Defense Health Care: Expansion of the CHAMPUS Reform Initiative Into
DOD's Region 6 (Letter Report, 02/09/94, GAO/HEHS-94-100).

Under the CHAMPUS Reform Initiative, private-sector contractors provide
beneficiaries with managed health care services under regional, at-risk
contracts that supplement the care provided in military hospitals and
clinics.  In a December 1993 letter, the Secretary of Defense told
Congress that the Initiative, with some benefit revisions and managerial
changes, would be the most cost-efficient way of providing health care
to beneficiaries in Arkansas, Oklahoma, and parts of Louisiana and
Texas--the Defense Department's (DOD) health service region 6.  GAO
found that the analyses supporting DOD's certification for expanding the
CHAMPUS Reform Initiative into region 6 were done in a reasonable way.
Moreover, the analyses fairly represent the likely impact of the
modified CHAMPUS Reform Initiative on cost, quality, and access.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-100
     TITLE:  Defense Health Care: Expansion of the CHAMPUS Reform 
             Initiative Into DOD's Region 6
      DATE:  02/09/94
   SUBJECT:  Health care services
             Health care programs
             Health services administration
             Beneficiaries
             Health care planning
             Cost analysis
             Comparative analysis
             Program evaluation
             Health care cost control
             Health care costs
IDENTIFIER:  CHAMPUS
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS Reform Initiative
             Arkansas
             Oklahoma
             Louisiana
             Texas
             California
             Hawaii
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairmen, and the Ranking Minority Members, Senate and
House Committees on Armed Services

February 1994

DEFENSE HEALTH CARE - EXPANSION OF
CHAMPUS REFORM INITIATIVE INTO
DOD'S REGION 6

GAO/HEHS-94-100

CRI Expansion


Abbreviations
=============================================================== ABBREV

  CBO - Congressional Budget Office
  CRI - CHAMPUS Reform Initiative
  DOD - Department of Defense
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services

Letter
=============================================================== LETTER


B-256201

February 9, 1994

The Honorable Sam Nunn
Chairman
The Honorable Strom Thurmond
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ronald V.  Dellums
Chairman
The Honorable Floyd D.  Spence
Ranking Minority Member
Committee on Armed Services
House of Representatives

This report responds to the requirement in the National Defense
Authorization Act for Fiscal Year 1993 (P.L.  102-484,  712) that
the Comptroller General and the Director of the Congressional Budget
Office (CBO) report to the Congress on their evaluations of the
Secretary of Defense's certification on expanding the CHAMPUS Reform
Initiative (CRI).\1 The CBO is reporting separately on its cost
estimates related to the expansion. 

In a letter dated December 27, 1993, the Secretary of Defense
certified to the Congress that CRI, with some benefit revisions and
managerial changes, would be the most efficient method of providing
health care to beneficiaries in Arkansas, Oklahoma, and portions of
Louisiana and Texas (DOD's health service region 6).\2 We and CBO
have previously reported on DOD's certification for expanding CRI to
Washington and Oregon (DOD's region 11).\3


--------------------
\1 The Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS) pays for a substantial portion of the health care that
civilian hospitals, physicians, and other providers give to
Department of Defense (DOD) beneficiaries.  Retirees and their
dependents and dependents of active-duty personnel and of deceased
members receive care from these providers if they cannot obtain it at
military facilities.  CRI currently operates in California; Hawaii;
New Orleans, Louisiana; and in the areas surrounding three military
hospitals that were closed in 1992 and 1993.  In July 1993, DOD
awarded a contract to continue CRI in California and Hawaii.  This
award was subsequently protested by two unsuccessful bidders.  On
December 20, 1993, GAO sustained the protest on the basis that DOD
did not follow the evaluation scheme for technical and cost proposals
as stated in the solicitation. 

\2 DOD has established 12 health service regions throughout the
country and is working toward developing a single, integrated health
care network for each region.  This report refers to the program
proposed for expansion of CRI as the "modified CRI program."

\3 Defense Health Care:  Expansion of the CHAMPUS Reform Initiative
Into Washington and Oregon (GAO/HRD-93-149, Sept.  20, 1993) and
Evaluating the Cost of Expanding the CHAMPUS Reform Initiative Into
Washington and Oregon, CBO (Nov.  1993). 


   BACKGROUND
------------------------------------------------------------ Letter :1

Under both CRI and the modified CRI program, private-sector
contractors provide managed health care services under regional,
at-risk contracts for CHAMPUS-eligible beneficiaries to supplement
the care provided in military hospitals and clinics.  Under both
programs, beneficiaries may choose one of three options:  (1) a
health maintenance organization program called Prime, which offers
improved benefits and reduced beneficiary out-of-pocket costs as
compared to standard CHAMPUS; (2) a preferred provider organization
called Extra, which requires a higher level of beneficiary
cost-sharing than under Prime; and (3) a continuation in standard
CHAMPUS. 

The Department of Defense Appropriations Act, 1994 (P.L.  103-139 
8025) directs DOD to implement, nationwide, managed care contracts
similar to CRI by September 30, 1996, and to award four such
contracts in fiscal year 1994.  Expansion of CRI is also subject to
section 712 of the National Defense Authorization Act for Fiscal Year
1993 (P.L.  102-484), which prohibits expansion of CRI to any
additional location unless the Secretary certifies that it would be
the most efficient method for providing health care services to
covered beneficiaries in the new location.  In making this
determination, the Secretary is required to consider CRI's
cost-effectiveness and its effect on access to and the quality of
care provided.  The law, as amended by section 720 of the National
Defense Authorization Act for Fiscal Year 1994 (P.L.  103-160), also
requires the Secretary, in considering cost-effectiveness, to ensure
that the combined cost of care in military facilities and under
CHAMPUS will not increase to either the government or beneficiaries,
as a result of the expansion. 

In 1993, RAND completed an evaluation of the CRI program in
California and Hawaii.  RAND found that CRI was 8 percent more
expensive than standard CHAMPUS in those two states during the
evaluation period.\4 In an effort to reduce program costs, DOD is
planning to implement the modified CRI program, which differs
somewhat from the CRI program now operating in California and Hawaii. 
The modified CRI program imposes annual enrollment fees on
beneficiaries and increases beneficiary copayments.  It also differs
by including several managerial changes designed to reduce the
program's cost to the government.  One of these changes is the use of
civilian primary care physicians to serve as "gatekeepers" to control
access to nonemergency outpatient services at military treatment
facilities by Prime enrollees.  Under the CRI program in California
and Hawaii, Prime enrollees, until recently, were free to use the
outpatient services in military hospitals at their own discretion. 

RAND's evaluation also included a comprehensive analysis of
beneficiaries' access to care under each of the health care options
offered under CRI as well as an evaluation of the quality of care
provided under each option.  RAND concluded that beneficiaries'
access to care under CRI was superior to that under standard CHAMPUS
primarily because of reduced out-of-pocket costs for those who chose
the Prime and Extra options and because of the designation of program
personnel to help beneficiaries identify health care providers to
meet their needs.  RAND also concluded that there was no discernable
difference in the quality of care received under CRI. 


--------------------
\4 Susan D.  Hosek, et al., Evaluation of the CHAMPUS Reform
Initiative, Vol.  3, Health Care Utilization and Costs, RAND,
R-4244/3-HA (1993). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

Jointly with CBO representatives, we interviewed DOD health care
officials as well as contractor personnel responsible for the
analyses underlying DOD's certification.  In addition, we reviewed
extensive documentation regarding the procedures, assumptions, and
data used in those analyses, primarily those pertaining to the
estimated combined costs of care in military facilities and from
civilian providers under the modified CRI program.  We also reviewed
RAND's study that assessed the impact of CRI on health care
utilization, cost, beneficiaries' access to care in California and
Hawaii and the quality of the care provided.  Although we did most of
our work on this DOD certification in January and February 1994, we
also drew on an extensive amount of work we have previously done
concerning both the CRI program in California and Hawaii and DOD's
proposed expansion of CRI in the states of Washington and Oregon. 
All of these efforts were conducted in accordance with generally
accepted government auditing standards. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :3

We found that the analyses conducted in support of DOD's
certification for expanding the modified CRI program to DOD's region
6 were done in a reasonable way.  Moreover, the analyses fairly
represent the likely impact of the modified CRI program on cost,
quality, and access. 


   DOD'S ASSESSMENT OF THE IMPACT
   OF THE MODIFIED CRI PROGRAM IN
   REGION 6
------------------------------------------------------------ Letter :4

To assess the cost impact of the modified CRI program in region 6,
DOD engaged the services of Lewin-VHI, Inc., the same contractor it
used to assess the cost impact in Washington and Oregon.  For its
region 6 analysis, Lewin-VHI first estimated the cost of the standard
CHAMPUS program plus the cost of military hospitals and clinics for
fiscal years 1995 through 1999.  It then estimated the costs of
operating the modified CRI program in the region over the same time
period and computed the difference. 

Lewin-VHI drew on historical data from the standard CHAMPUS program
in estimating CHAMPUS costs and estimated the costs of military
hospitals and clinics using a modeling system that forecasts military
facility workload based on projected changes in the eligible
population and capacity.  To estimate the cost of the modified CRI
program, Lewin-VHI identified program features that seemed likely to
decrease costs relative to standard CHAMPUS, such as a contractor's
ability to obtain discounts from health care providers.  Lewin-VHI
also identified other features that would increase costs, such as the
increase in health services utilization due to reduced beneficiary
out-of-pocket costs provided by the modified CRI program.  The
contractor then estimated the size of the effects on the government's
cost of each identified feature of the modified CRI program. 

Rather than developing one cost estimate as it did for Washington and
Oregon, Lewin-VHI developed three cost estimates for region 6,
varying the underlying assumptions\5 to reflect a low cost estimate,
a high cost estimate, and a most-likely cost estimate.  The most
likely and lower cost estimates showed that total military health
care costs (military hospitals and clinics and CHAMPUS) under the
modified CRI program would be 3.5 percent and 7.7 percent,
respectively, less expensive in region 6 than if the standard CHAMPUS
program remained in effect.  DOD's higher cost estimate showed that
total costs with the modified CRI program would be about .8 percent
more expensive. 

Based on our review of the work conducted by Lewin-VHI to support
DOD's certification, we believe that the cost comparison approach it
employed for region 6 was reasonable.  We agree with Lewin-VHI on the
modified CRI program features that seem likely to increase and
decrease costs relative to the standard CHAMPUS program.  We also
found that the Lewin-VHI assumptions on the magnitude of these likely
changes were generally well supported.  On this basis, we conclude
that the methods used by Lewin-VHI to estimate the costs of the
modified CRI program proposed for implementation in region 6 are
sound.\6

With regard to the potential impact in region 6 of the modified CRI
program on access to care and quality of care, DOD relied on its
earlier assessment of these factors done for expanding CRI into
Washington and Oregon.  That earlier assessment, in turn, was based
heavily on beneficiaries' experiences under the CRI program in
California and Hawaii which were extensively studied and reported on
by RAND in 1993.  In effect, DOD used the CRI experiences regarding
beneficiaries' access to care and the quality of that care as a proxy
for the likely prospective experiences for beneficiaries in both
Washington and Oregon and in region 6.  On this basis, DOD concluded
that beneficiaries' access to care under the modified CRI program
would be enhanced and that the quality of care would likely not be
changed from that which beneficiaries would receive under standard
CHAMPUS.  We believe that DOD's approach to predicting the likely
impact of the modified CRI program on access and quality is sound,
particularly given the lack of more recent experiences than those
under CRI. 


--------------------
\5 These assumptions included those involving likely beneficiary
enrollment, extent of utilization and claims management, varied
provider discounts, etc. 

\6 In our September 1993 report concerning the expansion of CRI into
Washington and Oregon, we stated that DOD had failed to compare CRI
with two other approaches to managed care that it was testing.  Since
then, the law has been amended to require DOD to implement CRI
nationwide by the end of fiscal year 1996.  DOD believes that this
new congressional direction supports its decision not to compare the
cost of the modified CRI program with the cost of other approaches. 
Although the certification requirement is essentially unchanged, we
agree that DOD's options regarding the implementation of CRI are now
more restricted. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

We discussed our report with officials in DOD's Office of the
Assistant Secretary of Defense (Health Affairs).  These officials
agreed with our conclusions. 

We are sending copies of this report to the Secretary of Defense; the
Director, Office of Management and Budget; and interested
congressional committees.  We will also make copies available to
others upon request. 

The report was prepared under the direction of David P.  Baine,
Director, Federal Health Care Delivery Issues.  If you have any
questions, you may contact him at (202) 512-7101.  Major contributors
to this report are listed in appendix I. 

Janet L.  Shikles
Assistant Comptroller General


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   HEALTH, EDUCATION, AND HUMAN
   SERVICES DIVISION, WASHINGTON,
   D.C. 
--------------------------------------------------------- Appendix I:1

Stephen P.  Backhus, Assistant Director, (202) 512-7120
James P.  Wright, Assistant Director


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:2

Barry R.  Bedrick, Associate General Counsel
Robert G.  Crystal, Assistant General Counsel
Julian P.  Klazkin, Senior Attorney


   NORFOLK REGIONAL OFFICE
--------------------------------------------------------- Appendix I:3

Steve J.  Fox, Regional Management Representative
William L.  Mathers, Evaluator-in-Charge
