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
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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

This is a work of the U.S. government and is not subject to copyright
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separately.

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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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.
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