Defense Health Care: Medicare Costs and Other Issues May Affect Uniformed
Services Treatment Facilities' Future (Letter Report, 05/17/96,
GAO/HEHS-96-124).

Pursuant to a congressional request, GAO reviewed the integration of
uniformed services treatment facilities' (USTF) into the Department of
Defense's (DOD) TRICARE Program, focusing on: (1) whether USTF members'
use of Medicare and the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS) results in unnecessary costs; and (2) other
issues that need to be considered during USTF program reauthorization.

GAO found that: (1) in fiscal year (FY) 1994, USTF members' use of
Medicare resulted in over $9.5 million in unnecessary costs; (2) total
unnecessary costs from members' Medicare use could total almost $38
million during FY 1994 to FY 1997; (3) DOD cannot fully recover
unnecessary Medicare payments from USTF under current USTF agreements;
(4) DOD and the Health Care Financing Administration (HCFA) lack the
explicit authority to prevent Medicare-eligible USTF members from using
Medicare; (5) DOD has been able to curb USTF members' use of military
treatment facilities and CHAMPUS because it has controls in place to
minimize such use; (6) Congress needs to consider how to serve USTF
members' health care needs cost-effectively, given DOD implementation of
TRICARE and its mandate to limit program costs; (7) some reports have
indicated that the USTF managed care program costs DOD from $93 million
to $193 million more per year than CHAMPUS; (8) Congress needs to
consider whether USTF should retain their noncompetitive status after
TRICARE implementation, and what the cost implications to TRICARE would
be; and (9) USTF enrollment of Medicare-eligible members creates
inequities for most older military retirees who rely on space-available
care in military hospitals.

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

 REPORTNUM:  HEHS-96-124
     TITLE:  Defense Health Care: Medicare Costs and Other Issues May 
             Affect Uniformed Services Treatment Facilities'
             Future
      DATE:  05/17/96
   SUBJECT:  Health care services
             Medical economic analysis
             Hospitals
             Questionable payments
             Retired military personnel
             Military dependents
             Managed health care
             Public Health Service facilities
             Cost effectiveness analysis
             Health care cost control
IDENTIFIER:  DOD TRICARE Program
             DOD Military Health Services System
             DOD Enrollment Eligibility Reporting System
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             Medicare Program
             DOD Uniformed Services Treatment Facilities Program
             
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Cover
================================================================ COVER


Report to the Chairman and Ranking Minority Member, Subcommittee on
Defense, Committee on Appropriations, U.S.  Senate

May 1996

DEFENSE HEALTH CARE - MEDICARE
COSTS AND OTHER ISSUES MAY AFFECT
UNIFORMED SERVICES TREATMENT
FACILITIES' FUTURE

GAO/HEHS-96-124

USTF Medicare Costs and Other Issues

(101479)


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

  CBO - Congressional Budget Office
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  DEERS - Defense Enrollment Eligibility Reporting System
  DOD - Department of Defense
  FAR - Federal Acquisition Regulation
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  MHSS - Military Health Services System
  USTF - Uniformed Services Treatment Facility

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


B-265686

May 17, 1996

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

Since fiscal year 1994, the Congress has appropriated nearly $1
billion for the Uniformed Services Treatment Facilities (USTF) to
deliver health care to what now totals about 124,000 beneficiaries. 
In 1982, the Congress enacted legislation that designates 10 former
Public Health Service hospitals now under civilian ownership as USTFs
and makes them part of the Department of Defense's (DOD) health care
system.\1 This arrangement with DOD has guaranteed the USTFs, in
addition to their private health care business, a stable revenue
source by enabling them to provide care to uniformed services
beneficiaries.\2 The arrangement also has improved eligible USTF
members' access to low-cost, comprehensive health care.  The USTFs'
deemed status will expire in September 1997 unless the Congress
intervenes.\3

In recent years, the Congress has grown concerned about the increased
cost to treat USTF members, in part because some members retain dual
eligibility and unrestricted access to such other government health
care services as Medicare, CHAMPUS,\4 and DOD hospitals.  As a
result, in 1991, the Congress directed DOD to institute a managed
care plan to reform the USTF program.  The USTF managed care program
has been in effect since October 1993.  Even with this change,
questions have arisen about the USTF program's future as DOD moves to
implement its new nationwide managed care program, known as TRICARE. 

DOD began to implement TRICARE in 1993 to improve beneficiary access
to high-quality health care while containing costs.  TRICARE calls
for coordinating and managing beneficiary care on a regional basis
using all available military hospitals and clinics, supplemented by
contracted civilian services.  DOD expects to have TRICARE fully
implemented by September 1997. 

At your request, we looked at issues regarding the USTFs' integration
into TRICARE, namely

  -- whether unnecessary costs result from USTF members' use of other
     federally funded health care sources and

  -- what other issues need to be considered during congressional
     deliberations on reauthorizing the USTF program. 

To do our work, we examined the legislative history of the USTFs and
the Medicare and USTF laws.  We reviewed DOD policies and regulations
affecting the USTFs, and our prior studies on USTF operations as well
as those conducted by the DOD Inspector General, DOD consultants, the
Congressional Budget Office, and the Institute for Defense Analyses. 
We obtained and analyzed data from DOD; the USTFs; and the Health
Care Financing Administration (HCFA), which administers Medicare,
regarding USTF members' Medicare, military treatment facility, and
CHAMPUS usage.  Fiscal year 1994 was the only year, at the time of
our work, for which sufficient data were available on the extent of
USTF members' Medicare usage.  We interviewed DOD, HCFA, and USTF
officials regarding USTF program operations and the USTFs' future
under TRICARE; unnecessary Medicare payments; and USTF members' use
of military treatment facilities and CHAMPUS.  We did our work from
August 1995 through April 1996 in accordance with generally accepted
government auditing standards.  A more detailed discussion of our
scope and methodology is in appendix I. 


--------------------
\1 The Military Construction Authorization Act of 1982, section 911
(42 U.S.C.  248c), deemed these facilities to be facilities of the
uniformed services. 

\2 The uniformed services include the Army, Navy, Marine Corps, Air
Force, Coast Guard, and the Commissioned Corps of the Public Health
Service and of the National Oceanic and Atmospheric Administration. 
USTFs provide care to active duty dependents and retirees of these
uniformed services as well as to retired lighthouse keepers and
retirees and dependents of the National Ocean Service. 

\3 The National Defense Authorization Act of Fiscal Year 1996, P.L. 
104-106, section 721.  The Congress has periodically enacted delays
in the termination of the deemed status since the program's inception
in 1982. 

\4 CHAMPUS (Civilian Health and Medical Program of the Uniformed
Services) is a fee-for-service health insurance program that pays for
a substantial part of the health care that civilian hospitals,
physicians, and others provide to non-active duty DOD beneficiaries. 


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

In fiscal year 1994, over $9.5 million in unnecessary costs to the
government resulted from USTF members' use of Medicare.\5 If the same
Medicare usage occurs from the time the USTF managed care program
began in fiscal year 1994 until current USTF agreements with DOD end
in September 1997, such unnecessary costs could approach $38 million. 
Some of these payments were made to USTF hospitals themselves and
hospitals under contract with the USTFs--hospitals required to bill
the USTFs for such care.  Although DOD requires Medicare-eligible
USTF members to agree on the enrollment form that they will not use
Medicare, these beneficiaries are statutorily eligible for care under
both programs.  DOD does not have explicit statutory authority to
disenroll USTF members for using Medicare or to prevent Medicare from
paying any claims submitted for such care.  Furthermore, under the
current agreement between DOD and the USTFs, the unnecessary Medicare
payments cannot be fully recovered.  Although DOD has attempted to
work with HCFA and the USTFs to address this continuing problem, they
have been only partly successful.  In contrast, DOD has been able to
curb USTF members' use of military treatment facilities and CHAMPUS
because DOD has the authority and controls in place to minimize such
occurrences. 

Other cost and equity issues will also likely affect forthcoming
deliberations on the USTF program's reauthorization.  One such issue
is how to cost-effectively serve USTF members' health needs given
DOD's TRICARE implementation and its mandate that the new system's
costs be no greater than DOD's current costs under CHAMPUS and in
military treatment facilities.\6 Recent reports have indicated that
the USTFs may be more costly to the government.  In 1996, for
example, the Institute for Defense Analyses estimated that the USTF
managed care program cost DOD $193 million more per year than what
costs would be if the members had to rely for their care on the
current military health services system (MHSS). 

Another issue is how the USTFs should fit into TRICARE, under which
DOD awards a single contract for an area's health care delivered
outside military hospitals.  Currently, the USTFs have a unique,
noncompetitive contractual and operational relationship with DOD.  At
issue is whether the USTFs should retain that special relationship
and, if so, what the cost and equity implications might be for
TRICARE. 


--------------------
\5 Medicare covers some medical services, such as end-stage renal
disease treatment, that the USTFs do not.  Payments for such services
are not included in the unnecessary Medicare payment total. 

\6 The National Defense Authorization Act for Fiscal Year 1996, P.L. 
104-106, section 714. 


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

Currently, 8.3 million people are eligible for medical care from the
MHSS:\7 1.7 million active duty members and 6.6 million non-active
duty beneficiaries.  As part of the MHSS, USTFs are permitted to
enroll any of these beneficiaries, except for active duty members
themselves, who generally must receive their care at military
hospitals or clinics.  At the beginning of fiscal year 1996, the
USTFs had 124,012 members and an appropriated funding level of $339
million.\8

Table 1 lists the locations, enrollment, and appropriations for each
of the USTFs. 



                          Table 1
          
           USTF Enrollment and Appropriation, FY
                            1996

                                                   FY 1996
                                     FY 1996  appropriatio
USTF              Location        enrollment             n
----------------  --------------  ----------  ------------
Bayley Seton      Staten Island,      15,772   $53,236,085
 Hospital          N.Y.
Brighton Marine   Boston, Mass.       11,892    40,010,161
 Public Health
 Care Center
Johns Hopkins     Baltimore, Md.      23,881    57,020,329
 Medical
 Services
 Corporation
Lutheran Medical  Cleveland,           6,570    13,915,480
 Center            Ohio
Martin's Point    Portland, Me.       18,795    41,340,896
 Health Care
 Center
Pacific Medical   Seattle, Wash.      20,048    58,802,354
 Center and
 Clinics
Sisters of        Texas               27,054    75,022,395
 Charity
 Hospitals\a
==========================================================
Total                                124,012  $339,347,700
----------------------------------------------------------
\a Sisters of Charity Hospitals operates three USTF facilities in
Texas (St.  John's Hospital, Nassau Bay; St.  Joseph's Hospital,
Houston; and St.  Mary's Hospital, Port Arthur).  Sisters of Charity
recently sold its fourth USTF facility, St.  Mary's Hospital,
Galveston, to the University of Texas Medical Branch, and it is no
longer a USTF. 

The USTFs provide health care under individual participation
agreements, which DOD negotiates with each facility on behalf of
itself and the Departments of Health and Human Services and
Transportation.  DOD's USTF program provides only a part of each
facility's total business because the facilities also provide
services for private insurance, Medicare, and other patients. 
Beneficiaries who enroll in the USTF program agree on the application
form not to use other DOD health care sources or the Medicare
program. 

In fiscal year 1994, at the Congress' direction, DOD implemented a
USTF managed care program to control rising care costs.  This
program, which is similar to a health maintenance organization (HMO),
is characterized by (1) the formation of provider networks to deliver
a full spectrum of inpatient and outpatient care, (2) enrollment of
beneficiaries, and (3) a capitated reimbursement system under which
each USTF is paid a monthly sum for each enrolled member in return
for the USTF's provision of all needed care for the member.  Appendix
II provides more detailed funding and enrollment information. 

The capitation payments made to the USTFs are to cover all the
medical care a member would need.  Thus, if another government
program (such as Medicare or CHAMPUS) is billed for any care a USTF
member receives and the bill is paid, the government is paying
unnecessarily for that care because it has already paid the USTF in
advance for all USTF members' care.  Similarly, if a USTF member
receives care at a military hospital, the government incurs costs
unnecessarily for care it has already paid for. 

The USTFs offer their members the full CHAMPUS benefit package plus
some additional preventive services not already covered by CHAMPUS. 
But unlike CHAMPUS, USTF members do not lose their participation
rights when they reach age 65 and become Medicare-eligible.  At the
beginning of fiscal year 1996, 22 percent (about 27,000) of the USTF
members were Medicare-eligible.  Figure 1 shows the breakdown, by
facility, of USTF Medicare-eligible members compared with all
members. 

   Figure 1:  Medicare-Eligible
   USTF Members Compared With
   Total Members, FY 1996

   (See figure in printed
   edition.)

The MHSS is moving from a system of direct care in military
facilities and CHAMPUS to TRICARE, DOD's nationwide managed care
program.  TRICARE implementation is aimed at improving access to
high-quality care while containing cost growth.  DOD's goal is to
have TRICARE implemented nationwide by September 1997.  TRICARE
involves managing beneficiary care using all available military
hospitals and clinics, supplemented by contracted civilian services. 
TRICARE features three benefit options, offering CHAMPUS-eligible
beneficiaries two new additional health care choices:  (1) TRICARE
Standard, the current fee-for-service CHAMPUS program; (2) TRICARE
Extra, a preferred provider option; and (3) TRICARE Prime, an
HMO-like alternative that provides comprehensive medical care to
beneficiaries through an integrated network of military and
contracted civilian providers.  The USTF managed care program is
similar to TRICARE Prime.  Appendix III contains details about
TRICARE's three options. 

The fiscal year 1996 National Defense Authorization Act contained a
number of provisions relevant to DOD's future relationship with the
USTFs.  First, it made the participation agreements between the USTFs
and DOD subject to the Federal Acquisition Regulation (FAR),\9 from
which the USTFs had been previously exempt.  Now DOD must seek full
and open competition from all qualified managed care providers for
the services previously procured on a sole source basis from the
USTFs.\10 Second, the act directed DOD to submit a plan to the
Congress addressing the USTFs' integration into TRICARE.  Third, the
act requires the USTFs to adopt TRICARE's enrollment fees and
copayments after October 1, 1996, or the implementation of TRICARE in
the USTF service area, whichever is later.  In that regard, the act
directed us to assess and report to the Congress the effects of
adopting such fees and copayments on USTF operations, provided that
the USTFs submitted actuarial estimates in support of their
contention that the extension of such fees and copayments will have
an adverse impact on the operation of the USTFs and the enrollment of
participants.\11


--------------------
\7 Includes members of the Coast Guard and the Commissioned Corps of
the Public Health Service and of the National Oceanic and Atmospheric
Administration, who are also eligible for military health care. 

\8 In addition to DOD's covered beneficiaries, this appropriation
includes amounts for the Department of Transportation's Coast Guard
beneficiaries and the Department of Health and Human Services'
Commissioned Corps beneficiaries of the Public Health Service and the
National Oceanic and Atmospheric Administration. 

\9 Federal Acquisition Regulation, 48 C.F.R.  Part 1. 

\10 The National Defense Authorization Act for Fiscal Year 1996
applies the requirements regarding competition to any new
participation agreement between DOD and the USTFs upon the expiration
of the current participation agreements (P.L.  104-106, section 724). 

\11 See Defense Health Care:  Effects of Mandated Cost Sharing on
Uniformed Services Treatment Facilities Likely to Be Minor
(GAO/HEHS-96-141, May 13, 1996). 


   UNNECESSARY COSTS RESULT FROM
   USTF MEMBERS' USE OF MEDICARE
------------------------------------------------------------ Letter :3

For fiscal year 1994, HCFA paid over $9.5 million for USTF members'
use of Medicare services.  If the same Medicare usage continues, such
unnecessary costs could approach $38 million when the current USTF
agreements with DOD end in September 1997.  Unnecessary costs result
when USTF members, for whose care DOD has prepaid the USTFs a monthly
capitation payment, use Medicare.  One reason for this is that
federal statute does not bar USTF members from using both types of
care.  In other cases, members may use USTF providers who
inappropriately bill Medicare.  Recognizing this, HCFA has agreed to
share its Medicare reimbursement data with DOD so that some cost
recovery can be effected from the USTFs.  But under the current DOD
and USTF agreements, DOD cannot fully recover the unnecessary
Medicare costs and to date has not recovered any of these costs.  In
contrast, DOD can prevent unnecessary payments from USTF members' use
of military treatment facilities and CHAMPUS. 


      MILLIONS OF DOLLARS
      NEEDLESSLY PAID FOR USTF
      MEMBERS' MEDICARE USE
---------------------------------------------------------- Letter :3.1

The unnecessary Medicare payments totaling over $9.5 million made for
USTF members' health care in fiscal year 1994 are shown in figure 2. 
The payments are aggregated by the USTF in which members were
enrolled. 

   Figure 2:  Unnecessary Medicare
   Payments Made for USTF Members,
   by Facility Membership, FY 1994

   (See figure in printed
   edition.)

Notes:  Sisters of Charity includes four hospitals.

This figure does not include $1.2 million in physician services for
USTF members whose place of enrollment could not be verified. 

These Medicare payments cover such medical services as care received
in both inpatient and outpatient settings as well as physician
services and skilled nursing facilities.  Because Medicare covers
some medical services that the USTFs do not, such as end-stage renal
disease treatment and chiropractic care, we did not include such
services in our analysis.  For a more detailed description of our
analysis, see appendix I.  Figure 3 shows unnecessary Medicare
payments for fiscal year 1994 by type of medical service. 

   Figure 3:  Unnecessary Medicare
   Payments, by Service Category,
   FY 1994

   (See figure in printed
   edition.)

Note:  Numbers add to more than 100 percent because of rounding. 

As shown in figure 3, 67 percent, or $6.3 million, of the unnecessary
Medicare payments were for inpatient and outpatient care.  USTF
members receive such care at USTF hospitals or at hospitals under
contract to the USTFs.  Although the hospitals under contract to the
USTFs have agreed to bill the USTFs for medical services to USTF
members, no control exists to prevent them, or the USTFs themselves,
from billing Medicare if the member is also Medicare-eligible.  In
these cases, non-USTF hospitals have no knowledge that
Medicare-eligible patients are USTF members unless the members
specifically tell them.  Our analysis showed that 78 percent of the
payments were in this category.  Conversely, 22 percent ($1.4
million) of the unnecessary Medicare payments for USTF members'
inpatient and outpatient care were made to USTF hospitals, as shown
in figure 4.  At present, DOD is not aware of such inappropriate
billings by USTF hospitals and their affiliates.  Thus, we believe
DOD needs to review the USTF entities' billing practices to ensure
that Medicare is not continuing to pay for such services. 

   Figure 4:  Percentage of
   Unnecessary Medicare Payments
   to USTF and Non-USTF Hospitals,
   FY 1994

   (See figure in printed
   edition.)

Note:  "USTF hospitals" includes hospitals under contract to USTFs. 

Unless effective preventive controls are put in place, the
unnecessary payments are likely to increase in magnitude.  For fiscal
years 1994, 1995, and 1996, the total number of USTF members aged 65
and over grew from 19,814 to 27,496--a 39-percent increase.  Also,
capitation payments for the USTF Medicare-eligible members continue
to account for an increasing percentage of total capitation payments
ranging from almost 40 percent in fiscal year 1994 to 50 percent in
fiscal year 1996.  Figure 5 shows the capitation payments paid to
USTFs for fiscal years 1994, 1995, and 1996 for Medicare-eligible
members compared with all members. 

   Figure 5:  USTF Annual
   Capitation Payments for
   Medicare-Eligible and All
   Members, FY 1994-96

   (See figure in printed
   edition.)

Note:  Payment amounts for Medicare-eligible members are estimates
based on capitation rates for Medicare-eligible members. 


      DOD AND HCFA LACK EXPLICIT
      STATUTORY AUTHORITY TO
      RESOLVE PROBLEM
---------------------------------------------------------- Letter :3.2

Lacking explicit legislative authority, DOD and HCFA are limited in
the actions they can take to prevent USTF members from using
Medicare.  DOD requires, for example, that USTF members sign a
statement upon enrollment that they will refrain from using Medicare
while a USTF member or be subject to disenrollment.  But, since the
USTF program's future is uncertain, DOD encourages Medicare-eligible
members, on the USTF enrollment form, to continue paying their
Medicare part B premiums to prevent penalties in the future.\12 Also,
USTF officials told us that they advise their Medicare-eligible
members not to use Medicare, but cannot control their actions. 

DOD has requested that HCFA insert an automated screen into the USTF
members' Medicare records to identify and block payments for Medicare
use.  However, HCFA believes it lacks the statutory authority to deny
Medicare-eligible USTF members the right to use Medicare. 
Accordingly, HCFA cannot institute this simple, yet effective
automated control that it now uses to prevent unnecessary Medicare
fee-for-service payments for beneficiaries enrolled in Medicare-risk
HMOs--a civilian equivalent of the USTFs.  For these HMOs, HCFA
inserts a screen into the members' Medicare records that alerts HCFA
not to pay any Medicare claim that may be submitted because HCFA has
prepaid the HMO.  In such cases, the patient is responsible for
paying for any unauthorized medical care obtained outside the HMO. 

If a legislative change was made to permit HCFA to automatically
screen\13 the records of Medicare-eligible USTF members, then members
choosing to receive care from a Medicare provider outside the USTF
network would bear the payment burden (except for emergency and
authorized out-of-area care).  Then, if a USTF provider
inappropriately billed Medicare for a member's care, Medicare would
send the bill to the USTF.  Currently, without a screen, HCFA pays
for care that DOD has already prepaid the USTFs to provide. 

An alternative legislative course is also available.  Currently, DOD
does not have explicit statutory authority to disenroll a USTF member
for using Medicare.  If legislation was enacted requiring USTF
members aged 65 and over to elect either to use Medicare or a USTF
for all health care for a specified period of time, and if DOD was
authorized to disenroll members who use Medicare in that period, DOD
could promptly act to disenroll individuals found to have acted
contrary to their USTF election.  In such cases, the members would
not be liable for the unnecessary Medicare costs but would lose their
USTF eligibility while retaining their entitlements to Medicare and
space-available care at military treatment facilities.  Without such
legislative authority, HCFA officials have made clear that any
Medicare usage data they supply to DOD should not be used for an
adverse purpose, such as member disenrollment. 

After lengthy negotiations, DOD and HCFA have agreed to share data in
an attempt to document the extent of Medicare usage.  Using these
data, DOD plans to recoup a portion of the unnecessary Medicare
payments from the USTFs by reducing their future capitation payments. 
But the recoupment will be based on a complex formula (see app.  IV)
negotiated between DOD and the USTFs that limits the risk to the
USTFs.  The costs incurred by Medicare will still be higher than the
costs recouped by DOD.  Also, because the formula reduces future USTF
capitation payments based on Medicare claims from an earlier period,
no provision exists for DOD to recoup unnecessary Medicare costs that
may occur in fiscal year 1997, when the USTF participation agreements
expire.  Since the USTF managed care program began in October 1993,
none of these unnecessary costs have been recovered from the USTFs. 


--------------------
\12 Medicare part B is a voluntary program financed by enrollee
premiums and federal general revenues and covers physician and a
variety of other health care services, such as laboratory and
outpatient hospital services.  If the recipient allows coverage to
lapse or does not begin participation in part B immediately upon
becoming Medicare- eligible, a penalty is assessed equal to 10
percent per year for each year the part B coverage is not taken. 

\13 HCFA estimated that the one-time cost of changing its systems to
screen USTF members would be $190,715.  In discussing our draft
report, HCFA officials told us that this estimate may need to be
amended to include system maintenance costs, but they gave no new
estimate. 


      DOD HAS CURBED USTF MEMBERS'
      USE OF MILITARY TREATMENT
      FACILITIES AND CHAMPUS
---------------------------------------------------------- Letter :3.3

In contrast with Medicare, automated controls are in place to prevent
military treatment facilities from providing care to USTF members. 
When a patient enters a military treatment facility for care, the
admissions personnel check the patient's military identification
number against data in the automated Defense Enrollment Eligibility
Reporting System (DEERS).  DEERS indicates whether the individual is
enrolled in a USTF and thus ineligible for treatment at a military
treatment facility.  Thus, as long as the DEERS information is kept
accurate and current, and the system is routinely checked, a military
facility should know not to treat a USTF member.  Our limited data
match of 100 members' names at two locations found only one instance
of military hospital use by a USTF member. 

Concerning CHAMPUS, controls appear adequate to prevent unnecessary
payments for health care services to USTF members.  For every claim
submitted, the CHAMPUS system automatically queries DEERS about
eligibility.  Thus, any medical claim submitted to CHAMPUS by a USTF
member is rejected.  Although we did not independently assess the
CHAMPUS claims processing system, contractor audits of the system
revealed few errors regarding eligibility.\14


--------------------
\14 CHAMPUS contractors audit claims for payment errors every
quarter.  Included in the payment error category is eligibility
determination. 


   OTHER COST AND EQUITY ISSUES
   LIKELY TO AFFECT THE USTFS'
   FUTURE
------------------------------------------------------------ Letter :4

In addition to the unnecessary Medicare costs, other issues need to
be addressed as the Congress deliberates the USTF program's
reauthorization.  One issue is how to most cost-effectively serve the
health care needs of the current USTF members, given DOD's nationwide
implementation of TRICARE and its mandate that it be no more costly
than DOD's current costs under CHAMPUS and the military treatment
facilities.  Several congressional and DOD studies have shown that
the USTF program may not be as cost-effective as CHAMPUS and other
health care sources.  And questions of cost and equity have arisen
with respect to the USTFs' prospective role as TRICARE providers. 


      STUDIES DOCUMENT USTFS'
      COMPARATIVE COSTLINESS
---------------------------------------------------------- Letter :4.1

In a 1988 study,\15 we reported that USTFs were no more costly than
comparable fee-for-service CHAMPUS providers.  We recommended in
subsequent testimony that in light of changes then being made to the
USTF reimbursement method, the question should be periodically
reevaluated.\16 Since then, the USTFs have changed to managed care,
and CHAMPUS benefits have been scaled back in an effort to contain
costs.  Several subsequent studies have found that the USTFs now may
be more costly than CHAMPUS and other health care sources. 

A 1994 study by Lewin-VHI for DOD compared the cost-effectiveness of
the USTF program with CHAMPUS and the military treatment
facilities.\17 The study found that if the USTF program ended and its
members had to rely for their care on CHAMPUS or military hospitals,
DOD's costs could be reduced by an estimated $93 million to $146
million per year.  Lewin-VHI also estimated that, for those aged 65
and over, USTF program costs were 10 times higher than what DOD's
costs would be in the MHSS.\18 This is because the USTF managed care
program provides to those aged 65 and over benefits that are not
available in CHAMPUS and on a space-available-only basis in military
treatment facilities.  Moreover, the study concluded that to be
budget neutral, the program should increase beneficiary cost sharing
and impose enrollment fees for members under age 65, and ensure that
all members receive all their care through the USTF. 

Also in 1994, a congressionally mandated study by the Congressional
Budget Office (CBO) addressed the USTFs' comparative
cost-effectiveness with the MHSS and also with civilian HMOs.\19
Similar to Lewin-VHI's findings, the study estimated that, for those
beneficiaries aged 65 and over, USTF program costs were eight times
greater, or $95 million more per year, than what DOD's costs would be
in the MHSS.  CBO also estimated that the eight USTFs not located
near military hospitals had costs 16 to 18 percent higher for caring
for retirees and other beneficiaries under age 65 than what DOD's
costs would be in the MHSS.  This is because beneficiaries use
CHAMPUS in areas not located near military treatment facilities, and
CHAMPUS requires beneficiary cost sharing, which reduces the
government's overall costs.  CBO's work also suggested that USTF
capitation rates were higher than the premiums of civilian HMOs. 

Regarding the beneficiary cost-sharing findings of these studies, the
fiscal year 1996 National Defense Authorization Act requires USTFs to
adopt the uniform benefit cost shares and enrollment fees applicable
to TRICARE after October 1, 1996, or the implementation of TRICARE in
the USTF service area, whichever is later.  The resulting higher
beneficiary cost sharing may help lower DOD's overall costs for the
USTF program. 

A 1996 congressionally mandated study by the Institute for Defense
Analyses also considered the cost-effectiveness issue.\20 The study
estimated that the USTF program cost DOD over $193 million more per
year than what costs would be if the members had to rely on the MHSS
for their care.  Considering overall government costs, the Institute
estimated that the USTFs cost about $110 million more per year than
what costs would be in the MHSS combined with Medicare coverage. 
Similar to the studies by Lewin-VHI and CBO, the study also estimated
that, for those aged 65 and over, USTF program costs were eight times
greater, or $115.5 million more per year, than what DOD's costs would
be in the MHSS.  Moreover, for those USTF members under age 65 who
are active duty dependents, the study estimated that USTF program
costs were 30 percent higher than what DOD's costs would be in the
MHSS.  The Institute also noted that high numbers of USTF members
have private insurance coverage and may be receiving care outside the
USTF, despite DOD's capitation payment to the USTF on their behalf to
cover all of their care.  The study results are currently under
consideration by DOD and the affected parties. 


--------------------
\15 Defense Health Care:  Cost of Care at Selected Uniformed Services
Treatment Facilities (GAO/HRD-88-67, Mar.  22, 1988). 

\16 Costs of Care at Selected Uniformed Services Treatment Facilities
(GAO/T-HRD-88-22, Sept.  28, 1988). 

\17 Review of the USTF Managed Care Plan, submitted to the Assistant
Secretary of Defense (Health Affairs) (Fairfax, Va.:  Lewin-VHI, Apr. 
26, 1994). 

\18 Although, as estimated, DOD's costs would be reduced if the
population aged 65 and over did not use USTFs, the total cost to the
government might not change, because many of these individuals would
switch to Medicare. 

\19 CBO Memorandum:  Evaluating the Uniformed Services Treatment
Facilities (Washington, D.C.:  CBO, June 1994). 

\20 Summary of IDA's Evaluation of the Uniformed Services Family
Health Plan (Washington, D.C.:  Institute for Defense Analyses, Jan. 
1996). 


      USTFS' INCLUSION IN TRICARE
      REMAINS UNDECIDED
---------------------------------------------------------- Letter :4.2

DOD's policy has been that USTFs eventually would be made part of
TRICARE on an equal footing with other contract providers.\21 With
this policy, DOD's aim was to provide a level playing field for
TRICARE's managed care programs and ensure beneficiary equity.  The
1996 National Defense Authorization Act requires DOD to report to the
Congress on how the USTFs could become TRICARE entities.  In
response, DOD formed a working group with USTF representatives and
has drafted guiding principles for the transition. 

Essentially, the guiding principles call for the USTFs to be distinct
MHSS components; managed by TRICARE's regional lead agents; allowed
to retain their currently enrolled members, including
Medicare-eligible members and those who became Medicare-eligible
while still USTF enrollees; and paid a per member capitation payment
by DOD based on local health care market costs.  In addition, the
USTFs and DOD Health Affairs officials negotiated legislative
language for the proposed fiscal year 1997 Defense Authorization Act
that is now under consideration by the authorizing congressional
committees.  The legislation would essentially implement the guiding
principles and specifically provide relief from FAR's competitive
requirements as they pertain to the participation agreements so as to
maintain DOD's current sole source contractual relationship with
USTFs. 


--------------------
\21 60 Fed.  Reg.  52090. 


         DOD PROPOSES THAT USTFS
         RETAIN NONCOMPETITIVE
         STATUS UNDER TRICARE
-------------------------------------------------------- Letter :4.2.1

DOD proposes that under TRICARE the USTFs should largely retain their
current, noncompetitive status.  Under this arrangement, the USTFs
would be uniquely authorized to enroll Medicare-eligible
beneficiaries aged 65 and over who would otherwise essentially lose
their access to military health care under TRICARE. 

Under TRICARE, civilian health care companies compete for each of the
seven regional managed care support contracts under which they
manage, within each designated area, all DOD beneficiaries' health
care that is provided outside of the military treatment facilities. 
Each designated area has one managed care support contractor that, in
turn, develops a network of providers within that area for the actual
health care delivery.  Under the proposed DOD plan, the USTFs would
remain outside of this network of providers.  Not only would the
USTFs be allowed to keep their current enrollment of beneficiaries
aged 65 and over, but they would be allowed to negotiate their
capitation rates noncompetitively with DOD directly, whereas, under
the TRICARE managed care support contracts, providers must compete. 


         USTF ENROLLMENT OF
         MEDICARE-ELIGIBLES
         CREATES INEQUITIES
-------------------------------------------------------- Letter :4.2.2

Along with the government's comparatively higher health care costs
for USTF Medicare-eligible members, the USTF program allows a small
number of beneficiaries to enjoy a benefit not now available to the
majority of military retirees.  For example, USTFs enroll about
27,000 Medicare-eligible beneficiaries who receive DOD-funded care
largely free to them.  But DOD's other 1.2 million retirees aged 65
and over now rely--and will do so under TRICARE--on space-available
access to military treatment facilities.  Alternately, they may rely
on Medicare, which does not cover such necessities as
pharmaceuticals.  TRICARE's goal of bringing as much CHAMPUS care as
possible into military treatment facilities, thus reducing their
resource availability, may further exacerbate the equity issue by
squeezing out still more retirees who do not have access to such
facilities. 

The USTFs alternatively have proposed that they act as Medicare
providers to treat individuals aged 65 and over and be reimbursed by
HCFA, and that DOD's reduced capitation payment for these individuals
should cover such added benefits as preventive, pharmaceutical, and
optical services.  Among other problems, however, such an arrangement
(referred to as Option II),\22 would not remove the inequity issue in
guaranteeing full health care coverage for only a fraction of DOD's
older retiree community. 


--------------------
\22 Option II is a USTF proposal that would designate the USTFs as
Medicare-risk HMOs and permit them to seek reimbursement from
Medicare for Medicare-covered services provided to beneficiaries
enrolled in the USTF health care program.  In addition, this option
would provide, for DOD beneficiaries, additional benefits such as
pharmaceutical, optical, and preventive care services, which would
supplement a beneficiary's Medicare benefits and require copayments
identical to those required in TRICARE Prime.  The 1996 National
Defense Authorization Act directed DOD to address the feasibility of
implementing Option II in its report to the Congress on its plan for
integrating the USTFs into TRICARE. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

In recent years, the Congress has increasingly been concerned about
the cost of the USTF program, partly because some members retain dual
eligibility for other federal health care sources.  Additionally,
questions have arisen about the role that the USTFs should play as
TRICARE providers.  DOD is implementing its nationwide TRICARE
program in the current environment of budget reductions and related
attempts to control health care costs.  Therefore, whether the USTFs
are as cost-effective as alternative sources of care has become an
issue. 

In instances where DOD has clear authority to minimize USTF members'
use of other potential health care sources, DOD has instituted
controls that prevent unnecessary payments for these services. 
However, DOD does not have explicit legal authority to prevent
unnecessary payments for health care to Medicare-eligible USTF
members because of their dual eligibility.  Accordingly, USTFs have
relied on providers and members to not use Medicare, but this
reliance has not proven effective as a control.  As a result,
unnecessary Medicare payments have been and continue to be made for
services to USTF members.  Unless action is taken, the magnitude of
the problem will grow as the age of the USTF population advances. 
Although DOD has developed a method for recovering some of the
capitation payments it has made to USTFs, this method allows for
recovering only a portion of the money unnecessarily spent by the
government.  As yet, no money has been recovered. 

In our view, DOD needs to reconsider its current plans to seek to
retain its noncompetitive contractual relationship with the USTFs. 
In effect, with its current relationship, the USTFs have a business
advantage relative to other, competitive TRICARE providers.  Also,
allowing the USTFs to continue to provide comprehensive health care
for some Medicare-eligible members would be inequitable relative to
the care the majority of such beneficiaries can obtain under TRICARE. 
This inequity would increase as the space-available care in military
treatment facilities for TRICARE's beneficiaries aged 65 and over is
further reduced.  Rather, DOD needs to weigh the merits of having the
USTFs compete on an equal footing with other TRICARE health care
providers for care delivered outside the military facilities.  At
issue is what is the best, most cost-effective way to provide
high-quality health care to uniformed services beneficiaries. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :6

To prevent unnecessary costs to the government from USTF members'
Medicare use, the Congress should consider

  -- deeming USTFs Medicare-risk HMOs under the Social Security Act's
     section 1876(a)(3) for the limited purpose of allowing HCFA to
     identify and block payments for the costs of services incurred
     by dually eligible members or

  -- requiring Medicare-eligible members to elect whether to receive
     care from a USTF or under Medicare for a specified time period
     and authorizing the Secretary of Defense to disenroll USTF
     members who act contrary to their election not to use Medicare. 

Also, the Congress should consider specifying in the authorizing
legislation whether USTFs should continue as sole source contractors
under TRICARE, and whether USTF members should be treated differently
from all other DOD beneficiaries who receive medical services under
DOD's managed care support contracts and direct care system. 


   RECOMMENDATIONS TO THE
   SECRETARY OF DEFENSE
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense direct the Assistant
Secretary of Defense, Health Affairs,

  -- pending action on the matters for congressional consideration in
     this report, to include, in all future USTF agreements, a method
     for directly and fully offsetting all unnecessary Medicare
     payments from the USTFs;

  -- to review USTF network providers who have inappropriately billed
     Medicare for USTF members' care and, as appropriate, require
     providers to reimburse Medicare for unnecessary payments and
     bill the USTFs for such costs; and

  -- to reconsider continuing the USTFs' sole source contractual
     relationship with DOD under TRICARE, including whether USTF
     members should be treated the same way all other DOD
     beneficiaries are treated under DOD's managed care support
     contracts and direct care system. 


   DOD AND USTF COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We obtained comments on a draft of this report from DOD, USTF, and
HCFA officials. 

DOD officials stated that they agree with our recommendation to
include, in all future USTF agreements, a method for directly and
fully offsetting all unnecessary Medicare payments from the USTFs. 
They also fully agreed with our recommendation concerning
inappropriate Medicare billings by USTF network providers and stated
that the data match between DOD and HCFA will enable them to identify
noncompliant USTF providers. 

DOD officials emphasized that competition is important in the
purchase of health care services and that providers' rates should be
competitive and services' costs should be no greater than the costs
of the TRICARE program.  But, in responding to our recommendation,
DOD officials declined to comment on the appropriateness of retaining
a sole source contractual relationship with the USTFs under TRICARE. 

We believe that DOD has the authority to reconsider its plan to
maintain such relationships with the USTFs.  Because DOD did not
indicate its willingness to do so and in light of the legislation now
pending in the Congress, we have also added to the report a matter
for consideration of the Congress that in deliberating the USTFs'
reauthorization it consider the fairness of the USTFs' continuing as
sole source DOD contractors under TRICARE, including whether USTF
members should be treated the same way all other DOD beneficiaries
are treated under DOD's managed care support contracts and direct
care system. 

Furthermore, DOD officials acknowledged the inequity that exists
because some Medicare-eligibles receive full medical care at USTFs,
whereas the majority of such DOD beneficiaries must access care
through military treatment facilities on a space-available basis. 
They said that they are pursuing an approach whereby Medicare would
help pay for such beneficiaries' care in military treatment
facilities to try to address this inequity. 

DOD also suggested some technical changes to the report, which we
incorporated as appropriate. 

USTF officials expressed concern that the report implies that the
USTFs are responsible for the unnecessary Medicare payments problem. 
They stated that they did not create the problem, have limited means
to stop its occurrence, and have not been given the tools to control
it.  In addition, these officials stated that the USTFs are the only
organizations that have acted to limit the government's exposure to
unnecessary Medicare payments, but that the report is silent on this. 

We disagree that the report assigns fault to the USTFs and state in
the report that the problem results from the dual eligibility of USTF
members who are aged 65 and over.  While we agree that the USTFs have
implemented some measures to help address the problem, such as
developing guidelines in 1994 for handling affiliated providers that
violate their agreement not to bill Medicare for USTF members' care,
we did not discuss these measures because our analysis showed they do
not prevent the problem from occurring. 

Furthermore, USTF officials disagreed that they should be responsible
for full reimbursement of their members' unnecessary Medicare
payments.  Because DOD's capitated USTF payments cover all the health
care of members who actually use Medicare, we continue to believe
that DOD should fully recover the unnecessary Medicare costs from the
USTFs so the government does not pay twice for such care. 

USTF officials disagreed with the findings of the Lewin, CBO, and
Institute for Defense Analyses studies cited in our report, stating
that these studies consider the USTFs' cost- effectiveness relative
to CHAMPUS and DOD's direct care system costs, not the federal
government's total costs.  But under TRICARE, DOD has been required
by congressional mandate to ensure that its costs under TRICARE not
exceed what costs would have been under CHAMPUS and the direct care
system.  Thus, studies of the USTFs' costliness relative to DOD's
other system costs are directly relevant to whether and how the USTFs
should be made a part of TRICARE.  Also, our report points out that
if the USTF population aged 65 and over were to leave the USTFs and
switch to Medicare, the federal government's total costs for such
beneficiaries might not change--except that the current overlapping
Medicare and DOD costs for some such members would be eliminated. 

Regarding USTF care for Medicare-eligible DOD beneficiaries, USTF
officials stated that inequities exist throughout the MHSS, and our
report did not discuss these other inequities.  We agree that other
inequities may exist in the MHSS, but this report specifically
addressed the USTF program. 

USTF officials stated that we distorted the competition issue and
that when TRICARE is fully established, the USTFs will compete
equally for DOD beneficiaries on the basis of their network design,
care, quality, reputation, access, and value-added services.  We
disagree, and continue to believe that if the USTFs retain their
noncompetitive contractual relationship with DOD under TRICARE, they
will have a decided business advantage over other, competitive
TRICARE providers. 

In discussions with us, HCFA officials stated that identifying and
blocking payments in the Medicare system for USTF members aged 65 and
older is a reasonable solution to the unnecessary payment problem,
but implementation details will have to be worked out.  We agree. 

HCFA officials also stated that our report alternatively suggests
that the Congress consider enacting legislation requiring USTF
members aged 65 and older to elect either USTF care or Medicare, and
authorizing DOD to disenroll members who inappropriately use
Medicare.  The officials stated, however, that in negotiations with
DOD regarding HCFA's providing DOD data on USTF members' Medicare
use, DOD agreed that no member would be disenrolled on the basis of
the released Medicare data.  Nevertheless, we believe that the
enactment of legislation expressly granting DOD authority to
disenroll such USTF members would remove any current statutory
impediments to DOD's using the HCFA-provided data for that purpose. 

The HCFA officials stated that the report's estimated cost for
adjusting their Medicare system to screen USTF members may need to be
amended to include the costs of maintaining the process once in
place.  Although they provided no amended cost estimate, we have
acknowledged this possibility in the report. 


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

We are sending copies of this report to the Secretaries of Defense,
Health and Human Services, Transportation, and Commerce; and the
USTFs.  We will make copies available to others upon request. 

If you have any questions about this report, please call me on (202)
512-7111.  Other GAO contacts and staff acknowledgments are listed in
appendix V. 

Stephen P.  Backhus
Associate Director, Health Care Delivery
 and Quality Issues


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

In conducting our review, we examined USTF program documents obtained
from DOD and the USTFs.  We examined the legislative history of the
USTFs and the Medicare and USTF statutes, and reviewed DOD policies
and regulations affecting the USTFs.  We interviewed USTF officials
from three USTFs, the USTF Conference Group, officials from the
Health Care Financing Administration (HCFA) responsible for the
Medicare program, and DOD officials from Walter Reed Army Medical
Center and Bethesda Naval Hospital. 

We analyzed fiscal year 1994 Medicare part A and part B data relating
to inpatient, outpatient, skilled nursing facility, and
physician/supplier claims for USTF enrollees.  We did not analyze
data for home health aides and hospice claims because these services
were not covered by the USTF program in fiscal year 1994.  We also
did not analyze data regarding durable medical equipment because the
number of claims and dollar amount were small. 

We matched fiscal year 1994 Medicare claims data to the USTF
enrollment file to verify that the claims were for USTF enrollees. 
We eliminated claims from our analysis if the date of service was
before the individual enrolled in the USTF program.  We also
eliminated claims for end-stage renal disease because Medicare is the
primary payer for these claims.  In addition, we eliminated
chiropractic claims from the physician/supplier category since
chiropractic care is not a covered benefit in the USTF program. 

We could not verify that all the claims for outpatient and
physician/supplier services occurred after the date of USTF program
enrollment because they did not contain the name of the beneficiary. 
For physician/supplier services, we took the ratio of the Medicare
payment amount incurred after USTF enrollment to the Medicare payment
amount after matching the HCFA data to the USTF enrollment file and
applied this ratio to the total Medicare payment amount for all
fiscal year 1994 claims. 

In addition, we obtained data from the USTFs listing USTF contracted
hospitals and compared these data with the Medicare claims data to
determine whether Medicare payments were made to USTF-contracted
hospitals or other hospitals. 

To get information on services USTF members received at military
treatment facilities, we obtained a list of USTF members from DOD,
which DOD personnel had entered into the military hospital's
Composite Health Care System at Walter Reed Army Medical Center and
Bethesda Naval Hospital. 

To obtain information on the CHAMPUS program, we reviewed contractor
monitoring reports from the contractors responsible for monitoring
the CHAMPUS fiscal intermediaries.  We also reviewed pertinent
sections of the CHAMPUS operations and automated data processing
manuals. 

We conducted work at the Office of the Assistant Secretary of Defense
(Health Affairs), Washington, D.C.; Walter Reed Army Medical Center,
Washington, D.C.; Bethesda Naval Hospital, Bethesda, Maryland; the
Johns Hopkins USTF in Baltimore; the corporate headquarters of the
Sisters of Charity, Houston; at two Sisters of Charity USTFs:  St. 
Joseph's, Houston, and St.  John's, Nassau Bay; and at the Pacific
Medical Center USTF in Seattle.  In addition, we interviewed
officials from the USTF Conference Group in Baltimore, and from the
Office of CHAMPUS in Aurora, Colorado. 


USTF PROGRAM INFORMATION
========================================================== Appendix II



                         Table II.1
          
           Capitation Payments Made to USTFs, FY
                          1994-96

USTF           FY 1994     FY 1995   FY 1996\a       Total
----------  ----------  ----------  ----------  ----------
Bayley      $29,042,94  $44,119,09  $11,871,80  $85,033,83
 Seton               2           3           2           7
Brighton    35,971,304  38,426,245   9,769,871  84,167,420
 Marine
Johns       44,184,621  51,487,006  13,699,693  109,371,32
 Hopkins                                                 0
Lutheran    10,037,476  12,985,443   3,361,360  26,384,279
 Medical
Martin's    37,095,034  38,793,141  10,003,219  85,891,394
 Point
Pacific     49,539,661  57,604,882  14,515,423  121,659,96
 Medical                                                 6
Sisters of  70,014,513  71,893,084  18,615,385  160,522,98
 Charity                                                 2
All         $275,885,5  $315,308,8  $81,836,75  $673,031,1
 facilitie          51          94           3          98
 s
----------------------------------------------------------
Note:  Capitation payments include those for all the uniformed
services, including the Army, Navy, Marines Corps, Air Force, Coast
Guard, and the Commissioned Corps of the Public Health Service and
the National Oceanic and Atmospheric Administration. 

\a Fiscal year 1996 data are for the first quarter only. 



                         Table II.2
          
          USTF Managed Care Program Enrollment by
                 USTF Facility, FY 1994-96

USTF                       FY 1994     FY 1995     FY 1996
----------------------  ----------  ----------  ----------
Bayley Seton                 8,574      13,858      15,772
Brighton Marine             10,290      11,411      11,892
Johns Hopkins               16,832      21,847      23,881
Lutheran Medical             3,878       6,001       6,570
Martin's Point              14,334      18,047      18,795
Pacific Medical             16,064      20,439      20,048
Sisters of Charity          24,720      26,903      27,054
All facilities              94,692     118,506     124,012
----------------------------------------------------------


                         Table II.3
          
            Fiscal Year 1996 USTF Enrollment and
          Percentage of Medicare-Eligible Members

                                            Percentage who
                                 FY 1996     are Medicare-
USTF                          enrollment          eligible
----------------------------  ----------  ----------------
Bayley Seton                      15,772                24
Brighton Marine                   11,892                29
Johns Hopkins                     23,881                17
Lutheran Medical                   6,570                12
Martin's Point                    18,795                14
Pacific Medical                   20,048                32
Sisters of Charity                27,054                23
All facilities                   124,012                22
----------------------------------------------------------


                         Table II.4
          
          Allocation of USTF Managed Care Program
                       Appropriations

USTF                       FY 1994     FY 1995     FY 1996
----------------------  ----------  ----------  ----------
Bayley Seton            $29,695,80  $45,600,00  $53,236,08
                                 0           0           5
Brighton Marine         36,776,800  38,700,000  40,010,161
Johns Hopkins           45,290,300  52,000,000  57,020,329
Lutheran Medical        15,641,000  14,400,000  13,915,480
Martin's Point          42,300,500  39,200,000  41,340,896
Pacific Medical         49,539,600  59,000,000  58,802,354
Sisters of Charity      75,756,000  72,100,000  75,022,395
All facilities          $295,000,0  $321,000,0  $339,347,7
                                00          00          00
----------------------------------------------------------
Notes:  This table lists the budget ceiling DOD has established for
each USTF program based on the total USTF appropriation.

Appropriations include those for the Army, Navy, Marine Corps, Air
Force, Coast Guard, and the Commissioned Corps of the Public Health
Service and the National Oceanic and Atmospheric Administration. 



                               Table II.5
                
                             USTF Operators

USTF                                Operator
----------------------------------  ----------------------------------
Bayley Seton                        Sisters of Charity Health Care
                                    System

Brighton Marine                     Allston-Brighton Aid & Health
                                    Group, Inc.

Johns Hopkins                       Johns Hopkins Health Systems

Lutheran Medical                    Fairview Health System

Martin's Point                      Penobscot Bay Medical Association

Pacific Medical                     Pacific Hospital Preservation
                                    Development Authority

Sisters of Charity                  Sisters of Charity of the
                                    Incarnate Word
----------------------------------------------------------------------
Note:  The operators are the owners of the USTF facilities. 


BACKGROUND ON TRICARE
========================================================= Appendix III

Following years of demonstration programs that tested alternative
health care delivery mechanisms, DOD designed TRICARE, a managed
health care program.  The program is intended to ensure a
high-quality, consistent health care benefit, preserve choice of
health care providers for beneficiaries, improve access to care, and
contain health care costs.  DOD began implementing TRICARE in 1993
and expects to complete implementation by September 1997. 

TRICARE is significantly changing the military health care system. 
It offers beneficiaries alternatives to the current CHAMPUS program,
such as the option of using a health maintenance organization (HMO)
that will lower cost sharing when beneficiaries agree to limitations
on their choice of physicians.  To implement and administer the
TRICARE program, DOD has reorganized its medical facilities into new
health care regions and established a new administrative structure to
oversee the delivery of health care within the regions.  Military
medical facilities are organized on a geographic basis into 12 health
care regions, encompassing medical facilities from all three of the
services.  The number and service affiliation of the facilities vary
among regions, as do the number of eligible beneficiaries within in
each region's boundaries.  A military medical center commander has
been designated in each region as the lead agent, or health
administrator, supported by a joint-service staff drawn from the
region's military medical facilities and DOD medical program offices. 

One significant feature that has been maintained from the
demonstration programs is the use of contracted civilian health care
providers to supplement the level and type of care provided by the
Military Health Services System (MHSS) on a regional basis.  DOD
estimates that these contracts will cost about $17 billion over the
5-year contract period.  TRICARE also incorporates several
cost-control features of civilian managed care programs. 

TRICARE features a triple-option benefit, offering beneficiaries
eligible for CHAMPUS two new options for health care in addition to
the CHAMPUS program.  The options vary in the choices beneficiaries
have in selecting their physicians and the amount beneficiaries are
required to contribute toward the cost of the care they receive from
civilian providers.  The first option, TRICARE Standard, is the
current fee-for-service CHAMPUS program.  This option provides
beneficiaries with the greatest freedom in selecting civilian
physicians and requires the highest beneficiary cost share.  The
second option, TRICARE Extra, is a preferred provider option, through
which beneficiaries receive a 5-percent discount on the Standard
option cost of care when they choose a medical provider from the
contractor's network.  The third option, TRICARE Prime, represents
the greatest change in MHSS health care delivery.  TRICARE Prime is
an HMO-like alternative that provides comprehensive medical care to
beneficiaries through an integrated network of military and
contracted civilian providers.  Beneficiaries selecting this option
must enroll annually in the program, agreeing to go through an
assigned military or civilian primary care physician for all care. 
Low enrollment fees and copaymant features provide financial
incentives for beneficiaries to select this option, the most highly
managed of the three options. 

See figure III.1, which shows the locations of the USTFs and the
TRICARE regions. 

   Figure III.1:  Map of USTFs and
   TRICARE Regions

   (See figure in printed
   edition.)


MEDICARE RECOUPMENT FORMULA
========================================================== Appendix IV

This appendix describes the formula negotiated between DOD and the
USTFs to recover unnecessary Medicare payments made on behalf of USTF
members.  Under this recoupment formula, DOD would not recover the
full amount of unnecessary Medicare payments.  Rather, after the
USTFs confirm the members' eligibility and verify the Medicare claims
data, the formula converts the data to units--that is, the number of
inpatient days and outpatient visits.  The units are adjusted to
reflect the difference between a beneficiary's experience under
Medicare and in managed care.  After removing outlier data such as
catastrophic care cases, the formula assigns the remaining units a
dollar value--$600 per inpatient day and $60 per outpatient visit. 
This total, rather than the total amount of unnecessary Medicare
costs, is the dollar value base unnecessary payments subject to
reimbursement.  This base is then divided by the USTFs' capitation
payments for their Medicare-eligible members, and the resulting
percentage determines the dollar value base for which the USTFs are
responsible.  The USTFs are responsible for 100 percent of the
derived base value up to 1 percent of the same year's capitation
payments; 75 percent of the value between 1 and 4 percent; 50 percent
of the value between 4 and 7 percent; and 25 percent of the value
between 7 and 10 percent.  The USTFs' liability is limited to 10
percent of the capitation payments. 

Following is the detailed formula that would be used to determine the
amount the USTFs would reimburse DOD for their members' use of
Medicare. 

1.  Define the cost to the government. 

The cost is the government cost associated with utilization of
covered health care services by Medicare beneficiaries enrolled in
the USTF managed care plan.  The cost does not include the following: 

  -- deductibles and copayments paid by the member;

  -- amounts not allowed by Medicare, such as charges in excess of
     the Medicare allowance;

  -- collection from third parties for deductibles and copayments as
     allowed; and

  -- payments to hospitals other than actual diagnosis related group
     payments, such as capital pass-through payments and indirect or
     direct medical education. 

On the basis of the information DOD/USTFs provide, HCFA furnishes the
USTFs with the names of Medicare beneficiaries with paid claims, the
amount of each claim, date of service, and Social Security number so
the claims can be verified and eligibility confirmed. 

2.  Determine out-of-plan utilization based on units of service for
inpatient days and outpatient physician visits during the first
enrollment period. 

On the basis of the information provided by HCFA, the USTFs calculate
the number of inpatient days for each USTF member with Medicare
coverage and the number of outpatient physician visits.  (Outpatient
visits include only those involving a physician.  Lab tests, for
example, are not counted unless they are part of the physician
visit.) The USTFs furnish this information to DOD for review and
comment. 

3.  Estimate utilization based on HMO experience. 

The USTFs manage the care of their Medicare-eligible members.  The
utilization experience of USTF members should be substantially less
than the utilization for nonenrolled Medicare beneficiaries.  Thus, a
USTF is responsible only for utilization that is consistent with
managed care service.  In 1989 the national average for hospital days
per 1,000 members aged 65 and over was 2,930.  For individuals
enrolled in HMOs who were 65 and older, the utilization was 1,545
days, or 53 percent of the national experience.  HMO members 65 and
older had 7 outpatient physician visits per member per year,
approximately 10 percent higher than the national average of 6.4
visits. 

Therefore, the number of utilization units, calculated in step 2
under Medicare, is adjusted to reflect the difference between the
beneficiary experience under Medicare and in an HMO.  The number of
inpatient units is multiplied by .53 to reflect this HMO experience. 
The number of outpatient physician visit units is multiplied by 1.1
to reflect this HMO experience.  The sum of these two calculations is
the number of units of unnecessary payments eligible for
reimbursement. 

4.  Determine outliers and remove them from the total number of units
of service eligible for reimbursement. 

To protect the USTF from bearing the cost for outlier claims for
non-managed-care services, the outlier claims are removed from the
units eligible for reimbursement.  The average inpatient utilization
for an HMO member aged 65 and older is 1.545 hospital days per year. 
This number is multiplied by 3 to get 4.635 units per member per year
as the outlier threshold.  Units above this threshold for each member
are removed from the total number of inpatient units used to
calculate the USTF reimbursement for unnecessary payments. 

5.  Determine the value of each unit of service and calculate the
value of unnecessary payments. 

Consistent with the individual reinsurance reimbursement, the number
of inpatient units of service allowed by this methodology is
multiplied by $600 and adjusted by the Medicare wage index.  The
number of outpatient physician units is multiplied by $60, and the
sum of the two calculations is the dollar amount of unnecessary
payments subject to reimbursement. 

6.  Allocation of unnecessary payments between DOD and the USTFs. 

The USTF is responsible for only a portion of any unnecessary
payments.  The allocation is subject to a maximum dollar amount based
on the capitation payments the USTF received during the enrollment
period.  The USTF is responsible for 100 percent of the value of the
unnecessary payment amount up to 1 percent of its capitation payments
for Medicare-eligible members.  If the unnecessary payments amount is
greater than 1 percent of the capitation payments but less than 4
percent, the USTF is responsible for 75 percent of this amount.  If
the amount is 4 percent but less than 7 percent, the USTF is
responsible for 50 percent of this amount.  If the amount is 7
percent of the capitation payments but less than 10 percent, the USTF
will be responsible for 25 percent of this amount.  The USTF is not
responsible for the value of any unnecessary payments beyond 10
percent of the capitation payments for its Medicare-eligible members. 

The following example illustrates this allocation band methodology: 

(1) USTF has 2,000 Medicare-eligible members. 

(2) The average Medicare capitation payment is $6,000 per member per
year. 

(3) The total of annual capitation payments for Medicare-eligible
members is $12,000,000. 

(4) Unnecessary payments are calculated to be $1.0 million on the
basis of this methodology. 

(5) The share of unnecessary payments allocated to the USTF is
$40,000, or 25 percent, as shown in table IV.1. 



                         Table IV.1
          
             USTF Share of Unnecessary Payments

                             Percentage of
Unnecessary payments           unnecessary   USTF share of
as a percentage            payment USTF is     unnecessary
of capitation payment      responsible for         payment
----------------------  ------------------  --------------
0 -1%                                 100%        $120,000
1% -4%                                 75%        $270,000
4% -7%                                 50%        $180,000
7% -10%                                25%         $40,000
----------------------------------------------------------
Any unnecessary costs in excess of the amount determined by this
methodology are not the responsibility of the USTF. 

7.  Recoupment of USTF portion of unnecessary payment reimbursement. 

At the beginning of the second enrollment period after the
calculation of unnecessary payments is made, DOD adjusts the payments
made to the USTF to reflect this amount.  At the beginning of the
second enrollment period, the number of Medicare-eligible members is
determined by age and gender.  The projected annual capitation
payments are calculated by multiplying the age/gender capitation
rates by the number of Medicare-eligible individuals.  The recoupment
amount, determined through the above methodology, is divided by the
projected annual capitation payments to the USTF.  The capitation
payment for each Medicare-eligible individual is reduced by this
percentage.  For example, if the USTF enrolled 2,000
Medicare-eligibles with an average capitation payment of $6,000, the
projected annual payment for these members will be $12 million.  If
the payment amount due, based on the above methodology, is $610,000,
the monthly capitation payment for each individual is reduced by
5.083 percent for the 12 months in the contract year.  The value of
the unnecessary payment amount is determined for each contract year. 
The amount of potential reduction in the capitation payments will
vary depending on the actual amount of unnecessary payments,
calculated by this methodology, in each enrollment period. 


CONTACTS AND STAFF ACKNOWLEDGMENTS
=========================================================== Appendix V

GAO CONTACTS

Daniel M.  Brier, Assistant Director, (202) 512-6803
Cheryl Brand, Senior Evaluator, (303) 572-7383

STAFF ACKNOWLEDGMENTS

In addition to those named above, the following individuals made
important contributions to this report:  Carolyn Kirby and Sigrid
McGinty, Senior Evaluators; Jean Chase, Evaluator; Robert DeRoy,
Assistant Director; Stefanie Weldon, Senior Attorney; and Pamela
Tumler, Communications Analyst. 


*** End of document. ***