Defense Health Care: Health Insurance Stipend Program Expected to
Cost More Than TRICARE But Could Improve Continuity of Care for  
Dependents of Activated Reserve Component Members (19-OCT-05,	 
GAO-06-128R).							 
                                                                 
Since the September 11, 2001, terrorist attacks, the Department  
of Defense (DOD) has increased its reliance on its National Guard
and reserve forces to support the Global War on Terrorism, and	 
particularly Operation Iraqi Freedom. Congress has been 	 
interested in making improvements and enhancements to		 
compensation and benefit programs for reserve component members. 
When reserve component members are activated for more than 30	 
days under federal authorities, they are covered under TRICARE,  
DOD's health care system. While reserve component members are	 
automatically covered by TRICARE when activated, their spouses	 
and other dependents have the option of using either TRICARE or  
their private health insurance. However, our prior work found	 
that dependents of reserve component members who had dropped	 
their private health insurance reported problems accessing the	 
TRICARE system--such as difficulty finding a health care	 
provider, establishing eligibility, understanding TRICARE	 
benefits, and knowing where to go when questions and problems	 
arise. In addition, maintaining continuity of care with the same 
health care providers, especially for dependents with chronic	 
medical conditions, may be problematic after switching to	 
TRICARE. To address these concerns, some legislative proposals	 
would give reserve component members the option of accepting a	 
stipend from DOD to help defray the cost of continuing their	 
private health insurance for their spouses and dependents when	 
they are activated for more than 30 days. The Ronald W. Reagan	 
National Defense Authorization Act for Fiscal Year 2005 requires 
us to determine the cost and feasibility of providing a stipend  
to members of the Ready Reserve to offset the cost of continuing 
their current private health insurance coverage for their	 
dependents while they are on active duty. Specifically, we (1)	 
examined whether the implementation of a health care stipend	 
program would be likely to increase or decrease the cost to DOD  
of providing health care to the spouses and dependents of reserve
component members and (2) identified the potential implications  
of a stipend program on members and their families, DOD, and the 
members' employers.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-128R					        
    ACCNO:   A39857						        
  TITLE:     Defense Health Care: Health Insurance Stipend Program    
Expected to Cost More Than TRICARE But Could Improve Continuity  
of Care for Dependents of Activated Reserve Component Members	 
     DATE:   10/19/2005 
  SUBJECT:   Cost analysis					 
	     Health care programs				 
	     Health care services				 
	     Health insurance					 
	     Military dependents				 
	     Military reserve personnel 			 
	     National Guard					 
	     DOD TRICARE Program				 

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GAO-06-128R

October 19, 2005

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

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

Subject: 	Defense Health Care: Health Insurance Stipend Program Expected
to Cost More Than TRICARE But Could Improve Continuity of Care for
Dependents of Activated Reserve Component Members

Since the September 11, 2001, terrorist attacks, the Department of Defense
(DOD) has increased its reliance on its National Guard and reserve forces
to support the Global War on Terrorism, and particularly Operation Iraqi
Freedom. Congress has been interested in making improvements and
enhancements to compensation and benefit programs for reserve component
members.1 When reserve component members are activated for more than 30
days under federal authorities, they are covered under TRICARE, DOD's
health care system.2 While reserve component members are automatically
covered by TRICARE when activated, their spouses and other dependents have
the option of using either TRICARE or their private health insurance.
However, our prior work3 found that

1 DOD's reserve components include the collective forces of the Army
National Guard and the Air National
Guard, as well as the forces from the Army Reserve, the Naval Reserve, the
Marine Corps Reserve, and the
Air Force Reserve. The Coast Guard Reserve is a service in the Department
of Homeland Security, except
when operating as a service in the Navy during times of war or national
emergency.
2 DOD provides health care through TRICARE, a regionally structured
program that uses civilian
contractors to maintain health care provider networks that complement
health care provided at military
treatment facilities.
3 GAO, Defense Health Care: Most Reservists Have Civilian Health Coverage
but More Assistance is
Needed When TRICARE Is Used, GAO-02-829 (Washington, D.C.: Sept. 6, 2002).

dependents of reserve component members who had dropped their private
health insurance reported problems accessing the TRICARE system-such as
difficulty finding a health care provider, establishing eligibility,
understanding TRICARE benefits, and knowing where to go when questions and
problems arise. In addition, maintaining continuity of care with the same
health care providers, especially for dependents with chronic medical
conditions, may be problematic after switching to TRICARE. To address
these concerns, some legislative proposals would give reserve component
members the option of accepting a stipend from DOD to help defray the cost
of continuing their private health insurance for their spouses and
dependents when they are activated for more than 30 days.

The Ronald W. Reagan National Defense Authorization Act for Fiscal Year
20054 requires us to determine the cost and feasibility of providing a
stipend to members of the Ready Reserve5 to offset the cost of continuing
their current private health insurance coverage for their dependents while
they are on active duty. Specifically, we (1) examined whether the
implementation of a health care stipend program would be likely to
increase or decrease the cost to DOD of providing health care to the
spouses and dependents of reserve component members and (2) identified the
potential implications of a stipend program on members and their families,
DOD, and the members' employers.

To determine the cost of a stipend program, we requested the Congressional
Budget Office (CBO) to prepare an estimate of cost for a stipend program
for varying rates of participation since it is not within our purview, but
rather CBO's, to develop cost estimates associated with legislative
proposals. CBO also prepared an estimate of cost to DOD for spouses and
dependents of activated reserve component members using TRICARE instead of
receiving the stipend.

To identify the potential implications of a stipend program on
recruitment, retention, and medical readiness,6 we discussed and obtained
documentation from DOD's Office of the Assistant Secretary of Defense for
Reserve Affairs and Office of the Assistant Secretary of Defense for
Health Affairs and representatives of selected military service
organizations-the Enlisted Association of the National Guard of the United
States, the Reserve Officers Association of the United States, and the
Military Officers Association of America. We also analyzed the November
2004 DOD survey of reserve component members to identify those factors
reserve component members consider important for retention. We also
discussed the potential implications of a stipend program with
representatives of two organizations representing employers-the National
Federation of Independent Businesses and the National Association of
Manufacturers. For more detailed information on our scope and methodology,
see enclosure I. We performed our

4 Pub. L. No. 108-375, S: 702 (2004).
5 The Ready Reserve accounts for about 98 percent of nonretired reserve
component members and
consists of individuals who are subject to activation under the provisions
of 10 U.S.C. S: 12301 and S: 12302.
6 For this report, we defined medical readiness as the medical fitness of
servicemembers to perform their
mission.

work from February 2005 through September 2005 in accordance with
generally accepted government auditing standards.

                                Results In Brief

Offering a health care stipend to reserve component members could cost DOD
from $365 million to $735 million over a 5-year period-fiscal years 2006
through 2010-exclusive of program administration costs, for a specific
range of reserve component member participation rates. CBO officials
cautioned that in the absence of specific legislative language that
describes the design of a proposed stipend program in detail, CBO's
estimates should be considered preliminary. Final CBO estimates would
reflect actual legislative language and CBO's then current baseline
assumptions. For example, in preparing this estimate of cost, CBO assumed
that the amount of the stipend would equal the average worker contribution
for family health plans. However, for deployments of more than 30 days,
employees may be liable for the full health insurance premium, including
the employer share, plus an additional 2 percent for administrative costs.
This amount may be significantly higher than the amount of the stipend
used by CBO in preparing the estimate of cost. In addition, DOD estimated
that it would cost about $10 million for startup costs in the first year
of implementation and $20 to $25 million annually to administer stipend
payments to participating reserve component members. Since the Ronald W.
Reagan National Defense Authorization Act for Fiscal Year 2005 did not
identify the specific design features of a stipend program, it was
difficult to identify a reliable anticipated participation rate for a
stipend program. Using CBO's cost estimate of a 75 percent participation
level by eligible servicemembers and including DOD's estimate of
administrative costs, it could cost DOD $230 million (45.5 percent) more
to provide health care stipends to spouses and dependents of activated
reserve component members over a 5-year period (fiscal years 2006 through
2010) than to provide TRICARE to these individuals.

The most significant potential impact of a health care stipend program
could be to improve continuity of care for spouses and dependents of
reserve component members because the availability of a stipend would
potentially allow more reserve component members to continue their private
health insurance while they are activated. Continuation of their private
health insurance would help family members avoid disruption in ongoing
medical treatment caused by switching to TRICARE for their health care
coverage, by enabling them to keep their current health care providers.
Civilian employers of reserve component members may also benefit from the
availability of a stipend since this amount will help to offset the burden
on those employers who choose to pay the full contribution for their
activated employees. However, DOD officials are unaware of any evidence to
support that a stipend would have any impact on several other issues
affecting the reserve components, including medical readiness,
recruitment, or retention of reserve component members.

                                   Background

There are seven reserve components: the Army Reserve, Army National Guard,
Air Force Reserve, Air National Guard, Naval Reserve, Marine Corps Reserve
and the Coast Guard Reserve. Reserve forces can be divided into three
major categories: the Ready Reserve, the Standby Reserve, and the Retired
Reserve. The Ready Reserve had about 1.1 million National Guard and
reserve members as of July 2005, and as of September 2005, members of the
Ready Reserve have been the only reserve component members subject to
mobilization under the partial mobilization authority7 declared by the
President on September 14, 2001.8

Under federal mobilization authorities, members of the reserve component
may be activated to move the military from its peacetime posture to a
heightened state of readiness to support national security objectives in
times of war or other national emergencies. In recent years, DOD has
dramatically increased its reliance on reserve component members for
military operations, particularly those in Afghanistan and Iraq. Between
September 2001 and May 2005, DOD mobilized more than 436,000 reserve
component members. The average number of days a reserve component member
spent on active duty for three ongoing operations (Operations Noble Eagle,
Enduring Freedom, and Iraqi Freedom) as of March 2004 totaled 342 days.

The Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005 included several provisions to enhance health care benefits for
reserve component members and their dependents-which includes spouses,
children, and others who qualify-to help with their transition from
civilian status to active duty status. Generally, these provisions
provided for the following:

o  	Permanent authority for reserve component members and their dependents
to be eligible for TRICARE benefits when they receive a
delayed-effective-date order for activation up to 90 days before
activation.

o  	Permanent authority to provide transitional health care benefits to
certain service members and their dependents for up to 180 days following
separation from active duty.

o  	Authorized waiver of certain deductibles required by certain TRICARE
programs for dependents of certain reserve component members who are
called or ordered to active duty for a period of more than 30 days.

o  	Exemption for dependents of reserve component members who are ordered
to active duty for a period of more than 30 days from paying a health care
provider any amount above the TRICARE maximum allowable charge.

7 The partial mobilization authority limits involuntary mobilizations to
not more than 1 million reserve
component members at any one time, for not more than 24 consecutive months
during a time of national
emergency.
8 Executive Order 13223 of September 14, 2001.

Also, the Act gave those reserve component members called up on or after
September 11, 2001 an opportunity to purchase TRICARE health care coverage
for themselves and their family members after they demobilize.9 This
program, known as TRICARE Reserve Select, requires the member to agree to
continue serving for a period of one year or more in the Selected Reserve
after their active duty service ends.

A reserve component member is covered by TRICARE while activated. The
member's dependents, who qualify, have the option of using TRICARE at no
premium or continuing to use health insurance that may be provided by the
member's employer, which may include a cost to the member. TRICARE
eligible dependents can obtain health care through DOD's direct care
system of military hospitals and clinics, commonly referred to as military
treatment facilities, and through DOD's purchased care system of civilian
providers. DOD uses managed care support contractors to develop networks
of providers to complement care available in military treatment
facilities. The Office of the Assistant Secretary of Defense for Health
Affairs establishes TRICARE policy. DOD's TRICARE Management Activity,
under the Assistant Secretary of Defense for Health Affairs, is
responsible for procuring, administering, and overseeing the health care
contracts for purchased care.

Under the Uniformed Services Employment and Reemployment Rights Act of
1994 (USERRA),10 activated reserve component members' employer-provided
health benefits are protected. Specifically, for absences of 30 days or
less, health benefits continue as if the employee had not been absent. For
absences of 31 days or more, coverage stops unless (1) the employee elects
to pay for the coverage, including the employer contributions,11 or (2)
the employer voluntarily agrees to continue coverage.12 Under USERRA,
employers must reinstate reserve component members' health coverage upon
reemployment.

In May 2003, about 87 percent of reserve component members with dependents
reportedly had health insurance before they were mobilized. Of these
members, only about 54 percent reportedly continued their health insurance
during their activation.13

9 Reserve component members may be eligible to purchase TRICARE "after the
member completes service
on active duty to which the member was called or ordered for a period of
more than 30 days on or after
September 11, 2001, under a provision of law referred to in section
101(a)(13)(B), if the member (1) served
continuously on active duty for 90 or more days pursuant to such call or
order; and (2) on or before the
date of the release from such active-duty service, entered into an
agreement with the Secretary concerned
to serve continuously in the Selected Reserve for a period of one or more
whole years following such
date." See Pub. L. No. 108-375 S: 701.
10 Codified at 38 U.S.C. S:S: 4301-4334, as amended.
11 For deployments of 31 days or more, USERRA permits the employer to
assess an additional 2 percent
administrative fee if the reserve component members elect to continue with
private health insurance and
pay the full premium, including the employer share.
12 When the employer elects to continue mobilized reserve component
members' health insurance, the
reserve component member may continue to be liable for the employee
portion of the premium. However,
some employers pay the full premium.
13 Based on responses to DOD's May 2003 Status of Forces Survey of reserve
component members. DOD
officials told us that the May 2003 survey represented a more accurate
portrayal of this information than
the November 2004 survey.

 Estimated Costs For Providing a Health Care Stipend Higher Compared to TRICARE

Providing a health care stipend program to activated reserve component
members to enable their dependents to maintain their private health
insurance would likely cost more than TRICARE, according to CBO's
estimates prepared for this study. In September 2005, CBO estimated that
offering a health care stipend program to reserve component members would
cost DOD from $365 million to $735 million over a 5-year period-fiscal
years 2006 through 2010-exclusive of program administration costs, for a
specific range of reserve component member participation rates. CBO
officials cautioned that in the absence of specific legislative language
that describes the design of a proposed stipend program in detail, CBO's
estimates should be considered preliminary. Final CBO estimates would
reflect actual legislative language and CBO's then current baseline
assumptions. For example, in preparing this estimate of cost, CBO assumed
that the amount of the stipend would equal the average worker contribution
of family health care plans. Since the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005 did not identify the specific
design features of a stipend program for our review, it was difficult to
identify a reliable anticipated participation rate for a stipend program.
In addition, DOD estimated that it would cost about $10 million for
startup costs in the first year of implementation and $20 to $25 million
annually to administer stipend payments to participating reserve component
members. Adding the DOD administrative cost estimates to the CBO program
cost estimates and comparing them to CBO estimates for TRICARE shows that
a stipend program would cost DOD $230 million (45.5 percent) more than
TRICARE over a 5-year period (fiscal years 2006 through 2010). (See
enclosure II for estimate of cost assumptions.)

CBO Estimate of Cost for a Health Care Stipend Program

CBO developed an estimate of cost for a stipend program at varying rates
of participation by reserve component members in the program. In
consultation with CBO analysts, we agreed that CBO would prepare an
estimate of cost for a stipend program equal to the employee's share of
health insurance, excluding federal employees. Since the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005 did not identify
the specific design features of a stipend program for our review, it was
difficult to identify a reliable anticipated participation rate for a
stipend program. As proxies for varying rates of participation, we
requested CBO to prepare an estimate of cost at three levels of
participation: low range (45 percent of eligible population), medium range
(75 percent of eligible population), and high range (90 percent of
eligible population). We selected the low range of participation (45
percent) as a marker representing the percentage of activated reserve
component members with spouses and dependents that had private health
insurance before the members activated and chose to continue this
insurance coverage while they were activated and after excluding those
members expected to participate in the TRICARE Reserve Select program.
Similarly, we selected the medium range (75 percent) as a marker
representing those reserve component members with dependents that had
private health insurance before they were activated

and also after excluding those members expected to participate in the
TRICARE Reserve Select program. We selected the high range (90 percent)
rather than 100 percent since full participation in a program is rarely
achieved.

Using a range of specified participation rates in a stipend program, CBO
estimated that DOD's cost for a stipend program, exclusive of
administrative costs, ranged from $365 million to $735 million for fiscal
years 2006 through 2010, as shown in table 1.14

Table 1: CBO Estimate of Cost for a Health Care Stipend Program At Varying
Rates of Participation, Exclusive of Administrative Costs, Fiscal Years
(FY) 2006 - 2010a

Dollars in millions

         Rates of       FY 2006b FY 2007 FY 2008 FY 2009 FY 2010   Total Cost 
                                                                          For 
     Participation in                                            FY 2006-2010 
     Stipend Program                                             
      Low range (45        60      105     85      60      55        365      
         percent                                                 
       of eligible                                               
       population)                                               
     Medium range (75     100      170     140     110     90        610      
percent of eligible                                           
       population)                                               
      High range (90      120      205     170     135     105       735      
percent of eligible                                           
       population)                                               

Sources: Estimate of cost from CBO; rates of participation provided by
GAO.
aCBO officials cautioned that in the absence of specific legislative
language that describes the design of a proposed stipend program in
detail, CBO's estimates should be
considered preliminary. Final CBO estimates would reflect actual
legislative language and CBO's then current baseline assumptions.
bCBO's estimate assumed that costs would be less in 2006 as the first year
of the program because it takes time for potential participants to become
aware of and actually enroll
in the program. For this reason, CBO estimated that participants would
receive the stipend for only part of the year in the first year of the
program.

Administrative Costs

DOD officials believe that the method of paying the stipend-directly to
reserve component members, to employers, or to insurance companies-would
affect DOD's administrative costs. Office of the Assistant Secretary of
Defense for Reserve Affairs (OASD/RA) officials commented that there would
be administrative costs to establish and administer the payment system,
regardless of which method is mandated. However, OASD/RA officials believe
that the administrative costs might be smaller if the payments were
provided directly to the reserve component member. This would avoid the
need to establish a new, unique process to handle payments/claims from
hundreds or thousands of employers/insurance companies.

If stipend payments are made directly to the reserve component member,
OASD/RA officials commented that some members may use the payments for
expenses other than health insurance unless appropriate internal control
processes are incorporated. In addition, CBO advised us that the decision
to pay stipends directly to the reserve component member could affect
participation rates, and therefore, program costs.

14 We did not assess the implications of making a stipend payment taxable
or non-taxable to the reserve component member. If the stipend is taxable
to the member, any taxes would effectively reduce the net cost to the
government and the amount available to the member for defraying the cost
of his or her private health insurance. We did not determine whether
taxing the stipend would significantly affect the extent to which members
would participate in a stipend program.

In order to calculate administrative costs for a stipend program, DOD
officials commented that the requirements of the stipend program would
need to be defined, including the eligibility rules, portion of the
premium to be covered by stipend, and required documentation.

DOD's TRICARE Management Activity estimated that administrative costs for
a stipend being paid directly to the member would approximate $10 million
in startup costs and $20 to $25 million annually to administer the
program. We were told that DOD had not estimated administrative costs for
stipend payments being paid directly to employers or health insurance
companies.

Comparative Costs Under TRICARE

We compared the estimated cost to DOD of providing health care for
dependents of activated reserve component members under a stipend program
and under TRICARE. For this comparison, we used the medium range, or 75
percent participation rate, for a health care stipend program.15 Based on
CBO's estimate of cost at the 75 percent participation level and DOD's
estimate of administrative costs, a stipend program could cost DOD $735
million compared with estimated costs of $505 million to provide TRICARE
to reserve component members' spouses and dependents. Thus, the net cost
of providing a stipend to reserve component members is estimated to be
$230 million (45.5 percent) more expensive than TRICARE over the 5 year
period (fiscal years 2006 through 2010), as shown in table 2. This net
difference will vary depending on the participation rate.

Table 2: Estimated Costs to DOD for Health Care Stipend Program Compared
to TRICARE

Dollars in millions

FY 2006 FY 2007 FY 2008 FY2009 FY 2010 Total Costs For FY 2006-2010

                      Under 150 120 100 75 60 505 TRICARE
                                       b
Under   125 195 165 135 115 735 Program       Percent       Participation       Rate            Administrative                   
Stipend                         At 75                                           including                            Costsa      

Difference <25> 75 65 60 55 230

Source: Estimate of cost for stipend program and under TRICARE from CBO;
estimate of administrative costs from TRICARE Management Activity.
aFor this comparison of estimated costs, we used $25 million each year for
administrative costs.
bSee enclosure II for CBO assumptions in the estimate of cost under
TRICARE.

15 DOD officials also expressed concern that a stipend payment may
represent a dual benefit to the reserve component member if the stipend
includes a portion for the member even though the member is already
covered by TRICARE while activated.

 Stipend Program Could Improve Continuity of Health Care For Reserve Component
     Members' Families, But May Have Minimal Impact On Other Reserve Issues

Implementing a stipend program to help defray a family's cost of
maintaining their private health insurance when a reserve component member
is activated for duty may have positive implications in terms of
continuity of care and decreased costs for civilian employers; however,
DOD officials do not believe that other factors-such as recruitment,
retention, and medical readiness-would likely be significantly affected.
By providing a stipend for health coverage to reserve component members,
fewer families may experience disruptions in medical treatment. In
addition, civilian employers may decide to reduce their contribution for
the reserve component members' private health insurance while the member
is activated if a stipend is available. However, a stipend is not likely
to cause more individuals to join or remain in the reserve components, or
improve the medical readiness of activated reserve component members.

Health Care Stipend Program Could Improve Continuity of Care and May
Decrease Civilian Employer Costs

A DOD health care stipend program could improve the continuity of care for
families of reserve component members and may decrease costs for civilian
employers while the member is activated. Officials with the Office of the
Assistant Secretary of Defense for Health Affairs commented that payment
of a stipend might enable families to avoid disruption in ongoing medical
treatment caused by families shifting to TRICARE when the reserve
component member is ordered to active duty for a period of more than 30
days because, with a stipend, dependents would be able to keep their same
health care providers. Officials pointed out that the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005 provides authority
for waiving TRICARE deductibles and enabling higher payments to physicians
who do not accept TRICARE payment rates, which would also increase the
likelihood that family members can continue receiving care from the same
health care providers. According to an official in the Office of the
Assistant Secretary of Defense for Reserve Affairs (OASD/RA), DOD is still
in the process of rule-making for these provisions; however, in the
interim, a demonstration project for reserve component family members with
these provisions has been extended until October 2007. Officials with the
Military Officers Association of America and the Enlisted Association of
the National Guard of the United States told us that switching to TRICARE
may cause disruption of health care because some reserve component members
live in areas that are not close to military treatment facilities and
where health care providers may not accept TRICARE patients. In July 2003,
we also reported that DOD and its contractors have reported long-standing
health care provider shortages in some geographic areas and that a lack of
health care providers in certain

geographic locations, low reimbursement rates, and administrative
requirements contribute to potential civilian provider network
inadequacy.16

OASD/RA officials commented that the implications of a health care stipend
program for employers would depend on how such a program is designed.
DOD's survey of reserve component members conducted in November 2004 found
that employers for 42 percent of the respondents paid the entire premium
for their private health insurance and another 43 percent paid a portion
of the insurance premium while the member was activated. Because
increasing employee health care costs are a major concern for employers,
we believe that the availability of a stipend may encourage employers to
transfer all or a portion of their cost for continuing the employer-based
health insurance to DOD. While there is no empirical evidence that
describes employer reactions, OASD/RA officials believe that employers who
paid some portion or all of the premium payments for reserve component
members who continue their private health insurance while activated are
unlikely to continue making such payments if the federal government covers
the expense. If employers reduce their contribution for the premium
because of the availability of a stipend, the employee's share could
increase and, therefore, the potential cost of a stipend program may
increase if the amount of the stipend is linked to the employee's share.

Neither the National Association of Manufacturers nor the National
Federation of Independent Businesses had surveyed their employer
memberships about the proposed stipend program. Similarly, neither had
taken any positions on legislative proposals to provide stipends to
reserve component members. However, officials from both organizations
commented that they believe the vast majority of their members would
prefer that stipends be made to employees or insurance companies rather
than to employers. They added that most employers do not like the idea of
dealing with the federal government because of the various reporting and
verification requirements that usually accompany such a program. Also,
most of their member-employers are relatively small companies with small
human resource staffs that would likely have additional responsibilities
associated with a stipend program.

Less Impact on Other Reserve Component Issues

DOD officials are unaware of any evidence to support that a stipend would
have any impact on several other issues affecting the reserve components,
including medical readiness, recruitment, or retention of reserve
component members. Representatives of three military service organizations
we contacted had mixed views about the effects of a stipend program on
recruitment but two of the three organizations believed that it could
positively affect retention in the reserve component.

o  	Recruitment: OASD/RA officials commented that DOD has no evidence that
any form of medical benefits or the prospect of such benefits during
future periods of

16 GAO, Defense Health Care: Oversight of the TRICARE Civilian Provider
Network Should Be Improved, GAO-03-928 (Washington, D.C.: July 31, 2003).

active duty affect individuals' decisions to join the reserve component.
Officials commented that it is very unlikely that the potential for future
medical benefits is an important factor in the decision of non-prior
service recruits to join the reserve component. However, officials
commented that a stipend program may contribute positively to the decision
of prior-service recruits to join the reserve component because their
families would be able to remain in the same health care system and keep
the same providers while the members are on active duty. Officials with
the Reserve Officers Association of the United States commented that they
do not believe a health care stipend program would draw more people to the
reserve component. Similarly, officials with the Military Officers
Association of America said that they are not sure of the extent to which
a stipend program would impact recruitment. However, officials with the
Enlisted Association of the National Guard of the United States commented
that they believe a stipend program may positively impact the recruitment
of older individuals with families but have less of an impact on younger
members without families.

o  	Retention: Although DOD has not surveyed reserve component members to
determine the effect a stipend might have on retention, OASD/RA officials
believe that it is unlikely that a stipend program would appreciably
affect overall reserve component member retention. Officials cited recent
surveys of National Guard and reserve members that found health care, in
general, was ninth in relative importance in their decision to continue to
participate in the reserve component. Only four percent of the respondents
placed health care as the most important factor affecting their decision,
and fewer than 15 percent placed it in their top three considerations.
Some factors that were more important than health care for members'
decision making as to whether to continue to participate in the reserve
component were pay and allowances, military retirement, and
predictability, frequency, and duration of deployments. Officials with the
Enlisted Association of the National Guard of the United States said that
a stipend program could positively impact retention of reserve component
members since it would improve the continuity of care for families.
Officials with the Reserve Officers Association of the United States said
that they believe a stipend program would have a positive impact on
retention because the lack of control in choosing health care insurance
coverage is one of many reasons cited by reserve component members who
leave military service. Officials with the Military Officers Association
of America were unsure of the extent to which a stipend would impact
retention but said that health care disruption is one of many factors
causing retention problems.

o  	Medical readiness: DOD officials commented that it is difficult to
understand how a stipend program for dependents would improve the medical
readiness of reserve component members. They added that the only possible
impact of a stipend program on medical readiness is the peace of mind
achieved through the knowledge that members' families would be able to
continue their private health insurance. However, officials commented that
they are not aware of any study that supports the assumption that the
member, while deployed, may enjoy

increased peace of mind knowing their family members have health care
coverage through private health insurance rather than TRICARE.

                            Concluding Observations

DOD officials believe that making stipend payments directly to the reserve
component member would be more efficient than making such payments to the
members' employers or health insurance plans. Further, CBO points out that
making stipend payments directly to the member could increase the rate of
participation in a stipend program and thus increase the cost of the
program. We believe that making stipend payments available to the member
creates some risk that the funds may not be used for the intended purpose.
To mitigate the risk of abuse, appropriate internal controls are important
in implementing a health care stipend program.

                       Agency Comments And Our Evaluation

DOD provided written comments on a draft of this report, which are found
in enclosure

III. The Assistant Secretary of Defense for Reserve Affairs commented that
the estimated cost of a stipend program could be substantially more than
the CBO estimate of cost, depending on the specific requirements included
in proposed legislation. Factors the Assistant Secretary said could
significantly increase the cost of a stipend program included:

o  	Continued deployment of reserve component members at fiscal year 2006
levels rather than assuming a decreasing number of deployed members;

o  	Payment of a stipend amount higher than the average worker
contribution for health insurance for employed workers; and

o  Payment of a stipend during the period before and after the member is
activated.

We agree that the cost of the stipend program could be significantly more
than the CBO estimate. As noted in our report, the actual cost of a
stipend program would depend on the number of reserve component members
activated over the next five years and the specific design of a stipend
program. CBO's estimate of cost is based on the assumptions provided in
enclosure II.

  Changes were made to the report, where appropriate, to respond to technical
                                   comments.

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

If you or your staffs have any questions about this report, please contact
me at (202) 5125559 or [email protected]. Key contributors to this report
are listed in enclosure IV.

Sincerely yours,

Derek B. Stewart
Director, Defense Capabilities and Management

Enclosure I

                             Scope and Methodology

To meet our objectives, we interviewed responsible officials and reviewed
pertinent documents, reports, and information, when available, related to
the cost and effects of providing a stipend to activated reserve component
members obtained from officials at the Office of the Assistant Secretary
of Defense for Reserve Affairs; the Office of the Assistant Secretary of
Defense for Health Affairs; the TRICARE Management Activity; the Defense
Manpower Data Center (DMDC); representatives of selected military service
organizations-the Enlisted Association of the National Guard of the United
States, the Reserve Officers Association of the United States, and the
Military Officers Association of America; representatives of two
organizations representing employers-the National Federation of
Independent Businesses and the National Association of Manufacturers;
DOD's National Committee for Employer Support to the Guard and Reserve;
and Humana Inc.

To determine the cost to DOD for providing a stipend to activated
reservists, we requested CBO to prepare an estimate of cost for fiscal
year 2006 through fiscal year 2010 for varying rates of participation in a
stipend program since developing cost estimates associated with
legislative proposals is not within our purview, but rather CBO's. In
consultation with CBO analysts, we agreed that CBO would prepare an
estimate of cost for a stipend program for a stipend equal to the
employee's share of health insurance, excluding federal employees, for the
specified participation rates, utilizing those assumptions that CBO
considered most appropriate and its expertise in preparing cost
projections.17

Since the Ronald W. Reagan National Defense Authorization Act for Fiscal
Year 2005 did not identify the specific design features of a stipend
program, it was difficult to identify a reliable anticipated participation
rate for a stipend program. To identify reasonable markers for
participation rates in a stipend program, we analyzed recent data obtained
from the May 2003 Status of Forces survey administered to members of the
reserve component regarding the percentage that have health insurance
other than TRICARE and the percentage that maintained this coverage when
they were activated. Based on discussions with DOD officials, we chose the
May 2003 Status of Forces survey instead of the more recent November 2004
survey for three reasons: (1) the series of questions related to other
health insurance in the May 2003 survey seemed more straight-forward than
in the November 2004 survey, which did not ask an overall question on the
percentage of families with insurance prior to their most recent
activation; (2) the May 2003 survey response percentages for other health
insurance coverage were consistent with our prior analysis of this issue
from 2000 survey data; and (3) quality control checks were possible on the
May 2003 survey that were not possible on the November 2004 survey. In
addition, DMDC officials had not analyzed the November 2004 survey data to

17 CBO officials cautioned that in the absence of specific legislative
language that describes the design of a proposed stipend program in
detail, CBO's estimates should be considered preliminary. Final CBO
estimates would reflect actual legislative language and CBO's then current
baseline assumptions.

Enclosure I the same degree that the May 2003 survey data had been
analyzed. We found estimates from the May 2003 Status of Forces survey to
be sufficiently reliable for the purposes of this report.

As proxies for varying rates of participation, we requested CBO to prepare
an estimate of cost at three levels of participation: low (45 percent of
eligible population), medium (75 percent of eligible population), and high
(90 percent of eligible population). We selected the low level of
participation (45 percent) as a marker representing the percentage of
activated reserve component members with dependents that had continued
their private health insurance while they were activated and after
excluding those members (17 percent) expected by the TRICARE Management
Activity to participate in the TRICARE Reserve Select program. Similarly,
we selected the medium level (75 percent) as a marker representing those
reserve component members with dependents that had private health
insurance before they were activated and also after excluding those
members expected by the TRICARE Management Activity to participate in the
TRICARE Reserve Select program. We selected the high level (90 percent) as
a marker, recognizing that full participation in a program is rarely
achieved.

At our request, CBO also prepared an estimate of cost to DOD for
dependents of activated reserve component members using TRICARE instead of
receiving the stipend. For the estimate of cost for TRICARE, CBO used the
average TRICARE cost per dependent based on fiscal year 2003 TRICARE costs
for active duty dependents. We did not independently verify the data used
by CBO in preparing its estimate of cost. Enclosure II shows the
assumptions used by CBO in preparing its estimates of cost for a stipend
program and comparative costs under TRICARE.

We discussed administrative and management considerations for DOD in
implementing a stipend program with DOD officials and obtained related
documentation. We also obtained an estimate of the cost to administer a
stipend program from the TRICARE Management Activity. We did not
independently assess the reliability of DOD's estimate for administrative
costs.

To identify the potential implications of a stipend program on
recruitment, retention, and medical readiness, we discussed and obtained
documentation from DOD's Office of the Assistant Secretary of Defense for
Reserve Affairs and Office of the Assistant Secretary of Defense for
Health Affairs and representatives of selected military service
organizations-the Enlisted Association of the National Guard of the United
States, the Reserve Officers Association of the United States, and the
Military Officers Association of America. We also analyzed the November
2004 DOD survey of reserve component members to identify those factors
they consider important for retention.

We discussed the potential implications of a stipend program on continuity
of care for dependents with pre-existing health conditions with DOD
officials and obtained related documentation. We also discussed the
prevalence of special medical needs within the TRICARE dependent
population with a Humana Inc. official since Humana Inc. has the contract
for administering the TRICARE program for about 2.8 million beneficiaries
in the 10-state South region.

Enclosure I We also discussed the potential implications of a stipend
program for employers with representatives of two organizations
representing employers-the National Federation of Independent Businesses
and the National Association of Manufacturers-with officials representing
DOD's National Committee for Employer Support to the Guard and Reserve,
and with DOD officials. We also obtained related documentation, when
available, from these organizations and officials.

We performed our work from February 2005 through September 2005 in
accordance with generally accepted government auditing standards.

Enclosure II

Assumptions Used In CBO Estimate of Cost For the Stipend Program and Comparative
                              Costs Under TRICARE

In developing the estimate of cost for the stipend program at specified
participation rates, CBO used the following assumptions:

o  	Based on an analysis of the number and types of reserve component
members currently activated, CBO estimates that 165,000 reserve component
members will be activated in 2005. CBO assumes that force levels and
overseas operations for 2006 will remain at levels expected for 2005 and
decline gradually over several years. If the number of reserve component
members called to active duty were to remain at current levels over the
2006 through 2010 period, the cost of this program would be significantly
higher. Costs are based on the following numbers of reserve component
members being activated for more than 30 days:

Table 3: Number of Reserve Component Members Activated For More Than 30
Days, Fiscal Years 2006 Through 2010

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010

        Reserve        165,000     130,000     100,000     75,000      55,000 
       component                                                    
        members                                                     
     activated for                                                  
     more than 30                                                   
         days                                                       

Source: CBO.

o  	The stipend is available only to activated reserve component members
with dependents. Sixty percent of the activated reservists would have
dependents based on 2005 data from DOD's Reserve Component Common
Personnel Data System.

o  	No cost was included for the 11 percent of reserve component members
with dependents who are assumed to be enrolled in the Federal Employee
Health Benefits Program based on 2005 data from DOD's Reserve Component
Common Personnel Data System and 2004 data from the Office of Personnel
Management Central Personnel Data File.

o  	Amount of the stipend is the average worker contribution of family
health insurance premiums based on 2004 data from The Kaiser Family
Foundation and Health Research and Education Trust.

o  	Health insurance premiums would increase at an annual inflation rate
of 7 percent.

In calculating the estimated costs for the dependents of the activated
reserve component members under TRICARE, CBO used the following
assumptions:

                                  Enclosure II

o  	Only 30 percent of activated reserve component members with dependents
move their dependents to TRICARE when activated.

o  	The average number of dependents per activated member is 2.3 based on
2005 data from DOD's Reserve Component Common Personnel Data System.

o  	Average TRICARE cost per dependent is based on the fiscal year 2003
TRICARE costs for active duty dependents.

o  	TRICARE costs per dependent will increase annually by CBO's Consumer
Price Index-Medical component forecast.

                                 Enclosure III

Comments From the Department Of Defense

                                 Enclosure III

                                 Enclosure III

Enclosure IV

                     GAO Contact and Staff Acknowledgments

GAO Contact Derek B. Stewart (202) 512-5559 or [email protected]

Acknowledgments 	In addition to the individual named above, Brenda
Farrell, Assistant Director; Steve Fox; Joseph Applebaum; Timothy Carr;
Alissa Czyz; Jennifer Popovic; William Mathers; Elisha Matvay; Terry
Richardson; Clifton Spruill; John Van Schaik; and Michael Zola made key
contributions to this report.

                                    (350659)

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