Defense Health Care: Under TRICARE, Children's Hospitals Paid	 
More Than Other Hospitals After Accounting for Patient Complexity
(31-JUL-07, GAO-07-947).					 
                                                                 
Under the Department of Defense's (DOD) TRICARE health program,  
hospitals that treat primarily children--designated by DOD as	 
children's hospitals--are paid differently from other types of	 
civilian hospitals through a children's hospital differential	 
payment. Representatives of children's hospitals state that	 
payments for children's hospital services do not fully recognize 
the higher complexity of children's hospital patients.		 
Acknowledging concerns over payments for children's hospital	 
services, the National Defense Authorization Act for Fiscal Year 
2006 directed GAO to study DOD's current system of payments to	 
children's hospitals. This report examines (1) the effect of the 
differential on TRICARE's base payments to children's hospitals, 
(2) differences in diagnosis and complexity between TRICARE	 
pediatric patients at children's hospitals and those at other	 
hospitals, (3) the extent to which TRICARE payment differences	 
across hospitals reflect differences in patient complexity, and  
(4) recent trends in TRICARE pediatric patients' use of 	 
children's hospital services. To do this, GAO analyzed pertinent 
TRICARE claims data for fiscal years 2003 through 2006 and	 
interviewed relevant DOD officials and representatives of	 
children's hospitals.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-947 					        
    ACCNO:   A73693						        
  TITLE:     Defense Health Care: Under TRICARE, Children's Hospitals 
Paid More Than Other Hospitals After Accounting for Patient	 
Complexity							 
     DATE:   07/31/2007 
  SUBJECT:   Children						 
	     Community hospitals				 
	     Differential pay					 
	     Hospital care services				 
	     Hospitals						 
	     Managed health care				 
	     Patient care services				 
	     Payments						 
	     Pediatrics 					 
	     Prospective payments				 
	     DOD TRICARE Program				 

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GAO-07-947

   

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

          * [3]The Number and Location of TRICARE Admissions at Children's
          * [4]The Establishment of the Children's Hospital Differential

     * [5]TRICARE's Base Payments to Children's Hospitals Substantiall

          * [6]Due to the Differential, Children's Hospitals Have Received
          * [7]Relative Difference in TRICARE's Base Payments between Child

     * [8]TRICARE Pediatric Patients at Children's Hospitals Similar t

          * [9]Children's Hospitals and Medical Centers Treated TRICARE Ped
          * [10]TRICARE Pediatric Patients at Children's Hospitals Were Simi

     * [11]After Adjusting for Patient Complexity, Children's Hospitals
     * [12]Rising Number of TRICARE Admissions at Children's Hospitals
     * [13]Concluding Observations
     * [14]Agency and Professional Association Comments and Our Evaluat
     * [15]Appendix I: Scope and Methodology

          * [16]Measuring Complexity of Admissions
          * [17]Measuring Inflation

     * [18]Appendix II: Comments from the Department of Defense
     * [19]Appendix III: GAO Contact and Staff Acknowledgments

          * [20]GAO Contact
          * [21]Acknowledgments

               * [22]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

July 2007

DEFENSE HEALTH CARE

Under TRICARE, Children's Hospitals Paid More Than Other Hospitals After
Accounting for Patient Complexity

GAO-07-947

Contents

Letter 1

Results in Brief 4
Background 6
TRICARE's Base Payments to Children's Hospitals Substantially Higher Than
Base Payments to Other Hospitals, Though Relative Difference in Payments
Decreases over Time 11
TRICARE Pediatric Patients at Children's Hospitals Similar to Those at
Medical Centers in Terms of Diagnoses and Complexity 15
After Adjusting for Patient Complexity, Children's Hospitals Were Paid
More per TRICARE Pediatric Admission Than Other Hospitals 18
Rising Number of TRICARE Admissions at Children's Hospitals Suggests No
Decline in Access 19
Concluding Observations 22
Agency and Professional Association Comments and Our Evaluation 22
Appendix I Scope and Methodology 25
Appendix II Comments from the Department of Defense 29
Appendix III GAO Contact and Staff Acknowledgments 30

Tables

Table 1: Average TRICARE Patient Complexity by Hospital Type, Fiscal Year
2003 through Fiscal Year 2006 17
Table 2: Indirect Measures of TRICARE Pediatric Patient Complexity by
Hospital Type, Fiscal Year 2003 through Fiscal Year 2006 18
Table 3: Average TRICARE Payment per Pediatric Admission, Patient
Complexity, and Payment Adjusted for Complexity, by Hospital Type, Fiscal
Year 2003 through Fiscal Year 2006 19
Table 4: Average Complexity per TRICARE Pediatric Admission by Hospital
Type, Using Both TRICARE DRGs and APR-DRGs, Fiscal Year 2003 through
Fiscal Year 2006 27
Table 5: Change in TRICARE Base Payments to Children's Hospitals Compared
to the Change in Hospital Inflation, Fiscal Year 1992 through Fiscal Year
2006 28

Figures

Figure 1: Civilian Hospital Types Treating TRICARE Pediatric Patients in
Fiscal Year 2006, by Number of Admissions and Number of Hospitals 7
Figure 2: Location of Children's Hospitals That Admitted TRICARE Pediatric
Patients in Fiscal Year 2006 8
Figure 3: TRICARE Base Payments to Children's Hospitals Compared to
TRICARE Base Payments to Other Hospitals, Fiscal Year 1989 through Fiscal
Year 2007 12
Figure 4: Relative Difference between TRICARE's Base Payment to Children's
Hospitals and Other Hospitals, in Percentages, Fiscal Year 1989 through
Fiscal Year 2007 14
Figure 5: Most Common TRICARE Children's Hospital Admissions by Major
Diagnostic Category (MDC) and Hospital Type, Excluding Newborns, Fiscal
Year 2003 through Fiscal Year 2006 16
Figure 6: TRICARE Pediatric Admissions to Children's Hospitals, Fiscal
Year 2003 through Fiscal Year 2006 20
Figure 7: Percentage of TRICARE Pediatric Civilian Hospital Admissions
Occurring in Children's Hospitals, Fiscal Year 2003 through Fiscal Year
2006 21

Abbreviations

APR-DRG All Patient Refined Diagnosis-Related Group
ASA adjusted standardized amount
CMS Centers for Medicare & Medicaid Services
DOD Department of Defense
DRG diagnosis-related group
MCSC managed care support contractor
MDC major diagnostic category
MTF military treatment facility
NACH National Association of Children's Hospitals
TMA TRICARE Management Activity

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separately.

United States Government Accountability Office
Washington, DC 20548

July 31, 2007

Congressional Committees

Of the more than 9 million individuals who were eligible for TRICARE--the
health program that is managed by the Department of Defense (DOD)--at the
end of fiscal year 2006, about 2 million were children. Under TRICARE,
beneficiaries can receive care from military treatment facilities (MTF),
which are owned and operated by DOD, or from civilian providers. Of the
$10 billion that TRICARE paid for civilian health care services in fiscal
year 2006, TRICARE spent a small fraction--approximately $430 million--on
inpatient hospital services for children. Of this amount, about $114
million--26 percent--went to children's hospitals, defined by TRICARE as
hospitals in which the majority of patients are under the age of 18.1
Children's hospitals accounted for 7.8 percent of TRICARE's pediatric
admissions.2

Inpatient care for children admitted as TRICARE patients can be provided
in a variety of civilian hospital settings. Since children's hospitals
treat primarily children, they are generally freestanding, meaning that
they are not part of a larger hospital that focuses on adult care.3 In
contrast, some medical centers that treat adults have a designated
pediatric inpatient unit.4 Both children's hospitals and medical centers
specialize in treating children with certain rare and complex conditions,
performing procedures such as pediatric heart surgeries.5 Community
hospitals, on the other hand, typically provide children with more routine
services, such as newborn care.6

1In this report, a children's hospital refers to a hospital that TRICARE
identifies as a children's hospital. At least 50 percent of a hospital's
patients must be children in order for TRICARE to identify the hospital as
a children's hospital. In addition, TRICARE officials use information from
the American Hospital Association to confirm that a hospital is a
children's hospital.

2In this report, we define pediatric admissions as admissions of children
under age 18.

3Examples of children's hospitals are Children's Hospital of Philadelphia
and Children's Hospital of The King's Daughters in Norfolk, Virginia.

4Examples of medical centers with a designated pediatric inpatient unit
are the University of Michigan Health System, which includes C.S. Mott
Children's Hospital, and the University of California Los Angeles Medical
Center, which includes Mattel Children's Hospital.

Like many other hospitals that participate in TRICARE, children's
hospitals are generally paid under a prospective payment system. In a
prospective payment system, hospitals receive a fixed, predetermined
amount per hospital stay.7 Payment is based on the patient's diagnosis and
procedures performed during the hospital stay. Stays are classified into
diagnosis-related groups (DRG) based on the information that hospitals
submit on their claims. Each DRG is assigned a weight, which is a measure
of the resources typically required to treat patients whose hospital stays
are classified in that DRG, with higher weights reflecting greater use of
resources. Because the most resource-intensive cases can be considered the
most complex cases, the DRG weight is also called a measure of complexity.

Under the prospective payment system, to determine the amount a hospital
is to be paid for a single stay the DRG weight is multiplied by the base
payment.8 For all hospitals other than children's hospitals, the base
payment equals the adjusted standardized amount (ASA), which is TRICARE's
annual estimate of the average cost per hospital stay. For children's
hospitals, the base payment equals the ASA plus an add-on payment known as
the children's hospital differential.9 Children's hospitals have received
the differential since their payment began under DOD's prospective payment
system on April 1, 1989. Previously, children's hospitals were paid based
on their charges--the amount they billed for their services--and DOD
viewed payments based on charges as excessive. The purpose of the
differential was to recognize that children's hospitals typically had
higher charges than other hospitals for the same services and to prevent
any reduction in payments to children's hospitals as a result of the
transition from a charge-based system to a prospective payment system.
Medical centers and community hospitals that treat children admitted as
TRICARE patients do not receive the children's hospital differential.

5In this report, we define medical centers as hospitals that contain a
pediatric inpatient unit that is designated by the National Association of
Children's Hospitals as a "children's hospital within a hospital." Some
hospitals commonly described as medical centers are included in this
category--if these hospitals do not contain a specialized pediatric unit
and do not meet the criteria of a children's hospital, they are
categorized as community hospitals. See app. I for more information.

6In this report, we define any hospital that is not a children's hospital
or a medical center as a community hospital. This group of community
hospitals includes some hospitals that may be referred to as medical
centers elsewhere.

7Prospective payment systems are designed to give hospitals incentives to
contain costs in that hospitals are allowed to retain any funds not spent
on care.

8Hospitals also have their payment adjusted based on the area wage level
and for their indirect medical education expenses, which are calculated
based on the ratio of medical residents to hospital beds. In addition, all
hospitals except children's hospitals can receive separate payments for
their capital and direct medical educational expenses.

Representatives of the National Association of Children's Hospitals (NACH)
have stated that TRICARE's prospective payment system does not adequately
compensate children's hospitals.10 In particular, these representatives
contend that TRICARE pays children's hospitals at rates that are below
their costs of care. In addition, NACH representatives state that the
children treated at children's hospitals typically have more complex
conditions than children at other types of hospitals.

Recognizing concerns over TRICARE's payments to children's hospitals, the
National Defense Authorization Act for Fiscal Year 2006 directed us to
study the effectiveness of the current system of differential payments to
children's hospitals under TRICARE.11 Specifically, as discussed with the
committees of jurisdiction, this report examines (1) the effect of the
differential on TRICARE's base payments to children's hospitals, (2)
differences in diagnosis and complexity between TRICARE pediatric patients
at children's hospitals and those at other hospitals, (3) the extent to
which TRICARE payment differences across hospitals reflect differences in
patient complexity, and (4) recent trends in TRICARE pediatric patients'
use of children's hospital services.

9The term base payment is not used by TRICARE in the same context. In this
report, our definition of base payment is the amount that is multiplied by
the DRG weight to determine actual payment, before adjustments for the
area wage level and indirect medical education expenses are applied. Our
use of the term reflects language used by the Centers for Medicare &
Medicaid Services.

10Members of this organization include more than 120 hospitals that focus
on treating children.

11See Pub. L. No. 109-163, S 734, 119 Stat. 3136, 3353-55; S. Rep. No.
109-69, at 337 (2006).

To examine the effect of the differential on children's hospital base
payments, we analyzed TRICARE data on base payments from fiscal year 1989
to fiscal year 2007. To compare the diagnoses and complexity of patients
at children's hospitals with patients at other hospital types, we used
information from TRICARE claims data for all pediatric inpatient
admissions to civilian hospitals in the United States for fiscal year 2003
through fiscal year 2006 and a tool to measure patient complexity that was
developed by a health information company with input from NACH.12 This
tool classifies hospital stays into a more refined set of diagnostic
groups than TRICARE's DRG system. We used the same claims data and
classification tool to determine the extent to which differences between
TRICARE's payments to children's hospitals and TRICARE's payments to other
hospitals reflect differences in patient complexity. To identify recent
trends in TRICARE pediatric patients' use of children's hospital services,
we also analyzed TRICARE pediatric inpatient claims data from fiscal year
2003 through fiscal year 2006. In addition, we interviewed DOD officials
on hospital payment policy and representatives of children's hospitals to
learn their perspective on the effect of TRICARE's payment policies on
TRICARE beneficiaries' access to children's hospital services. We did not
attempt to calculate the costs of admissions at children's hospitals
because we determined that sufficiently reliable data on children's
hospital costs for TRICARE admissions were not available.13 We found that
some data fields in the TRICARE claims data were not sufficiently
reliable, and we therefore did not use these fields in our analyses. We
determined the remaining TRICARE claims data to be sufficiently reliable
for the purposes of this report. (See app. I for a detailed explanation of
our scope and methodology.) We conducted our work from July 2006 through
June 2007 in accordance with generally accepted government auditing
standards.

Results in Brief

In fiscal year 2007, TRICARE's base payments, a key component of TRICARE's
hospital payment formula, were 61 percent higher for facilities that
TRICARE defines as children's hospitals than for other hospital types.
Base payments to children's hospitals have been substantially higher than
base payments to other hospitals since 1989. However, the relative
difference in base payments has decreased over time. The relative
difference in base payments will continue to decrease, as the children's
hospital differential is not adjusted for inflation.

12Our unit of analysis was a hospital admission. Multiple admissions of
the same patient during our period of analysis would be counted
separately.

13Prior to the release of this report, DOD and NACH were planning to
produce a reliable measurement of children's hospital costs of treating
TRICARE beneficiaries.

From fiscal year 2003 through fiscal year 2006, excluding newborns, the
types of diagnoses for TRICARE pediatric patients at children's hospitals
were similar to those treated at medical centers. TRICARE pediatric
patients at children's hospitals had a similar level of complexity to
those at medical centers and were substantially more complex than those at
community hospitals. We measured the complexity of patients using a tool
that classifies hospital stays into a more refined set of groups than
TRICARE's system. Indirect measures of complexity, such as the length of a
hospital stay, also showed similarities between TRICARE pediatric patients
at children's hospitals and those at medical centers.

We found that after we adjusted for differences in patient complexity,
TRICARE payments to children's hospitals were substantially greater per
admission than TRICARE payments to medical centers and community
hospitals. Specifically, holding patient complexity constant, children's
hospitals were paid 22 percent more than medical centers and 53 percent
more than community hospitals.

The number of TRICARE pediatric admissions at children's hospitals
increased from 5,027 in fiscal year 2003 to 7,083 in fiscal year 2006. The
percentage of TRICARE pediatric admissions in civilian hospitals that
occurred at children's hospitals also increased during this time period.
The increase in the use of children's hospital services is consistent with
statements from representatives of children's hospitals, who said that
their hospitals are committed to accepting and caring for TRICARE
patients.

Our findings show TRICARE's hospital payment system functioning largely as
DOD expected, as the difference in base payments to children's hospitals
and other hospitals was designed to endure but diminish over time. We have
no data on other factors that might support payment differences, however,
our findings suggest that further increasing payments to children's
hospitals is not supported on the basis of patient complexity.

In its comments on a draft of this report, DOD stated that it agreed with
our findings and concluding observations. NACH agreed with our findings
that TRICARE pediatric patients at children's hospitals were clinically
similar to TRICARE pediatric patients at medical centers, and that TRICARE
pays children's hospitals more than other hospitals, after accounting for
patient complexity.

Background

Children's hospitals constitute a small fraction of civilian hospitals
providing inpatient services to TRICARE pediatric patients. Children's
hospitals have been paid the children's hospital differential since 1989,
when they were incorporated under DOD's prospective payment system.

The Number and Location of TRICARE Admissions at Children's Hospitals

In fiscal year 2006, there were 7,083 TRICARE pediatric admissions to
children's hospitals (see fig. 1). A similar number of admissions, 6,416,
occurred in medical centers. In contrast, 77,866 pediatric admissions took
place in community hospitals.14 The number of community hospitals that
treated TRICARE pediatric patients was substantially higher than the
number of children's hospitals or medical centers that treated TRICARE
pediatric patients in fiscal year 2006. Specifically, 3,441 community
hospitals treated TRICARE pediatric patients compared with 67 children's
hospitals and 62 medical centers.

14An additional 61,438 pediatric admissions occurred in U.S.-based MTFs in
fiscal year 2006.

Figure 1: Civilian Hospital Types Treating TRICARE Pediatric Patients in
Fiscal Year 2006, by Number of Admissions and Number of Hospitals

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital." A community hospital is any hospital that was not a children's
hospital or medical center under our definitions.

TRICARE admissions to children's hospitals were concentrated in a subset
of these hospitals in fiscal year 2006. Of the 67 children's hospitals
that treated TRICARE pediatric patients, 14 accounted for more than half
of the TRICARE children's hospital admissions, and 30 children's hospitals
accounted for 84 percent. Children's hospitals that treated TRICARE
pediatric patients in fiscal year 2006 are spread throughout the United
States (see fig. 2). Similarly, children's hospitals that had more than
200 TRICARE admissions were located in areas that were diverse
geographically. States that were home to these high-volume children's
hospitals include California, Virginia, Pennsylvania, Texas, Washington,
and Alabama.

Figure 2: Location of Children's Hospitals That Admitted TRICARE Pediatric
Patients in Fiscal Year 2006

Note: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children.

The Establishment of the Children's Hospital Differential

DOD began paying hospitals under its prospective payment system in October
1987, although children's hospitals and certain other types of hospitals
were initially exempted.15 TRICARE's prospective payment system was
modeled on Medicare's prospective payment system. DOD is required by law
to follow Medicare's rules with regard to payment to providers to the
extent practicable.16 In 1988, after discussions with children's hospital
representatives, DOD proposed including children's hospitals under the
prospective payment system and recommended paying those hospitals the
children's hospital differential. In December 1988, DOD issued a final
rule placing children's hospitals under the prospective payment system and
establishing the differential.17 DOD began paying children's hospitals
under the prospective payment system on April 1, 1989.

DOD established the differential with the goal of ensuring that payments
to children's hospitals were not reduced as a result of the transition
from the previous charge-based payment system to the prospective payment
system as well as to recognize that children's hospitals typically charged
more than other hospitals for the same services. The value of the
differential is based on a calculation made by DOD that sought to ensure
revenue neutrality to children's hospitals. The regulation that
established the differential states that it is not to be updated for
inflation, and it has
not been.18 As of 2007, the value of the differential was set at
$2,635.41, and it has changed only twice since 1989.19

15TRICARE does not pay all hospitals under a prospective payment system.
Rehabilitation hospitals and psychiatric hospitals, among others, are by
regulation exempt from the system. In addition, TRICARE maintains networks
of providers, and hospitals can join that network and negotiate a discount
rate agreement with managed care support contractors (MCSC), organizations
that manage provider networks on behalf of TRICARE. This discount can take
the form of a discount off the prospective payment rate. Alternatively,
MCSCs can negotiate to pay hospitals under a different methodology, such
as a per diem rate. Claims that were paid at a discount were included in
our analysis. For more information, see app. I.

16See 10 U.S.C. S 1079(j)(2).

17See 53 Fed. Reg. 50515-20 (Dec. 16, 1988). This final rule was
consistent with the Department of Defense Appropriations Act for Fiscal
Year 1989, Pub. L. No. 100-463, S 8091, 102 Stat. 2270, 2270-33 to 2270-34
(1988).

When DOD first proposed adopting the children's hospital differential, it
expressed concern about the prospective payment system's ability to
account for the complexity of children's hospital patients.20 DOD noted
that children's hospitals could be particularly susceptible to issues in
measuring complexity since children's hospitals often treat complex cases.
Like other prospective payment systems, DOD's system does not capture
every difference in complexity. For example, patients whose hospital stays
are classified into DRG 98, pediatric cases of bronchitis and asthma, may
vary in levels of complexity: one patient may have a severe case of
bronchitis, while another patient may have a mild case.21 However, all
hospital stays in DRG 98 receive the same DRG weight and therefore are
paid the same rate.22 As a result, a hospital that consistently treats
patients with severe cases of bronchitis will be paid no more for those
admissions than a hospital that consistently treats patients with less
severe cases of bronchitis, even though the hospital would likely incur
higher costs for treating the more severe cases.23 However, it is also
expected that at most hospitals, these differences in complexity will
"balance out." In other words, a hospital may treat some patients who have
severe cases of bronchitis, but the hospital will also treat some patients
who have mild cases of bronchitis, so that overall the hospital will treat
children who are at the average complexity of the DRG.

18See 32 C.F.R. S 199.14(a)(1)(iii)(E)(4)(v) (2006).

19From April 1, 1989, to April 1, 1992, children's hospitals that had a
high volume of TRICARE admissions (defined as 50 or more TRICARE
admissions per year) received a hospital-specific children's hospital
differential, and the remaining hospitals were assigned one of two
national differentials: one for children's hospitals in large urban areas
and another, lower differential for children's hospitals in other areas.
(A hospital was considered to be located in a large urban area if was
located in a metropolitan statistical area, as defined by the Office of
Management and Budget, that had a population of more than 1 million, or in
a New England County Metropolitan Area with a population of more than
970,000.) On April 1, 1992, DOD stopped paying high-volume hospitals a
hospital-specific differential and recalculated the values of the national
differentials to include data from the high-volume children's hospitals.
This was the first change in the differential. The second change occurred
at the beginning of fiscal year 2005, when the value of the differential
for children's hospitals in other areas was increased to the value of the
differential for children's hospitals in large urban areas.

20See 53 Fed. Reg. 20576, 20579-80 (June 3, 1988).

21Children who are suffering from asthma or bronchitis and need to be
placed on a ventilator are typically classified into DRGs other than DRG
98.

22This assumes the admission is not classified as an outlier.

23This assumes the two hospitals have the same wage adjustment and are
paid the same amount for their indirect medical education expenses.

TRICARE's Base Payments to Children's Hospitals Substantially Higher Than Base
Payments to Other Hospitals, Though Relative Difference in Payments Decreases
over Time

TRICARE's base payments to children's hospitals have been substantially
higher than base payments to other hospital groups, although the relative
difference in base payments has declined over time. For fiscal year 2007,
TRICARE's base payments to children's hospitals were set 61 percent higher
than base payments to all other hospitals. However, the relative
difference between TRICARE's base payments to children's hospitals and
base payments to other hospitals has decreased, and it will continue to
decrease over time.

Due to the Differential, Children's Hospitals Have Received Substantially Higher
Base Payments from TRICARE

As a result of the children's hospital differential, children's hospitals
have received substantially higher base payments than other hospitals
under TRICARE's prospective payment system--61 percent higher in fiscal
year 2007. Base payments to children's hospitals have been substantially
higher than base payments to other hospitals since the children's hospital
differential was established in 1989 (see fig. 3). So long as the TRICARE
prospective payment system continues to include a children's hospital
differential, base payments to children's hospitals will always be higher
than base payments to other hospitals.

Figure 3: TRICARE Base Payments to Children's Hospitals Compared to
TRICARE Base Payments to Other Hospitals, Fiscal Year 1989 through Fiscal
Year 2007

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. Other hospitals include
medical centers, which in this report are teaching hospitals that include
a pediatric inpatient unit that is designated by NACH as a "children's
hospital within a hospital," and community hospitals, which in this report
are hospitals that were not children's hospitals or medical centers under
our definitions.

This figure reflects the two changes to the children's hospital
differential. The first change occurred in fiscal year 1992, when the
children's hospital differential for hospitals in large urban areas and
hospitals in other areas was adjusted (the adjustment for the differential
for children's hospitals in large urban areas was so slight that it is
difficult to discern from the figure). In fiscal year 2005, the children's
hospital differential was increased for hospitals located in areas other
than large urban areas. In this figure, that change is reflected in the
data for fiscal year 2007, which is the first year shown after the fiscal
year 2005 change.

Relative Difference in TRICARE's Base Payments between Children's Hospitals and
Other Hospitals Has Decreased over Time

Although TRICARE's base payment to children's hospitals remains higher
than the base payment to other hospitals, the relative difference between
the two base payments has decreased, as the ASA has been adjusted for
inflation and the children's hospital differential has not. In fiscal year
1989, the base payment to children's hospitals in large urban areas was 92
percent greater than the base payment to other hospitals in those areas
(see fig. 4). Eighteen years later, the relative difference in base
payments has been reduced. By fiscal year 2007, TRICARE's base payment to
children's hospitals in large urban areas exceeded TRICARE's base payment
to other hospitals in large urban areas by 61 percent.

The relative difference in base payments between children's hospitals and
other hospitals in areas other than large urban areas has also decreased.
In fiscal year 1989, the base payment to children hospitals in other areas
was 79 percent greater than the base payment to other hospitals in those
areas. In fiscal year 2007, the base payment to children's hospitals in
other areas exceeded the base payment to other hospitals in those areas by
61 percent.24

24The decline in the relative difference in base payments between
children's hospitals and other hospitals in other areas was mitigated by
the 2005 increase in the children's hospital differential for children's
hospitals in other areas.

Figure 4: Relative Difference between TRICARE's Base Payment to Children's
Hospitals and Other Hospitals, in Percentages, Fiscal Year 1989 through
Fiscal Year 2007

Notes: Percentages represent the amount by which children's hospital base
payments are higher than base payments to other hospitals--for example, 92
means that children's hospital base payments were 92 percent higher than
base payments to other hospitals. Projections are based on the assumption
that the ASA continues to increase at an annual rate of 2.4 percent.

A children's hospital under TRICARE is one in which at least 50 percent of
a hospital's patients are children. Other hospitals include medical
centers, which in this report are teaching hospitals that include a
pediatric inpatient unit that is designated by NACH as a "children's
hospital within a hospital," and community hospitals, which in this report
are hospitals that were not children's hospitals or medical centers under
our definitions.

The relative difference in base payments will continue to decline so long
as the ASA is increased to account for inflation and the children's
hospital differential is not. Since 1989, the ASA for hospitals in large
urban areas has increased at an average annual rate of 2.4 percent. If
that rate continues, the base payment to children's hospitals will be 45
percent higher than the base payment to other hospitals in 2020. The
relative difference will never disappear entirely, however, as long as
children's hospitals continue to receive the children's hospital
differential.

TRICARE Pediatric Patients at Children's Hospitals Similar to Those at Medical
Centers in Terms of Diagnoses and Complexity

From fiscal year 2003 through fiscal year 2006, children's hospitals
treated TRICARE pediatric patients for the same types of diagnoses as
medical centers, with the exception of newborns, which more often received
care at medical centers than at children's hospitals. TRICARE patients at
children's hospitals were similar in complexity levels to TRICARE
pediatric patients treated at medical centers. In contrast, TRICARE
patients at children's hospitals were more than three times as complex as
those at community hospitals.

Children's Hospitals and Medical Centers Treated TRICARE Pediatric Patients for
Similar Types of Diagnoses

Children's hospitals and medical centers treated TRICARE pediatric
patients for similar types of diagnoses from fiscal year 2003 through
fiscal year 2006, although children's hospitals were less likely to treat
newborns. Once newborns are excluded, the pattern of diagnoses at
children's hospitals was very similar to the pattern of diagnoses at
medical centers (see fig. 5). Newborns accounted for about 10 percent of
TRICARE pediatric patients at children's hospitals, 35 percent of TRICARE
pediatric patients at medical centers, and 73 percent of TRICARE pediatric
patients at community hospitals.

Figure 5: Most Common TRICARE Children's Hospital Admissions by Major
Diagnostic Category (MDC) and Hospital Type, Excluding Newborns, Fiscal
Year 2003 through Fiscal Year 2006

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital."

For patients at both children's hospitals and medical centers, the three
most common major diagnostic categories were related to the respiratory
system, nervous system, and digestive system. Common diagnoses related to
these systems include asthma, seizure and headache, and appendicitis,
respectively. Compared to medical centers, children's hospitals were
slightly more likely to treat children with circulatory system disorders,
such as hypertension and heart failure.

TRICARE Pediatric Patients at Children's Hospitals Were Similar to Those at
Medical Centers Based on Measures of Complexity

We found that from fiscal year 2003 through fiscal year 2006, the average
complexity of TRICARE pediatric patients at children's hospitals was about
10 percent higher than the average complexity of TRICARE pediatric
patients at medical centers. For the same time period, the average
complexity of pediatric patients at children's hospitals was more than
three times as high as the average complexity of pediatric patients at
community hospitals.

In conducting this analysis, we used a tool that measures the complexity
of diagnostic groups; a score of 1.0 serves as a reference point for
relative complexity.25 Using this reference, we found that the average
patient complexity of pediatric admissions at children's hospitals was
1.62, while at medical centers the score was 1.47 (see table 1). In
contrast, the average pediatric patient complexity at community hospitals
was .52. The relatively low level of complexity of patients at community
hospitals is driven by the large percentage of normal newborns, babies
that do not have any complications and therefore have a low level of
complexity.26

Table 1: Average TRICARE Patient Complexity by Hospital Type, Fiscal Year
2003 through Fiscal Year 2006

Hospital type        Average patient complexitya 
Children's hospitals                        1.62 
Medical centers                             1.47 
Community hospitals                          .52 

Source: GAO analysis of TRICARE claims data.

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital." A community hospital is any hospital that was not a children's
hospital or medical center under our definitions.

aThe average patient complexity is often called the case mix index.

Indirect measures of complexity--length of hospital stay, hospital
transfers, and in-hospital deaths--show comparable differences. From
fiscal year 2003 through fiscal year 2006, length of hospital stay for
pediatric admissions at children's hospitals and medical centers averaged
about 6 days; transfers from another hospital were somewhat more frequent
at children's hospitals than at medical centers; and frequency of
pediatric admissions ending in death was about 1 percent in both settings
(see table 2). In contrast, stays at community hospitals averaged 3.5 days
and percentages of transfers and in-hospital deaths at community hospitals
were substantially lower, at about 3 percent and less than 1 percent,
respectively.

25We measured complexity using the All Patient Refined Diagnosis-Related
Group (APR-DRG) grouper program, which is a more refined measure of
complexity than that used by TRICARE. The company that developed the
APR-DRG grouper refers to patient complexity as severity of illness. For
more information, see app. I.

26From fiscal year 2003 through fiscal year 2006, the average pediatric
patient complexity, excluding normal newborns, was 1.65 at children's
hospitals, 1.73 at medical centers, and .96 at community hospitals.

Table 2: Indirect Measures of TRICARE Pediatric Patient Complexity by
Hospital Type, Fiscal Year 2003 through Fiscal Year 2006

                                              Percentage of                   
                    Average length of   admissions that are     Percentage of 
                   stay per admission  transfers from other admissions ending 
Hospital type            (in days)             hospitals          in death 
Children's                     6.1                   8.8               1.1 
hospitals                                                                  
Medical centers                6.2                   5.5               1.4 
Community                      3.5                   3.3               0.4 
hospitals                                                                  

Source: GAO analysis of TRICARE claims data.

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital." A community hospital is any hospital that was not a children's
hospital or medical center under our definitions.

After Adjusting for Patient Complexity, Children's Hospitals Were Paid More per
TRICARE Pediatric Admission Than Other Hospitals

After comparing pediatric patients at children's hospitals to patients at
other hospital types, we examined hospitals' payments per admission,
adjusting for patient complexity. Using claims data from fiscal year 2003
through fiscal year 2006, we found that after adjusting for patient
complexity, children's hospitals were paid substantially more per
admission than both medical centers and community hospitals (see table 3).

Table 3: Average TRICARE Payment per Pediatric Admission, Patient
Complexity, and Payment Adjusted for Complexity, by Hospital Type, Fiscal
Year 2003 through Fiscal Year 2006

                   Average payment Average patient   Average payment adjusted 
Hospital type     per admission      complexity             for complexity 
Children's              $16,367            1.62                    $10,089 
hospitals                                                                  
Medical centers         $12,131            1.47                     $8,275 
Community                $3,401             .52                     $6,596 
hospitals                                                                  

Source: GAO analysis of TRICARE claims data.

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital." A community hospital is any hospital that was not a children's
hospital or medical center under our definitions.

The average payment per admission has been adjusted upwards for medical
centers and community hospitals to account for payments for capital and
direct medical education expenses. Average payment adjusted for complexity
equals average payment per admission divided by average patient
complexity. However, due to rounding, the calculations do not work out
perfectly.

We adjusted for patient complexity for the three hospital types by
dividing the average payment per pediatric admission by the average
patient complexity. For example, across the 4-year period, TRICARE
payments to children's hospitals--adjusted for the average patient
complexity--averaged $10,089 per patient, based on an average payment of
$16,367 per admission and an average complexity of 1.62. This average
complexity-adjusted payment to children's hospitals was 22 percent higher
than the equivalent amount paid to medical centers, which was $8,275.
TRICARE payments to children's hospitals were 53 percent higher than those
made to community hospitals for pediatric patients, which were $6,596
after adjusting for patient complexity.

Rising Number of TRICARE Admissions at Children's Hospitals Suggests No Decline
in Access

From fiscal year 2003 through fiscal year 2006, TRICARE pediatric
admissions at children's hospitals rose steadily, suggesting that access
to children's hospital services has not decreased in recent years.
Specifically, the total number of TRICARE pediatric admissions rose from
5,027 admissions in fiscal year 2003 to 7,083 admissions in fiscal year
2006 (see fig. 6). This change represents an increase of 41 percent for
the time period.

Figure 6: TRICARE Pediatric Admissions to Children's Hospitals, Fiscal
Year 2003 through Fiscal Year 2006

Note: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children.

The proportion of TRICARE pediatric civilian hospital admissions that
occurred in children's hospitals also increased in recent years. In fiscal
year 2006, children's hospitals accounted for 7.8 percent of all TRICARE
pediatric admissions to civilian hospitals, up from 6.2 percent in fiscal
year 2003 (see fig. 7).

Figure 7: Percentage of TRICARE Pediatric Civilian Hospital Admissions
Occurring in Children's Hospitals, Fiscal Year 2003 through Fiscal Year
2006

Note: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children.

The increase in the use of children's hospital services is consistent with
statements made by representatives of children's hospitals about their
policy toward TRICARE patients.27 These representatives stated that
children's hospitals are committed to treating all children, including
TRICARE patients, because of their legal obligations as nonprofit
hospitals as well as their mission to serve all patients.28 These
statements, coupled with recent trends in utilization, suggest that
TRICARE pediatric patients' access to children's hospitals has not
declined in recent years.

27Any hospital that participates in Medicare is legally required to accept
TRICARE patients, and many children's hospitals accept Medicare patients.
See 42 U.S.C. S 1395cc(a)(1)(J). However, hospitals are not required to
join TRICARE's network of providers. TRICARE beneficiaries who need a
referral to see an out-of-network provider could face restrictions in
accessing children's hospital services if many children's hospitals
declined to join TRICARE's network.

28Children's hospital representatives did express concern about the level
of TRICARE payments affecting their ability to maintain readily available
services and noted that this could have a negative impact on patient
waiting times.

Concluding Observations

The current children's hospital payment system is functioning largely as
DOD expected. In establishing a policy of inflation updates to the ASA,
but no inflation updates to the children's hospital differential, DOD set
up a system in which the difference between children's hospital base
payments and base payments to other hospitals would endure, but would be
reduced gradually over time. This reduction has taken place as planned.

Given the lack of reliable data, we cannot know the cost to children's
hospitals of treating TRICARE beneficiaries and thus cannot know how their
costs compared to payment amounts. Although greater patient complexity has
been cited as a rationale for larger payments to children's hospitals, our
analysis shows that patient complexity for children's hospital admissions
was roughly comparable to those at medical centers. While we have only
limited indicators of the extent to which TRICARE pediatric patients have
access to children's hospitals, we did not find data that would support
concerns about access problems.

Agency and Professional Association Comments and Our Evaluation

We obtained written comments on a draft of this report from DOD, which are
reprinted in appendix II. DOD concurred with our findings and conclusions
and said that the report was technically accurate.

We also obtained oral comments from representatives of NACH. They agreed
with our finding that TRICARE pays children's hospitals more than other
hospitals, after accounting for patient complexity, and agreed with our
finding that TRICARE pediatric patients at children's hospitals were
clinically similar to TRICARE pediatric patients at medical centers.
Despite this similarity, NACH said the two types of hospitals have
important differences--most notably that medical centers are typically
larger institutions than children's hospitals and therefore can achieve
greater economies of scale. Given this difference, NACH officials noted
the importance of examining whether TRICARE's payments met children's
hospital costs. However, as we state in the report, this analysis was
beyond the scope of our work--as agreed to with the committees of
jurisdiction--because sufficiently reliable data on children's hospital
costs were not available.

NACH officials raised a concern related to our analysis of the percentage
difference in complexity-adjusted payments to children's hospitals and
other hospital types. Specifically, they suggested that the percentage
difference between complexity-adjusted payments at children's hospitals
and other hospital types would change if outlier claims--claims with
unusually high charges given their DRGs--were analyzed separately. We
could not perform this analysis because the TRICARE claims data base could
not be used to reliably identify all claims that were cost outliers.

Noting that utilization of children's hospital services is an imperfect
measure of access, NACH officials suggested that the increase in the use
of children's hospital services could have resulted from community
hospitals providing fewer specialty pediatric services. NACH officials
also said that our findings could have resulted from increases in the
number of children enrolled in TRICARE. However, as noted in our report,
the percentage of all TRICARE pediatric admissions that occurred in
children's hospitals also increased, supporting our finding that access to
children's hospitals does not appear to have declined.

Additionally, we received technical comments from NACH, which we
incorporated as appropriate.

We are sending copies of this report to the Secretary of Defense, and
other interested parties. We will also provide copies to others on
request. In addition, the report is available at no charge on GAO's Web
site at [23]http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7114 or [24][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 III.

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 K. 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: Scope and Methodology

To analyze the change in TRICARE base payments over time, we obtained data
on the adjusted standardized amount (ASA) and the children's hospital
differential from the TRICARE Management Activity (TMA), the office that
manages TRICARE. Using these data, we calculated the base payment to
children's hospitals and to other hospitals for each year since 1989.

Most of the remainder of our analysis was based on claims data we obtained
from TMA. The data include TRICARE claims from U.S. civilian hospitals
from fiscal year 2003 through fiscal year 2006 for all patients under the
age at 18 at the time of admission. To analyze the claims data, we divided
providers into three separate categories: children's hospitals, medical
centers, and community hospitals. We identified children's hospitals as
those designated as such by TRICARE. A children's hospital under TRICARE
is one in which at least 50 percent of a hospital's patients are children.
We identified hospitals as medical centers if they contained a pediatric
inpatient unit that was designated as a "children's hospital within a
hospital" by the National Association of Children's Hospitals (NACH). We
classified all other hospitals as community hospitals.

In analyzing diagnoses and complexity, we examined a subset of claims. Our
analysis was of TRICARE's prospective payment system, and therefore we
aimed to exclude all claims that were paid outside the prospective payment
system. We excluded claims from hospitals that are exempt from TRICARE's
prospective payment system. This group of providers includes psychiatric
hospitals, rehabilitation hospitals, sole community hospitals, and all
institutions in Maryland (hospitals in Maryland are exempt from TRICARE's
prospective payment system).1 We excluded claims that had an indicator
stating that they were paid according to an alternative payment system,
such as a per diem payment system. We excluded claims that were paid by a
health insurance program other than TRICARE, since these claims can be
paid according to the payment rules of the other payer, with TRICARE as
the secondary payer. We excluded all claims related to bone marrow
transplants, cystic fibrosis, or care for children with HIV, since those
claims are excluded from TRICARE's prospective payment system in cases for
which the patient is a child. As a result of these exclusions, our
universe of claims was reduced from 348,225 claims to 265,857 claims.

1Maryland hospitals are also exempted from Medicare's prospective payment
system.

We included claims that were paid under a discount rate agreement. These
claims accounted for about half of the claims in our analysis. The
discounted claims can be paid as a percentage discount off the prospective
payment rate, or they can be paid under an alternate payment methodology.
We included these claims even though some of these claims may not have
been paid under the prospective payment system. We concluded that
regardless of whether these claims were paid under a prospective payment
system, the terms of the discount rate agreement were based on the fact
that the hospital was eligible to be paid under a prospective payment
system.

Measuring Complexity of Admissions

To account for the complexity of admissions, we obtained the All Patient
Refined Diagnosis-Related Group (APR-DRG) grouper program from 3M Health
Information Systems (3M). The APR-DRG grouper program was developed by 3M
with input from NACH, which offered its expertise on classifying pediatric
admissions. The APR-DRG grouper program divides claims into groups, known
as APR-DRGs. We applied the APR-DRG program to the subset of claims that
we analyzed. (We also excluded claims that the APR-DRG grouper program
could not categorize). We also obtained a file of APR-DRG weights from 3M,
and we merged this file with our claims data based on the APR-DRG assigned
to each claim. We used this APR-DRG weight as our refined measure of
complexity.

Like TRICARE's DRG grouper program, the APR-DRG grouper program assigns
claims to a diagnosis group (called an APR-DRG in the case of the APR-DRG
grouper) based on diagnostic, procedural, and demographic information on
the claim. However, the APR-DRG grouper divides claims into a greater
number of categories than the TRICARE DRG grouper program. The APR-DRG
grouper program divides claims into 1,258 categories; in comparison, the
TRICARE DRG grouper program divides claims into 553 categories. Since the
APR-DRG grouper divides claims into more groups that are more clinically
homogeneous, there is less variation in complexity within those groups.
For example, TRICARE's DRG grouper program would classify a severe case of
pediatric asthma into the same category as a mild case of pediatric
asthma, so long as the patient did not require ventilator support. The
APR-DRG grouper program, on the other hand, would place these two cases
into separate categories and therefore assign them different weights. As a
result, the APR-DRG grouper program produces a more refined measure of
complexity, as compared to the TRICARE DRG grouper program.

The average complexity of children's hospital claims varied depending on
which grouper program was used to measure complexity. The average
complexity of TRICARE pediatric admissions to children's hospitals was
1.62 using the APR-DRG grouper, 4 percent higher than the average
complexity of TRICARE pediatric admissions to children's hospitals when
the TRICARE DRG grouper was used to measure complexity (see table 4). The
average complexity of TRICARE pediatric admissions at medical centers was
approximately the same, regardless of which grouper program was used to
measure complexity. In contrast, the average complexity of TRICARE
pediatric admissions at community hospitals was lower when the APR-DRG
grouper was used to measure complexity than when the TRICARE DRG grouper
was used to measure complexity.

Table 4: Average Complexity per TRICARE Pediatric Admission by Hospital
Type, Using Both TRICARE DRGs and APR-DRGs, Fiscal Year 2003 through
Fiscal Year 2006

                       Average complexity per                                 
                             admission                                        
                                                        Percentage difference 
                   Using TRICARE's                 between APR-DRG complexity 
Hospital type              DRGs Using APR-DRGs  and TRICARE DRG complexity 
Children's                 1.56           1.62                           4 
hospitals                                                                  
Medical centers            1.47           1.47                           0 
Community                   .56            .52                          -8 
hospitals                                                                  

Source: GAO analysis of TRICARE claims data.

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. In this report, a medical
center refers to a teaching hospital that includes a pediatric inpatient
unit that is designated by NACH as a "children's hospital within a
hospital." A community hospital is any hospital that was not a children's
hospital or medical center under our definitions.

In comparing payments to complexity, we adjusted for complexity by
dividing the payment for the claim by the APR-DRG weight. For claims that
occurred at medical centers and community hospitals, the payment on the
claim was increased by a percentage adjustment. We applied this percentage
adjustment to account for payments that medical centers and community
hospitals receive for their direct medical education and capital expenses,
payments that children's hospitals do not receive. We calculated a
percentage adjustment of 8.7 percent for community hospitals and 9.6
percent for medical centers based on data on capital and direct medical
education payments provided by TMA.

Measuring Inflation

To assess the level of hospital inflation, we analyzed data from the
Centers for Medicare & Medicaid Services (CMS) on the agency's Inpatient
Prospective Payment System Hospital 2002 Input Price Index and compared it
to TRICARE base payments to children's hospitals. Since 1992, the
percentage increase in TRICARE base payments to children's hospitals has
been less than the percentage increase in hospital costs. From fiscal
years 1992 through 2006, hospital inflation has increased an average of
3.2 percent annually (see table 5). In contrast, base payments to
children's hospitals in large urban areas have increased by 1.2 percent
annually, while base payments to children's hospitals in other areas have
increased by 2.1 percent annually.

Table 5: Change in TRICARE Base Payments to Children's Hospitals Compared
to the Change in Hospital Inflation, Fiscal Year 1992 through Fiscal Year
2006

                                      Percentage increase, FY 1992 through FY
                                                       2006
                                          Average annual                      
Measure                                      increase  Cumulative increase 
Hospital inflation                                3.2                 56.0 
Base payment to children's                                                 
hospitals in large urban areas                    1.2                 18.5 
Base payment to children's                                                 
hospitals in other areas                          2.1                 34.5 

Source: GAO analysis of TRICARE payment data and CMS hospital inflation
data.

Notes: A children's hospital under TRICARE is one in which at least 50
percent of a hospital's patients are children. Hospital inflation is
measured by the CMS Inpatient Prospective Payment System Hospital 2002
Input Price Index.

TRICARE base payments to children's hospitals in other areas increased at
a faster rate than TRICARE base payments to children's hospitals in large
urban areas for two primary reasons. In fiscal year 2003, the ASA for
children's hospitals in other areas was increased to match the higher ASA
for children's hospitals in large urban areas. In addition, in fiscal year
2005 the differential for children's hospitals in other areas was
increased to the level of the higher differential for children's hospitals
in large urban areas. As a result of these two changes, TRICARE base
payments to children's hospitals in other areas increased by 24 percent
from fiscal year 2003 through fiscal year 2005.

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

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Laurie Ekstrand, (202) 512-7114 or [25][email protected]

Acknowledgments

In addition to the contact above, Phyllis Thorburn, Assistant Director;
Alexander Dworkowitz; Hannah Fein; Jenny Grover; Darryl Joyce; Richard
Lipinski; and Dae Park made key contributions to this report.

(290560)

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Highlights of [33]GAO-07-947 , a report to congressional committees

July 2007

DEFENSE HEALTH CARE

Under TRICARE, Children's Hospitals Paid More Than Other Hospitals

After Accounting for Patient Complexity

Under the Department of Defense's (DOD) TRICARE health program, hospitals
that treat primarily children--designated by DOD as children's
hospitals--are paid differently from other types of civilian hospitals
through a children's hospital differential payment. Representatives of
children's hospitals state that payments for children's hospital services
do not fully recognize the higher complexity of children's hospital
patients. Acknowledging concerns over payments for children's hospital
services, the National Defense Authorization Act for Fiscal Year 2006
directed GAO to study DOD's current system of payments to children's
hospitals. This report examines (1) the effect of the differential on
TRICARE's base payments to children's hospitals, (2) differences in
diagnosis and complexity between TRICARE pediatric patients at children's
hospitals and those at other hospitals, (3) the extent to which TRICARE
payment differences across hospitals reflect differences in patient
complexity, and (4) recent trends in TRICARE pediatric patients' use of
children's hospital services. To do this, GAO analyzed pertinent TRICARE
claims data for fiscal years 2003 through 2006 and interviewed relevant
DOD officials and representatives of children's hospitals.

In fiscal year 2007, TRICARE's base payments, a key component of the
program's hospital payment formula, were 61 percent higher for facilities
that TRICARE defines as children's hospitals than for other hospital
types. Base payments to children's hospitals have been substantially
higher than base payments to other hospitals since 1989. However, the
relative difference in base payments has decreased over time, and will
continue to decrease, as the children's hospital differential is not
adjusted for inflation.

From fiscal year 2003 through fiscal year 2006, excluding newborns, the
types of diagnoses for TRICARE pediatric patients at children's hospitals
were similar to those treated at medical centers, hospitals that also
provide specialized pediatric services. TRICARE pediatric patients at
children's hospitals had a similar level of complexity to those at medical
centers and were substantially more complex than those at community
hospitals, facilities that focus on more routine children's care. GAO
measured the complexity of patients using a tool that classifies hospital
stays into a more refined set of groups than TRICARE's system. Indirect
measures of complexity, such as the length of a hospital stay, also showed
similarities between TRICARE pediatric patients at children's hospitals
and those at medical centers.

GAO found that after adjusting for differences in patient complexity,
TRICARE payments to children's hospitals were substantially greater per
admission than TRICARE payments to medical centers and community
hospitals. Specifically, holding patient complexity constant, children's
hospitals were paid 22 percent more than medical centers and 53 percent
more than community hospitals.

The number of TRICARE pediatric admissions at children's hospitals
increased from 5,027 in fiscal year 2003 to 7,083 in fiscal year 2006. The
percentage of TRICARE pediatric admissions in civilian hospitals that
occurred at children's hospitals also increased during this time period.
The increase in the use of children's hospital services is consistent with
statements from representatives of children's hospitals, who said that
their hospitals are committed to accepting and caring for TRICARE
patients.

GAO's findings show TRICARE's hospital payment system functioning largely
as DOD expected, as the difference in base payments to children's
hospitals and other hospitals was designed to endure but diminish over
time. GAO has no data on other factors that might support payment
differences, however, GAO's findings suggest that further increasing
payments to children's hospitals is not supported on the basis of patient
complexity. In commenting on a draft of this report, DOD agreed with GAO's
findings and concluding observations.

References

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