Military Health Care: TRICARE Cost-Sharing Proposals Would Help  
Offset Increasing Health Care Spending, but Projected Savings Are
Likely Overestimated (31-MAY-07, GAO-07-647).			 
                                                                 
In light of the fact that Department of Defense (DOD) health care
spending more than doubled from 2000 to 2005 and continues to	 
escalate, DOD proposed increasing the share of health care costs 
paid by TRICARE beneficiaries, under a proposal known as Sustain 
the Benefit. DOD estimated that if the proposal had been	 
implemented in fiscal year 2007, savings would amount to over $11
billion through fiscal year 2011. As required by the National	 
Defense Authorization Act for 2007, GAO evaluated (1) the	 
likelihood that DOD would achieve its estimated savings from the 
proposed enrollment fee and deductible increases for retirees and
dependents under age 65, (2) the likelihood that DOD would	 
achieve its estimated savings from the proposed pharmacy	 
co-payment increases for all beneficiaries except active duty	 
personnel, and (3) the factors identified by DOD as contributing 
to increased TRICARE spending from 2000 to 2005. To conduct its  
work, GAO examined DOD analyses and interviewed DOD officials.	 
GAO also analyzed data on many aspects of health care costs in	 
general and interviewed health economists.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-647 					        
    ACCNO:   A70070						        
  TITLE:     Military Health Care: TRICARE Cost-Sharing Proposals     
Would Help Offset Increasing Health Care Spending, but Projected 
Savings Are Likely Overestimated				 
     DATE:   05/31/2007 
  SUBJECT:   Beneficiaries					 
	     Cost analysis					 
	     Deductibles and Coinsurance			 
	     Defense cost control				 
	     Health care costs					 
	     Health care programs				 
	     Health insurance					 
	     Insurance premiums 				 
	     Managed health care				 
	     Military dependents				 
	     User fees						 
	     Cost growth					 
	     Savings estimates					 
	     DOD TRICARE Program				 

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GAO-07-647

   

     * [1]Results in Brief
     * [2]Background

          * [3]DOD's Proposed Sustain the Benefit Initiative
          * [4]Rationale for Sustain the Benefit
          * [5]DOD's Projected Savings from Sustain the Benefit

     * [6]DOD Is Unlikely to Achieve $9.8 Billion in Savings as a Resu

          * [7]DOD Overestimated the Number of Avoided Users That Would Lik
          * [8]DOD Likely Overestimated the Savings Associated with Each Av
          * [9]Revenues from Higher Enrollment Fees and Deductibles Would L
          * [10]A Lack of Data on TRICARE Beneficiaries Prevents a More Accu

     * [11]Savings from Increased Pharmacy Co-payments Are Likely Overe

          * [12]DOD's Estimate of Savings Resulting from Beneficiaries' Resp
          * [13]Although DOD May Collect More Revenue Than Projected from Hi

     * [14]Medical Care Inflation, Benefit Enhancements, and Other Fact
     * [15]Conclusions
     * [16]Recommendation for Executive Action
     * [17]Agency Comments and Our Evaluation
     * [18]Appendix I: DOD's Calculation of the Portion of TRICARE Cost
     * [19]Appendix II: Comparison of DOD Medical Care Inflation with I
     * [20]Appendix III: Scope and Methodology

          * [21]Evaluation of Cost Savings Estimates

               * [22]Data Reliability Tests

     * [23]Appendix IV: Comments from the Department of Defense
     * [24]Appendix V: GAO Contact and Staff Acknowledgments

          * [25]GAO Contact
          * [26]Acknowledgments

               * [27]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

May 2007

MILITARY HEALTH CARE

TRICARE Cost-Sharing Proposals Would Help Offset Increasing Health Care
Spending, but Projected Savings Are Likely Overestimated

GAO-07-647

Contents

Letter 1

Results in Brief 6
Background 8
DOD Is Unlikely to Achieve $9.8 Billion in Savings as a Result of
Increased Enrollment Fees and Deductibles, though Significant Savings Can
Be Expected 17
Savings from Increased Pharmacy Co-payments Are Likely Overestimated,
although Some Savings Can Be Expected 24
Medical Care Inflation, Benefit Enhancements, and Other Factors Drove the
Increase in DOD Health Care Spending from 2000 to 2005 27
Conclusions 32
Recommendation for Executive Action 33
Agency Comments and Our Evaluation 33
Appendix I DOD's Calculation of the Portion of TRICARE Costs Being Paid by
Retirees and Dependents under Age 65 36
Appendix II Comparison of DOD Medical Care Inflation with Insurance
Premium Growth and Broader Inflation Indicators 38
Appendix III Scope and Methodology 41
Appendix IV Comments from the Department of Defense 44
Appendix V GAO Contact and Staff Acknowledgments 46

Tables

Table 1: TRICARE Prime Proposed Enrollment Fees for Military Retirees and
Dependents under Age 65 10
Table 2: TRICARE Standard and Extra Proposed Enrollment Fee and Deductible
Increases for Military Retirees and Their Dependents under Age 65 11
Table 3: Proposed TRICARE Pharmacy Co-payments for All Beneficiaries
Except Active Duty 12

Figures

Figure 1: DOD's Projected Number of Retirees and Dependents under Age 65
Who Would Use TRICARE under the Sustain the Benefit Proposal and under
Current Policy, 2004-2011 14
Figure 2: Percentage of Military Retirees under Age 65 Reporting Not
Having Access to Civilian Group Health Insurance by Age and Health Status,
2006 19
Figure 3: Comparison of Proposed TRICARE Enrollment Fees with
Kaiser/HRET-Reported Employee Shares of Employer-Sponsored Insurance
Premiums, Family Coverage, 2000-2008 20
Figure 4: Factors Identified by DOD as Contributing to the Increase in Its
Health Care Spending, 2000-2005 27
Figure 5: TRICARE Users by Beneficiary Group, 2001-2005 30
Figure 6: DOD Health Care Costs by Beneficiary Group, 2001-2005 32
Figure 7: Comparison of DOD's Estimated Rate of Medical Care Inflation,
Health Insurance Premium Growth Trends, and Broader Indicators of
Inflation 39

Abbreviations

AHRQ Agency for Healthcare Research and Quality
BLS Bureau of Labor Statistics
CalPERS California Public Employees' Retirement System
CBO Congressional Budget Office
COLA cost of living adjustment
CPI Consumer Price Index
CPI-W Consumer Price Index for Urban Wage Earners and Clerical Workers
DOD Department of Defense
FEHBP Federal Employees Health Benefits Program
GWOT Global War on Terrorism
Kaiser/HRET Kaiser Family Foundation and Health Research and Educational
Trust
MEPS Medical Expenditure Panel Survey
MTF military treatment facility
NDAA National Defense Authorization Act
OMB Office of Management and Budget
OPM Office of Personnel Management
RAND RAND Corporation
TMOP TRICARE Mail Order Pharmacy

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United States Government Accountability Office
Washington, DC 20548

May 31, 2007

Congressional Committees

From 2000 to 2005, the Department of Defense's (DOD) spending for health
care,1 which primarily funds TRICARE--its program that provides health
care to 9.2 million active duty personnel2 and other beneficiaries,
including dependents of active duty personnel, military retirees, and
dependents of retirees--more than doubled, from $17.4 billion to $35.4
billion.3 DOD projects that its health care spending will continue to rise
in coming years and will consume 12 percent of its total budget by 2015,4
up from 7.5 percent in 2005. In prior work, we have identified long-term
increases in the cost of health care, including TRICARE, as one of the
major challenges facing the nation in the 21st century.5 We have also
previously identified concerns with the sustainability of military
benefits, including health care, and recommended that Congress consider
restructuring military compensation.6 From 2000 to 2005, the Department of
Defense's (DOD) spending for health care,1 which primarily funds
TRICARE--its program that provides health care to 9.2 million active duty
personnel2 and other beneficiaries, including dependents of active duty
personnel, military retirees, and dependents of retirees--more than
doubled, from $17.4 billion to $35.4 billion.3 DOD projects that its
health care spending will continue to rise in coming years and will
consume 12 percent of its total budget by 2015,4 up from 7.5 percent in
2005. In prior work, we have identified long-term increases in the cost of
health care, including TRICARE, as one of the major challenges facing the
nation in the 21st century.5 We have also previously identified concerns
with the sustainability of military benefits, including health care, and
recommended that Congress consider restructuring military compensation.6

1While TRICARE is DOD's health care program, its total health care
spending includes additional items, such as research and development. All
of the DOD spending figures and calculations included in this report
relate to fiscal years, rather than calendar years. Figures that appear in
this report are generally rounded.

2Reserve personnel who are on active duty orders for a period of more than
30 consecutive days become eligible for TRICARE with the same benefits as
active duty personnel. The duration of eligibility may range from up to 90
days before active duty begins to 180 days after active duty ends. The
dependents of these reservists also become eligible for several TRICARE
options. In this report, we include these mobilized reservists with other
active duty personnel and include their dependents with other dependents
of active duty personnel.

3TRICARE includes a health maintenance organization option called TRICARE
Prime, a preferred-provider organization option called TRICARE Extra, and
a fee-for-service option called TRICARE Standard. A separate benefit,
TRICARE for Life, supplements Medicare coverage for eligible
beneficiaries.

4DOD estimates that its health care spending will amount to about $64
billion in 2015.

5GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [28]GAO-05-325SP (Washington, D.C.: February 2005).

6GAO, Military Personnel: DOD Needs to Improve the Transparency and
Reassess the Reasonableness, Appropriateness, Affordability, and
Sustainability of Its Military Compensation System, [29]GAO-05-798
(Washington, D.C.: July 19, 2005).

According to DOD, the increase in its health care spending can be
attributed to several factors, including growth in the number of TRICARE
beneficiaries; the addition of new benefits such as the TRICARE for Life
program, which supplements Medicare coverage for TRICARE beneficiaries
over age 65;7 and increasing costs for prescription drugs. For example,
TRICARE spending on prescription drugs increased from $1.6 billion in 2000
to $5.4 billion in 2005. DOD health care officials have stated that
ensuring that TRICARE remains intact, affordable, and effective is their
top priority, and this includes finding ways to manage the growth in DOD's
health care spending.8

While DOD's health care spending has increased significantly,
out-of-pocket expenses paid by many beneficiaries--including enrollment
fees, deductibles, coinsurance rates,9 and co-payments--have remained
relatively unchanged since TRICARE's inception in 1995. For example, a
retired beneficiary who is not yet eligible for TRICARE for Life currently
pays an annual enrollment fee of $460 for family coverage in TRICARE
Prime, DOD's managed care option--the same fee that was charged in 1995.10
As a result, the proportion of TRICARE costs paid by beneficiaries has
steadily declined since the program was implemented. According to
calculations by DOD officials, retirees and dependents under age 65 paid
for approximately 27 percent of their overall health care costs in 1996
and about 12 percent of these costs in 2005.11

7TRICARE for Life also supplements Medicare coverage for TRICARE
beneficiaries under age 65 who qualify for Medicare on the basis of
disability or end-stage renal disease and enroll in Medicare Part B.

8Department of Defense, The Military Health System (Prepared statement for
testimony before the Subcommittee on Personnel, Committee on Armed
Services, U.S. Senate, April 2005).

9Coinsurance is a form of cost sharing between insurer and beneficiary in
which the beneficiary pays a percentage of the cost of certain aspects of
care. In some of the TRICARE benefit options, for retirees and dependents
under age 65, the coinsurance rate for outpatient visits is 20 or 25
percent.

10The current retirement system requires servicemembers to generally serve
20 years before becoming eligible for nondisability retirement pay and
benefits. Retired reserve component personnel are eligible for TRICARE
when they reach age 60.

11In this report, we use the phrase retirees and dependents under 65 to
refer to military retirees under age 65 and their dependents and survivors
under age 65. Survivors include widows, widowers, and certain unmarried
children. After age 65, beneficiaries are generally eligible for Medicare
with supplementary coverage through TRICARE for Life.

To help address the growth in its health care spending, DOD proposed--as
part of the President's budget proposal for fiscal year 2007--increasing
the share of health care costs paid by TRICARE beneficiaries, under a
proposal DOD calls Sustain the Benefit. For one group of TRICARE
beneficiaries--retirees and dependents under age 6512--DOD proposed
implementing higher enrollment fees for TRICARE Prime and establishing
enrollment fees for beneficiaries who choose not to use TRICARE Prime and
instead use either TRICARE's fee-for-service or preferred-provider
options, called TRICARE Standard and TRICARE Extra, respectively. Under
the proposal, retirees and dependents under age 65 who use Standard and
Extra would also incur higher annual deductibles. DOD proposed phasing in
the enrollment fee and deductible increases in fiscal years 2007 and 2008
and then adjusting enrollment fees and deductibles in future years based
on the rate of premium increases in the Federal Employees Health Benefits
Program (FEHBP), the largest employer-sponsored health insurance program
in the country.13 Furthermore, DOD has proposed increasing retail pharmacy
co-payments in fiscal year 2007 for all TRICARE beneficiaries except
active duty personnel--that is, retirees and dependents under age 65,
retirees and dependents in TRICARE for Life, and dependents of active duty
personnel. The increased co-payments are intended to encourage the use of
the TRICARE Mail Order Pharmacy (TMOP) or military treatment facility
(MTF) pharmacies and to discourage the use of more costly retail
pharmacies. While DOD originally proposed implementing Sustain the Benefit
beginning in fiscal year 2007, provisions in the John Warner National
Defense Authorization Act for Fiscal Year 2007 (NDAA for 2007)14 prevent
DOD from implementing the proposal before October 1, 2007.15 The
proposal's implementation after that date remains uncertain; DOD officials
are awaiting the recommendations of the Task Force on the Future of
Military Health Care, a group established by DOD and required by the NDAA
for 2007 to make interim recommendations on TRICARE's cost-sharing
structure by May 31, 2007.16

12The proposed increases in enrollment fees and deductibles do not apply
to beneficiaries in TRICARE for Life, including TRICARE for Life
beneficiaries who may be under age 65 but who are eligible for Medicare on
the basis of disability or end-stage renal disease.

13The Office of Personnel Management (OPM) administers FEHBP by
contracting with multiple health insurance carriers to offer health plans
for federal employees enrolled in the program. OPM negotiates benefits and
premium rates with each carrier.

14See Pub. L. No. 109-364, SS 704, 708, 120 Stat. 2083, 2280, and 2284
(2006).

15The proposal remained as part of the President's budget proposal for
fiscal year 2008.

DOD estimated that if the proposal had been implemented beginning in
fiscal year 2007 as planned, savings from these changes--in the form of
reduced costs and increased revenues17--would amount to over $11 billion
through fiscal year 2011, including $9.8 billion from the effects of
enrollment fee and deductible increases and $1.5 billion from pharmacy
co-payment increases. DOD estimated that these savings would largely be
the result of current users leaving TRICARE or potential users choosing
not to enroll in TRICARE--and choosing other health care options--because
of the higher enrollment fees and deductibles. Collectively, DOD refers to
these individuals as avoided users.

Advocacy groups for military beneficiaries have raised concerns over the
analyses that led DOD to propose increasing beneficiaries' out-of-pocket
costs. The advocacy groups have questioned DOD's accounting of the factors
that have driven increases in DOD's health care spending as well as the
amount of projected savings from the Sustain the Benefit proposal. The
NDAA for 2007 required that we review DOD's proposal.18 Specifically, as
discussed with the committees of jurisdiction, we examined (1) the
likelihood that DOD would achieve its estimated savings associated with
the proposed enrollment fee and deductible increases for retirees and
dependents under age 65, (2) the likelihood that DOD would achieve its
estimated savings associated with the proposed pharmacy co-payment
increases for all beneficiaries except active duty personnel, and (3) the
factors identified by DOD as contributing to the increase in its health
care spending from 2000 to 2005. The act also required us to review DOD's
calculations of the proportion of TRICARE's health care costs paid by
retirees and dependents under 65. This information is included in appendix
I. Furthermore, the act required that we describe how DOD's annual rate of
medical care inflation--that is, the rate at which prices rise and
purchasing power falls for a fixed set of medical goods and
services--compares with increases in health insurance premium growth
trends and broader indicators of inflation from 2001 through 2005. We
provide this information in appendix II. We did not examine other
challenges that might be faced by DOD in managing TRICARE spending, but
instead limited our scope to those areas prescribed by the NDAA for 2007.

16See Pub. L. No. 109-364, S 711, 120 Stat. 2083, 2284-87 (2006).

17DOD refers to offsetting collections from enrollment fees, deductibles,
and co-payments as revenue. We have adopted this term for the purposes of
this report.

18See Pub. L. No. 109-364, S 713(a), 120 Stat. 2083, 2288-89 (2006).

To examine the likelihood that DOD would achieve its estimated savings
associated with the proposed enrollment fee and deductible increases for
retirees and dependents under age 65 and the proposed pharmacy co-payment
increases for all beneficiaries except active duty personnel, we reviewed
the analyses prepared by DOD and a DOD contractor that projected cost
savings from these increases. We also interviewed DOD officials, reviewed
relevant economic literature, and consulted with several health economists
about DOD's assumptions and methodology for making the savings estimates.
As part of our review of DOD's savings estimates, we used survey data from
the RAND Corporation (RAND) on military retirees' options for obtaining
health insurance, survey data from the Kaiser Family Foundation and Health
Research and Educational Trust (Kaiser/HRET) on employer-sponsored health
insurance premiums, and survey data from the Agency for Healthcare
Research and Quality on the health care costs for the U.S. population. We
also reviewed a draft report prepared by RAND on the health insurance
options of military retirees and Kaiser/HRET reports on employer health
benefits.

To examine the factors identified by DOD as contributing to the increase
in DOD health care spending, we reviewed the factors DOD identified as
contributing to the increase in its health care spending from 2000 to
2005, including TRICARE's rate of medical care inflation.19 We determined
that the spending data provided by DOD were sufficiently reliable for our
purposes, but we did not independently verify DOD's figures. In most
cases, DOD provided estimates instead of actual spending data, a practice
on which we have previously reported. We made recommendations to DOD in a
previous report to improve the reliability and reporting of its costs.20
DOD officials told us that in many cases the department does not have the
information systems necessary to precisely determine actual spending for
specific activities. We also interviewed DOD officials and reviewed
relevant literature on medical care inflation. To assess the reliability
of the data used by DOD to project savings for Sustain the Benefit and
identify the factors influencing increased DOD health care spending, we
interviewed DOD officials and tested the data for errors. We determined
that the data were sufficiently reliable for our purposes. As required by
the NDAA for 2007, we cooperated with the Congressional Budget Office
(CBO) to conduct our work. We periodically discussed our progress with and
obtained advice from CBO officials, particularly concerning our review of
DOD's savings estimates.

19Medical care inflation represents cost increases for delivering a fixed
set of medical goods and services. Medical care inflation is distinguished
from other cost increases in health care that can result from changing
medical goods and services, such as expanding health benefits or an
increase in the number of beneficiaries.

20GAO, Global War on Terrorism: DOD Needs to Improve the Reliability of
Cost Data and Provide Additional Guidance to Control Costs, [30]GAO-05-882
(Washington, D.C.: Sept. 21, 2005), and Global War on Terrorism:
Observations on Funding, Costs, and Future Commitments, [31]GAO-06-885T
(Washington, D.C.: July 18, 2006).

We conducted our work from July 2006 through May 2007 in accordance with
generally accepted government auditing standards. See appendix III for
more information about our scope and methodology.

Results in Brief

If Sustain the Benefit is implemented, DOD is unlikely to achieve the $9.8
billion savings that it expects over 5 years as a result of higher TRICARE
enrollment fees and deductibles aimed at retirees and dependents under age
65, but it is still likely to achieve significant savings. DOD's savings
estimate depends largely on the assumption that the increased fees and
deductibles will result in approximately 500,000 retirees and dependents
under age 65 either leaving or choosing not to enroll in
TRICARE--collectively referred to as avoided users--and on the assumption
that each avoided user will save DOD the equivalent of the cost of
providing health care to the average TRICARE beneficiary. However, DOD's
projected number of avoided users is likely too high. Many beneficiaries
in this group, particularly older and sicker individuals, are unlikely to
have lower-priced health insurance options available to them and would
therefore be likely to continue to use TRICARE. In addition, DOD's
estimated savings per avoided user is also likely too high because the
estimate does not account for the fact that the older and sicker
individuals who are less likely to leave or not enroll in TRICARE also
incur greater-than-average medical expenses. CBO officials reviewed DOD's
savings estimates and our analysis and agreed that DOD's estimates were
likely too high. Nevertheless, even with no avoided users, we estimate
that DOD's proposed fee and deductible increases would likely achieve a
minimum of $2.3 billion in savings over 5 years, in the form of revenue
collected from higher enrollment fees and deductibles. DOD's savings will
likely be higher than this minimum because Sustain the Benefit should
result in some avoided users. However, neither we nor DOD are able to make
a more accurate estimate of these savings, in part because DOD does not
collect and compile certain data, such as the cost of other health
insurance options available to beneficiaries. These data, along with
information on beneficiaries' access to other health insurance options,
could help DOD estimate how TRICARE beneficiaries would react to changes
in TRICARE's cost-sharing structure, such as the number of beneficiaries
who would become avoided users because of increased fees and deductibles.

DOD would also be unlikely to achieve the $1.5 billion it expects to save
by increasing retail pharmacy co-payments for all beneficiaries except
active duty personnel. According to DOD officials, DOD based its estimated
savings on a study that measured savings from increased pharmacy
co-payments in non-DOD employer-sponsored insurance programs.21 DOD used
the decrease in costs reported by the study to estimate the likely
decrease in the number of TRICARE retail prescriptions resulting from the
proposed changes. However, doing so resulted in an overestimate of the
likely reduction in the number of prescriptions that would be obtained
from retail pharmacies because of the increased co-payments--and therefore
an overestimate of savings--because some savings in the study resulted
from beneficiaries switching from brand-name to generic drugs. Because DOD
already generally requires the use of generic drugs when available, it
cannot expect to receive significant additional savings from a shift to
generic drugs. If fewer beneficiaries than DOD projected choose to reduce
retail pharmacy use, then more beneficiaries would pay the higher
co-payments, generating more revenue for DOD. However, increased revenues
from these beneficiaries would not be large enough to offset the higher
cost to DOD of providing these beneficiaries' prescriptions in retail
pharmacies.

DOD attributed the increase in its health care spending, from $17.4
billion in 2000 to $35.4 billion in 2005, to a number of factors. The
factors DOD identified as the largest contributors were medical care
inflation and benefit enhancements required by law, including TRICARE for
Life. DOD also identified other factors, including an increase in the
number of TRICARE beneficiaries who have chosen to use TRICARE and
increased health care costs because of the Global War on Terrorism (GWOT),
such as DOD's costs of providing health care for mobilized National Guard
and Reserve personnel and their families.

21G.F. Joyce and others, "Employer Drug Benefit Plans and Spending on
Prescription Drugs," JAMA, vol. 288, no. 14 (2005): 1733-1739.

To help DOD manage its health care spending, we are recommending that DOD
routinely collect and compile certain information that could help DOD
identify the reasons why beneficiaries may or may not choose to use
TRICARE, including information on beneficiaries' access to and costs of
other health insurance.

In its written comments on a draft of this report, DOD concurred with our
conclusions and recommendation. See appendix IV for DOD's comments. DOD
also provided technical comments, which we incorporated as appropriate.

Background

DOD's TRICARE program, which was established in 1995,22 offers health care
benefits to active duty personnel and other beneficiaries, including
dependents of active duty personnel, military retirees, and dependents of
retirees. Beneficiaries receive care at MTFs or from civilian providers.
TRICARE beneficiaries can obtain prescription drugs through TRICARE's
pharmacy system, which includes MTF pharmacies, network retail pharmacies,
nonnetwork retail pharmacies, or TMOP.

Dependents of active duty personnel and retirees and dependents under age
65 can choose to enroll in TRICARE Prime (managed care option), or if they
choose not to enroll, they can obtain care through TRICARE Standard
(fee-for-service option) or TRICARE Extra (preferred-provider option).
Active duty personnel are generally required to enroll in TRICARE Prime.23
Enrollees in TRICARE Prime, except for active duty beneficiaries and their
family members, pay an annual enrollment fee, which is the same regardless
of a retired beneficiary's rank. Beneficiaries who do not enroll in
TRICARE Prime can receive care subject to an annual deductible and other
cost shares. When these unenrolled beneficiaries use providers outside the
TRICARE network, they pay higher cost shares and are considered to be
using TRICARE Standard. When they use providers who are part of the
TRICARE network, they pay discounted cost shares and are considered to be
using TRICARE Extra. Before 2001, DOD provided health care for
beneficiaries eligible for the Medicare program--typically those over age
65--at MTFs on a space-available basis. The National Defense Authorization
Act for Fiscal Year 2001 established TRICARE for Life to provide
supplementary health care coverage for TRICARE beneficiaries enrolled in
the Medicare program.24 All TRICARE beneficiaries except active duty
personnel pay co-payments for prescription drugs obtained through retail
pharmacies or TMOP. MTF pharmacies do not charge co-payments.

22Prior to 1995, DOD provided health benefits under a different system,
the Civilian Health and Medical Program of the Uniformed Services.

23DOD officials told us that some active duty beneficiaries are not
required to enroll in TRICARE Prime. However, DOD still considers these
beneficiaries to be covered by TRICARE Prime.

DOD's Proposed Sustain the Benefit Initiative

As part of the President's fiscal year 2007 budget proposal, DOD proposed
increasing certain TRICARE fees through its Sustain the Benefit
initiative. Under the proposal, for retirees and dependents under age 65,
DOD would increase enrollment fees for TRICARE Prime and establish
enrollment fees and higher annual deductibles for TRICARE Standard and
TRICARE Extra.25 DOD proposed different fee and deductible levels for
retired officers and their dependents, retired senior enlisted personnel
(E-7 and above) and their dependents, and retired junior enlisted
personnel (E-1 to E-6) and their dependents. DOD has proposed phasing in
enrollment fee and deductible increases in fiscal year 2007 and fiscal
year 2008 that are generally lower than the total percentage increase in
premiums over the past 10 years for FEHBP; these premiums are negotiated
by the Office of Personnel Management. DOD proposed adjusting enrollment
fee and deductible increases based on the annual rate of premium increases
in FEHBP beginning in fiscal year 2009.

Provisions in the NDAA for 2007 prevent DOD from implementing its proposal
before October 1, 2007. The act also requires DOD to establish the Task
Force on the Future of Military Health Care and requires the task force to
make interim recommendations by May 31, 2007, on the beneficiary and
government cost-sharing structure needed to sustain TRICARE's health
benefits over the long term. The Sustain the Benefit proposal was also
included as part of the President's fiscal year 2008 budget proposal, but
DOD officials expect to await the recommendations of the task force before
deciding on the future of the proposal. Table 1 lists DOD's proposed
enrollment fees for TRICARE Prime.

24See Pub. L. No. 106-398, SS 712-713, 114 Stat. 1654, 1654A-176 to
1654A-184 (2000). TRICARE for Life covers beneficiaries who are eligible
for Medicare Part A, which helps cover inpatient care in hospitals, and
who are enrolled in Medicare Part B, which helps cover medical services
such as doctors' services and outpatient care. It acts as a secondary
payer to Medicare and pays for many services that Medicare only partially
covers or does not cover. While TRICARE beneficiaries do not have to pay
for their TRICARE for Life coverage, they pay premiums to be enrolled in
Medicare Part B. Some TRICARE beneficiaries under age 65 are eligible for
Medicare on the basis of disability or end-stage renal disease, and
therefore are also eligible for TRICARE for Life.

25Outpatient deductibles for TRICARE Standard and Extra are currently
capped by law at $150 annually for single beneficiaries and $300 annually
for families. See 10 U.S.C. S 1086(b).

Table 1: TRICARE Prime Proposed Enrollment Fees for Military Retirees and
Dependents under Age 65

                                         Annual enrollment fees
                            FY 95-FY 06  FY 07 FY 08 FY 09 and future years   
Retired junior  Self            $230   $275  $325 Fees for all adjusted    
enlisteda       Family      460     550     650   based on FEHBP           
Retired senior  Self             230    350   475                          
enlistedb       Family      460     700     950   
Retired officer Self             230    500   700                          
                   Family      460   1,000   1,400   

Source: DOD.

aRetired junior enlisted is defined as military grades E-1 to E-6.

bRetired senior enlisted is defined as military grades E-7 and above.

Table 2 lists DOD's proposed enrollment fees and deductibles for TRICARE
Standard and Extra.

Table 2: TRICARE Standard and Extra Proposed Enrollment Fee and Deductible
Increases for Military Retirees and Their Dependents under Age 65

                  Annual                 Annual
                enrollment             outpatient
                   fee                 deductible
                                                                          FY 09
                    FY                 FY 09 and           FY             and
                 95-FY  FY             future           95-FY             future
                    06  07       FY 08 years               06 FY 07 FY 08 years
Retired  Self       $0 $75        $140 Fees for          $150  $175  $185 Fees for
junior                                 all                                all
enlisted Family      0 150 280 300 350 adjusted           370             adjusted
Retired  Self        0 100         200 based on           150   175   185 based on
senior                                 FEHBP                              FEHBP
enlisted Family      0 200 400     300                    350   370  
Retired  Self        0 150         280                    150   225   280    
officer  Family      0 300 560                300         450   560  

Source: DOD.

In addition, for all beneficiaries except active duty personnel--that is,
for retirees and dependents under age 65, retirees and dependents in
TRICARE for Life, and dependents of active duty personnel, the proposal
includes increasing retail pharmacy co-payments and eliminating
co-payments for generic drugs in TMOP (see table 3).26 The proposal would
not change other TRICARE provisions that affect beneficiaries' costs, such
as cost shares for inpatient and outpatient care or the annual limit on
beneficiaries' costs, known as the catastrophic cap.27

26Retirees and dependents in TRICARE for Life are eligible to obtain
prescription drugs through TRICARE, including from retail pharmacies,
TMOP, and MTF pharmacies. According to DOD, for nearly all TRICARE for
Life beneficiaries, under most circumstances, there is no added value in
purchasing Medicare prescription drug coverage, referred to as Medicare
Part D.

27Specifically, the catastrophic cap is the maximum out-of-pocket expense
for which TRICARE beneficiaries are responsible in a given fiscal year. As
of March 2007, the catastrophic cap for active duty families was $1,000
and the catastrophic cap for all other TRICARE-eligible families was
$3,000. The catastrophic cap applies only to services covered by TRICARE.

Table 3: Proposed TRICARE Pharmacy Co-payments for All Beneficiaries
Except Active Duty

                          Current co-payments         Proposed co-payments
Delivery                                                                   
option      Supply  Generic Brand Nonformulary  Generic Brand Nonformulary 
Military    Up to   None    None  Not           None    None  Not          
treatment   90                    applicable                  applicable   
facility    days                                                           
TRICARE     Up to   $3      $9    $22           $0      $9    $22          
Mail Order  90                                                             
Pharmacy    days                                                           
Retail      Up to   $3      $9    $22           $5      $15   $22          
network     30                                                             
pharmacy    days                                                           
Retail      Up to   Greater of $9 Greater of    Greater of    Greater of   
nonnetwork  30      or 20 percent $22 or 20     $15 or 20     $22 or 20    
pharmacy,   days    of total cost percent of    percent of    percent of   
TRICARE                           total cost    total cost    total cost   
Standard                                                                   
and Extra                                                                  
Retail      Up to   50 percent    50 percent    50 percent    50 percent   
nonnetwork  30                                                             
pharmacy,   days                                                           
TRICARE                                                                    
Prime                                                                      

Source: DOD.

Note: Retirees and dependents in TRICARE for Life are eligible to obtain
prescription drugs through TRICARE, including from retail pharmacies,
TMOP, and MTF pharmacies.

Rationale for Sustain the Benefit

DOD designed the Sustain the Benefit proposal to slow the increases in its
health care spending, which more than doubled from $17.4 billion in 2000
to $35.4 billion in 2005. A portion of this increase was caused by
prescription drug spending, which increased from $1.6 billion in 2000 to
$5.4 billion in 2005. While TRICARE spending has increased, many fees paid
by beneficiaries, such as enrollment fees, deductibles, and co-payments,
have remained virtually unchanged since the program's inception. In
particular, TRICARE Prime enrollment fees have remained at $230 for single
beneficiaries and $460 for families since 1995, and TRICARE Standard and
Extra have never had an enrollment fee.28 In addition, enhancements to the
TRICARE benefit required by law, such as the reduction of the TRICARE
Standard and Extra catastrophic cap for retirees and dependents under age
65, have further limited beneficiaries' out-of-pocket costs, thereby
increasing DOD's share of TRICARE costs.29

28Active duty beneficiaries and their family members do not pay enrollment
fees.

29The Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001 lowered the maximum allowable catastrophic cap for retirees and
dependents under age 65 in TRICARE Standard and Extra from $7,500 to
$3,000. See Pub. L. No. 106-398, S 759, 114 Stat. 1654, 1654A-200 (2000),
codified at 10 U.S.C. S 1086(b)(4).

DOD's increased health care costs, combined with the largely unchanged
average out-of-pocket costs for TRICARE beneficiaries, have led to a
decreasing portion of TRICARE costs being paid by beneficiaries. To
explain the need for Sustain the Benefit, DOD officials said that military
retirees and dependents under age 65--the group that would be affected by
enrollment fee and deductible increases--paid approximately 27 percent of
their health care costs covered by TRICARE in 1996 and about 12 percent of
these costs in 2005. For more information on DOD's calculation of these
figures, see appendix II.

From 1996 to 2005, average out-of-pocket expenses paid by TRICARE
beneficiaries remained relatively unchanged, while average out-of-pocket
expenses for enrollees in FEHBP and other employer-sponsored health
insurance increased, largely in the form of higher premiums. For example,
an enrollee's share of the average FEHBP premium, when weighted by the
proportion of enrollees with single and family coverage, nearly doubled in
9 years, from about $1,148 in 1996 to about $2,260 in 2005. In contrast,
the TRICARE Prime enrollment fees, when weighted by the number of
enrollees with single and family coverage, amounted to $437 in 1996 and
remained at $437 in 2005.

According to DOD, increasing enrollment fees and deductibles would reduce
the price gap between civilian health insurance premiums and TRICARE
enrollment fees, thereby reducing the incentive for retirees and
dependents under age 65 to choose TRICARE over other health insurance
options. DOD officials estimate that by 2011, the proposed increases in
enrollment fees and deductibles would generate over 500,000 avoided users.
(See fig. 1.)

Figure 1: DOD's Projected Number of Retirees and Dependents under Age 65
Who Would Use TRICARE under the Sustain the Benefit Proposal and under
Current Policy, 2004-2011

DOD officials told us that they want to increase enrollment fees and
deductibles for retirees and dependents under age 65 because these
beneficiaries are more likely than other beneficiaries to have other
health insurance options and therefore are more likely to leave or choose
not to enroll in TRICARE. DOD officials said that they did not consider
implementing enrollment fees and deductibles for active duty personnel or
increasing deductibles for their dependents to avoid affecting military
readiness. DOD officials also did not consider establishing enrollment
fees for retirees and dependents in TRICARE for Life because they believe
that the fact that the TRICARE for Life benefit was recently established
suggests that Congress would not be likely to approve enrollment fees for
those beneficiaries. In addition, DOD officials told us that they proposed
FEHBP as the basis for the proposed increase amounts because its premiums
are driven by the private insurance market and are calculated outside of
DOD by the Office of Personnel Management.30 DOD officials did not want to
use DOD data to set rate increases because they wanted to avoid any
appearance that the data might be manipulated to DOD's financial
advantage.

To discourage TRICARE users from obtaining prescriptions at high-cost
retail pharmacies, DOD officials chose to increase co-payments for
prescriptions dispensed at retail pharmacies for all beneficiary groups
except active duty personnel. We previously reported that in 2004, DOD
spent over 50 percent--about $2.4 billion--of its pharmacy costs on
prescriptions dispensed through retail pharmacies, even though these
prescriptions account for less than 30 percent of its total number of
prescriptions.31 DOD's reported cost per prescription varies among retail
pharmacies, TMOP, and MTF pharmacies for a number of reasons, including
differences in the price of drugs dispensed in each system, co-payments,
and the administrative costs of dispensing the drugs. For example, DOD
receives discounted drug prices for drugs it purchases and then dispenses
through MTFs or TMOP, but does not receive these discounts when
beneficiaries obtain drugs through retail pharmacies. Therefore, DOD's
costs for purchases at retail pharmacies are generally higher than at MTFs
or through TMOP.

DOD's Projected Savings from Sustain the Benefit

DOD projected that implementing the Sustain the Benefit proposal would
lead to a total savings of more than $11 billion over a 5-year period,
from 2007 through 2011. DOD projected that the effects of the proposed
increases in enrollment fees and deductibles for retirees and dependents
under age 65 would account for approximately $9.8 billion of these
savings, while the effects of proposed increases in pharmacy co-payments
for dependents of active duty personnel and retirees and dependents under
age 65 would account for about $1.5 billion of the savings.32

30For more information on how FEHBP costs are calculated, see GAO, Federal
Employees Health Benefits Program: Premium Growth Has Recently Slowed, and
Varies Among Participating Plans, [32]GAO-07-141 (Washington, D.C.: Dec.
22, 2006).

31See GAO, Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could
Produce Savings and Other Benefits, [33]GAO-05-555 (Washington, D.C.: June
22, 2005).

Specifically, DOD estimated that $7.6 billion of the $9.8 billion in
savings from the proposed increases in enrollment fees and deductibles
would result from avoided users--current beneficiaries choosing to leave
TRICARE or potential beneficiaries choosing not to enroll. DOD also
expected that some beneficiaries who choose to use TRICARE Standard or
Extra would be influenced by the proposal's higher deductibles to use
fewer health care services, leading to about $361 million of the $9.8
billion of expected savings. Finally, DOD expected that $1.9 billion of
the $9.8 billion in savings would come from the higher enrollment fees and
deductibles collected from beneficiaries who continue to use TRICARE.33

DOD also projected that the $1.5 billion in savings from increased
pharmacy co-payments would result from three factors: (1) reductions in
the overall number of prescriptions for TRICARE beneficiaries filled at
retail pharmacies, (2) a shift of prescriptions from higher-cost retail
pharmacies to lower-cost MTF pharmacies or TMOP, and (3) increased
revenues from higher co-payments. DOD officials expected that the first
two factors would account for about $982 million in savings. DOD officials
expected that the third factor would produce savings of $486 million, in
the form of co-payments collected from beneficiaries who choose to use
retail pharmacies.

32DOD also expects that there will be savings of $1.5 billion over 5 years
because of pharmacy co-payment increases for retirees and dependents over
65 in TRICARE for Life. However, DOD officials told us that they did not
include this amount in DOD's estimate of savings because TRICARE for Life
costs are paid through the Department of Defense Medicare Eligible Retiree
Health Care Fund. See 10 U.S.C. SS 1111 et seq.

33Numbers do not total precisely because of rounding.

DOD Is Unlikely to Achieve $9.8 Billion in Savings as a Result of Increased
Enrollment Fees and Deductibles, though Significant Savings Can Be Expected

DOD is unlikely to achieve the $9.8 billion it expects to save as a result
of higher TRICARE enrollment fees and deductibles because it overestimated
the number of avoided users the increases would likely generate. The
number of avoided users is likely to be lower than DOD estimated because
for many military retirees and dependents under age 65, TRICARE may be the
only option or may still be the lowest-cost option for health insurance.
DOD also overestimated the amount of savings that could be attributed to
each avoided user. If no current TRICARE users leave TRICARE and no
potential users choose not to enroll as a result of the proposed
cost-share increases, collection of the higher enrollment fees and
deductibles from a greater number of users would likely amount to a
minimum of $2.3 billion in savings through 2011. DOD's savings would be
higher than $2.3 billion to the extent that DOD generates avoided users.
However, because DOD does not collect and compile certain information from
its beneficiaries--such as data on the cost of other health insurance
options available to TRICARE beneficiaries that could help DOD estimate
beneficiaries' reaction to changes in TRICARE's cost-sharing
structure--neither we nor DOD are able to make a more accurate estimate.

DOD Overestimated the Number of Avoided Users That Would Likely Result from
Higher Fees and Deductibles

DOD is unlikely to achieve the $9.8 billion it expects to save over 5
years from the effects of higher TRICARE enrollment fees and deductibles
aimed at retirees and dependents under age 65, largely because the
department likely overestimated the number of avoided users that the
change would generate. DOD projected that the proposed increase in fees
and deductibles would generate approximately 500,000 avoided users in 5
years. The department based this projection on a RAND review of studies
that examined how individuals enrolled in employer-sponsored health
insurance have responded to premium increases.34 The studies RAND reviewed
showed that most individuals who left health insurance plans when faced
with increases in their health insurance premiums switched to lower-priced
health insurance plans. DOD officials recognized that TRICARE
beneficiaries often would lack lower-priced health insurance alternatives
and therefore relied on one of the studies in the RAND review that showed
the lowest level of beneficiary responsiveness to premium increases.
However, even in this study, the individuals who left their health
insurance plans in response to premium increases had lower-priced health
insurance options to choose from, an option that many TRICARE
beneficiaries would be unlikely to have. Therefore, DOD's projected number
of avoided users is probably too high. CBO officials reviewed DOD's
savings estimates, including its estimates of the number of avoided users,
and agreed that these estimates were likely too high.

34J.S. Ringel and C. Eibner, Health Care Demand Elasticities and Their
Implications for Military Health Cost Containment (RAND Corporation:
2004).

In its savings estimates, DOD did not develop separate measures of
responsiveness to enrollment fee and deductible increases for various
groups within the population of retirees and dependents under age 65, such
as those who are older or less healthy than average, but instead applied
an average measurement of price sensitivity to the population as a whole.
However, for some retirees and dependents under age 65, TRICARE is the
only option for group health insurance through an employer, a spouse's
employer, or a professional association. For these TRICARE beneficiaries,
the proposed increases in enrollment fees and deductibles are unlikely to
make them leave TRICARE and become avoided users. According to a draft
report compiled in 2006 by RAND, around 21 percent of retired enlisted and
27 percent of retired officers reported that they do not have access to
group health insurance.35 Because these individuals do not have access to
group health insurance, they are unlikely to have access to health
insurance plans that are less expensive than TRICARE.36 The lack of group
health insurance options is even more pronounced for retirees who reported
being older or less healthy than average, making these beneficiaries even
less likely than others to become avoided users. According to the RAND
survey, 51 percent of retired enlisted personnel ages 60-64 and 44 percent
of retired officers in that age group reported not having access to group
health insurance, compared with 11 percent of retired enlisted personnel
ages 45-49 and 15 percent of retired officers in that age group.
Similarly, 47 percent of military retirees under age 65 in poor health
reported not having access to group health insurance through any of these
sources, compared with 26 percent of those in excellent health. (See fig.
2.)

35Louis T. Mariano and others, Civilian Health Insurance Options of
Military Retirees: Findings from a Pilot Survey, Draft (RAND Corporation:
August 2006).

36These individuals may have access to health insurance plans on the
individual market, but premiums for these plans are, for the most part,
more expensive than the premiums they would pay for group health
insurance.

Figure 2: Percentage of Military Retirees under Age 65 Reporting Not
Having Access to Civilian Group Health Insurance by Age and Health Status,
2006

In addition, for many retirees and dependents under age 65 with access to
group health insurance, TRICARE may be the lowest-cost option for health
insurance, even when DOD's proposed fee increases are taken into account.
According to the 2006 Kaiser/HRET Employer Health Benefits Annual Survey,
the average employer-sponsored insurance premium paid by enrollees in 2006
was $2,973 for family coverage and $627 for single coverage. Under DOD's
Sustain the Benefit proposal, enrollment fees for TRICARE, including
Prime, Standard, and Extra, in 2008 would largely remain below this
average and range from $280 to $1,400 for family coverage and $140 to $700
for single coverage, depending on the primary beneficiary's rank (retired
junior enlisted personnel, retired senior enlisted personnel, or retired
officer) and choice of TRICARE benefit option (Prime or Standard and
Extra). For example, if the average employer-sponsored insurance premium
paid by enrollees remains unchanged from 2006 to 2008, only about 22
percent of employer-sponsored insurance premiums for family coverage would
be lower than or equal to the proposed enrollment fees to be paid by
retired officers enrolled in TRICARE Prime in that year (see fig. 3).37

Figure 3: Comparison of Proposed TRICARE Enrollment Fees with
Kaiser/HRET-Reported Employee Shares of Employer-Sponsored Insurance
Premiums, Family Coverage, 2000-2008

Another factor limiting the number of avoided users that DOD is likely to
achieve is the fact that DOD's proposed enrollment fee and deductible
increases will not affect retirees and their dependents under 65 who have
annual out-of-pocket health care costs greater than $3,000. All enrollment
fees and deductibles paid by TRICARE beneficiaries count toward TRICARE's
catastrophic cap of $3,000 per family.38 If DOD increases TRICARE
enrollment fees and deductibles, more TRICARE beneficiaries will reach the
cap. For those who reach the cap, there will be no additional
out-of-pocket costs for TRICARE, even if fees and deductibles continue to
rise. Therefore, the proposed fee and deductible increases may be limited
in their ability to generate avoided users, especially among high-cost
users who anticipate exceeding the cap.39

37If employer-sponsored insurance premiums increase from 2006 to 2008,
then these percentages would be even lower.

DOD Likely Overestimated the Savings Associated with Each Avoided User

In addition to overestimating the number of avoided users, DOD also
overestimated the savings that it would be likely to achieve from each
avoided user. In projecting $7.6 billion in savings over 5 years from
avoided users, DOD calculated that each year, the average avoided user
would result in savings equivalent to DOD's annual cost of providing
health care to the average TRICARE retiree or dependent under age 65.40
However, this calculation is likely too high, for two reasons. First, as
previously discussed, beneficiaries who are older and sicker than average
are less likely than others to become avoided users. Therefore, avoided
users would likely have lower-than-average health care costs, reducing
DOD's savings. As previously noted, beneficiaries who anticipate meeting
the catastrophic cap for their out-of-pocket expenses--and this group
includes beneficiaries who tend to be older and sicker than average--have
little incentive to become avoided users in response to increased
enrollment fees and deductibles. Similarly, studies on individuals'
choices of health insurance have concluded that older and sicker
individuals are less likely than those of average health to leave a health
insurance plan in response to premium increases.41

38Specifically, the catastrophic cap is the maximum out-of-pocket expense
for which TRICARE beneficiaries are responsible in a given fiscal year. As
of March 2007, the catastrophic cap for active duty families was $1,000
and the catastrophic cap for all other TRICARE-eligible families was
$3,000. The catastrophic cap applies only to services covered by TRICARE.

39DOD estimated that approximately 20 percent of families in Standard and
Extra would exceed the cap from 2007 to 2011. These beneficiaries are
generally responsible for the highest health care costs among Standard and
Extra beneficiaries.

40For example, for 2007, DOD determined that the projected annual cost of
providing health care for the average retiree and dependent under 65 was
$3,924 for TRICARE Prime users and $3,173 for TRICARE Standard and Extra
users.

Second, older and sicker beneficiaries are more likely to incur greater
medical expenses than the average TRICARE user. In developing the Sustain
the Benefit proposal, DOD did not conduct an analysis of the distribution
of health care costs by age or health status of TRICARE beneficiaries.
However, data on the health care costs by age and health status are
available for the general population from the Medical Expenditure Panel
Survey (MEPS), a set of surveys of families and individuals, their medical
providers, and employers across the United States conducted by the Agency
for Healthcare Research and Quality. According to the most recent MEPS
data, the reported average health care costs for individuals ages 60-64 in
2004 were more than twice as high as the reported costs for individuals
ages 45-49. Moreover, in 2004 the reported health care costs for
individuals who indicated that they were in poor health were more than 10
times as high as those for individuals who indicated that they were in
excellent health.

In its technical comments, DOD stated that many beneficiaries are unable
to anticipate being sicker than average. While this is true, the lack of a
limited enrollment period for TRICARE Standard and Extra would allow these
beneficiaries to enroll in TRICARE whenever they choose to do so.
Therefore, DOD's projected savings per avoided user may be overestimated
because healthy individuals who are eligible for TRICARE may initially
choose not to enroll in the program--avoiding associated enrollment
fees--until confronted with a costly medical condition, at which point
they could choose to enroll in TRICARE Standard and Extra. DOD officials
told us that they are considering limiting the enrollment period for
TRICARE Standard and Extra to an annual or semiannual open-enrollment
period; however, as of March 2007 no final decision had been made.

41See, for example, B.A. Strombom, T.C. Buchmueller, and P.J. Feldstein,
"Switching Costs, Price Sensitivity, and Health Plan Choice," Journal of
Health Economics, vol. 21, no. 1 (2002): 89-116 and A.B. Royalty and N.
Solomon, "Health Plan Choice: Price Elasticities in a Managed Competition
Setting," The Journal of Human Resources, vol. 34, no. 1 (1999): 1-41.

Revenues from Higher Enrollment Fees and Deductibles Would Likely Be between
$1.9 Billion and $2.3 Billion, Depending on the Number of Avoided Users

DOD expects to collect $1.9 billion in revenues from retirees and
dependents under 65 who remain in TRICARE and who would pay higher
enrollment fees and deductibles under Sustain the Benefit. The estimate of
$1.9 billion depends on DOD achieving its projected number of 500,000
avoided users from Sustain the Benefit. However, if DOD does not generate
as many avoided users as projected, the increase in revenue would be
higher than $1.9 billion, because DOD would collect higher enrollment fees
and deductibles from a greater number of beneficiaries. We estimated that
if the higher enrollment fees and deductibles do not result in any avoided
users, the increase in collected revenue would likely amount to $2.3
billion over 5 years.

This $2.3 billion figure also represents the minimum total savings that
are likely to result from the proposed enrollment fee and deductible
increases, if these changes do not generate any avoided users. However,
Sustain the Benefit would be likely to generate some avoided users, and
any savings associated with each avoided user would increase total savings
in excess of $2.3 billion. With each avoided user, total savings would
increase because the average savings generated from each avoided user
would be higher than the associated reduction in revenue from the user no
longer paying enrollment fees and deductibles.

A Lack of Data on TRICARE Beneficiaries Prevents a More Accurate Estimate of
Likely Savings from Proposed Fee and Deductible Increases

While we estimate that DOD would achieve $2.3 billion or more from the
proposed fee and deductible increases, we cannot make a more accurate
estimate of these savings, in part because DOD does not collect and
compile certain data from TRICARE beneficiaries--data that DOD could have
used to make the projections for Sustain the Benefit more accurate.42 In
particular, DOD officials told us that the department does not collect and
compile data from TRICARE beneficiaries on the cost of premiums in
non-TRICARE health insurance programs available to them. In addition, for
Sustain the Benefit, DOD did not collect information on why beneficiaries
choose to use or not to use TRICARE. This information could be used to
help better predict how beneficiaries might react to changes in TRICARE's
cost-sharing structure, such as the number of avoided users that might
result from TRICARE enrollment fee increases. RAND recently surveyed
military retirees under age 65 and collected some of this information for
its draft report. However, this information was compiled after DOD
developed its Sustain the Benefit proposal, and it does not include some
important information. RAND researchers stated that data on premiums for
other health insurance plans available to TRICARE beneficiaries, relative
to their available financial resources, and reasons why beneficiaries
choose to enroll in TRICARE Prime would be necessary to fully model the
effects of increases in TRICARE cost shares. They recommended a follow-up
survey of military retirees under age 65, aimed at collecting this
information.

42DOD routinely collects data about its beneficiaries, such as their
satisfaction with TRICARE, through surveys. DOD is required by law to
conduct an annual survey to collect certain information from beneficiaries
and may also collect additional information on other matters through those
surveys, as appropriate. See 10 U.S.C. S 1071, note.

Savings from Increased Pharmacy Co-payments Are Likely Overestimated, although
Some Savings Can Be Expected

DOD is unlikely to achieve the $1.5 billion it expects to receive by
increasing retail pharmacy co-payments for all beneficiaries except active
duty personnel.43 DOD projected that implementing the proposed higher
co-payments would both reduce demand for prescription drugs purchased in
retail pharmacies and encourage TRICARE beneficiaries to use MTF
pharmacies and TMOP instead of relatively more expensive retail
pharmacies, resulting in $982 million in savings. DOD's estimate of $982
million in savings is likely too high because fewer beneficiaries than DOD
projects are likely to reduce their use of retail pharmacies. If more
beneficiaries continue to use retail pharmacies and pay higher
co-payments, DOD will receive more than the estimated $486 million in
increased revenue that the department expects. However, the increased
revenue collected from these co-payments would not be large enough to
offset the cost of providing these beneficiaries' prescriptions through
higher-cost retail pharmacies.

43DOD also expects that there will be savings of $1.5 billion over 5 years
because of pharmacy co-payment increases for retirees and dependents over
65 in TRICARE for Life. However, DOD officials told us that they did not
include this amount in DOD's estimate of savings because TRICARE for Life
costs are paid through the Department of Defense Medicare Eligible Retiree
Health Care Fund. See 10 U.S.C. SS 1111 et seq.

DOD's Estimate of Savings Resulting from Beneficiaries' Response to Increased
Retail Pharmacy Co-payments Is Likely Too High

DOD projected that $982 million in savings from the proposed increases in
retail pharmacy co-payments would result from beneficiaries' reactions to
the increased co-payments. Specifically, DOD projected that some
beneficiaries would reduce their demand for prescription drugs purchased
in retail pharmacies and increase their use of MTF pharmacies and TMOP
instead of relatively more expensive retail pharmacies. However, DOD's
estimate of $982 million is likely too high because DOD based the estimate
on results from a study44 of non-DOD employer-sponsored health insurance
plans that was not analogous to DOD's situation. The study included
savings from individuals who shifted from brand-name to less expensive
generic drugs, but DOD already generally requires beneficiaries to use
generic drugs when available. Specifically, the study measured how
increases in the co-payments for brand-name and generic prescription drugs
affected prescription drug spending in employer-sponsored health insurance
plans. However, the cost-sharing structures and options for obtaining
prescriptions in the plans included in the study were different from those
in TRICARE. DOD relied on this study because no studies were available
that directly applied to its situation. The study reported a percentage
decrease in prescription drug spending because of increased co-payments.
However, DOD applied this percentage as a decrease in the number of retail
prescriptions. Doing so is incorrect--and overestimates the reduction in
demand for prescription drugs obtained at retail pharmacies--because a
portion of the percentage decrease in prescription drug costs reported in
the study resulted from individuals shifting from brand-name to less
expensive generic drugs. DOD cannot expect significant additional savings
from beneficiaries shifting from brand-name to generic prescriptions
because TRICARE already generally requires beneficiaries to use generic
drugs when available.45 Therefore, DOD's projected savings are likely to
be lower than the savings projected in the study. In its technical
comments, DOD stated that the study did not find savings from increased
pharmacy co-payments to be caused by an increased use of generic drugs and
that savings were similar among plans that required beneficiaries to use
generic drugs when available and plans that did not. Although the study is
somewhat ambiguous on this point, a discussion with the study's main
author indicated that DOD's use of the study's results likely
overestimated the savings from increased retail pharmacy co-payments.

44Joyce and others.

45A clinical justification for the use of a brand-name drug may be made
under procedures prescribed by DOD. See 32 C.F.R. S 199.21(j).

DOD's projection of $982 million in savings depends on a reduction in the
number of prescriptions obtained at retail pharmacies over 5 years. DOD
projected that about two-thirds of these prescriptions would instead be
obtained from MTF pharmacies or TMOP, and projected that about one-third
would not be obtained through TRICARE. However, neither we nor DOD have
data to accurately project the number of beneficiaries who would be likely
to obtain prescriptions at MTFs or TMOP instead of retail pharmacies. It
is likely that some beneficiaries would increase their use of MTF
pharmacies and TMOP because these options would continue to be less
expensive than retail pharmacies. However, the exact number and associated
savings cannot be estimated accurately because of the lack of data.

Although DOD May Collect More Revenue Than Projected from Higher Co-payments,
the Increase Would Not Be Sufficient to Offset the High Cost of Retail
Pharmacies

If fewer beneficiaries than DOD projected choose to reduce retail pharmacy
use, then more beneficiaries would pay the higher co-payments, generating
more revenue than the $486 million over 5 years that DOD estimated.46 DOD
calculated this estimate by determining the additional amount of
co-payments that would be paid by beneficiaries who continue to obtain
prescriptions at retail pharmacies. If more beneficiaries than DOD
projected continue using retail pharmacies, then revenues would be higher
because more beneficiaries would pay higher retail pharmacy co-payments.
However, the increased revenue collected from these co-payments would not
be large enough to offset the higher cost of providing these
beneficiaries' prescriptions through retail pharmacies. For example, DOD
would collect an additional $6 for each brand-name prescription drug and
$2 for each generic drug that beneficiaries would obtain from retail
pharmacies if Sustain the Benefit were enacted. However, based on DOD
data, we estimated that it would save an average of $29 for each
prescription that is no longer dispensed at a retail pharmacy. Some of
these prescriptions would instead be dispensed through TMOP or MTFs.47

46DOD's estimate of savings from increased retail pharmacy co-payments
also depends on the number of avoided users generated by increased
enrollment fees and deductibles for retirees and dependents under 65. If
there are some avoided users, the population of beneficiaries who would be
affected by increased retail pharmacy co-payments would be decreased,
which would result in a reduction in savings from higher retail pharmacy
co-payments. However, the reduction in savings from higher retail pharmacy
co-payments would not be high enough to offset the savings from avoided
users.

47In calculating its data on average costs, DOD assumed that it would
receive federal pricing discounts at retail pharmacies, although it
currently does not receive these discounts.

Medical Care Inflation, Benefit Enhancements, and Other Factors Drove the
Increase in DOD Health Care Spending from 2000 to 2005

DOD estimated that from 2000 to 2005, its health care spending increased
by $18.0 billion, from $17.4 billion to $35.4 billion, and that this
increase was driven by several factors: medical care inflation; benefit
enhancements required by law, including TRICARE for Life; increasing
numbers of beneficiaries who choose to use TRICARE; and GWOT (see fig. 4).
According to DOD, increases in its overall health care spending are
reflected in spending for each of its beneficiary groups--active duty
personnel, their dependents, retirees and dependents under age 65, and
retirees and dependents in TRICARE for Life.

Figure 4: Factors Identified by DOD as Contributing to the Increase in Its
Health Care Spending, 2000-2005

aDOD officials believe that the "not attributed to specific causes"
category is driven by additional medical care inflation beyond DOD's
estimated amount of $4.4 billion, increasing use of health care services,
technological advancements in treatment, and decreasing portions of costs
paid by beneficiaries.

bThe $8.7 billion increase in spending for TRICARE for Life is based on
contributions DOD has made to the DOD Medicare Eligible Retiree Health
Care Fund.

DOD estimated that medical care inflation accounted for $4.4 billion of
the $18.0 billion increase in its health care spending from 2000 to 2005.
According to DOD, medical care inflation--increases in cost over time for
delivering a fixed set of medical goods and services--averaged 4.6 percent
per year. According to DOD officials, the department did not develop this
estimate of medical care inflation based on its own spending. Instead, DOD
based this estimate on information provided annually by the Office of
Management and Budget (OMB) on inflation rates for the various components
of the TRICARE operating budget, such as military personnel assigned to
MTFs, private sector health care, and pharmaceuticals.48

However, an additional portion of DOD's spending increase may also be
caused by medical care inflation. DOD officials identified $1.6 billion in
spending increases--classified as residual--that DOD could not attribute
directly to specific causes. DOD officials stated that a portion of the
residual could also be the result of medical care inflation. If the
residual category is included with DOD's estimate of medical care
inflation, then medical care inflation could account for up to $6.0
billion of the increase in DOD health care spending from 2000 to 2005.
This could add up to 1.5 percent to DOD's average annual rate of medical
care inflation, making the total as much as 6.1 percent per year. However,
DOD officials told us that they believe a large portion of the residual is
caused by factors other than medical care inflation, such as an increasing
use of health care services by beneficiaries, technological advancements
in treatment, and decreasing portions of health care costs paid by TRICARE
beneficiaries.49 Our prior work on TRICARE has noted that a factor similar
to DOD's residual--technology and intensity--is widely recognized as one
that reflects growth in health care costs and often accounts for an
additional 1 or 2 percent beyond medical care inflation in the private and
public sectors.50 As health care providers adopt new and expensive medical
technologies and offer more intensive patient treatment, health care costs
can increase at rates above the rate of medical care inflation. (See app.
II for information on how DOD's estimated rate of medical care inflation
compares to health insurance premium growth trends and broader indicators
of inflation.)

DOD attributed a total of $9.6 billion of the increase in its health care
spending to benefit enhancements required by law--$8.7 billion for TRICARE
for Life and $941 million to other enhancements to the TRICARE benefit
required by law. DOD's estimate of $8.7 billion in increased spending on
TRICARE for Life, which was implemented in 2001, is based on contributions
DOD has made to the DOD Medicare Eligible Retiree Health Care Fund, an
accrual fund that pays costs for TRICARE for Life.51 Since TRICARE for
Life's initial implementation and 2005, the increase in DOD's spending
represented by payments to the accrual fund was $8.7 billion.52 In
addition to its spending on TRICARE for Life, DOD estimated that its
spending increased by $941 million from 2000 to 2005 because of other
enhancements to TRICARE required by law, such as the reduction of the
TRICARE Standard and Extra catastrophic cap from $7,500 to $3,000 for
retirees and dependents under age 65 and the elimination of TRICARE Prime
co-payments for active duty dependents. According to DOD, the $941 million
is based on cost estimates of benefit enhancements before they were
implemented. DOD did not determine actual spending on these benefit
enhancements. CBO cost estimates done at about the same time project lower
costs for some benefit enhancements. CBO officials also questioned the
appropriateness of using cost estimates completed prior to implementation
to estimate actual program costs because they are often based on
incomplete information about a program. DOD officials have estimated
spending on some of these enhancements after their implementation, but DOD
officials told us that the department does not have the information
systems necessary to precisely determine the spending because of the
enhancements.

48As part of the annual budget process, OMB provides agencies with
inflation rates for the various components of their budgets. The TRICARE
operating budget is mostly supported by appropriations for Operation and
Maintenance.

49According to DOD officials, the residual also includes any spending not
accounted for in the other categories, such as the spending for the global
settlement to pay managed care support contract claims.

50See GAO, Defense Health Program: Future Costs Are Likely to Be Greater
Than Estimated, [34]GAO/NSIAD-97-83BR (Washington, D.C.: Feb. 21, 1997).

DOD estimated that an increase in the number of retirees and dependents
under age 65 accounted for $1.3 billion of the $18.0 billion increase in
DOD health care spending from 2000 to 2005. DOD's ability to control its
health care spending for this population depends to a large degree on the
extent to which beneficiaries who currently do not use TRICARE later enter
the program for care, generating more spending. Our analysis of DOD data
indicates that the number of retirees and dependents under age 65
increased 6.0 percent a year, on average, from 2001 to 2005. (See fig. 5.)

51Before the TRICARE for Life program was implemented, DOD provided care
to these beneficiaries on a space-available basis in MTFs. DOD makes
annual contributions to the accrual fund for the cost of medical benefits
to be provided in retirement to certain active duty servicemembers and
reservists. The U.S. Treasury also makes contributions to the fund to
cover its unfunded liability, including liability for beneficiaries who
are already retired.

52DOD contributed about $10.22 billion to the accrual fund in 2005, but
DOD officials estimated that DOD would have spent approximately $1.56
billion on increased MTF care if the TRICARE for Life benefit had not been
implemented. Therefore, increased spending attributed to TRICARE for Life
benefit amounts to $8.66 billion as of 2005.

Figure 5: TRICARE Users by Beneficiary Group, 2001-2005

DOD attributed $1.1 billion of the increase in its health care spending
from 2000 to 2005 to health care costs associated with GWOT. According to
DOD officials, the largest components of costs related to GWOT over this
period were health care for mobilized National Guard and Reserve personnel
and their families, pre- and postdeployment medical care for
servicemembers, and filling vacated positions of deployed medical
personnel. DOD was able to provide only limited documentation and
description of how these estimates were calculated. We reported in
September 2005 about numerous problems with DOD's processes for recording
and reporting costs for GWOT. Factors affecting the reliability of DOD's
reported costs included long-standing deficiencies in DOD financial
management systems and business processes, the use of estimates instead of
actual costs, and the lack of supporting documentation. We made several
recommendations to DOD to improve the reliability and reporting of costs.
These included using actual data whenever possible and, when not possible,
taking steps to allow the development of actual data.53

The overall increase of $18.0 billion in DOD health care spending from
2000 to 2005 is spread across each of DOD's beneficiary groups--active
duty personnel, dependents of active duty personnel, retirees and
dependents under age 65, and retirees and dependents in TRICARE for
Life--each of which showed increases in overall spending and spending per
beneficiary. Our analysis of DOD data on overall health care spending from
2001 to 2005 by beneficiary group indicated that total spending has
increased by an average of 10.8 percent per year for active duty
personnel, 11.7 percent for dependents of active duty personnel, and 13.6
percent for retirees and dependents under age 65. (See fig. 6.) A separate
analysis indicated that total spending for retirees and dependents in
TRICARE for Life increased at 16.2 percent per year, on average, from 2003
to 2006. During this time, DOD's spending per TRICARE beneficiary also
increased. According to our analysis of DOD data, from 2001 to 2005,
health care spending per beneficiary increased by an average of 7.3
percent per year for active duty personnel, 8.6 percent for dependents of
active duty personnel, and 7.2 percent for retirees and dependents under
age 65.

53 [35]GAO-05-882 and [36]GAO-06-885T .

Figure 6: DOD Health Care Costs by Beneficiary Group, 2001-2005

aThe costs for retirees and dependents in TRICARE for Life increased by
16.2 percent, on average, per year from 2003 through 2006.

Conclusions

DOD health care spending more than doubled from 2000 to 2005. In an effort
to control this rapidly increasing health care spending, DOD has proposed
increases to certain fees and co-payments that have remained unaltered for
over 10 years. DOD's proposal would begin to narrow the price difference
between TRICARE and civilian health insurance, which is consistent with
DOD's priority of ensuring that TRICARE remains intact, affordable, and
effective.

While the proposal would likely result in significant savings for DOD, DOD
is unlikely to achieve the amount of savings it projected. In particular,
DOD overestimated the amounts it would likely save from the increases in
fees, deductibles, and retail pharmacy co-payments, in large part because
of the difficulties in determining how beneficiaries will react to the
increases. Determining how beneficiaries will react to changes in the
TRICARE benefit--such as the number who would be likely to leave or choose
not to enroll in TRICARE because of increased enrollment fees and
deductibles--can be important for understanding the effects of
implementing benefit changes. Although DOD routinely collects and compiles
some information from its TRICARE beneficiaries, it does not collect and
compile information on beneficiaries' access to and cost of other health
insurance, or other information on reasons why beneficiaries may or may
not choose to use TRICARE. This information would allow DOD to more
accurately predict beneficiaries' likely responses to changes in TRICARE
and could help DOD manage its health care spending.

Recommendation for Executive Action

To help DOD manage its health care spending, we recommend that the
Secretary of Defense direct the Assistant Secretary of Defense for Health
Affairs to collect and compile information that could help DOD identify
the reasons why beneficiaries may or may not choose to use TRICARE. Such
data could include beneficiaries' access to and cost of other health
insurance.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from DOD. DOD
stated that it concurs with our conclusions and recommendation. DOD
expressed concern that the report leaves the impression that savings from
DOD's proposed cost share increases may be as low at $2.3 billion. As
stated in the draft report, we estimate that even with no avoided users,
the enrollment fee and deductible portion of DOD's proposed cost share
increases would likely achieve a minimum of $2.3 billion in savings over 5
years. We state that DOD's savings will likely be higher than this minimum
because the proposal should result in some avoided users. However, neither
we nor DOD are able to make a more accurate estimate of these savings.
DOD's concern highlights the importance of our recommendation. Because the
available information did not allow us or DOD to make a more accurate
estimate of savings, we recommend that DOD collect and compile information
that could help identify the reasons why beneficiaries may or may not
choose to use TRICARE, such as beneficiaries' access to and cost of other
health insurance. DOD's written comments are reprinted in appendix IV. DOD
also provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Secretary of Defense and other
interested parties. We will also make copies available to others on
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) 512-7101 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix V.

Laurie Ekstrand
Director, Health Care

List of Committees

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

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

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

The Honorable John P. Murtha
Chairman
The Honorable C. W. Bill Young
Ranking Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Appendix I: DOD's Calculation of the Portion of TRICARE Costs Being Paid
by Retirees and Dependents under Age 65

To demonstrate the need for its Sustain the Benefit proposal, Department
of Defense (DOD) officials calculated the proportion of health care costs
paid by retirees and dependents under age 65 in 1996 and 2005. We were
mandated to review these calculations.

DOD's calculations show that retirees and dependents under age 65 paid for
approximately 27 percent of their overall health care costs in 1996, while
they paid for around 12 percent in 2005. DOD based this calculation on the
average out-of-pocket health care costs paid by a family of three and
estimates of DOD's costs to provide health care to an average family of
that size. DOD's calculations assume that the hypothetical family of three
received all of its health care through civilian providers rather than
military treatment facilities (MTF).1 Had DOD included care received at
MTFs in its calculation, the share of the cost paid by beneficiaries would
have been even lower, because unlike civilian providers, MTFs do not
charge co-payments or coinsurance.

Our review of DOD's calculation showed that DOD used different methods to
calculate beneficiaries' out-of-pocket costs in 1996 than it used for
2005. DOD officials told us that they used the best available data for
each year. Certain information, such as individual claims data used to
estimate the average costs paid per beneficiary in 2005, was not available
for 1996. Instead, for TRICARE Standard and Extra users DOD estimated
average costs paid by beneficiaries in 1996 by allocating TRICARE's total
health care costs paid to civilian providers for that year among the total
number of Standard and Extra users and estimating the average family of
three's out-of-pocket costs, including deductibles and coinsurance based
on these data and the assumption that all care was received from civilian
providers.

To ensure consistency, we asked DOD officials to recalculate the
proportion of health care costs paid by retirees and their dependents
under age 65 who were Standard and Extra users in 2005 using the same
methods that they used for the 1996 calculation. We then reviewed the
results of this calculation. These results were very similar to DOD's
original calculation, but were different in two ways. First, the new
calculation produced a 2005 estimated proportion of health care costs paid
by beneficiaries that was slightly smaller than the proportion estimated
using DOD's original calculation. Second, the new calculation showed that
the proportion decreased by a slightly larger amount over the same period.

1For the calculation, DOD officials assumed that TRICARE Prime users
received all of their care from participating TRICARE network providers
and that TRICARE Standard and Extra users received all of their care from
nonnetwork providers in 1996 and 50 percent of their care from network
providers and 50 percent from nonnetwork providers in 2005.

Appendix II: Comparison of DOD Medical Care Inflation with Insurance
Premium Growth and Broader Inflation Indicators

The John Warner National Defense Authorization Act for Fiscal Year 2007
required that we describe how DOD's annual rate of medical care inflation
compares with increases in health insurance premium growth trends and
broader indicators of inflation from 2001 through 2005.1 To respond to
this requirement, this appendix compares DOD's estimated annual rate of
medical care inflation with premium growth trends among non-TRICARE health
insurance, including the Federal Employees Health Benefits Program (FEHBP)
and other programs, and indicators of inflation in broader sectors of the
economy from 2001 through 2005. The methods used by DOD to estimate its
annual rate of medical care inflation are not strictly comparable to the
methods used to calculate more widely used price indexes, such as the
Consumer Price Index (CPI). Price indexes such as CPI and its components,
including the medical care component, are constructed from detailed data
on the prices of a fixed set of goods and services of constant quantity
and quality bought on average by urban consumers over time. DOD did not
develop its estimate of inflation based on its own spending. Instead, DOD
based the estimate on inflation rates provided annually by the Office of
Management and Budget for the various components of the TRICARE operating
budget, such as military personnel, private sector health care, and
pharmacy. To facilitate the comparison, we gathered premium data,
including FEHBP premium trend data from the Office of Personnel
Management; premium data from the California Public Employees' Retirement
System (CalPERS)--the second largest public purchaser of employee health
benefits; and premium levels from surveys of employer-sponsored health
plans from the Kaiser Family Foundation and Health Research and
Educational Trust (Kaiser/HRET). We also gathered information on broader
indicators of inflation from the Bureau of Labor Statistics (BLS) on the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W),
which is the basis for the annual cost of living adjustment (COLA) to cash
pensions paid to military retirees,2 and the medical care component of
CPI-W.

Generally, the annual rate of medical care inflation estimated by DOD from
2001 to 2005 is lower than premium growth trends among FEHBP and other
purchasers but higher than increases in broader indicators of inflation.
(See fig. 7.) However, these measurements are by definition very different
from each other, so comparing them to each other can be problematic.

1See Pub. L. No. 109-364, S 713(a)(2)(D), 120 Stat. 2083, 2289 (2006).

2For military personnel who first entered military service before August
1, 1986, each December a COLA equal to the percentage increase in CPI-W
between the third quarters of successive years is applied to military
retired pay for the annuities paid beginning each January 1.

Figure 7: Comparison of DOD's Estimated Rate of Medical Care Inflation,
Health Insurance Premium Growth Trends, and Broader Indicators of
Inflation

Notes: Cumulative growth reflects increases over the level of each
measurement in 2000.

DOD calculated its average annual rate of medical care inflation to be
about 4.6 percent per year from 2001 through 2005.3 Premium growth trends
in FEHBP, the Kaiser/HRET survey of employer-sponsored health plans, and
CalPERS ranged from 10.4 to 14.4 percent, on average, per year from 2001
to 2005. The average premium growth rate for the 10 largest FEHBP plans by
enrollment--accounting for about three-quarters of total FEHBP
enrollment--was 10.4 percent per year during this period. The average
premium growth rate for surveyed employers was 11.6 percent per year and
14.4 percent per year for CalPERS.

Comparing DOD's annual rate of medical care inflation to premium growth
trends and broader indicators of inflation is difficult because of
differences in each measurement. Unlike medical care inflation, premium
growth trends may reflect factors such as changes in the comprehensiveness
of the policy, changes in the ratio of premiums collected to benefits
paid, or changes in costs because of increased utilization of health care
services. Therefore, it can be problematic to compare premium growth
trends to DOD's estimated rate of medical care inflation. Broader
indicators of inflation increased substantially slower than premium growth
trends. In contrast, broader indicators of inflation, particularly the
medical care component of CPI-W and the COLA, increased at lower rates
than DOD's estimated rate of medical care inflation. The medical care
component of CPI-W increased almost 2 percentage points per year faster
than the COLA--4.4 percent per year compared to 2.5 percent per year, on
average. The medical care component of CPI-W is based on medical care
expenses, but it is difficult to compare with DOD's estimated rate of
medical care inflation because it is based only on out-of-pocket medical
expenditures paid by consumers, including health insurance premiums, and
excludes the medical expenditures paid by public and private insurance
programs. The COLA is also not directly comparable to DOD's estimated rate
of medical care inflation because it is based on price increases of a
broad range of goods and services, and is not based solely on medical
expenses.

3DOD's rates of medical care inflation from 2001 through 2005 are based on
inflation rates provided annually by the Office of Management and Budget
for the various components of the TRICARE operating budget, such as
military personnel assigned to MTFs, private sector health care, and
pharmacy. As we note in this report, an additional portion of DOD's
spending increase may also be caused by medical care inflation, making
DOD's average annual rate of medical care inflation likely to be from 4.6
to 6.1 percent.

Appendix III: Scope and Methodology

To examine the DOD's estimated savings associated with enrollment fee and
deductible increases for retirees and dependents under age 65 and pharmacy
co-payment increases for all beneficiaries except active duty personnel,
we reviewed the analyses prepared by DOD and its contractor that projected
cost savings from these increases. We also interviewed DOD officials in
the Office of the Assistant Secretary of Defense for Health Affairs, the
Office of Program Analysis and Evaluation, and the Office of the Under
Secretary of Defense (Comptroller). Furthermore, we reviewed literature
from the field of health economics and interviewed six health economists
to discuss economic principles relevant to our work, including price
sensitivity for health insurance and prescription drugs and adverse and
biased selection. We also reviewed survey data from (1) the Kaiser Family
Foundation and Health Research and Educational Trust (Kaiser/HRET) on
employer-sponsored insurance premiums, (2) the RAND Corporation (RAND) on
the health insurance options of military retirees, and (3) the Agency for
Healthcare Research and Quality (AHRQ) on health care costs for the U.S.
population. We also reviewed a draft report prepared by RAND on the health
insurance options of military retirees and Kaiser/HRET reports on employer
health benefits. In addition, to identify concerns with DOD's Sustain the
Benefit proposal and associated savings estimates, we interviewed
representatives from the Reserve Officers Association, the National
Association of Uniformed Services, the National Military Families
Association, and The Military Coalition.

To examine the factors identified by DOD as contributing to the increase
in TRICARE spending, we reviewed the factors that DOD identified as
contributing to the increase in TRICARE spending from 2000 to 2005 and
interviewed officials from the Office of the Assistant Secretary of
Defense for Health Affairs. We determined that the spending data provided
by DOD were sufficiently reliable for our purposes, but we did not
independently verify DOD's figures. We also reviewed academic literature
on medical care inflation.

Evaluation of Cost Savings Estimates

As part of our evaluation of DOD's estimate of beneficiary response to
increases in TRICARE enrollment fees and deductibles and the cost savings
attributable to these individuals, we reviewed data from several sources
to conduct the following frequency analyses and cross tabulations.

We calculated the average cost of civilian health insurance premiums and
how it compares to TRICARE enrollment fees by evaluating data on the cost
of employer-sponsored insurance premiums reported in the Kaiser/HRET
annual employer health benefits survey. Using these data for 2000 through
2006, we determined the percentage of enrollees whose share of the
employer-sponsored health insurance premium was lower than or equal to the
TRICARE Prime and Standard and Extra enrollment fees for both single and
family coverage.

We assessed characteristics of the military retiree population, including
access to health insurance other than TRICARE, self-reported health
status, age, and employment status, by reviewing data reported in RAND's
draft report titled Civilian Health Insurance Options of Military
Retirees. We also examined cross tabulations showing access to health
insurance other than TRICARE by age and self-reported health status to
determine whether older and less healthy individuals are less likely to
have other health insurance options.

We examined health care spending for various groups within the U.S.
population by reviewing data from the Medical Expenditure Panel Survey
(MEPS), which is conducted by AHRQ. Using the results from the 2004 MEPS,
we examined cross tabulations of health care expenditures by age and
health status.

Our analysis was limited because neither we nor DOD were able to control
for several important factors affecting beneficiaries' response to
enrollment fee and deductible increases and the associated savings. For
example, no data on TRICARE beneficiaries' sensitivity to cost-share
increases is available because DOD has not attempted to increase fees
since TRICARE's inception. Furthermore, although the RAND draft report
includes information on access to civilian insurance plans among military
retirees and their dependents under age 65, there are no data specific to
this population on the cost of civilian health insurance plans available
to them.

Data Reliability Tests

To ensure that the DOD data were sufficiently reliable for our analyses,
we conducted detailed data reliability assessments of the data sets that
we used. We restricted these assessments, however, to the specific
variables that were pertinent to our analyses.

We reviewed DOD analyses that we determined to be relevant to our findings
to assess their quality and methodological soundness. Our review consisted
of (1) examining documents that describe the respective analyses, (2)
manually and electronically checking the data for obvious errors and
missing values, (3) interviewing DOD officials to inquire about concerns
we uncovered, (4) interviewing DOD officials about internal controls in
place to ensure that data are complete and accurate, and (5) assessing the
reasonableness of assumptions DOD made. To assess DOD assumptions, we
reviewed relevant health economics literature and interviewed six health
economists.

Our review revealed inconsistencies and minor errors in DOD's analyses
that we reported to DOD officials. Overall, however, we found that all of
the data sets used in this report were sufficiently reliable for use in
our analyses.

We conducted our work from July 2006 through May 2007 in accordance with
generally accepted government auditing standards.

Appendix IV: Comments from the Department of Defense

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Laurie Ekstrand (202) 512-7101 or [email protected]

Acknowledgments

In addition to the contact named above, Bonnie Anderson, Assistant
Director; Thomas Conahan, Assistant Director; Timothy Carr; Timothy
Cunningham; Krister Friday; Adrienne Griffin; William Simerl; Eric Wedum;
and Michael Zose made key contributions to this report.

(290559)

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For more information, contact Laurie Ekstrand at (202) 512-7101 or
[email protected].

Highlights of [47]GAO-07-647 , a report to congressional committees

May 2007

MILITARY HEALTH CARE

TRICARE Cost-Sharing Proposals Would Help Offset Increasing Health Care
Spending, but Projected Savings Are Likely Overestimated

In light of the fact that Department of Defense (DOD) health care spending
more than doubled from 2000 to 2005 and continues to escalate, DOD
proposed increasing the share of health care costs paid by TRICARE
beneficiaries, under a proposal known as Sustain the Benefit. DOD
estimated that if the proposal had been implemented in fiscal year 2007,
savings would amount to over $11 billion through fiscal year 2011. As
required by the National Defense Authorization Act for 2007, GAO evaluated
(1) the likelihood that DOD would achieve its estimated savings from the
proposed enrollment fee and deductible increases for retirees and
dependents under age 65,

(2) the likelihood that DOD would achieve its estimated savings from the
proposed pharmacy co-payment increases for all beneficiaries except active
duty personnel, and (3) the factors identified by DOD as contributing to
increased TRICARE spending from 2000 to 2005. To conduct its work, GAO
examined DOD analyses and interviewed DOD officials. GAO also analyzed
data on many aspects of health care costs in general and interviewed
health economists.

[48]What GAO Recommends

GAO recommends that DOD collect and compile certain data from TRICARE
beneficiaries to help manage its health care spending. In its comments,
DOD concurred with this recommendation and with GAO's conclusions.

Although DOD would likely achieve significant savings if its proposal is
implemented, it is unlikely to achieve the $9.8 billion savings that it
expects to receive over 5 years as a result of increased TRICARE
enrollment fees and deductibles for retirees and dependents under age 65.
DOD's savings estimate depends largely on the assumption that the
increased fees and deductibles will result in approximately 500,000
retirees and dependents under age 65 either leaving or choosing not to
enroll in TRICARE--collectively referred to as avoided users--and on the
assumption that each avoided user will save DOD the equivalent of the cost
of providing health care to the average TRICARE beneficiary. However,
DOD's projected number of avoided users is likely too high. Many
beneficiaries in this group, particularly older and sicker individuals,
are unlikely to have lower-priced health insurance options available to
them and would therefore be likely to continue to use TRICARE. In
addition, DOD's estimated savings per avoided user is likely too high
because the estimate does not account for older and sicker individuals,
who are less likely to leave or not enroll in TRICARE, and who incur
greater-than-average medical expenses. Even without any avoided users, GAO
estimates that DOD's proposed fee and deductible increases would achieve
at least $2.3 billion in savings over 5 years. Neither GAO nor DOD can
make a more accurate savings estimate, in part because DOD does not
collect and compile certain data, such as the cost of other health
insurance options. These data, along with information on beneficiaries'
access to other health insurance options, could help DOD estimate
beneficiary reaction to changes in TRICARE's cost-sharing structure, such
as the number of beneficiaries who would become avoided users.

DOD is unlikely to achieve the $1.5 billion it expects to save by
increasing retail pharmacy co-payments for all beneficiaries except active
duty personnel. DOD based its estimated savings on a study that measured
savings from increased pharmacy co-payments in non-DOD employer-sponsored
insurance programs. This study was not analogous to DOD's situation, which
resulted in DOD overestimating the reduction in the number of
prescriptions obtained from retail pharmacies, and thereby overestimating
its savings. Therefore, more beneficiaries may continue to use retail
pharmacies and pay higher co-payments, generating more revenue for DOD.
However, revenues from these beneficiaries would not offset the higher
cost of providing these beneficiaries' prescriptions in retail pharmacies.

DOD attributed its increase in health care spending, from $17.4 billion in
2000 to $35.4 billion in 2005, to a number of factors. The factors DOD
identified as the largest contributors were medical care inflation and
benefit enhancements required by law, including TRICARE for Life, which
supplements Medicare coverage for TRICARE beneficiaries, generally after
age 65. DOD also identified other factors, including an increased number
of beneficiaries who have chosen to use TRICARE and health care costs for
mobilized reservists and their families due to the Global War on
Terrorism.

References

Visible links
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-798
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-05-882
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-06-885T
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-141
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-05-555
  34. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-97-83BR
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-05-882
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-06-885T
  37. http://www.gao.gov/
  47. http://www.gao.gov/cgi-bin/getrpt?GAO-07-647
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