Review of the President's Fiscal Year 2009 Budget Request for the
Defense Health Program's Private Sector Care Budget Activity	 
Group (28-MAY-08, GAO-08-721R). 				 
                                                                 
The President's budget request for the Department of Defense's	 
(DOD) Defense Health Program has increased steadily in recent	 
years. For example, from fiscal year 2005 to fiscal year 2009,	 
the budget request for the program increased from about $17.6	 
billion to about $23.6 billion, an increase of about 34 percent. 
DOD has attributed a majority of this increase to growth in	 
medical care, dental care, and pharmaceuticals provided in the	 
private sector to active duty personnel and other eligible	 
beneficiaries. These private sector expenses are funded through  
the Defense Health Program's Private Sector Care Budget Activity 
Group (BAG). From fiscal year 2005 to fiscal year 2009, the	 
budget request for this BAG increased by about 36 percent--from  
about $9.0 billion to almost $12.2 billion. The Conference Report
accompanying the Fiscal Year 2008 Department of Defense 	 
Appropriations bill directed us to review the President's fiscal 
year 2009 budget request for the Defense Health Program's Private
Sector Care BAG. To do this, we reviewed (1) DOD's justification 
for the request for the Private Sector Care BAG, including the	 
underlying estimates and the extent to which DOD considered	 
historical information; and (2) changes between this request and 
the request for fiscal year 2008 and factors causing these	 
changes.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-721R					        
    ACCNO:   A82207						        
  TITLE:     Review of the President's Fiscal Year 2009 Budget Request
for the Defense Health Program's Private Sector Care Budget	 
Activity Group							 
     DATE:   05/28/2008 
  SUBJECT:   Beneficiaries					 
	     Budget functions					 
	     Budget obligations 				 
	     Budget outlays					 
	     Budgeting						 
	     Cost analysis					 
	     Cost sharing (finance)				 
	     Data integrity					 
	     Defense budgets					 
	     Defense capabilities				 
	     Health care cost control				 
	     Health care costs					 
	     Health care programs				 
	     Health care services				 
	     Managed health care				 
	     Military health services				 
	     Military personnel 				 
	     Presidential budgets				 
	     Private sector					 
	     Budget requests					 
	     Cost estimates					 
	     Program costs					 
	     Defense Health Program				 
	     DOD TRICARE Program				 
	     GAO High Risk Series				 

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GAO-08-721R

This is the accessible text file for GAO report number GAO-08-721R 
entitled 'Review of the President's Fiscal Year 2009 Budget Request for 
the Defense Health Program's Private Sector Care Budget Activity Group' 
which was released on May 29, 2008. 

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May 28, 2008: 

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

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

Subject: Review of the President's Fiscal Year 2009 Budget Request for 
the Defense Health Program's Private Sector Care Budget Activity Group: 

The President's budget request for the Department of Defense's (DOD) 
Defense Health Program has increased steadily in recent years.[Footnote 
1] For example, from fiscal year 2005 to fiscal year 2009, the budget 
request for the program increased from about $17.6 billion to about 
$23.6 billion, an increase of about 34 percent. DOD has attributed a 
majority of this increase to growth in medical care, dental care, and 
pharmaceuticals provided in the private sector to active duty personnel 
and other eligible beneficiaries.[Footnote 2] These private sector 
expenses are funded through the Defense Health Program's Private Sector 
Care Budget Activity Group (BAG).[Footnote 3] From fiscal year 2005 to 
fiscal year 2009, the budget request for this BAG increased by about 36 
percent--from about $9.0 billion to almost $12.2 billion. 

The Conference Report accompanying the Fiscal Year 2008 Department of 
Defense Appropriations bill directed us to review the President's 
fiscal year 2009 budget request for the Defense Health Program's 
Private Sector Care BAG.[Footnote 4] To do this, we reviewed (1) DOD's 
justification for the request for the Private Sector Care BAG, 
including the underlying estimates and the extent to which DOD 
considered historical information; and (2) changes between this request 
and the request for fiscal year 2008 and factors causing these changes. 

To conduct our work, we analyzed the methodologies that DOD used to 
develop the budget requests for the Private Sector Care BAG in fiscal 
years 2008 and 2009. We also interviewed officials and analyzed 
documents from DOD's Office of the Under Secretary of Defense 
(Comptroller) and TRICARE Management Activity, which were the offices 
responsible for developing budget requests for the Private Sector Care 
BAG. We also relied on prior GAO work, particularly past work in which 
we analyzed DOD's projected savings from planned increases in 
beneficiary cost sharing.[Footnote 5] 

In addition, we reviewed budget and obligation data related to the 
Defense Health Program but we did not validate these data.[Footnote 6] 
We have raised concerns about the quality of DOD's financial data in 
previous reports.[Footnote 7] However, we determined that these data 
were sufficiently reliable to understand DOD's budget formulation 
process and the underlying assumptions used to develop the President's 
budget request. We based our determination on interviews with DOD 
officials and an examination of the data for obvious errors and 
omissions. We conducted this audit from January 2008 to May 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. A detailed description of 
our scope and methodology is listed in enclosure I. 

Results in Brief: 

DOD based the President's fiscal year 2009 budget request of almost 
$12.2 billion for DOD's Private Sector Care BAG on models and cost 
projections that used historical data. The department developed the 
budget request through a two-step process. The first step involved 
building an initial budget estimate, which was largely based on fiscal 
year 2006 data that were adjusted using trend models to reflect changes 
in the number of TRICARE users, utilization (i.e., health care usage 
per user), and costs. The second step resulted in a net reduction of 
almost $2.2 billion to the initial budget estimate of about $14.3 
billion. To do this, DOD considered various factors, including 
projected savings from increased beneficiary cost sharing. While DOD 
included appropriate factors in developing the President's fiscal year 
2009 budget request for the Private Sector Care BAG, it is likely that 
DOD underestimated its funding needs as we do not believe that all of 
the cost savings DOD expects to achieve from increased beneficiary cost 
sharing will be realized.[Footnote 8] In addition, similar proposals in 
the past to increase beneficiary cost sharing have not been enacted. 

The President's fiscal year 2009 budget request of almost $12.2 billion 
for the Private Sector Care BAG was about $1.7 billion higher than the 
about $10.5 billion requested for fiscal year 2008. Of this increase, 
$995 million was due to estimated increases in the number of TRICARE 
users, utilization, health care costs, and administrative costs. The 
remainder of this increase was due to several factors, including 
greater funding needs for congressionally mandated benefit changes. 

Background: 

DOD's Defense Health Program provides funding for medical and dental 
services to active duty personnel and other eligible beneficiaries, 
medical command headquarters, medical personnel training, occupational 
and industrial health care worldwide, and veterinary services. Defense 
Health Program funding is divided into three parts: Operation and 
Maintenance (O&M); Research, Development, Test and Evaluation; and 
Procurement. The President has requested about $23.6 billion for the 
Defense Health Program for fiscal year 2009, of which about $23.1 
billion (about 98 percent) was for O&M. The O&M request was distributed 
into seven BAGs, including one for Private Sector Care. (See encl. II 
for a list and description of these BAGs.) The Private Sector Care BAG 
accounts for about $12.2 billion (almost 53 percent) of the request for 
O&M. The budget request for this BAG is divided among 12 program 
elements, which are described in detail in enclosure III. See figure 1 
for the amount of requested funding for each program element in the 
fiscal year 2009 budget request for the Private Sector Care BAG. 

Figure 1: The President's Fiscal Year 2009 Budget Request of about 
$12.2 Billion for the Private Sector Care BAG by Program Element: 

This figure is a horizontal bar graph showing the president's fiscal 
year 2009 budget request of about $12.2 billion for the private sector 
care BAG by program element. 

Dollars in millions: 

Purchased Healthcare Pharmaceuticals: $256.1; 
National Retail Pharmacy: $1,701.9; 
Managed Care Support Contracts: $5,155.2; 
Purchased Care for Military Treatment Facility Enrollees: $2,230.4; 
Purchased Dental Care: $293.9; 
Uniformed Services Family Health Program: $374.3; 
Healthcare Supplemental Care: $1,031.2; 
Dental Supplemental Care: $108.1; 
Continuing Health Education/Capitalization of Assets: $253.0; 
Overseas Purchased Healthcare: $255.9; 
Miscellaneous Purchased Healthcare: $464.3; 
Miscellaneous Support Activities: $31.4. 

[See PDF for image] 

Source: GAO analysis of DOD data. 

[End of figure] 

The Defense Health Program includes funding for TRICARE--DOD's program 
that provided health care to about 7.6 million active duty personnel 
and other beneficiaries in 2007.[Footnote 9] TRICARE beneficiaries can 
elect to obtain health care either through TRICARE network or 
nonnetwork providers, funded through the Private Sector Care BAG, or 
through DOD's direct care system of military treatment facilities, 
funded through the In-House Care BAG. 

The President's budget requests for the Private Sector Care and In- 
House Care BAGs have sometimes differed from the actual funding 
amounts. The President's budget request for the Private Sector Care BAG 
has grown at a rate similar to the budget request for the In-House Care 
BAG. For example, from fiscal year 2005 to fiscal year 2008, the budget 
request for the In-House Care BAG increased by 16 percent compared to 
the 17 percent increase in the budget request for the Private Sector 
Care BAG. However, during that same period, funding for the In-House 
Care BAG increased by 26 percent compared to a 38 percent increase for 
the Private Sector Care BAG. The difference for the Private Sector Care 
BAG is because Congress funded it for $12.3 billion in fiscal year 
2008, which is $1.8 billion more than the President's budget request of 
$10.5 billion. Congress provided this additional funding to offset 
projected savings associated with DOD's proposal to increase TRICARE 
beneficiary cost sharing since provisions in the Conference Report 
accompanying the National Defense Authorization bill for Fiscal Year 
2008 prevented DOD from implementing this proposal before October 1, 
2008.[Footnote 10] 

DOD's Process for Developing the Fiscal Year 2009 Budget Request for 
the Private Sector Care BAG Relied on Historical Data: 

The President's fiscal year 2009 budget request of almost $12.2 billion 
for DOD's Private Sector Care BAG was based on models and cost 
projections that used historical data. DOD developed the budget request 
through a two-step process. The first step involved building an initial 
budget estimate. The second step consisted of revising the initial 
budget estimate for the Private Sector Care BAG of about $14.3 billion 
to reflect various factors, including projected savings from increased 
beneficiary cost sharing. This revision resulted in a net reduction of 
about $2.2 billion. While DOD included appropriate factors in 
developing the President's fiscal year 2009 budget request for the 
Private Sector Care BAG, it is likely that DOD underestimated its 
funding needs as we do not believe that all of the cost savings DOD 
expects to achieve from increased beneficiary cost sharing will be 
realized.[Footnote 11]In addition, similar proposals in the past to 
increase beneficiary cost sharing have not been enacted. 

The first step in DOD's process was to develop the initial budget 
estimate for the Private Sector Care BAG and began in mid 2006. DOD 
established a baseline for the initial budget estimate by using Private 
Sector Care obligation data from the first 7 months of fiscal year 
2006, which it annualized and adjusted for seasonal differences in 
health care spending. DOD officials told us that the department used 
part-year data because full-year data for fiscal year 2006 were not 
available when the budget estimate was being developed. Since DOD 
develops an initial budget estimate every 2 years, the initial budget 
estimates for fiscal years 2008 and 2009 were developed simultaneously 
and both used fiscal year 2006 obligation data as their baseline. This 
baseline represented the size of the program (or program capacity) in 
fiscal year 2006 whether the source of funding was from new budget 
authority (obligational authority) or carryover amounts.[Footnote 12] 
Furthermore, DOD did not adjust its initial budget estimate for 
reprogramming actions because there were no funds reprogrammed into the 
Private Sector Care BAG.[Footnote 13] Hence, there were no obligations 
related to reprogrammed funds for the Private Sector Care BAG that 
occurred in fiscal year 2006. 

To project its funding needs beyond the baseline year, DOD primarily 
used trend models, which projected growth in TRICARE user numbers, 
health care utilization, and costs.[Footnote 14] The department used 
the trend models to make adjustments to the baseline for retail and 
mail-order pharmacy programs and major private sector health care 
programs for active duty personnel, active duty dependents, as well as 
retirees and dependents under age 65. Together, funding needs for these 
programs accounted for about 80 percent of the fiscal year 2009 request 
for Private Sector Care BAG and largely comprised the following program 
elements: Purchased Healthcare Pharmaceuticals, National Retail 
Pharmacy, Managed Care Support Contracts, Purchased Care for Military 
Treatment Facility Enrollees, and Healthcare Supplemental Care. For a 
detailed overview of DOD's trend models, see table 1. 

Table 1: Description of DOD's Trend Models Used to Develop the Initial 
Estimate for the President's Fiscal Year 2009 Budget Request: 

Model: Pharmacy trend model; 
Purpose: To project year-to-year changes in the funding needs for 
TRICARE's retail pharmacy system and the TRICARE Mail Order Pharmacy 
for active duty personnel, active duty dependents, as well as retirees 
and dependents under age 65; 
Description: DOD used historical data to estimate trends in the TRICARE 
user numbers, utilization (i.e., the average number of prescriptions 
per user), and the average cost per prescription; 
Program element(s): * National Retail Pharmacy; 
* Purchased Healthcare Pharmaceuticals. 

Model: Health care trend model for active duty dependents as well as 
retirees and dependents under age 65; 
Purpose: To project year-to-year changes in the funding needs for 
private sector health care for active duty dependents as well as 
retirees and dependents under age 65; 
Description: DOD used historical data to estimate trends in the TRICARE 
user numbers, utilization (i.e., the average number of weighted 
inpatient and outpatient services per user), and the average cost per 
weighted service; 
Program element(s): * Managed Care Support Contracts; 
* Purchased Care for Military Treatment Facility Enrollees. 

Model: Health care trend model for active duty personnel; 
Purpose: To project year-to- year changes in the funding needs for 
private sector health care for active duty personnel; 
Description: DOD used historical data to estimate trends in the TRICARE 
user numbers, utilization (i.e., the average number of weighted 
inpatient and outpatient services per user), and the average cost per 
weighted service; 
Program element(s): * Healthcare Supplemental Care. 

Source: GAO analysis based on DOD process. 

[End of table] 

DOD developed the initial budget estimate for the remaining 20 percent 
of the Private Sector Care BAG--including administrative costs, dental 
programs, overseas purchased health care, and other miscellaneous 
purchased health care programs--by using various methodologies. For 
example, DOD projected its funding needs for administrative costs 
associated with providing health care to active duty dependents as well 
as retirees and dependents under age 65 primarily by using data on the 
fees it had negotiated with its managed care support contractors and 
its projected health care costs for these beneficiaries. This total 
process resulted in an initial budget estimate of about $14.3 billion. 

The second step in developing the fiscal year 2009 budget request for 
the Private Sector Care BAG was to adjust the initial budget estimate 
for various factors. DOD officials told us they used actual obligation 
data from fiscal years 2006 and 2007 to make adjustments to the initial 
budget estimate for fiscal year 2009, which was based on actual 
obligation data from only 7 months of fiscal year 2006. DOD also 
considered the results of economic models that were developed by a DOD 
contractor to project growth trends in retail and mail-order pharmacy 
programs and DOD's major private sector health care programs for active 
duty personnel, active duty dependents, as well as retirees and 
dependents under age 65. DOD officials compared the results of the 
economic models with the results of DOD's trend models and decided to 
reduce its initial budget estimate as a result of this comparison. DOD 
decided to use the lower of the two projections, because the difference 
between them was relatively small. Table 2 lists the adjustments, 
including factors that were not accounted for in the initial budget 
estimate, such as changes in TRICARE beneficiary cost sharing. The 
adjustments to the initial budget estimate for the Private Sector Care 
BAG resulted in a net reduction of almost $2.2 billion, bringing the 
fiscal year 2009 budget request to almost $12.2 billion. 

Table 2: Adjustments to the Initial Budget Estimate for the President's 
Fiscal Year 2009 Budget Request for the Private Sector Care BAG: 

Dollars in millions: 

Adjustment: 1. Proposed changes in TRICARE beneficiary cost sharing: 
Projected savings from DOD's proposed increase in TRICARE enrollment 
fees, deductibles, and copayments for certain TRICARE beneficiaries; 
Amount: -$1,262.1. 

Adjustment: 2. Alternative projection of pharmacy and health care cost 
growth: Difference between the results of economic models developed by 
a DOD contractor and the results of DOD's trend models; 
Amount: -$437.0. 

Adjustment: 3. Revised cost projections for DOD's TRICARE Reserve 
Select program:  
Lower than expected enrollment in the original three-tier TRICARE 
Reserve Select program.[A]; 
Amount: -$208.3. 

Adjustment: 4. Federal pricing arrangements for pharmaceuticals: 
Projected savings from federal pricing arrangements for drugs purchased 
at retail pharmacies.[B]; 
Amount: -$352.0. 

Adjustment: 5. Changes to the number of active duty personnel:  
Projected health care savings due to the reduction in the number of 
active duty personnel.[C]; 
Amount: -$131.0. 

Adjustment: 5. Changes to the number of active duty personnel: 
Projected health care savings due to the conversion of active duty 
medical positions to civilian medical positions; 
Amount: -$3.0. 

Adjustment: 5. Changes to the number of active duty personnel: 
Projected health care costs associated with an increase in the number 
of Army and Marine Corps ground forces.[D]; 
Amount: $100.9. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: Projected costs for forensic exams for sexual 
assaults; 
Amount: $1.1. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: 
Projected costs for dental anesthesia covered by TRICARE for pediatric 
cases; 
Amount: $1.1. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: 
Projected costs for expansion of TRICARE Reserve Select.[E]; 
Amount: $204.4. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: 
Projected savings from the prohibition on employers to offer military 
retirees incentives to use TRICARE; 
Amount: -$166.0. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: 
Projected costs due to the standardization of claims processing under 
TRICARE and Medicare; 
Amount: $39.0. 

Adjustment: 6. Benefit changes from the National Defense Authorization 
Act for Fiscal Year 2007: 
Projected costs of TRICARE's disease management program; 
Amount: $27.0. 

Adjustment: 7. Technical adjustments: Technical adjustments to account 
for rounding; 
Amount: $0.3. 

Total; 
Amount: -$2,185.6. 

Source: GAO analysis based on DOD data. 

[A] Through September 30, 2007,TRICARE Reserve Select consisted of 
three tiers, with reservists in each tier paying different premiums 
based on the tier for which they qualified. The expanded TRICARE 
Reserve Select program went into effect on October 1, 2007. Additional 
projected costs for the expansion are included under item 6, above. 

[B] Federal pricing arrangements refer to prices made available through 
the Federal Supply Schedule under 38 U.S.C. ï¿½ 8126. The Federal Supply 
Schedule price is generally available to all federal purchasers through 
contracts administered by the Department of Veterans Affairs. The law 
also requires drug manufacturers to provide brand-name drugs to the 
four large federal purchasers of drugs (DOD, the Department of Veterans 
Affairs, the United States Coast Guard, and the United States Public 
Health Service) at a price that does not exceed a federal ceiling 
price. If the Federal Supply Schedule price for a given brand-name drug 
exceeds the federal ceiling price, manufacturers must offer another 
price to the four large agencies that is at or below the federal 
ceiling price. The federal ceiling price does not apply to generic 
drugs. 

[C] DOD reviewed service-projected end strengths for fiscal year 2009 
and identified end strength reductions for the Navy and Air Force. 

[D] In January 2007 the President announced plans to request authority 
for a permanent increase in the Army and Marine Corps end strength 
through the Grow the Force initiative to enhance overall U.S. forces, 
reduce stress on deployable personnel, and provide necessary forces for 
success in the Global War on Terrorism. This expansion will increase 
the active Army's end strength by 50,000 soldiers and the Marine Corps' 
end strength by 19,000 marines through fiscal year 2009. In total, the 
Grow the Force initiative will increase the active Army's end strength 
by 65,000 soldiers through fiscal year 2012 and the Marine Corps' end 
strength by 27,000 through fiscal year 2011. 

[E] DOD initially projected that the costs for the expansion of TRICARE 
Reserve Select would be $368.6 million, but decided to decrease its 
projection to $204.4 million due to lower-than-expected enrollment in 
the program. 

[End of table] 

Overall, we believe DOD considered appropriate factors in developing 
the President's fiscal year 2009 budget request for the Private Sector 
Care BAG for two reasons. First, DOD employed a methodology that relied 
heavily on historical data. These data (consisting of obligation data, 
TRICARE user numbers, health care utilization rates, and health care 
and administrative costs) provided a basis for the department to 
project future funding needs and adjust past cost projections. For 
example, DOD adjusted its cost projection for the original three-tier 
TRICARE Reserve Select program based on lower-than-expected enrollment 
in the program (see table 2, item 3). Second, the department compared 
the results of the DOD-developed models to project growth trends for 80 
percent of the Private Sector Care BAG with alternative economic models 
developed by a contractor. The trend models and economic models used 
different methodologies for their projections but arrived at somewhat 
similar results. However, while DOD considered appropriate factors in 
developing the budget request, we have questioned DOD's projected 
savings from increased TRICARE beneficiary cost sharing. We have 
previously reported that DOD is unlikely to achieve some of its 
projected savings from these increases largely because we believe that 
DOD overestimated the number of beneficiaries that are likely to leave 
or not enroll in TRICARE due to these increases.[Footnote 15] In 
addition, similar proposals in the past to increase beneficiary cost 
sharing have not been enacted. Therefore, DOD will have underestimated 
its funding needs for the Private Sector Care BAG if it is unable to 
achieve some of its anticipated savings from increased TRICARE 
beneficiary cost sharing. 

The Increase from the Fiscal Year 2008 Budget Request to the Fiscal 
Year 2009 Budget Request Was Largely Due to Projected Growth in TRICARE 
User Numbers, Utilization, and Costs: 

The President's fiscal year 2009 budget request of almost $12.2 billion 
for DOD's Private Sector Care BAG was about $1.7 billion higher than 
the fiscal year 2008 budget request of about $10.5 billion. This 
increase was due to the following factors. 

* Projected growth in TRICARE user numbers,[Footnote 16] projected 
increases in health care utilization, and projected increases in health 
care and administrative costs increased the budget request for the 
Private Sector Care BAG by about $995 million above the fiscal year 
2008 budget request. 

* Higher projected funding needs for congressionally mandated benefit 
changes relative to fiscal year 2008 increased the budget request by an 
additional $107 million in fiscal year 2009. 

* DOD's fiscal year 2009 cost savings projection for its plan to 
increase beneficiary cost sharing was about $600 million lower than in 
fiscal year 2008, which resulted in an increase in the fiscal year 2009 
budget request. Projected savings in fiscal year 2009 were lower 
largely because DOD has proposed a smaller increase for TRICARE 
enrollment fees than it had in the fiscal year 2008 budget request. 

* The increases were partially offset by projected savings from federal 
pricing arrangements for drugs purchased at retail pharmacies.[Footnote 
17] These savings were expected to be about $54 million higher in 
fiscal year 2009 than the expected savings in fiscal year 
2008.[Footnote 18] This increase in projected savings was due to 
assumed growth from fiscal year 2008 to fiscal year 2009 in DOD's 
retail pharmacy costs. 

Agency Comments: 

We received written comments on a draft of this report from DOD. DOD 
stated that it concurs with our findings and believes that we 
appropriately captured the process DOD uses to develop the budget 
request for the Private Sector Care BAG. DOD's written comments are 
reprinted in enclosure IV. DOD also provided technical comments, which 
we incorporated as appropriate. 

We are sending copies of this report to the Secretary of Defense and 
appropriate congressional committees. We will also make copies 
available to others upon request. In addition, the report is available 
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have questions about this report, please contact 
Denise M. Fantone at 202-512-7114 or [email protected] or Sharon Pickup 
at 202-512-9619 or [email protected]. Contact points for our Office of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff members who made key contributions to 
this report are listed in enclosure IV. 

Signed by: 

Denise M. Fantone: 
Acting Director: 
Health Care: 

Signed by: 

Sharon Pickup: 
Director: 
Defense Capabilities and Management: 

Enclosures - 5: 

[End of section] 

Enclosure I: Scope and Methodology: 

Our objectives were to review (1) the Department of Defense's (DOD) 
justification for the President's fiscal year 2009 request for the 
Private Sector Care Budget Activity Group (BAG), including the 
underlying estimates and the extent to which DOD considered historical 
information; and (2) changes between this request and the request for 
fiscal year 2008 and factors causing these changes. 

To analyze DOD's justification for the fiscal year 2009 budget request 
for the Private Sector Care BAG including the underlying estimates and 
the extent to which DOD considered historical information, we reviewed 
the analyses DOD used to develop this budget request. As part of our 
review, we examined how DOD (1) developed the initial budget estimate 
for the Private Sector Care BAG and (2) adjusted this estimate for 
various factors to form the President's fiscal year 2009 budget 
request. Specifically, we examined how DOD developed its initial budget 
estimate by reviewing (1) the fiscal year 2006 obligation data that DOD 
used as a baseline for this estimate; (2) the three models that DOD 
used to project cost trends for its private sector health care and 
pharmacy programs for active duty personnel, active duty dependents, as 
well as retirees and dependents under age 65; and (3) DOD's methodology 
for projecting the costs for the remainder of the Private Sector Care 
BAG. We examined how DOD adjusted the initial budget estimate to form 
the President's fiscal year 2009 budget request by identifying all of 
the changes DOD made to the estimate and analyzing the methodology DOD 
used to project the financial implications of these changes. We also 
considered related GAO reports and interviewed DOD officials in the 
TRICARE Management Activity (TMA) and the Office of the Under Secretary 
of Defense (Comptroller).[Footnote 19] These officials were responsible 
for developing the budget request for the Private Sector Care BAG. 

To identify the changes from the fiscal year 2008 budget request for 
the Private Sector Care BAG to the budget request for fiscal year 2009 
and the factors causing these changes, we reviewed the factors that DOD 
identified as contributing to the increase in the budget request and 
the dollar values associated with them. 

We also reviewed budget and obligation data related to the Defense 
Health Program but we did not validate these data. We have raised 
concerns about the quality of DOD's financial data in previous 
reports.[Footnote 20] However, we determined that these data were 
sufficiently reliable to understand DOD's budget formulation process 
and the underlying assumptions used to develop the President's budget 
request. Our assessments consisted of (1) manually and electronically 
checking the data for obvious errors and missing values, (2) 
interviewing knowledgeable DOD officials responsible for overseeing the 
data sources in question to determine if they had any concerns about 
the quality of their data and internal controls in place to ensure data 
quality, and (3) reviewing documentation on the data sources in 
question. 

We conducted this performance audit from January 2008 to May 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Enclosure II: 

Table: Description of the Defense Health Program Operation and 
Maintenance Budget Activity Groups: 

The budget request for the Defense Health Program Operation and 
Maintenance (O&M) is distributed into seven Budget Activity Groups 
(BAGs). The name and description of each of the seven BAGs are below. 

Budget Activity Group: In-House Care; 
Description of Budget Activity Group: This BAG provides for the 
delivery of patient care inside and outside the continental United 
States. The program includes inpatient and outpatient care in 
Department of Defense (DOD) medical centers, inpatient facilities, and 
medical clinics for surgical and nonsurgical conditions for military 
health system beneficiaries. It also provides for dental care and 
pharmaceuticals. 

Budget Activity Group: Private Sector Care; 
Description of Budget Activity Group: This BAG provides funds for 
medical and dental care plus pharmaceuticals received by DOD-eligible 
beneficiaries in the private sector. The BAG includes Purchased 
Healthcare Pharmaceuticals, National Retail Pharmacy, Managed Care 
Support Contracts, Purchased Care for Military Treatment Facility 
Enrollees, Purchased Dental Care, Uniformed Services Family Health 
Program, Healthcare Supplemental Care, Dental Supplemental Care, 
Continuing Health Education/Capitalization of Assets, Overseas 
Purchased Healthcare, Miscellaneous Purchased Healthcare, and 
Miscellaneous Support Activities. See enclosure III for additional 
information about these programs. 

Budget Activity Group: Consolidated Health Support; 
Description of Budget Activity Group: This BAG provides funds for seven 
functions which support delivery of patient care worldwide. It 
comprises Examining Activities, Other Health Activities, Military 
Public/Occupational Health, Veterinary Services, Military Unique-Other 
Medical Activities, Aeromedical Evacuation System, and Armed Forces 
Institute of Pathology. 

Budget Activity Group: Information Management; 
Description of Budget Activity Group: This BAG provides for the 
Information Management and Information Technology resources dedicated 
to the operation and maintenance of Defense Health Program facilities. 
This program includes the Tri-Service Information 
Management/Information Technology (IM/IT), Service Medical IM/IT, and 
Defense Health Program IM/IT Support Programs. The O&M portion of the 
Tri-Service centrally- managed IM/IT program funds the costs of program 
management, system and infrastructure sustainment, annual software 
licensing fees, and software and hardware maintenance fees. The Service 
Medical IM/IT funds noncentrally managed programs. The Defense Health 
Program IM/IT funds services in support of the program. 

Budget Activity Group: Management Activities; 
Description of Budget Activity Group: This BAG provides funds for 
Services Medical Headquarters and TRICARE Management Activity functions 
supporting Military Health System worldwide patient care delivery. It 
includes Management Headquarters, the TRICARE Management Activity, and 
the Business Management Modernization Program. 

Budget Activity Group: Education and Training; 
Description of Budget Activity Group: This BAG provides funds for the 
three primary categories that provide support for education and 
training opportunities for personnel with the Defense Health Program, 
including the Health Professions Scholarship Program, Uniformed 
Services University of the Health Sciences, and Education and Training 
for specialized skill training and professional development education 
programs. 

Budget Activity Group: Base Operations-Communications; 
Description of Budget Activity Group: This BAG provides funds for the 
operation and maintenance of Defense Health Program facilities. It 
provides for facilities and services at military medical activities 
supporting active duty combat forces, reserve and guard components, 
training, and eligible beneficiaries. This BAG includes the following: 
Facility Restoration and Modernization, Facility Sustainment, 
Facilities Operations, Base Communications, Base Operations Support, 
Environmental, Visual Information Systems, and Demolition/Disposal of 
Excess Facilities. 

Source: DOD budget justification documents. 

[End of table] 

[End of section] 

Enclosure III: 

Table: Description of Operations Financed by Defense Health Program: 
Private Sector Care Budget Activity Group: 

This Budget Activity Group (BAG) provides for private sector medical 
care, dental care, and pharmaceuticals received by Department of 
Defense (DOD) eligible beneficiaries. Twelve program elements make up 
the Private Sector Care BAG. 

Program element: Purchased Healthcare Pharmaceuticals; 
Description of program element: This program element includes 
pharmaceutical costs associated with contractual pharmacy services 
providing authorized benefits to eligible beneficiaries via the TRICARE 
Mail Order Pharmacy Program. 

Program element: National Retail Pharmacy; 
Description of program element: This program element includes 
pharmaceutical costs associated with contractual pharmacy services 
providing authorized benefits to eligible beneficiaries via the TRICARE 
Retail Pharmacy contract, which provides network pharmaceutical 
prescription benefits for medications from local economy 
establishments. 

Program element: Managed Care Support Contracts; 
Description of program element: This program element funds the TRICARE 
Managed Care Support Contracts, which provide a managed care program 
that integrates a standardized health benefits package with military 
medical treatment facilities and civilian network providers on a 
regional basis. With the full deployment of TRICARE, all but a small 
portion of the standard Civilian Health and Medical Program of the 
Uniformed Services benefits have been absorbed into the Managed Care 
Support Contracts. This program element includes health care costs 
provided in civilian facilities and by private practitioners to retired 
military personnel and authorized family members of active duty, 
retired, or deceased military service members. 

Program element: Purchased Care for Military Treatment Facility 
Enrollees; 
Description of program element: This program element includes 
underwritten costs for providing health care benefits to the Military 
Treatment Facility enrollees in the private sector as authorized under 
the Civilian Health and Medical Program of the Uniformed Services. 

Program element: Purchased Dental Care; 
Description of program element: This program element includes the 
government paid portion of insurance premiums which provides dental 
benefits in civilian facilities and by private practitioners for 
beneficiaries enrolled in the Dental Program. Beneficiaries eligible 
for enrollment are (a) active duty family members and (b) certain 
reservists and their family members. 

Program element: Uniformed Services Family Health Program; 
Description of program element: This program element provides TRICARE-
like benefits authorized through contracts with designated civilian 
hospitals in selected geographic markets to beneficiaries who reside in 
one of these markets and who are enrolled in the program. 

Program element: Healthcare Supplemental Care; 
Description of program element: This program element provides the 
TRICARE benefit to active duty servicemembers and other designated 
eligible patients who receive health care services in the civilian 
sector and non-DOD facilities either referred or nonreferred from 
military treatment facilities, including emergency care. This program 
element also covers health care sought in the civilian sector or non-
DOD facilities due to active duty assignments in remote locations under 
TRICARE Prime Remote.[A] It does not cover care to active duty 
servicemembers stationed overseas who receive health care in the 
private sector, which is paid under the Overseas Purchased Healthcare 
program element. 

Program element: Dental Supplemental Care; 
Description of program element: This program element provides for 
uniform dental care and administrative costs for active duty 
servicemembers receiving dental care services in the civilian sector, 
including from Veteran Administration facilities. All dental claims are 
managed, paid, and reported by the Military Medical Support Office. 

Program element: Continuing Health Education/Capitalization of Assets; 
Description of program element: This program element provides for 
support of graduate medical education and capital investment within 
civilian facilities that provide services to the Military Healthcare 
System and Medicare. 

Program element: Overseas Purchased Healthcare; 
Description of program element: This program element includes coverage 
for delivery of TRICARE benefits in civilian facilities by private 
practitioners to eligible active duty and active duty family members 
through the Global Remote Overseas Contract and foreign claims for 
nonactive duty beneficiaries, including Medicare eligibles. The 
Medicare eligibles claims are administered by the Medicare Eligible 
Retiree Health Care Fund. This program element also includes the 
Supplemental Care program, which pays for care provided overseas to 
active duty members. 

Program element: Miscellaneous Purchased Healthcare; 
Description of program element: This program element provides for 
payments of health care services in civilian facilities by private 
practitioners not captured in other specifically defined elements. It 
includes administrative, management, and health care costs for 
Custodial Care, Special and Emergent Care Claims, Alaska Claims, 
Expanded Cancer, Dual-Eligible Beneficiaries Program, Transition 
Assistance Programs, the TRICARE Reserve Select premium-based program 
for Guard/Reservists and their family members, TRICARE Management 
Activity managed demonstrations, and congressionally directed health 
care programs. 

Program element: Miscellaneous Support Activities; 
Description of program element: This program element provides for 
payments of costs for functions or services in support of health care 
delivery not actual health care. Contracts for marketing and education 
functions, claims auditing, e-Commerce, and the National Quality 
Monitoring Service are reflected in this program element. 

Source: DOD budget justification documents. 

[A] TRICARE Prime Remote and TRICARE Prime Remote for Active Duty 
Family Members are managed care options for active duty service members 
and their eligible family members while they are assigned to remote 
duty stations in the United States. 

[End of table] 

[End of section] 

Enclosure IV: Comments from the Department of Defense: 

The Assistant Secretary Of Defense: 
200 Defense Pentagon: 
Washington, Dc 20301-1 200: 

Health Affairs: 

May 2, 2008:  

Ms. Janet A. St Laurent: 
Managing Director, Defense Capabilities and Management: 
U.S. Government Accountability Office 441 G. Street, N.W. 
Washington, DC 20548 

Dear Ms. St Laurent: 

This is the Department of Defense response to the Government 
Accountability Office (GAO) draft report, GAO-08-721R, "Military Health 
Care: Review of the President's Fiscal Year 2009 Budget Request for the 
Defense Health Program's Private Sector Care Budget Activity Group," 
dated May 9, 2008 (GAO Code 351143). 

Thank you for the opportunity to review and comment on the draft 
report. Overall, I concur with the information contained in the Draft 
Report by GAO, and believe you have appropriately captured the process 
the TRICARE Management Activity uses to develop, document, and support 
Private Sector Care requirements and budget requests. The technical 
comments are enclosed. 

My points of contact on this action are Ms. Farah Sarshar (Functional), 
who can be reached at (703) 681-6779 and Mr. Gunther Zimmerman (Audit 
Liaison) who can be reached at (703) 681-4360. 

Sincerely,

Signed by: 

S. Ward Casscells, MD: 

Enclosure: 
As stated: 

Government Accountability Office Draft: 
Report Dated MAY 1, 2008: 
GAO-08-721R (GAO CODE 351143): 

Military Health Care: Review of the President's Fiscal Year 2009 Budget 
Request for the Defense Health Program's Private Sector Care Budget 
Activity Group: 

Department Of Defense Comments: 

Technical Comments:

1. Page 8, "This process resulted in an initial budget estimate of 
about $14.3 billion." TRICARE Management Activity (TMA) recommends this 
sentence be changed to: "This total process resulted in an initial 
budget estimate of about $14.3 billion," 2. Page 9, "Department of 
Defense (DoD) officials compared the results of the economic models 
with the results of DoD's trend models and decided to reduce its 
initial budget estimate as a result of this comparison because DoD 
wanted to use the lower of the two projections." TMA recommends this 
sentence be changed to: "DoD officials compared the results of the 
economic models with the results of DoD's trend models and decided to 
reduce its initial budget estimate as a result of this comparison. DoD 
believed additional risk could be taken within the Defense Health 
Program, and therefore chose to accept the lower of the two estimates."

[End of section] 

Enclosure V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Denise M. Fantone (202) 512-7114 or [email protected]: 

Sharon Pickup (202) 512-9619 or [email protected]: 

Acknowledgments: 

In addition to the contacts named above, key contributors to this 
report were Tom Conahan, Assistant Director; Laura Durland, Assistant 
Director; John Bumgarner; Cynthia Forbes; Mae Jones; Ron La Due Lake; 
Brian Mateja; Lonnie McAllister; Charles Purdue; Joseph Rutecki; and 
Michael Zose. 

[End of section] 

Related GAO Products: 

Military Health Care: Cost Data Indicate That TRICARE Reserve Select 
Premiums Exceeded the Costs of Providing Program Benefits. GAO-08-104. 
Washington, D.C.: December 21, 2007. 

Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset 
Increasing Health Care Spending, but Projected Savings Are Likely 
Overestimated. GAO-07-647. Washington, D.C.: May 31, 2007. 

High-Risk Series, An Update: Department of Defense Financial 
Management. GAO-07-310. Washington, D.C.: January 31, 2007. 

Defense Travel System: Reported Savings Questionable and Implementation 
Challenges Remain. GAO-06-980. Washington, D.C.: September 26, 2006. 

Financial Management: Improvements Under Way but Serious Financial 
Systems Problems Persist. GAO-06-970. Washington, D.C.: September 26, 
2006. 

Department of Defense: Sustained Leadership Is Critical to Effective 
Financial and Business Management Transformation. GAO-06-1006T. 
Washington, D.C.: August 3, 2006. 

Defense Working Capital Fund: Military Services Did Not Calculate and 
Report Carryover Amounts Correctly. GAO-06-530. Washington, D.C.: June 
27, 2006. 

Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have Struggled 
to Resolve Military Debts. GAO-06-494. Washington, D.C.: April 27, 
2006. 

Environmental Liabilities: Long-Term Fiscal Planning Hampered by 
Control Weaknesses and Uncertainties in the Federal Government's 
Estimates. GAO-06-427. Washington, D.C.: March 31, 2006. 

Fiscal Year 2005 U.S. Government Financial Statements: Sustained 
Improvement in Federal Financial Management Is Crucial to Addressing 
Our Nation's Financial Condition and Long-Term Fiscal Imbalance. GAO- 
06-406T. Washington, D.C.: March 1, 2006. 

DOD Business Transformation: Defense Travel System Continues to Face 
Implementation Challenges. GAO-06-18. Washington, D.C.: January 18, 
2006. 

Global War on Terrorism: DOD Needs to Improve the Reliability of Cost 
Data and Provide Additional Guidance to Control Costs. GAO-05-882. 
Washington, D.C.: September 21, 2005. 

Army Corps of Engineers: Improved Planning and Financial Management 
Should Replace Reliance on Reprogramming Actions to Manage Project 
Funds. GAO-05-946. Washington, D.C.: September 16, 2005. 

DOD Problem Disbursements: Long-standing Accounting Weaknesses Result 
in Inaccurate Records and Substantial Write-offs. GAO-05-521. 
Washington, D.C.: June 2, 2005. 

[End of section] 

Footnotes: 

[1] The Defense Health Program account is established under 10 U.S.C. 
Sec. 1100 and is funded by a separate Defense Health Program account 
appropriation every year in the Department of Defense Appropriations 
Act. In addition to appropriations, the Defense Health Program account 
contains other sources of spending authority, such as offsetting 
collections, which are funds collected by the government that are 
required by law to be credited directly to an expenditure account. 

[2] DOD provides these health care services through its TRICARE 
program. 

[3] Budget Activity Groups represent major programs within the Defense 
Health Program. 

[4] H.R. Conf. Rep. No. 110-434, at 355 (2007). 

[5] Increases in beneficiary cost sharing refer to higher TRICARE 
enrollment fees, deductibles, and copayments for certain TRICARE 
beneficiaries. See GAO, Military Health Care: TRICARE Cost-Sharing 
Proposals Would Help Offset Increasing Health Care Spending, but 
Projected Savings Are Likely Overestimated, GAO-07-647 (Washington, 
D.C.: May 31, 2007). 

[6] In obligation is a definite commitment that creates a legal 
liability of the government for the payment of goods and services 
ordered or received. 

[7] See, for example, GAO, High-Risk Series, An Update: Department of 
Defense Financial Management, GAO-07-310 (Washington, D.C.: Jan. 31, 
2007). 

[8] In our prior work, we stated that projected savings from DOD's 
proposal to increase TRICARE cost sharing for certain beneficiaries in 
the form of higher enrollment fees, deductibles, and copayments are 
likely too high. See GAO-07-647. 

[9] The Defense Health Program does not include funding for about 1.6 
million Medicare-eligible beneficiaries. Costs for these beneficiaries 
are funded through the Medicare Eligible Retiree Health Care Fund. 

[10] H.R. Conf. Rep. No. 110-477, at 937 (2008). Savings associated 
with increased TRICARE beneficiary cost sharing are also a part of the 
President's budget request for fiscal year 2009. 

[11] See GAO-07-647. 

[12] Budget authority is the authority provided by federal law to enter 
into financial obligations that will result in immediate or future 
outlays involving federal government funds. DOD excludes any 
obligations related to the Global War on Terrorism from these data 
because these costs are not funded through the Private Sector Care BAG. 
The Defense Health Program O&M appropriation allows for carryover 
funds, which remain available for new obligations from one fiscal year 
until the end of the next fiscal year. Prior to fiscal year 2008, 
carryover of up to 2 percent of the initial appropriation was allowed, 
but the Fiscal Year 2008 Department of Defense Appropriations Act 
limited the allowable carryover amount to 1 percent. The unobligated 
balance, or the portion of the budget authority that was not obligated 
in 2006, was not factored into the baseline because the baseline was 
developed using actual obligations, which are a more accurate 
reflection of the size of the program (or program capacity). 

[13] Since fiscal year 2002, Congress has not allowed DOD to reprogram 
funds into the Private Sector Care BAG without obtaining prior 
congressional approval. H.R. Conf. Rep. No. 107-298, at 221 (2001). 
However, it does generally allow DOD to reprogram funds out of the 
Private Sector Care BAG. 

[14] In this report, health care utilization refers to the average 
number of prescriptions, weighted inpatient services, and weighted 
outpatient services per user. DOD weighted both inpatient and 
outpatient services by the relative intensity of resources required to 
perform each service. 

[15] See GAO-07-647. 

[16] DOD's projected growth in TRICARE user numbers includes increases 
in the Army and Marine Corps end strength through the Grow the Force 
initiative. 

[17] Federal pricing arrangements refer to prices made available 
through the Federal Supply Schedule under 38 U.S.C. ï¿½ 8126. The Federal 
Supply Schedule price is generally available to all federal purchasers 
through contracts administered by the Department of Veterans Affairs. 
The law also requires drug manufacturers to provide brand-name drugs to 
the four large federal purchasers of drugs (DOD, the Department of 
Veterans Affairs, the United States Coast Guard, and the United States 
Public Health Service) at a price that does not exceed a federal 
ceiling price. If the Federal Supply Schedule price for a given brand-
name drug exceeds the federal ceiling price, manufacturers must offer 
another price to the four large agencies that is at or below the 
federal ceiling price. The federal ceiling price does not apply to 
generic drugs. 

[18] DOD officials told us that some of DOD's expected savings from 
federal pricing arrangements in fiscal year 2008 were not realized and 
that it is unlikely that all of the department's expected savings for 
fiscal year 2009 will be realized. 

[19] For example, GAO, Military Health Care: Cost Data Indicate That 
TRICARE Reserve Select Premiums Exceeded the Costs of Providing Program 
Benefits, GAO-08-104 (Washington, D.C.: Dec. 21, 2007) and GAO, 
Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset 
Increasing Health Care Spending, but Projected Savings Are Likely 
Overestimated, GAO-07-647 (Washington, D.C.: May 31, 2007). 

[20] See, for example, GAO, High-Risk Series, An Update: Department of 
Defense Financial Management, GAO-07-310 (Washington, D.C.: Jan. 31, 
2007).

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