Defense Health Care: Despite TRICARE Procurement Improvements, Problems
Remain (Letter Report, 08/03/95, GAO/HEHS-95-142).

Pursuant to a congressional request, GAO reviewed defense health care,
focusing on: (1) procurement process problems identified by the bid
protest experiences; (2) the Department of Defense's (DOD) actions to
improve and help ensure the fairness of the procurement process; and (3)
what problems and concerns remain and whether further actions are
needed.

GAO found that: (1) DOD has changed its managed care procurement process
to address such past problems as its failure to evaluate bidders'
proposed prices according to solicitation criteria, the lack of
communication between technical and price evaluators, and its failure to
properly evaluate bidders' cost containment approaches; (2) although DOD
has revised its evaluation methodology and has added new discussion
requirements to improve future procurements and ensure better treatment
of bidders, protests are likely to continue, given the vast sums of
money at stake and the relatively small expense of protesting; (3) DOD
may have difficulty meeting the congressional deadline for awarding all
contracts by September 1996, since procurements have been taking twice
as long as planned; (4) DOD has tried to make up for procurement delays
by reducing its transition period after contract award for contractors
to deliver health care, but this action has created major risks; and (5)
DOD must establish required qualifications for evaluation board members,
since their tasks have become so specialized.

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

 REPORTNUM:  HEHS-95-142
     TITLE:  Defense Health Care: Despite TRICARE Procurement 
             Improvements, Problems Remain
      DATE:  08/03/95
   SUBJECT:  Defense procurement
             Service contracts
             Health care services
             Contract award protests
             Contract negotiations
             Procurement practices
             Health services administration
             Military personnel
             Beneficiaries
             Health care cost control
IDENTIFIER:  Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             DOD TRICARE Program
             Medicaid Program
             CHAMPUS Reform Initiative
             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 Congressional Requesters

August 1995

DEFENSE HEALTH CARE - DESPITE
TRICARE PROCUREMENT IMPROVEMENTS,
PROBLEMS REMAIN

GAO/HEHS-95-142

TRICARE Improvements and Residual Problems


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

  BPET - Business Proposal Evaluation Team
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CRI - CHAMPUS Reform Initiative
  DOD - Department of Defense
  MHSS - Military Health Services System
  RFP - request for proposal
  SSAC - Source Selection Advisory Council
  SSEB - Source Selection Evaluation Board

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


B-259398

August 3, 1995

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

The Honorable Hank Brown
The Honorable Ben Nighthorse Campbell
United States Senate

The Honorable Scott McInnis
The Honorable Patricia Schroeder
House of Representatives

As federal and state medical programs move to managed care,
competitively bid contracting with private health care companies is
increasingly being used.  Under the Medicaid program, states are
using such contracts as part of their overall strategy to control
rapidly escalating medical costs.  In the federal sector, the
Department of Defense (DOD) has been a leader in using these
contracts.  As part of its implementation of a nationwide managed
health care program for military beneficiaries called TRICARE,\1 DOD
has begun to award large, complex, competitively bid contracts to
supplement and support the health care provided in military medical
facilities.  These 5-year contracts are estimated to cost a total of
about $17 billion. 

In response to concerns about DOD's difficulties with an early
contract award covering California and Hawaii for which GAO\2
sustained\3 a protest of the award, you asked that we review (1)
procurement process problems identified by the bid protest
experiences, (2) DOD's actions to improve and help ensure the
fairness of the procurement process, and (3) what problems and
concerns remain and whether further actions are needed. 

In doing our work, we examined pertinent procurement regulations and
the agency files for several DOD procurements.  We also had many
discussions with officials responsible for (1) developing
solicitation requirements; (2) conducting the procurements; (3)
evaluating offerors' proposals; and (4) ensuring that the
procurements are conducted in a legal, fair, and equitable manner. 
In addition, we contacted health care companies and regional military
officials that had participated in recent procurements for
information on their experiences with these procurements as well as
their views of the procurements.  For a more complete discussion of
our scope and methodology, see appendix I. 


--------------------
\1 Defense Health Care:  Issues and Challenges Confronting Military
Medicine (GAO/HEHS-95-104, Mar.  22, 1995). 

\2 Under the Competition in Contracting Act of 1984 (31 U.S.C. 
3551-56 (1988)), GAO is required to consider bid protests and
determine whether a challenged federal government solicitation,
contract award, or proposed award complies with applicable statutes
and regulations. 

\3 Foundation Health Federal Services, Inc.; QualMed.  Inc.,
B-254397.4 et al., Dec.  20, 1993, 94-1 CPD ï¿½ 3. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In sustaining the protest of DOD's California/Hawaii contract award,
GAO cited several problems, including DOD's failure to evaluate
offerors' proposed prices according to solicitation criteria, lack of
communication between DOD evaluators performing technical and price
evaluations, and failure to properly evaluate offerors' cost
containment approaches such as their proposed methods for controlling
health care service use.  In response, DOD changed its managed care
procurement processes in several ways to correct these and other
problems.  For example, DOD has revised its methodology for
evaluating proposed prices, added new requirements for discussions
between boards evaluating the technical and price proposals, revised
its utilization management requirements and evaluation criteria, and
made other changes. 

In our view, DOD's changes should improve future procurements and
ensure more equitable and fair treatment of offerors.  They are
unlikely, however, to eliminate future protests.  On two subsequent
protests, one challenging the revised solicitation terms and another
contesting the contract award following the California/Hawaii
protest, GAO ruled in DOD's favor.  Protests are likely to continue,
however, given the vast sums of money at stake and the relatively
small added expense involved in lodging them. 

Despite these improvements, several matters remain that concern both
those administering and those responding to the procurements.  For
example, the procurements thus far have taken more than twice as long
as originally planned.  Unless DOD can avoid delays such as those due
to numerous changes in solicitation requirements, it may not meet the
congressional deadline for awarding all contracts by September 30,
1996.  Also, because the procurements are broad, complex, involve
huge sums, and have been lengthy, unsuccessful offerors incur
substantial expense to participate, which may sharply narrow future
competition to only a few providers.  But DOD could consider
alternative award approaches for the next round of procurements.\4

Also, offerors maintain that solicitation requirements are so
prescriptive that offerors cannot fully propose innovative and
cost-saving managed care techniques or the best practices now
available in the private sector.  DOD, while seeking system
uniformity so that similar benefits are provided no matter where
beneficiaries live, acknowledges offerors' concerns and has expressed
interest in making requirements less process and more outcome based. 

Further, DOD has tried to make up for procurement delays by reducing
its 8-month transition period after contract award for contractors to
prepare to deliver health care.  By doing so, however, DOD has
introduced significant risk that contractors will not complete all
the tasks needed to deliver health care on time. 

Finally, evaluation board members are now selected without DOD having
set forth their needed qualifications.  Because the tasks they
evaluate are so specialized and because the boards have grown in
number and members are less familiar to selecting officials, DOD
needs to better ensure that prospective evaluators are appropriately
qualified. 


--------------------
\4 The current round of procurements consists of seven contracts
covering the 12 TRICARE regions.  The next round will begin after the
first 5-year managed care support contract expires in February 2000. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Since the Civilian Health and Medical Program of the Uniformed
Services (CHAMPUS) began in 1956 and was expanded in 1966,\5 it
functioned much like a fee-for-service insurance program. 
Beneficiaries\6 have been free to select providers and required to
pay deductibles and copayments, but, unlike with most insurance
programs, they have not been required to pay premiums.  CHAMPUS has
approximately 5.7 million beneficiaries and, as part of a larger
Military Health Services System (MHSS), these beneficiaries are also
eligible for care in the MHSS' 127 hospitals and 500 clinics
worldwide.  Of the approximately $15.2 billion budgeted for the MHSS
in fiscal year 1995, the CHAMPUS share is about $3.6 billion or about
24 percent. 

Because of escalating costs, claims paperwork demands, and general
beneficiary dissatisfaction, DOD initiated, with congressional
authority, a series of demonstration projects in the late 1980s
designed to more effectively contain costs and improve services to
beneficiaries.  One of these projects, the CHAMPUS Reform Initiative
(CRI), a forerunner of TRICARE managed care support contracts, was
one of the first to introduce managed care features to CHAMPUS. 
Included as part of a triple-option health benefit were a health
maintenance organization choice, a preferred provider choice, and the
existing standard CHAMPUS choice.  Managed care features introduced
included enrollment, utilization management,\7 assistance in referral
to the most cost-effective providers, and reduced paperwork. 

The first CRI contract, awarded to Foundation Health Corporation,\8
covered California and Hawaii.  Foundation delivered services under
this contract between August 1988 and January 1994.  Before the
contract expired, DOD began a new competitively bid procurement for
California and Hawaii that resulted in DOD's awarding a 5-1/2 year (1
half-year plus 5 option years), $3.5 billion contract to Aetna
Government Health Plans, Inc.  in July 1993.  Because a bid protest
was sustained on this procurement, it was recompeted, although
Aetna's contract was allowed to proceed until a new one was awarded. 

In late 1993, in response to requirements in DOD's Appropriation Act
for Fiscal Year 1994, the Department announced plans for
restructuring the entire MHSS program, including CHAMPUS.  The
restructured program, known as TRICARE, is to be completely
implemented by May 1997.  To implement and administer TRICARE, DOD
reorganized the military delivery system into 12 new, joint-Service
regions.  DOD also created a new administrative organization
featuring lead agents in each region to coordinate among the three
Services and monitor health care delivery. 

For medical care the military medical facilities cannot provide,
seven managed care support contracts will be awarded to civilian
health care companies covering DOD's 12 health care regions.  These
contracts, much like the former CRI contracts, retain the
fixed-price, at-risk,\9 and triple-option health benefit that CRI
featured.  An important difference, however, is the addition of lead
agent requirements--tasks to be performed by the contractor specific
to military medical facilities in the region.  Figure 1 shows the
regions covered by the seven contracts. 

   Figure 1:  Managed Care Support
   Contract Regions

   (See figure in printed
   edition.)

Note:  Managed care support for Alaska will be addressed separately
from these regions. 

Since the December 1993 decision sustaining the protest of the
California/Hawaii (regions 9, 10, and 12) contract award, three
managed care support contracts have been awarded and all have been
protested.  Also, a protest was filed on the solicitations for the
California/Hawaii recompetition and that for Washington/Oregon
(region 11).\10 GAO has denied the protests on these solicitations
and the Washington/Oregon contract award\11 and has yet to decide on
the other two award protests.  Information on the procurements
awarded to date appears in table 1. 



                           Table 1
           
            Managed Care Support Contracts Awarded
                          Since 1993

          Date of                        Number
          contract            Amount    of final  Protest
Region     award    Awardee   of award  offerors  status
--------  --------  --------  --------  --------  ----------
11          9/94    Foundati  $650         3      Denied
                    on        million
                    Health
                    Federal
                    Services
                    , Inc.

9,10,       3/95    QualMed,  $2.5         4      Pending
and 12              Inc.\a    billion

6           4/95    Foundati  $1.8         5      Pending
                    on        billion
                    Health
                    Federal
                    Services
                    , Inc.
------------------------------------------------------------
\a The recompeted contract award stemming from the successful protest
of the first California/Hawaii contract award. 

For more information on the transition to managed care support
contracts and the offerors submitting proposals for these contracts,
see appendixes II and III, respectively. 

The Office of CHAMPUS, an organization within the Office of the
Assistant Secretary of Defense (Health Affairs), administers the
procurements.  The procurement process involves the issuance of a
request for proposal (RFP) that has the detailed specifications and
instructions offerors are to follow in responding.  Offerors are
required to submit both a technical and a business (price) proposal. 

Upon receipt of the offerors' proposals, a Source Selection
Evaluation Board (SSEB) evaluates the technical proposals according
to detailed evaluation criteria, and a Business Proposal Evaluation
Team (BPET) evaluates the proposed prices.  A Source Selection
Advisory Council (SSAC) reviews the work of the two boards and
consults with them.  Following discussions with offerors about
weaknesses and deficiencies in their proposals, DOD requests offerors
to submit "best and final offers." The two boards again evaluate
changes to proposals, complete final scoring, and prepare reports on
the evaluations.  A senior executive designated as the source
selection authority uses these reports in selecting the winning
offeror.  As part of the evaluation process, evaluators are asked to
identify ways to improve the process.  For a complete description of
the procurement process and the tasks performed, see appendix IV. 


--------------------
\5 CHAMPUS was established initially by the Dependents' Medical Care
Act of 1956 (P.L.  84-569) and expanded by the Military Medical
Benefits Amendments of 1966 (P.L.  89-614). 

\6 Beneficiaries eligible for CHAMPUS include dependents of
active-duty members, retirees and their dependents, and dependents of
deceased members.  They include those from the Army, Navy, Air Force,
Marines, Coast Guard, and the Commissioned Corps of the Public Health
Service and of the National Oceanic and Atmospheric Administration. 

\7 Utilization management involves the use of such techniques as
preadmission hospital certification, concurrent and retrospective
reviews, and case management to determine the appropriateness,
timeliness, and medical necessity of an individual's care. 

\8 Foundation later created a subsidiary to administer this contract
called Foundation Health Federal Services, Inc. 

\9 At-risk features of the contract provide for the sharing of gains
and losses between the contractor and the government.  For example,
contractors are at risk for health care cost overruns up to 1 percent
of health care prices.  Beyond that, the contractor and the
government share in losses until an amount prepledged by the
contractor, called contractor equity, is totally depleted, at which
time the government assumes full responsibility for further losses. 

\10 QualMed, Inc., B-254397.13; B-257184, July 20, 1994, 94-2 CPD
ï¿½33. 

\11 QualMed, Inc., B-257184.2, Jan.  27, 1995, 95-1 CPD ï¿½94. 


   PROBLEMS IDENTIFIED DURING
   AWARD PROTESTS
------------------------------------------------------------ Letter :3

GAO sustained the protest of the July 1993 California/Hawaii award
primarily because DOD failed to evaluate offerors' proposals
according to the RFP criteria.  The RFP provided that each offeror's
proposed approach to attaining health care cost estimates would be
individually evaluated.  However, in evaluating the proposals, DOD
evaluators rejected the contractors' cost estimates and assigned the
same government cost estimates to all offerors' proposals.  By so
doing, the BPET did not consider offerors' individual
cost-containment approaches, such as their utilization management
approaches, upon which the success of managed care contracting to
contain costs largely rests.  In effect, the evaluators' action made
this part of the evaluation methodology meaningless. 

Also, the process did not allow the price evaluators to discuss with
the technical evaluators possible inconsistencies between the price
and technical proposals nor otherwise discuss the technical
information that supported the price estimates.  Such discussions may
have highlighted the need to analyze offerors' individual cost
containment approaches. 

During the protest of the Washington/Oregon award, the offeror
protested nearly a dozen of DOD's technical ratings of its proposal. 
In its decision, GAO recognized that DOD made mathematical errors
that affected scoring, but these errors were not limited to the
protesting offeror, and correcting them did not affect the
procurement's final outcome. 


   DOD ACTIONS TO IMPROVE AND HELP
   ENSURE FAIRNESS OF THE
   PROCUREMENT PROCESS
------------------------------------------------------------ Letter :4

DOD has made several changes that should improve future procurements. 
Major changes due to the protest experiences include (1) revising the
price evaluation methodology and providing offerors more complete RFP
information on how the methodology will be used in evaluating bid
prices, (2) adding requirements for discussions between price and
technical evaluation boards, and (3) revising both the requirements
and the technical evaluation criteria for utilization management. 
Also, DOD is developing a computer spreadsheet to automate the
technical scoring process and, thus, address mistakes made during the
Washington/Oregon evaluation process. 

DOD's other changes include providing more training for proposal
evaluators, colocating the technical evaluation boards, and providing
more feedback to offerors on their proposals' weaknesses.  A final
change requires that DOD approve the bid price evaluation methodology
before evaluating prices. 


      PRICE EVALUATION METHODOLOGY
      REVISED
---------------------------------------------------------- Letter :4.1

DOD significantly changed its methodology for evaluating the health
care cost portion of the offerors' business proposals.  While details
of the new methodology are procurement sensitive and cannot be
disclosed, the changes essentially involve evaluating the
reasonableness of the offerors' estimates for cost factors over which
the contractor has some control, such as utilization management and
provider discounts.  The evaluation includes comparing the offerors'
cost estimates with the government's estimates and considering the
offerors' justification and documentation. 

Also, DOD rewrote portions of the RFP to provide more explicit
information to offerors so they can better understand the new
evaluation methodology and the factors to be considered in evaluating
prices.  This more complete guidance should facilitate offerors'
ability to furnish the information DOD needs to evaluate their
proposals. 


      DISCUSSIONS BETWEEN PRICE
      AND TECHNICAL EVALUATORS
---------------------------------------------------------- Letter :4.2

DOD instituted a process requiring discussions between the technical
and the price evaluators.  Previously, discussions between the two
boards were prohibited, and knowledge possessed about offerors'
proposals by one group was not shared with the other.  Under the new
procedures, the SSEB briefs the BPET and responds to BPET questions
on offerors' proposed technical approaches.  This should enable the
BPET to better judge whether offerors can achieve the health care
costs that they have bid.  Conversely, the SSEB can request
information from the BPET to assist in its technical evaluation. 


      UTILIZATION MANAGEMENT
      REQUIREMENTS REVISED
---------------------------------------------------------- Letter :4.3

DOD significantly revised its RFP utilization management requirements
and utilization management criteria used in evaluating offerors'
proposals.  DOD incorporated these revisions in the solicitations for
the then ongoing Washington/Oregon procurement as well as the
post-protest recompetition of the California/Hawaii procurement.  The
revised utilization management requirements place additional
responsibilities on the contractor and establish specific utilization
management procedures.  Also, while the previous evaluation criteria
basically involved checking whether offerors' proposed approaches
addressed requirements, the revised criteria require evaluators to
judge the effectiveness of the cost-containment approaches. 


      OTHER PROCUREMENT
      IMPROVEMENTS
---------------------------------------------------------- Letter :4.4

Among other DOD improvements is the provision of more training for
evaluators and team leaders who oversee the evaluation of specific
tasks.  Training for the California/Hawaii evaluators had been
limited to about one-half day, but training on more recent
procurements has been increased to nearly 1 week.  The new training
includes more detailed information on the (1) procurement cycle, (2)
technical and price evaluation boards, (3) evaluation of proposals,
and (4) use of personal computers to record evaluation information. 

Another change involves colocating at Aurora, Colorado, the SSEB
staff who had been split between Aurora and Rosslyn, Virginia.  SSEB
members evaluating managed care tasks were located in Rosslyn, and
those evaluating claims processing and related tasks were in Aurora. 
The dual locations caused the board chair to travel frequently to the
Rosslyn location to review work and provide guidance to board members
there.  Also, DOD lost time awaiting information arriving from the
Rosslyn site to Aurora and retyping and reformatting information
submitted from the Rosslyn site.  More significantly, some rating
procedures differed between the two locations. 

A further change in the process is that DOD, along with providing
offerors the questions evaluators raise on their proposals, is also
providing information on proposal weaknesses.  As a result, offerors
are better assured that they are addressing the specific concerns
that prompted the questions.  Offerors told us, moreover, that DOD is
now providing them more information about their proposals, responding
more quickly to their questions, and providing more complete
information after initial evaluations and debriefings following
contract award. 

A final procedural change is that DOD now formally approves the price
evaluation methodology prepared by a contractor before the proposal
evaluation begins.  On the California/Hawaii procurement awarded to
Aetna, DOD had not approved the evaluation methodology before the
proposals had been evaluated.  The methodology had been prepared by a
consultant who submitted it to DOD for review, received no formal
response, and proceeded to use it to evaluate proposals.  Late in
this process, DOD determined that the methodology improperly skewed
the evaluation and ordered it changed at that time.  DOD's new
procedure eliminates the possibility of changing the evaluation
methodology during the process, thus removing any such possible
appearance of impropriety. 


   REMAINING PROBLEMS AND CONCERNS
------------------------------------------------------------ Letter :5

Despite DOD's process improvements, several matters remain that
concern both those administering and those responding to the
procurements.  First, unless DOD can avoid further delays in this
round of procurements, it may not meet the congressional deadline for
awarding all contracts by September 30, 1996.  Also, the substantial
expense that offerors incur to participate may further limit future
competition.  Also, the specificity of solicitation requirements may
work against offerors proposing innovative, cost-saving managed care
techniques.  Further, by reducing the length of transition periods,
DOD has introduced significant risk that all the tasks needed to
deliver health care will not be completed on time.  Finally, DOD
needs to better ensure that prospective evaluators are properly
qualified. 


      LENGTHY PROCUREMENTS
      JEOPARDIZE MEETING
      CONGRESSIONAL AWARD DEADLINE
---------------------------------------------------------- Letter :5.1

For each of the four contracts awarded thus far, the procurement
lengths, on average, have been 18 months or more than twice as long
as originally planned.  Figure 2 compares the planned and actual
procurement times for the contracts. 

   Figure 2:  Planned Versus
   Actual Procurement Times

   (See figure in printed
   edition.)

Note:  The solicitation period for region 11's actual procurement
time includes both the initial solicitation period plus an additional
period for a major amendment that resulted in offerors' submitting
completely new proposals. 

If the remaining procurements encounter similar delays, DOD will have
difficulty in meeting the congressional mandate for awarding all
contracts by September 30, 1996.  The current schedule allows about 1
month of slippage for the remaining procurements to have all
contracts awarded on time. 

A primary cause of delays has been the many changes DOD has made to
solicitation requirements.  For example, as shown in figure 3, the
California/Hawaii (regions 9, 10, and 12) recompetition procurement
had 22 RFP amendments, and the Washington/Oregon (region 11)
procurement had 15 amendments. 

   Figure 3:  Number of RFP
   Amendments Issued on DOD
   Managed Care Procurements

   (See figure in printed
   edition.)

Note:  The regions 3 and 4 procurement is ongoing and more amendments
could be added. 

Some of the changes resulted from such new requirements as the lead
agent concept and a new uniform benefits package\12

to replace previous beneficiary cost-sharing requirements that
differed across the country.  Other changes resulted from major
revisions to such existing requirements as utilization management. 
When such changes occur, extra time is needed to issue solicitation
amendments, for offerors to analyze the changes and revise their
proposals, and often for evaluation boards to review the changes. 
Offerors have expressed extreme displeasure about the continually
changing program requirements that make it more costly for them to
participate in the protracted procurements. 

On the other hand, procurements have been delayed to allow offerors
to correct errors in their cost proposals and as a result of bid
protests.  While these actions have not caused major delays so far,
because DOD normally can proceed with the procurements, protests can
add additional time to the overall schedule. 

DOD has acted to shorten the procurement process by increasing the
size of evaluation boards and changing the way proposals are
evaluated.  The enlarged boards can divide evaluation tasks among
more members, and members have narrower spans of review
responsibility. 

Regarding RFP changes, some offerors maintain that DOD did not
adequately plan the program before beginning the procurements.  While
DOD officials acknowledge planning problems, particularly for the
lead agent concept, they told us that RFP changes will become less of
a problem as their experience with the managed care support contracts
grows.  Also, DOD officials are concerned that if needed changes are
not added before contract award, it will be more costly to implement
them after award in the form of contract change orders when
competition no longer exists. 

Currently, the administration is strongly encouraging simplifying
federal procurements by, among other things, adopting commercial best
practices to reduce costs and expedite service delivery.  DOD
recognizes that its process is extremely costly, complex, and
cumbersome for all affected and acknowledges the need to simplify and
shorten it.  DOD can take advantage of the administration
initiative's momentum and seek ways to simplify and streamline its
health care procurements by considering, among other things, the
private sector's best practices. 


--------------------
\12 Section 731 of the National Defense Authorization Act for fiscal
year 1994 required the establishment of a health maintenance
organization benefit option to provide reduced out-of-pocket costs
and a benefit structure that is as uniform as possible nationwide. 
This benefit will be included in all DOD's future managed health care
initiatives. 


      COSTS TO PARTICIPATE MAY
      NARROW FUTURE COMPETITION
---------------------------------------------------------- Letter :5.2

Because the procurements are broad, complex, lengthy, and involve
huge sums of money, offerors incur substantial expense to
participate.  As a result, participation thus far has been limited to
large companies with vast resources.  For example, the
California/Hawaii procurement required that offerors be in a position
to risk losing a minimum of $65 million should they incur losses
during the contract's performance.  Competition is further limited
because only a small number of available subcontracting firms can now
knowledgeably process CHAMPUS claims. 

Moreover, several offerors told us that it cost them between $1 and
$3 million to develop their proposals.  Planning and preparing bid
proposals and responding to amendments require them to divert their
most able people from their regular duties to work months preparing
offers.  One offeror, in illustrating the procurement's size,
complexity, and resources needed to participate, told us that its
proposal consisted of 33,000 pages.  The offeror told us that if it
did not win a then ongoing procurement, it would not participate
again unless it could develop a proposal for no more than $100,000. 
Another offeror said its firm could not afford to continue bidding if
it did not win a contract soon. 

DOD incurs substantial costs as well.  The evaluation process, in
particular, requires tremendous time, effort, and costs.  A DOD
official estimated that 54,000 hours were spent on evaluating a
recent procurement.  In addition to evaluation duties, many staff
must continue to perform their regular duties.  Many commonly spend
weekends performing evaluation duties involving a considerable amount
of overtime expense.  Further, many of the evaluators travel from all
over the country and are on travel status for 5 to 6 weeks. 

DOD recognizes that in the next round of the seven regional
procurements, the number of offerors may further narrow and consist
only of those who won awards in the first round.  While DOD has
chosen to award large contracts on a regional basis, it may be
advisable in the next round to consider such alternatives as awarding
smaller contracts covering smaller geographic areas, awarding to more
than one offeror in a region, or simplifying the contracts by
removing the claims processing function and awarding it separately. 


      PRESCRIPTIVE REQUIREMENTS
      MAY BAR INNOVATIVE,
      COST-SAVING TECHNIQUES
---------------------------------------------------------- Letter :5.3

DOD's RFP requirements are extremely specific and prescriptive
because, the Department has stated, it desires a uniform program
nationwide in which beneficiaries and providers are subject to the
same requirements and processes regardless of residence.  Offerors,
on the other hand, maintain that if DOD's RFP stated minimum
requirements but emphasized the health care outcomes desired and
allowed offerors more flexibility in devising approaches to achieve
such outcomes, costs could be reduced without adversely affecting the
quality of care delivered. 

In specifying its requirements, DOD has sought to ensure that
beneficiaries not be denied necessary care and that care be provided
by appropriate medical personnel in the appropriate setting.  DOD's
concern has been that allowing contractors to use different processes
and criteria might jeopardize these ends.  Offerors maintain that
those objectives can be met by allowing them more freedom to use
innovative approaches, drawing on their private-sector managed care
expertise. 

In comparing DOD's managed care procurements with private-sector
procurements, private corporations interested in contracting for
managed care have far less specific requirements and normally only
request general information about offerors such as corporate
background, financial capability, health care performance, and
utilization management/quality assurance strategies.  Offerors told
us that DOD does not ask for the kind of information on
private-sector experience that would allow them to adequately compare
performance among offerors.  Also, many corporations use managed care
consulting firms to help identify their requirements and select
awardees. 

Offerors often cite utilization management as the area in which more
relaxed DOD requirements would enable them to implement equally or
more effective techniques than DOD requires but with greater cost
savings.  Among the most objectionable requirements is the use of a
two-level review process for determining care
appropriateness/necessity, a specific company's utilization
management criteria, and reviewers with the same specialty as the
providing physician.  DOD has maintained that its utilization
management requirements are based on its extensive review of the
literature and are reasonable, though perhaps not the most
cost-effective.  Also, DOD has maintained that because the military
environment differs from the private sector, it warrants different
requirements. 

Nevertheless, DOD has acknowledged that offerors have some legitimate
concerns.  In recent discussions, DOD told us that, while it has no
plans yet, for the next round of procurements it may begin
considering ways of making the requirements less onerous to offerors
while ensuring that beneficiaries receive adequate access to care. 
DOD officials said that they may begin seeking to simplify the
requirements by making them less process and more outcome driven,
while respecting, to the extent practicable, their overall system
goals. 


      SHORTENING POST-AWARD
      TRANSITION CREATES
      SIGNIFICANT RISK
---------------------------------------------------------- Letter :5.4

Because of procurement delays occurring before contract award, DOD
has tried to recover lost time by reducing to 6 months its scheduled
8- to 9-month transition period during which contractors prepare to
deliver health care.  But by doing so, DOD has introduced significant
risk that contractors will not complete the many tasks needed to
begin health care delivery on time. 

We have reported that DOD has experienced serious problems in the
past both with fiscal intermediary\13 contractors\14 and the CRI
contractor\15 being unable to begin processing claims by the start
work date because the 6-month transition period was too short.  As a
result, beneficiaries faced considerable difficulties getting
services and providers getting reimbursement.  The managed care
transitions are more complex and involved than the prior transitions. 

Most offerors we contacted told us that 6 months was too short and
that about 8 months was needed to accomplish the tasks required to be
ready on time.  The transition tasks include signing up network
providers, establishing service centers, hiring health care finders,
preparing information brochures, bringing the claims processing
system on line, resolving database problems, enrolling beneficiaries,
and many other tasks.  Offerors also told us that even a contractor
with CRI experience would have difficulty meeting the 6-month
transition requirement.  DOD contracting officials and evaluators
also have expressed the same concerns. 

While DOD, in reducing the transition periods, is driven to adhere to
its individual procurement schedules and thus respond to internal and
external pressures to bring services on line, we believe the risk
introduced far outweighs the small potential time savings due to
shorter transition periods.  As demonstrated in the fiscal
intermediary and CRI transitions, inadequate transition periods can
overly tax contractors to the point of failure and result in
substantial additional time and expense to recover. 


--------------------
\13 Private organizations under contract with DOD to pay claims for
health care services provided to beneficiaries under standard
CHAMPUS.  This arrangement was used before regions converted to
TRICARE and is still used where such contracts have yet to be
awarded. 

\14 CHAMPUS Has Improved Its Methods for Procuring and Monitoring
Fiscal Intermediary Services to Process Medical Claims
(GAO/HRD-85-56, Aug.  23, 1985). 

\15 Implementation of the CHAMPUS Reform Initiative (GAO/T-HRD-89-25,
June 5, 1989). 


      EVALUATORS' NEEDED
      QUALIFICATIONS NOT SPECIFIED
---------------------------------------------------------- Letter :5.5

DOD has so far selected evaluation board members in a relatively
informal way, either allowing board chairs to do so, on the basis of
their knowledge of the individuals, or military services headquarters
or lead agents to do so, on the basis of general guidelines.  To
date, DOD, relying on this less formal appointee approach, has not
set forth general qualification requirements for evaluators such as
experience or subject area knowledge.  But, because the tasks they
evaluate are so specialized and because the boards have expanded and
members are increasingly less familiar to selecting officials,
specifying evaluator qualifications--as has been suggested by
offerors and board members alike--seems prudent. 

Some offerors expressed concern to us that DOD evaluators have had
little or no experience with private-sector managed care plans and
thus have difficulty distinguishing among offerors who can perform
effectively in the private sector and those who are less effective in
ensuring quality care and controlling costs.  Evaluation board team
leaders for recent procurements told us that qualification
requirements would be helpful to ensure that people with appropriate
experience and knowledge can adequately evaluate specific tasks.  One
board member, as input to DOD's internal improvement process, stated
that some SSEB members seemed to lack (by their own admission) the
prerequisite experience and background to serve most effectively as
subject matter experts on the SSEB.  He went on to state that, given
the potential impact of these contracts in dollars and health care
service, it seems critical that only experienced evaluators be put in
a position to make the essential judgment calls inherent in the
technical review process. 

On more recent procurements, DOD has requested that evaluator
nominees submit resumes to assist selection decisions and facilitate
their assignment to various tasks.  While this is a step in the right
direction, it does not ensure that prospective evaluators with
appropriate skills are nominated in the first place and are selected
on the basis of the requisite qualifications. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

DOD has improved the procurement process since the protest on the
California/Hawaii award to Aetna was sustained, to the extent that
offerors can be more assured of equitable and fair treatment.  While
the dollar value of the contracts will likely cause offerors to
protest in the future, DOD improvements have reduced the chance of
protests being sustained. 

Despite improvements in the process, several areas of concern remain,
particularly regarding the next round of procurements.  The
procurement process is extremely costly, complex, and cumbersome for
all affected, and DOD acknowledges the need to simplify it.  We agree
and see an opportunity for DOD to draw upon the administration's
current initiative for simplifying federal procurements as it seeks
ways to streamline its processes.  Further, because of the costs of
participating, the number of offerors in the next procurement round
may be limited to only those who received contracts in the first
round.  We think that DOD should consider alternative procurement
approaches to help preserve the competitiveness of the process. 
Along with these measures, DOD needs to address whether its
solicitation requirements can be less prescriptive and still achieve
their overall health care goals. 

Though DOD was driven by internal and external pressures to bring
health care services on line, we do not agree with the Department's
decision to reduce transition times to make up for time lost in
awarding the contracts.  The potential time saved by shortening
transition periods, in our view, does not justify the risk of
contractors not being able to prepare to deliver services on time. 
Finally, given the increasing size of the evaluation boards, their
specialized tasks, and members' increasing lack of familiarity to
selecting officials, we believe that DOD needs to develop
qualification requirements for evaluator appointees. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense direct the Assistant
Secretary of Defense (Health Affairs) to

  weigh, in view of the potential effects of such large procurements
     on competition, alternative award approaches for the next
     procurement round;

  determine whether and, if so, how the next round's solicitation
     requirements could be simplified, incorporating the use of
     potentially better, more economical, best-practice managed care
     techniques while preserving the system's overall health care
     goals;

  adhere to the 8- to 9- month scheduled transition period and
     discontinue, whenever possible, reducing such periods to make up
     for delays incurred before contracts are awarded; and

  establish general qualification requirements for evaluator
     appointees. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In commenting on the draft report, DOD fully agreed with the first
three of our recommendations and agreed in part that qualifications
for evaluation board appointees need to be established.  DOD pointed
out that, while it could improve the evaluator selection process, it
now tasks lead agents and the Services with nominating qualified
individuals and the contracting officer and board chairs with
reviewing their resumes.  We continue to believe that establishing
general qualification requirements would more appropriately equip
responsible DOD officials to nominate and select the best qualified
evaluators and assign them the most suitable tasks.  DOD made other
comments and suggested changes that we incorporated in the report as
appropriate.  DOD's comments are included as appendix V. 


---------------------------------------------------------- Letter :8.1

As arranged with your staff or offices, unless you announce its
contents earlier, we plan no further distribution of this report
until 7 days after its issue date.  At that time, we will send copies
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. 

If you have any questions concerning the contents of this report,
please call me at (202) 512-7101.  Other major contributors to this
report are Stephen P.  Backhus and Daniel M.  Brier, Assistant
Directors, Donald C.  Hahn, Evaluator-in-Charge, and Robert P. 
Pickering and Cheryl A.  Brand, Senior Analysts. 

David P.  Baine
Director, Federal Health Care
 Delivery Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

We examined in detail the complete California/Hawaii procurement file
for the contract that was awarded to Aetna as well as selected
portions of more recent procurements' files.  These files were from
the California/Hawaii recompetition procurement, the
Washington/Oregon procurement, and the region 6 procurement.  We also
reviewed agency files and discussed with agency officials various
aspects of the procurement process. 

Also, we reviewed pertinent regulations governing the procurement
processes in the Federal Acquisition Regulation, the Defense Federal
Acquisition Regulation Supplement, and the Office of CHAMPUS
Acquisition Manual.  We held discussions with contract management
personnel who conduct the procurements, officials who develop
solicitation requirements, staff involved in the evaluations, and
agency legal staff who ensure that the procurements are conducted
according to applicable laws and regulations and in an equitable
manner. 

Our review of procurement documents included (1) documents related to
the planning of the CHAMPUS Reform Initiative and managed care
support procurements, (2) procurement schedules showing planned and
actual dates, (3) RFPs and amendments to the RFPs, (4) questions
raised by offerors and agency responses, (5) documents relating to
evaluation methodology, (6) evaluation criteria and scoring sheets,
(7) reports of discussions with offerors, (8) internal reports, (9)
reports of the evaluation boards, (10) selection reports, and (11)
preaward survey reports. 

Because of agency concerns about compromising future procurements, we
are not presenting specific information on the evaluation methodology
or on the scoring and weighting systems used.  Nor are we presenting
information on the criteria used in the rating and scoring process. 
We examined proposals of individual offerors to only a limited extent
and are not providing information on these proposals because it is
proprietary. 

We interviewed the Source Selection Evaluation Board, Business
Proposal Evaluation Team (BPET), and Source Selection Advisory
Council chairmen involved in recent procurements as well as the
selecting officials.  We also interviewed several team leaders
involved in evaluating the technical proposals of the
California/Hawaii recompetition procurement and several members of
the BPET.  In addition, to assess the qualifications of evaluation
members, we reviewed their resumes. 

In conducting our review, we examined GAO bid protest decisions
involving these managed care procurements and coordinated our efforts
with GAO's Office of General Counsel, which handles these bid
protests.  In addition to the protest decisions, we reviewed much of
the supporting documentation for decisions, including the offerors'
protests, agency reports, offerors' comments on the agency reports,
videotapes of the protest hearings, and post-hearing comments. 

To obtain information on their experiences with DOD managed care
procurements and their views of the overall procurement process and
the solicitation requirements, we interviewed officials from four
offerors who had participated in recent procurements.  The officials
interviewed were from Aetna Government Health Plans, Inc., California
Care Health Plan (Blue Cross of California), Foundation Health
Federal Services, Inc., and QualMed, Inc.  We also interviewed the
lead agents and their staffs for regions 9 and 11 to obtain similar
information. 

Our work was conducted at the Office of CHAMPUS, Aurora, Colorado,
and at the Office of the Assistant Secretary of Defense (Health
Affairs), Washington, D.C.  In addition, we visited the offerors at
their headquarters offices and the lead agents at their military
treatment facilities. 

We conducted our review between March 1994 and June 1995 in
accordance with generally accepted government auditing standards. 


TRANSITION TO TRICARE MANAGED CARE
SUPPORT CONTRACTS
========================================================== Appendix II

CHAMPUS provides funding for health care services from civilian
providers for uniformed services beneficiaries.\16 CHAMPUS began in
1956 and was expanded in 1966 to include additional classes of
beneficiaries and more comprehensive benefits.\17 These beneficiaries
eligible for CHAMPUS include dependents of active-duty members,
retirees and their dependents, and dependents of deceased members. 
CHAMPUS has approximately 5.7 million eligible beneficiaries and has
traditionally functioned much like a fee-for-service insurance
program.  Beneficiaries are free to select providers and are required
to pay deductibles and copayments, but, unlike with most insurance
programs, they are not required to pay premiums. 

CHAMPUS is part of the overall Military Health Services System (MHSS)
that serves active- and nonactive-duty members and includes 127
hospitals and over 500 clinics worldwide.  CHAMPUS beneficiaries can
also obtain medical care services in military medical facilities on a
space-available basis.  In fiscal year 1995, the MHSS was budgeted at
over $15 billion, of which $3.6 billion, or about 24 percent, was
budgeted for CHAMPUS. 

Because of escalating costs, claims paperwork demands, and general
beneficiary dissatisfaction, DOD initiated in the late 1980s, with
congressional authority, a series of demonstration projects designed
to more effectively contain costs and improve services to
beneficiaries.  One of these, known as the CHAMPUS Reform Initiative
(CRI), was designed by DOD in conjunction with a consulting company. 
Under CRI, a contractor provided both health care and
administrative-related services, including claims processing. 

The CRI project was one of the first to introduce managed care
features to the CHAMPUS program.  Beneficiaries under CRI were
offered three choices--a health maintenance organization-like option
called CHAMPUS Prime that required enrollment and offered enhanced
benefits and low-cost shares, a preferred provider organization-like
option called CHAMPUS Extra that required use of network providers in
exchange for lower cost shares, and the standard CHAMPUS option that
continued the freedom of choice in selecting providers and higher
cost shares and deductibles.  Other features of CRI included use of
health care finders for referrals and the application of utilization
management.  The project also contained resource sharing features
whereby the contractor, to reduce overall costs, could provide staff
or other resources to military treatment facilities to treat
beneficiaries in these facilities. 

Although DOD's initial intent under CRI was to award three
competitively bid contracts covering six states, only one bid--made
by Foundation Health Corporation--covering California/Hawaii was
received.\18 Because of the lack of competition, DOD ended up
awarding a negotiated fixed-price, at-risk contract with price
adjustment features to Foundation.  Although designated as fixed
price, the contract contained provisions for sharing risks between
the contractor and the government.  Foundation delivered services
under this contract between August 1988 and January 1994. 

Before the contract expired, DOD began a new procurement for the CRI
California/Hawaii contract that resulted in the competition's
narrowing down to four bidders.  In July 1993, DOD awarded a 5-1/2
year (1 half-year plus 5 option years), $3.5 billion contract to
Aetna Government Health Plans, with health care services beginning on
February 1, 1994.  Because a bid protest was sustained on this
procurement, this contract was recompeted, although Aetna was allowed
to proceed with its contract until a new contract was awarded. 

In late 1993, in response to requirements in the DOD Appropriation
Act for Fiscal Year 1994, the Department announced plans for
implementing a nationwide managed care program for the MHSS that
would be completely implemented by May 1997.  Under this program,
known as TRICARE, the United States is divided into 12 health care
regions.  An administrative organization, the lead agent, is
designated for each region and coordinates the health care needs of
all military treatment facilities in the region. 

Under TRICARE, seven managed care support contracts will be awarded
covering DOD's 12 health care regions.  DOD estimates that over a
5-year period these contracts will cost about $17 billion.  The
TRICARE managed care support contracts retain the fixed-price,
at-risk, and triple-option health benefit features of CRI as well as
many other CRI features.  An important change, however, involves
including in the contract tasks to be performed by the contractor
that are specific to military treatment facilities in the regions, in
addition to the standard requirements. 

Since the announcement of DOD's plan for implementing managed care
contracts nationwide, three contracts have been awarded, as shown in
table II.1. 



                          Table II.1
           
            Managed Care Support Contracts Awarded
                          Since 1993

          Date of                        Number
          contract             Amount   of final  Protest
Region     award    Awardee   of award  offerors  status
--------  --------  --------  --------  --------  ----------
11          9/94    Foundati    $650       3      Denied
                    on        million
                    Health
                    Federal
                    Services
                    , Inc.

9,10,       3/95    QualMed,    $2.5       4      Pending
and 12              Inc.\a    billion

6           4/95    Foundati    $1.8       5      Pending
                    on        billion
                    Health
                    Federal
                    Services
                    , Inc.
------------------------------------------------------------
\a The recompeted contract award stemming from the successful protest
of the first California/Hawaii contract award. 

The current schedule for awarding the remaining four contracts
appears in table II.2. 



                              Table II.2
               
               Contract Award Schedule for Managed Care
                          Support Contracts

                     RFP issue                      Scheduled health
                  date (actual                         care delivery
Region(s)          or planned)  Planned award date              date
----------------  ------------  ------------------  ----------------
3,4                     8/1/94  third quarter 1995            5/1/96
7,8                    3/24/95  first quarter 1996           11/1/96
1                      9/15/95  third quarter 1996            5/1/97
2,5                    9/15/95  third quarter 1996            5/1/97
--------------------------------------------------------------------

--------------------
\16 Uniformed service beneficiaries include those from the Air Force,
Army, Marine Corps, Navy, Coast Guard, and Commissioned Corps of the
Public Health Service and the National Oceanic and Atmospheric
Administration. 

\17 Dependents' Medical Care Act of 1956 (P.L.  84-569) and Military
Medical Benefits Amendments of 1966 (P.L.  89-614). 

\18 Foundation later created a subsidiary to administer this contract
called Foundation Health Federal Services, Inc. 


ORGANIZATIONS SUBMITTING BEST AND
FINAL PROPOSALS
========================================================= Appendix III

                               Organizations submitting best
Region                         and final proposals
-----------------------------  -----------------------------
9,10, and 12                   1. Aetna Government Health
                               Plans, Inc.
                               2. BCC/PHP Managed Health
                               Company
                               3. Foundation Health Federal
                               Services, Inc.
                               4. QualMed, Inc.

11                             1. CaliforniaCare Health
                               Plans (Blue Cross of
                               California)
                               2. Foundation Health Federal
                               Services, Inc.
                               3. QualMed, Inc.

9,10, and 12 (recompetition)   1. Foundation Health Federal
                               Services, Inc.
                               2. Aetna Government Health
                               Plans, Inc.
                               3. Blue Cross of California
                               4. QualMed, Inc.

6                              1. Aetna Government Health
                               Plans, Inc.
                               2. Blue Cross Blue Shield of
                               Texas
                               3. Foundation Health Federal
                               Services, Inc.
                               4. Humana Military Health
                               Care Services, Inc.
                               5. Prudential Uniformed
                               Services Administrator
------------------------------------------------------------

THE TRICARE MANAGED CARE SUPPORT
PROCUREMENT PROCESS
========================================================== Appendix IV

The Office of CHAMPUS, an organization within the Office of the
Assistant Secretary of Defense (Health Affairs) conducts the managed
care support procurements.  In conducting these procurements, DOD
must follow the requirements in the Federal Acquisition Regulation
and the Defense Federal Acquisition Regulation Supplement.  In
addition, the Office of CHAMPUS Acquisition Manual provides further
guidance for conducting procurements.  The major steps in the
procurement process are described in this appendix. 


   ISSUANCE OF THE RFP
-------------------------------------------------------- Appendix IV:1

The request for proposal (RFP) contains the detailed specifications,
instructions to offerors in responding to the RFP, and evaluation
factors that DOD will consider in making the award.  The RFP requires
that offerors submit both a technical and a business (price)
proposal, and offerors are told that the technical content will
account for 60 percent of the scoring weight and the price, 40
percent. 

In preparing the technical proposal, offerors are required to address
13 different tasks:  (1) health care services; (2) contractor
responsibilities for coordination and interface with the lead agent
and military treatment facilities; (3) health care providers'
organization, operations, and maintenance; (4) enrollment and
beneficiary services; (5) claims processing; (6) program integrity;
(7) fiscal management and controls; (8) management; (9) support
services; (10) automatic data processing; (11) contingencies for
mobilization; (12) start-up and transitions; and (13) resource
support program. 

Experience and performance are other evaluation factors.  Offerors
must describe the approaches they would take in accomplishing these
tasks.  While offerors are not told the specific weights assigned the
individual tasks, they are told their order of importance. 

In preparing the business proposal, offerors must provide support for
both their administrative and health care prices and justify their
health care prices by addressing seven cost factors over which the
offerors have some control:  (1) HMO option penetration rates
(enrollment), (2) utilization management, (3) provider discounts, (4)
coordination of benefits/third-party liability, (5) resource sharing
savings, (6) resource sharing expenditures, and (7) enrollment fee
revenues.  Offerors must also provide trend data for costs that the
offeror is considered likely to have little or no control over such
as price inflation.  In evaluating proposals, since these factors are
considered uncontrollable, the government substitutes its own
estimates for the offerors' so that all offerors are treated equally. 
Offerors must also pledge an equity amount to absorb losses if health
care costs exceed the amount proposed.  In evaluating proposals, DOD
determines whether offerors have the financial resources to meet this
pledge, and the equity amount is also applied as part of the
methodology in evaluating prices. 

Before the proposals' due date, offerors are free to submit questions
on clarification of requirements or further program information. 
Offerors can continue to submit questions up until the close of
discussions before best and final offers are due. 


   EVALUATION OF PROPOSALS
-------------------------------------------------------- Appendix IV:2

Upon receipt of the offerors' proposals, a Source Selection
Evaluation Board (SSEB) evaluates the technical proposals according
to detailed evaluation criteria.  The board size depends on the
number of offerors and, in recent procurements, has numbered about 80
people.  Board members are selected from offices such as the
Assistant Secretary of Defense (Health Affairs), the military
Surgeons General, the military treatment facilities, and the Office
of CHAMPUS.  A chairperson heads the board, which is divided into
teams to review the various tasks and subtasks.  The worksheets used
in these evaluations contain both the specifications and the criteria
upon which to base a judgment. 

A Business Proposal Evaluation Team (BPET) evaluates the business
proposals.  A chairperson also heads this team, which comprises about
10 people, divided between a team that primarily evaluates
administrative costs and another that primarily evaluates health
service costs.  The team evaluating administrative costs is supported
by the Defense Contract Audit Agency, which performs a cost analysis
of the administrative costs bid.  The team evaluating health service
costs consists primarily of consultants, some of whom are actuaries. 
In their evaluation, they use specially developed criteria as well as
a government-developed cost estimate.  Another consultant ensures the
financial viability of the offerors, including whether they have the
fiscal capacity to absorb the amount of equity offered, which would
be at risk if losses were to be incurred under the contract. 

A Source Selection Advisory Council (SSAC) is an oversight board that
reviews the work of the SSEB and BPET and provides consultation
advice to the two teams.  The SSAC comprises about six
executive-level personnel. 


   BEST AND FINAL OFFERS
-------------------------------------------------------- Appendix IV:3

DOD does not normally award a contract after the initial evaluations,
although nothing precludes an award at that time.  Instead, DOD
notifies offerors in writing of weaknesses and deficiencies
identified in the initial evaluation and prepares questions relating
to them.  This gives the offerors an opportunity to correct the
weaknesses and deficiencies and improve their proposals.  In addition
to the questions provided offerors, DOD holds face-to-face
discussions to clarify and resolve any outstanding issues.  DOD then
requests best and final offers, and offerors submit their revised
proposals, including any desired price revisions. 

Upon receipt of the best and final offers, the SSEB and BPET evaluate
revisions to the initial proposals, and the SSAC reviews the work of
the two boards.  DOD then completes final scoring and prepares
reports of the evaluations. 


   PREAWARD SURVEY
-------------------------------------------------------- Appendix IV:4

DOD can conduct preaward surveys before award if outstanding issues
remain to be resolved.  This survey can include an on-site visit to
an offeror or subcontractor. 


   SELECTION OF OFFEROR
-------------------------------------------------------- Appendix IV:5

A senior official, designated as the Source Selection Authority,
selects the winning offeror using reports prepared by the SSEB, BPET,
and SSAC.  The official prepares a written report justifying the
final selection. 


   DEBRIEFING OF UNSUCCESSFUL
   OFFERORS
-------------------------------------------------------- Appendix IV:6

Following selection of the winning offeror, unsuccessful offerors can
learn why they were not selected.  Offerors are individually told of
the deficiencies and weaknesses in their proposals.  This can serve
as the basis for preparing improved proposals for subsequent
procurements. 


   TRANSITION PERIOD
-------------------------------------------------------- Appendix IV:7

The period between contract award and the start of health care
delivery is referred to as the transition period.  During this
period, the contractor must perform many tasks, including assembling
a provider network, establishing service centers, getting the claims
processing system operational, and beginning the process of enrolling
beneficiaries into the HMO-like option. 


   LESSONS LEARNED
-------------------------------------------------------- Appendix IV:8

Throughout the evaluation process, evaluators are requested, as part
of the "lessons learned" process, to identify problems or suggest
potential changes to improve future procurements.  The lessons
learned can be as minor as correcting specification references or as
major as changing evaluation procedures. 




(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)

