide automated referrals and authorizations for
    specialty care, and both MTFs and MCSCs had developed business processes
    based on the assumption that EWRAS would be available at the start of
    health care delivery. In its absence, both entities expeditiously
    developed and implemented labor-intensive manual processes. MCSCs' initial
    estimates of the costs involved with addressing the absence of EWRAS
    exceed $250 million over the 5-year contract period, but they have not yet
    negotiated this cost with TMA for reimbursement. MTFs had to absorb the
    costs associated with addressing the additional workload resulting from
    the need to manually process referrals and authorizations, and the
    military services could not provide the costs of these efforts. TMA
    officials also could not provide comprehensive costs incurred to develop
    EWRAS but estimated $9 million in contract costs-an estimate that does not
    include the staff resources expended to develop specifications for the
    system. Further, additional resources are being expended as TMA has
    established multiple teams to develop solutions for managing referrals and
    authorizations. Depending on what these teams recommend, TMA officials
    will decide whether EWRAS will be used or whether another automated system
    will need to be developed even though TMA lacks critical cost information
    needed to facilitate decision making on the optimal approach for managing
    referrals and authorizations. Additionally, although TMA continues to
    incur costs related to identifying and developing solutions, TMA officials
    could not provide an estimate of when an automated system would be
    available.

    Issues arose during the implementation of the new TRICARE regional
    governance structure that highlighted ambiguities about the roles and
    responsibilities of the TROs with respect to both contract oversight and
    collaboration with the military services' MTFs. Although the governance
    plan gives TRO directors responsibility for overseeing contract functions,
    it does not specifically delineate how this responsibility is to be
    coordinated with the TMA offices traditionally responsible for contract
    oversight. As a result, there have been coordination difficulties between
    the TROs and these TMA offices, resulting in conflicting communications on
    issues such as financial penalties and policy related to authorizations
    for care to an MCSC. In light of these difficulties, TMA officials have
    acknowledged the need to reassess and clarify the responsibilities and
    coordination requirements for contract oversight functions. In addition,
    while the governance plan states that TRO directors are to work with MTFs
    on issues such as maximizing the use of the direct care system, it does
    not provide the TROs with a protocol for these interactions. Because MTFs
    belong to the military services, TRO directors do not have authority over
    them and must rely on a collaborative approach to obtain cooperation. In
    the absence of clear protocols, military service officials have expressed
    concern about TROs' efforts to exert influence on MTFs stating that TROs
    have overstepped their authority in some instances by directly providing
    guidance to MTFs on issues such as referral management procedures and the
    movement of staff among MTFs.

    TMA has two new management tools for assessing the performance of the
    MCSCs-performance guarantees and award fees-which are used to financially
    penalize and reward MCSCs. Performance guarantees establish a minimum
    baseline for performance against 10 specific standards and serve as the
    basis for financial penalties. Although TMA has assessed performance
    guarantee penalties for each of the MCSCs, the process for assessing these
    penalties is still evolving. Because the new health care delivery
    contracts are performance based and focus on outcomes instead of
    processes, each MCSC measures and reports performance data differently. As
    of April 2005, TMA was still working with two MCSCs to understand their
    reported data and was still working to complete the validation of MCSCs'
    systems that generate reported performance data. Furthermore, TMA and MCSC
    officials acknowledge that administering the performance guarantees is
    difficult because not all of these standards reflect common industry
    practices and, therefore, they have no precedent on how to measure them.
    Separately, TMA uses award fees to provide MCSCs with financial bonuses
    based on customer satisfaction surveys administered to beneficiaries and
    MTF commanders as well as the TRO directors' firsthand knowledge of MCSCs'
    performance. All MCSCs received an award fee for their performance during
    the first quarter of their contract year.

    Business plans-the management tools established for overseeing TRICARE
    performance at the MTF and regional levels-could not be used as intended
    during fiscal year 2005. TMA provided the military services with only
    minimal guidance on developing MTF business plans and, consequently, each
    of the services developed its own guidance, resulting in variations among
    the fiscal year 2005 MTF business plans in both content and format. These
    inconsistencies subsequently impeded the development of the regional
    business plans, which were intended to incorporate the regions' MTF
    business plans. As a result, regional business plans for fiscal year 2005
    focused primarily on regional operations and health care delivery in areas
    without MTFs and could not be used to ensure optimal use of the direct
    care system. To improve upon the business planning process for fiscal year
    2006, the three military services collaborated to develop an automated
    tool to standardize the content and format of MTF business plans and to
    ensure that the plans are aligned with the military health system's
    overarching strategic plan. The automated tool also includes metrics that
    can be used to assess direct care system performance. TMA officials expect
    that the automated tool for MTF business plans will subsequently improve
    the quality of information to be incorporated in the regional plans,
    allowing regional plans to be used as intended to monitor both the direct
    and purchased care systems.

                                      Conclusions

    The overall implementation of the new contracts and governance structure
    was an enormous undertaking for all stakeholders in the TRICARE system
    that proceeded with few issues affecting beneficiaries due to the close
    collaboration of TMA, MCSCs, and the military services. Most of the
    contract implementation issues were related to program administration and
    affected costs and operations with little impact on health care delivery.
    The most significant implementation issue-the nonavailability of
    EWRAS-required extensive and costly process changes under short time
    frames. However, TMA has not clearly identified all of the costs
    associated with EWRAS development and nonavailability although MCSCs' have
    estimated costs of over $250 million for their efforts in addressing this
    problem over the 5-year contract period. Additionally, TMA continues to
    incur costs related to developing solutions for managing referrals and
    authorizations-a process that may take years to complete. Without a
    complete understanding of past and ongoing costs associated with EWRAS and
    the development of solutions, TMA will have difficulty determining what
    further investments are warranted in developing the optimal approach for
    managing referrals and authorizations.

    The implementation of the new regional governance structure has not been
    flawless, largely because the role of the newly created TROs was not
    always clearly defined in the governance plan. Confusion about the TROs'
    role in contract oversight has created coordination problems with the TMA
    offices that have traditionally conducted contract oversight functions,
    resulting in conflicting directions on certain issues. Further, despite
    the TROs' lack of authority over the direct care system, the governance
    plan did not provide clear protocols for how TROs are expected to
    collaborate with the military services' MTFs in order to obtain their
    cooperation and maximize regional use of the direct care system. In some
    instances, military service officials have expressed concerns about the
    TROs overstepping their authority in working with MTFs, potentially
    straining the collaborative relationships. Without clearly defined roles
    and responsibilities for overseeing the contracts and collaborating with
    MTFs, TRO's oversight of regional health care delivery as envisioned by
    the governance plan could be compromised.

    Finally, the management tools used in assessing program performance
    continue to evolve. TMA is working with the MCSCs to hone its approach for
    measuring and administering performance guarantees, an effort that should
    help improve contract oversight. Furthermore, the new automated business
    planning tool appears promising and could result in improvements in the
    consistency and content of the fiscal year 2006 MTF business plans,
    subsequently improving the quality of the regional plans. If effective,
    TROs and MTF commanders should be able to use the business plans as
    intended to assess program performance at the MTF and regional levels and
    to ensure optimal use of the direct care system.

                          Recommendations for Executive Action

    As DOD considers what further investments are warranted for managing
    referrals and authorizations, we recommend that the Secretary of Defense
    direct the Assistant Secretary of Defense for Health Affairs to determine
    comprehensive costs for the development and nonavailability of EWRAS as
    well as the costs being incurred to develop a solution.

    To facilitate the TROs' oversight of regional health care delivery, we
    recommend that the Secretary of Defense direct the Assistant Secretary of
    Defense for Health Affairs to take the following two actions:

               1. clearly define the TROs' contract oversight roles and
               responsibilities as they relate to other TMA offices and
               2. establish protocols for how TROs are to collaborate with the
               military services' MTFs.

                           Agency Comments and Our Evaluation

    In commenting on a draft of this report, DOD concurred with each of our
    recommendations and said that it was actively working to manage the issues
    we noted. DOD's written response is reprinted in appendix II. DOD also
    provided several technical comments that we incorporated where
    appropriate.

    DOD specifically stated that as the search for an automated solution to
    referrals and authorizations continues, the process of cost development
    and containment is ongoing. Once all costs associated with the
    nonavailability of EWRAS have been fully examined, DOD plans to negotiate
    a final cost for manual referral processing with the MCSCs. In addition,
    DOD stated that as it develops and implements an automated solution for
    processing referrals and authorizations, program oversight will be
    maintained to ensure that an automated solution satisfies the needs of all
    end users.

    To more clearly define contract oversight responsibilities, DOD said that
    it is in the process of reexamining business functions for the TROs and
    other TMA offices. DOD acknowledged that TMA's existing business practices
    and processes were established before the TROs were created and that
    business functions need to be reexamined in light of the new regional
    structure. The Assistant Secretary of Defense for Health Affairs has
    directed TMA to evaluate certain business functions and to develop written
    guidance to clearly define how the related business practices are
    performed. In conducting this evaluation, it will be important for DOD to
    specifically examine the administration of MCSCs' performance guarantees
    and the associated financial penalties-a critical aspect of contract
    oversight where coordination has been problematic. Further, to ensure
    continuous communication and coordination of critical issues affecting all
    contracts, DOD has recently established a Program Oversight Council, whose
    members include the TRO Directors, the Deputy Chief for Acquisitions, the
    Deputy Chief for Resource Management and Procurement, and the Chief of
    Health Plan Operations.

    In addition, DOD stated that it intends to establish protocols and
    specific management mechanisms for the TROs to coordinate with MTFs. In
    particular, the Assistant Secretary of Defense for Health Affairs has
    directed the development of agreed-upon protocols and mechanisms for the
    TROs to coordinate regional business plans with MTFs in their regions.
    While we agree that the business planning process is the primary method of
    collaboration between TROs and MTFs, it is not the only area for which
    protocols are needed. Because TROs serve as the health plan managers for
    the regions, they will sometimes need to collaborate with MTFs on issues
    that are not directly related to business plans, such as the communication
    of referral management procedures. We believe that established protocols
    could facilitate such communication and alleviate the military services'
    concerns about how TROs are interacting with the MTFs.

    Despite concurring with our recommendations, DOD stated that the report
    did not emphasize what it viewed as the positive aspects of the
    implementation-primarily that DOD achieved its paramount goal of assuring
    a minimal impact on beneficiaries. However, the objectives of our review
    were to identify the issues that were encountered during the
    implementation of the new contracts and governance structure, and our
    report appropriately focuses on these issues. Nonetheless, our overarching
    assessment of DOD's implementation activities clearly states that the
    impact on beneficiaries was minimal and attributes this to the close
    collaboration of TMA, MCSCs, and the military services.

    We are sending copies of this report to the Secretary of Defense and other
    interested parties. We will also make copies available upon request. In
    addition, the report will be available at no charge on GAO's Web site at
    http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-7119. Contact points for our Offices of Congressional
    Relations and Public Affairs may be found on the last page of this report.
    In addition to the contacts named above, Bonnie Anderson, Assistant
    Director, Lois Shoemaker, Rob Suls, and Cathy Hamann made key
    contributions to this report.

    Marcia Crosse Director, Health Care

    Appendix I: Briefing on the Implementation of New TRICARE Contracts and
    Governance Structure Appendix I: Briefing on the Implementation of New
    TRICARE Contracts and Governance Structure

    Appendix II: Comments from the Department of Defense and GAO's Response
    Appendix II: Comments from the Department of Defense and GAO's Response

    See comment 2.

    See comment 1.

    See comment 4.

    Now on pp. 6 and 7.

    See comment 3.

    Now on pp. 4 and 5.

    The following are GAO's comments on the DOD June 29, 2005, letter.

                                     GAO's Comments

               1. The TRICARE Management Activity (TMA) estimated that $9 million
               in contract costs had been spent for the development of EWRAS
               through June 2004. In addition, as a result of EWRAS
               nonavailability, the managed care support contractors (MCSC)
               estimated $250 million for implementing a manual referral and
               authorization process over five years. However, TMA did not
               provide us with complete data related to EWRAS costs. TMA could
               only verify that $6 million had been spent on a contract to
               develop the system and estimated that an additional $3 million had
               been spent on EWRAS development through another information system
               contract. Therefore, TMA's estimate of EWRAS expenditures are
               associated only with system development contracts and do not
               include the separate costs incurred by TMA or the military
               services for staffing resources expended in conceptualizing the
               system and developing system specifications.
               2. TMA has established multiple teams to develop solutions for
               managing referrals and authorizations. In July 2005, we confirmed
               with TMA officials that the most recent team has established a
               business process that will serve as the framework for the
               automated management of referrals and authorization. DOD's
               response acknowledges that efforts to develop an automated system
               are ongoing as functional requirements for a system are being
               defined and technical solutions analyzed. Therefore, as we
               reported, TMA continues to incur costs to identify and develop
               solutions for managing referrals and authorizations. Additionally,
               DOD's response asserts that an automated system is expected to be
               complete within 24 months. However, in further discussions, TMA
               officials told us that implementation would not be initiated until
               the concept of operations is approved and funding is
               provided-activities that had not occurred and would likely stretch
               the timeline past 24 months. Additionally, in its rationale, DOD
               confirms that until definitions for both business processes and
               functional requirements are completed, a technical solution and
               implementation timeline cannot be developed.
               3. We believe that our report paragraph accurately depicts the
               history and status of the referral and authorization process.
               Further, as previously stated, TMA officials told us that
               implementation would not be initiated until the concept of
               operations is approved and funding is provided-activities that had
               not occurred and would likely stretch the timeline past 24 months.
               In addition, DOD confirmed that a technical solution and
               implementation timeline cannot be developed until definitions for
               both business processes and functional requirements are completed.
               4. We agree that the lack of standardization of the referral and
               authorization process prohibited TMA from deploying its EWRAS
               automated system. This was a critical issue that TMA should have
               recognized and addressed during EWRAS development. Because this
               was not done, EWRAS could not be deployed, and, as we concluded,
               EWRAS nonavailability became the most significant implementation
               issue.

    (290419)

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    www.gao.gov/cgi-bin/getrpt? GAO-05-773 .

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    Highlights of GAO-05-773 , a report to Committees on Armed Services, U.S.
    Senate and House of Representatives

    July 2005

    DEFENSE HEALTH CARE

    Implementation Issues for New TRICARE Contracts and Regional Structure

    The Department of Defense (DOD) provides health care through TRICARE-a
    regionally structured program that uses civilian contractors to maintain
    provider networks to complement health care provided at military treatment
    facilities (MTF). In 2004, DOD implemented extensive changes to its
    TRICARE contracts and regional structure. A committee report accompanying
    the Ronald W. Reagan National Defense Authorization Act for Fiscal Year
    2005 directed GAO to provide information on implementation issues for (1)
    the new TRICARE contracts and (2) the new regional structure. This report
    also provides information on the new management tools used to assess (3)
    contractors' performance and (4) program performance at the MTF and
    regional levels.

    What GAO Recommends

    GAO is making recommendations to DOD that are aimed at determining the
    costs associated with its automated system for referrals and
    authorizations to decide what future investments are warranted as well as
    clarifying responsibilities for contract oversight and establishing
    protocols for regional offices to collaborate with MTFs to facilitate
    regional oversight.

    DOD concurred with each of GAO's recommendations and stated that it was
    actively working to manage these issues.

    During implementation of the new health care delivery contracts, issues
    arose that affected the administration of the TRICARE program. These
    issues increased program costs and impacted operations but had a minimal
    impact on the delivery of health care to beneficiaries. In particular,
    DOD's automated referral and authorization system was not available for
    contractors and MTFs at the start of health care delivery, resulting in
    the need for labor-intensive manual processes. DOD could not provide
    comprehensive costs associated with the system's development and
    subsequent nonavailability, but contractors' initial estimates for
    implementing manual processes in response to the system's nonavailability
    exceed $250 million over the 5-year contract period. DOD continues to
    incur costs to identify and develop solutions for managing referrals and
    authorizations and could not yet provide a time frame for when an
    automated system would be implemented.

    Implementation of the new regional structure, called the governance
    structure, highlighted ambiguities about the roles and responsibilities of
    the newly established TRICARE regional offices (TRO) with respect to both
    contract oversight and coordination with the military services' MTFs. DOD
    offices, which traditionally oversee the contracts, and the TROs, which
    were assigned contract oversight responsibilities under the plan for the
    new governance structure, have had difficulties coordinating their
    responsibilities. In addition, while the governance plan states that TRO
    directors are to work with MTFs on issues such as maximizing the use of
    the direct care system, it does not provide the TROs with a protocol for
    these interactions. TRO directors do not have authority over MTFs and must
    rely on a collaborative approach to obtain cooperation. In some instances,
    military service officials have expressed concern that TROs have
    overstepped their authority by directly providing MTFs with guidance.

    DOD has two new management tools for assessing the performance of
    contractors-performance guarantees and award fees. While performance
    guarantees serve as the basis for financial penalties, DOD's process for
    assessing penalties is still evolving. Nonetheless, for the first quarter
    of the contract year, DOD assessed all contractors with performance
    guarantee penalties, including penalties related to telephone wait times
    and the timely submission of referral reports for specialty care. In
    addition to penalties, DOD uses award fees to provide contractors with
    financial bonuses based on customer service. All contractors received an
    award fee for their performance during the first quarter of their contract
    year.

    Although business plans were intended to be the management tools used to
    assess program performance at the MTF and regional levels, the fiscal year
    2005 business plans for MTFs and TROs could not be used as intended for
    program oversight. Lacking clear guidance, each military service used its
    own approach to develop MTF business plans. The resulting inconsistencies
    in content and form impeded development of regional business plans, which
    are intended to incorporate the regions' MTF business plans. The three
    military services have collaborated to develop a standard MTF business
    planning approach-an effort that should improve both the MTF and regional
    plans for fiscal year 2006.
    *** End of document. ***