Defense Health Care: Effects of Mandated Cost Sharing on Uniformed
Services Treatment Facilities Likely to Be Minor (Letter Report,
05/13/96, GAO/HEHS-96-141).

Pursuant to a legislative requirement, GAO reviewed the potential
effects of the Department of Defense's (DOD) new health care benefit and
cost-sharing package, which is part of its TRICARE managed health care
program, on the Uniformed Services Treatment Facilities (USTF).

GAO found that: (1) the new cost-sharing arrangement might leave USTF at
risk for higher costs by causing some healthy members to disenroll, an
outcome known as adverse selection; (2) adverse selection probably will
not have long-term negative financial effects on USTF, because less than
10 percent of current USTF members are expected to disenroll, and USTF
costs would not increase by more than 2 percent; (3) DOD capitation
payments will automatically adjust for higher USTF costs caused by
changes in enrollment, and USTF may negotiate payment adjustments for
the effects of the benefit and cost-sharing revisions; (4) USTF
estimated that cost-sharing would cause about 40 percent of their
members to disenroll and increase costs by about 11 percent; (5) the
USTF estimates are unreliable because of data and methodological
weaknesses; (6) the USTF estimates included data for large claims which
are unpredictable and dramatically affect cost estimates; (7) the
difference in members' out-of-pocket costs between USTF and TRICARE
Standard is not expected to be great enough to cause more than an
estimated 10-percent USTF disenrollment; and (8) USTF already serve
proportionally more retirees and their dependents who are under age 65
than exist in the general DOD population, but cost-sharing may reduce
the proportion of younger retirees and their dependents in the USTF
population.

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

 REPORTNUM:  HEHS-96-141
     TITLE:  Defense Health Care: Effects of Mandated Cost Sharing on 
             Uniformed Services Treatment Facilities Likely to Be
             Minor
      DATE:  05/13/96
   SUBJECT:  Health care programs
             Cost sharing (finance)
             Medical economic analysis
             Hospitals
             Medical services rates
             Retired military personnel
             Military dependents
             Surveys
             Public Health Service facilities
             Managed health care
IDENTIFIER:  DOD Uniformed Services Treatment Facilities Program
             DOD TRICARE Program
             DOD TRICARE Standard Program
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             DOD Military Health Services System
             Federal Employees Health Benefits Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1996

DEFENSE HEALTH CARE - EFFECTS OF
MANDATED COST SHARING ON UNIFORMED
SERVICES TREATMENT FACILITIES
LIKELY TO BE MINOR

GAO/HEHS-96-141

Effects of USTF Cost Sharing

(101487)


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

  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  DOD - Department of Defense
  FEHBP - Federal Employees Health Benefits Program
  HMO - health maintenance organization
  MHSS - Military Health Services System
  USTF - Uniformed Services Treatment Facility

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


B-271864

May 13, 1996

The Honorable Daniel R.  Coats
Chairman
The Honorable Robert C.  Byrd
Ranking Minority Member
Subcommittee on Personnel
Committee on Armed Services
United States Senate

The Honorable Robert K.  Dornan
Chairman
The Honorable Owen B.  Pickett
Ranking Minority Member
Subcommittee on Military Personnel
Committee on National Security
House of Representatives

As required by the National Defense Authorization Act for Fiscal Year
1996 (P.L.  104-106), this report describes the financial and other
effects that the Department of Defense's (DOD) new health care
benefit and cost-sharing package will likely have on the Uniformed
Services Treatment Facilities (USTF).\1 USTFs are former Public
Health Service hospitals now under civilian ownership and designated
by the Congress in the Military Construction Authorization Act of
1982 (42 U.S.C.  248c) to be part of the Military Health Services
System (MHSS).  The Congress has periodically renewed this
legislative authority, which is now set to expire September 30, 1997. 
Under the USTF program, the Congress has appropriated nearly $1
billion since fiscal year 1994 for the USTFs to deliver health care
to what now totals 124,000 beneficiaries. 

DOD's health care benefit and cost-sharing package is an integral
part of TRICARE, DOD's nationwide managed health care initiative. 
Section 726(a) of P.L.  104-106 requires that DOD extend TRICARE cost
shares to the USTFs after either October 1, 1996, or the start of
TRICARE in the USTF service area, whichever is later.  Currently,
USTF members pay no enrollment fees and low or no copayments for
health services.  Appendix I shows the TRICARE cost-sharing
provisions and the current USTF cost-sharing requirements.  The USTFs
contend that the new cost shares will harm them financially.  This is
because a substantial number of healthy USTF members may disenroll to
seek less costly coverage, leaving the USTFs at risk from their less
healthy members' higher care costs--an outcome known as adverse
selection.  Accordingly, P.L.  104-106 provides that the USTFs could
submit to us, within 30 days of its enactment, evidence on the likely
financial effects of the new cost shares.  The act further requires
that if the USTFs submitted such evidence, we review whether the cost
shares will (1) cause adverse selection of USTF members; (2) be
inappropriate for a fully at-risk managed care facility; and (3)
result in a USTF member population different from DOD's general
population.  In March 1996, the USTFs submitted a report to us
detailing their position.\2

To do our work, we contracted with the Hay Group for actuarial
assistance.  In reviewing the USTFs' actuarial estimates, we examined
various supporting documents, including adverse selection literature;
records from a telephone survey of USTF members asking whether
members would disenroll because of the new cost shares and instead
use TRICARE Standard;\3 and the health care costs of surveyed
members.  We also interviewed the USTFs' actuary (Milliman &
Robertson, Inc.), the USTF market research firm (Market Street
Research, Inc.), and USTF and DOD representatives in Washington, D.C. 
We did our work from February 17 through May 9, 1996, in accordance
with generally accepted government auditing standards. 


--------------------
\1 "Cost sharing" refers to the requirement that enrollees pay
copayments for the care they receive and/or enrollment fees for
joining a health plan. 

\2 Stanley A.  Roberts and Robert G.  Cosway, Impact on Uniformed
Services Treatment Facilities of the Implementation of the TRICARE
Uniform HMO Benefit Cost Shares Provisions (Seattle, Wash.:  Milliman
& Robertson, Inc., 1996). 

\3 Under TRICARE, the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS) is renamed TRICARE Standard. 


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

While the new cost-sharing arrangement mandated under TRICARE may
cause some adverse selection, it will have no lasting negative
financial effects on the USTFs.  We estimate that less than 10
percent of the USTFs' current members will disenroll and USTF costs
will increase by less than 2 percent of their current reimbursement
levels.  DOD's reimbursement approach, however, automatically adjusts
USTFs' capitation payments for higher USTF costs due to enrollee age
and gender.  It also allows for negotiated adjustments in
reimbursement rates for the effects of benefit and cost-sharing
revisions, which may result in adverse selection. 

In contrast, the USTFs estimated in their March 1996 report to us
that the cost shares will cause about a 40-percent USTF disenrollment
rate and cost increases of about 11 percent over current
reimbursement levels.  We found weaknesses in the USTFs' data
gathering and health claims analysis, however, that tend to overstate
the disenrollment estimate and reduce the results' reliability. 
Also, according to actuarial research, a major disenrollment
incentive is a high out-of-pocket cost difference between an
individual's current health plan and competing plans.  But such
differences between the USTFs' new cost shares and TRICARE Standard's
out-of-pocket costs (a maximum of $460 per year less under TRICARE
Standard) are not likely to be great enough to cause disenrollment in
excess of 10 percent.  Further, in estimating an 11-percent cost
increase, the USTFs included all large claims incurred in the prior
year.  Actuarial research shows, however, that individuals who incur
a large claim in one year will not necessarily do so the following
year because large claims may be for one-time high-cost events. 
Moreover, our analysis showed that these estimates are greatly
influenced by just a few large claims. 

Contrary to the USTFs' contention, the new cost shares are
appropriate for the risks to be borne by the USTFs.  Although the
cost shares could create some problems for a managed care plan not
able to adjust its capitation, any USTF loss attributable to age and
gender would be covered through automatic capitation adjustments. 
Any costs attributable to revisions of the benefit and cost-sharing
provisions are negotiable between DOD and the USTFs.  DOD has
recently reiterated this position in its discussions with us and the
USTFs.  As a result, the new cost shares are not expected to create a
financial burden on the USTFs.  Furthermore, the new cost-sharing
structure is similar to that of health maintenance organization (HMO)
plans in the Federal Employees Health Benefits Program (FEHBP),
although with lower out-of-pocket costs.  Compared with the 1996
FEHBP HMO plan costs in USTF regions, for example, the TRICARE
enrollment fee for family coverage is from $614 to $6,975 less per
year than FEHBP's HMO plan premiums. 

Finally, the USTFs believe that adoption of the new cost shares will
result in their enrolling an older, perhaps less healthy beneficiary
population than is enrolled under TRICARE.  This, in their opinion,
will increase USTF costs.  The USTF and DOD beneficiary populations,
however, are already different in that the USTFs serve
proportionately more retirees and their dependents than exist in the
DOD populations in their regions.  At issue, therefore, is to what
degree this difference is expected to change as a result of the
USTFs' new cost shares.  Adopting the cost shares may make the USTF
population more like DOD's general population by reducing the number
of USTF retirees and their dependents under age 65. 


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

DOD offers medical services to 8.3 million eligible people through
the MHSS--1.7 million active duty members\4 and another 6.6 million
non-active duty members, such as dependents of active duty personnel
and military retirees and their dependents.  The bulk of the health
care is provided at more than 600 military hospitals and clinics
worldwide; through CHAMPUS; and, to a comparatively minor extent, at
USTFs.\5

The USTF managed care program involves the formation of provider
networks to deliver a full spectrum of inpatient and outpatient care
and preventive services; beneficiary enrollment; and a monthly
capitated reimbursement system.  DOD's capitation payment rates cover
all the medical care a member would need in a year.  Subject to
annual appropriations, USTFs are permitted to enroll any person
eligible for MHSS benefits except for active duty members, who
receive their care at military hospitals and clinics.  But unlike
those under CHAMPUS, USTF members do not lose their participation
rights when they reach age 65 and become eligible for Medicare.  At
the beginning of fiscal year 1996, the USTFs had 124,012 members,
including about 27,000 Medicare-eligibles, and an appropriated
funding level of $339 million (see table 1). 



                                Table 1
                
                 USTF Enrollment and Program Budget, FY
                                  1996

                         (Dollars in Millions)

                                                        Member   Share
                                                             s      of
                                                        enroll  progra
Facility name               Location                        ed       m
--------------------------  --------------------------  ------  ------
Bayley Seton Hospital       Staten Island, N.Y          15,772   $53.2
Brighton Marine Public      Boston, Mass.               11,892    40.0
 Health Care Center
Johns Hopkins Medical       Baltimore, Md.              23,881    57.0
 Services Corporation
Lutheran Medical Center     Cleveland, Ohio              6,570    13.9
Martin's Point Health Care  Portland, Me.               18,795    41.3
 Center
Pacific Medical Center and  Seattle, Wash.              20,048    58.8
 Clinics
Sisters of Charity          Texas                       27,054    75.0
 Hospitals\a
Total                                                   124,01  $339.3
                                                             2      \b
----------------------------------------------------------------------
Note:  See app.  II for annual USTF funding and enrollment since
fiscal year 1994. 

\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, which is no
longer a USTF. 

\b In addition to DOD's covered beneficiaries, this appropriation
includes $24.3 million 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. 

By September 1997, DOD plans to complete its implementation of
TRICARE--a nationwide managed care program.  TRICARE is aimed at
improving access to high-quality care while containing costs. 
TRICARE involves coordinating and managing beneficiary care on a
regional basis using all available military hospitals and clinics
supplemented by competitively contracted civilian services.  TRICARE
offers beneficiaries three plans:  (1) TRICARE Standard, a
fee-for-service arrangement to replace the present CHAMPUS program;
(2) TRICARE Extra, a preferred provider plan; and (3) TRICARE Prime,
an HMO that provides comprehensive medical care to beneficiaries
through an integrated network of military and contracted civilian
providers.  (App.  I compares the cost-sharing provisions of the
three TRICARE plans.)

As required by P.L.  104-106, DOD is to develop a plan to integrate
the USTFs into TRICARE.  We will soon report on several issues
regarding the USTFs' integration into TRICARE, including whether the
USTFs should retain their special, noncompetitive relationship with
DOD.  The managed care support contractors under TRICARE compete on a
cost-effectiveness basis rather than through a noncompetitive
negotiation of rates as is done with the USTFs. 


--------------------
\4 Includes members of the Coast Guard and Commissioned Corps of the
Public Health Service and of the National Oceanic and Atmospheric
Administration, who are also eligible for military health care. 

\5 DOD administers CHAMPUS, an insurance-like program that pays for a
portion of the care military families and retirees receive from
private sector health care providers.  Military retirees and their
dependents who are covered under Medicare are also eligible for care
at military medical facilities on a space-available basis but are not
eligible for CHAMPUS. 


   POTENTIAL ADVERSE SELECTION
   EFFECTS WILL LIKELY BE MINOR
   AND OFFSET BY CAPITATION
   ADJUSTMENTS
------------------------------------------------------------ Letter :3

Our analysis of the potential effects on the USTFs of adopting the
TRICARE cost shares showed that less than 10 percent of the members
will disenroll, causing less than a 2-percent increase in operating
costs.  But DOD's reimbursement approach takes into account and
otherwise adjusts the USTFs' capitation payments for higher costs
that may result from changes in the population's age and gender.  It
also allows for negotiated adjustments in reimbursement rates for the
effects of benefit and cost-sharing revisions, which may result in
adverse selection. 

In contrast, the USTFs estimated that the new cost shares will cause
about a 40-percent USTF disenrollment rate and cost increases of
about 11 percent.  However, the USTFs' estimates are overstated
because of weaknesses in their survey and health claims data, and the
absence of out-of-pocket cost differences among the key plans that
are significant enough to cause disenrollment of more than 10
percent. 


      SURVEY AND CLAIMS DATA
      WEAKNESSES REDUCE
      RELIABILITY OF USTFS'
      ESTIMATES
---------------------------------------------------------- Letter :3.1

The USTFs' estimates of the effects of the new cost shares were based
largely on the results of a telephone survey of USTF households and
an analysis of health claims data.  In February 1996, the USTFs
conducted a survey of 2,100 member households (300 from each USTF) to
determine whether, with the new cost shares, members would disenroll
and choose TRICARE Standard.\6 Retirees under age 65 and their
households were surveyed because only this group--not the
Medicare-eligible or active duty dependent members--will be subject
to the new enrollment fee.\7 Also, USTF health claims data for the
surveyed households covering the 12 months ending September 30, 1995,
were analyzed to determine the costs for members who said they would
remain and those who would disenroll. 

Our review of the USTFs' survey approach and data analysis raised
several concerns about the reliability of their estimates.  First,
the survey questions focused solely on the households' out-of-pocket
cost increases and did not probe respondents' views about the quality
of or access to care at the USTF versus other options available to
them.  (See app.  III for the questionnaires used in the USTF
survey.) Since households may base their health plan decisions on
factors other than out-of-pocket costs, such as access and quality,
questions on these other factors would have added needed perspective
to the survey responses.  Second, the wording of several questions
could have misled respondents and produced incorrect responses.  For
example, one question asked:  ï¿½If you have to choose between CHAMPUS
[or TRICARE Standard, TRICARE Extra, or TRICARE Prime at the Pacific
Medical USTF] and the [subject] USTF with higher copays and
enrollment fees for your household in the future, which would you
select?ï¿½ The question's phrasing could have led respondents to
believe that with the new cost shares the USTFs will have higher
copayments than the other choices.  This is not the case. 

Furthermore, survey choices were categorized as "would stay," "would
leave and choose TRICARE Standard," "neither, or would choose
different plan," and "don't know." To reduce the number of "don't
know" responses, interviewers were instructed to probe respondents
and try to force them to make a decision.  One probe was "We're not
asking you to make a firm commitment right now, but we are interested
in knowing which one you would be most likely to choose on the basis
of the information I just read to you." Because interviewers tried to
force respondents to change "don't know" answers, the responses in
these cases may not reliably predict the respondent's answer. 
Finally, the average length of time individuals took to respond to
the survey was about 4 minutes.  This short period probably did not
allow most individuals to weigh and respond thoughtfully about the
medical plan they would choose. 

When analyzing cost differences among respondents, the USTF actuaries
combined the "don't know" responses with the group who responded they
would disenroll.  This caused an overstatement of the number of
respondents the USTFs estimated will leave.  Also, in analyzing
potential cost differences, the USTF actuaries did not verify the
claims data the USTFs reported.  In addition, four of the USTFs
provided incomplete data for the surveyed households.  They provided
less than 12 months of claims data and/or omitted such services as
outpatient prescription drugs and care provided under subcontract
with non-USTF providers.  For Bayley Seton and Johns Hopkins, 172 and
106, respectively, of the 300 surveyed households for each facility
were dropped because no claims data were available for these
households.  Furthermore, the USTF report stated that the USTFs had
to perform some adjustments to produce theoretical billed charges. 
In effect, a percentage of the claims costs the USTFs provided is
incomplete, or estimated; thus, such data cannot be validated and are
of questionable use for estimating the potential cost effects of
adverse selection. 


--------------------
\6 Because TRICARE is currently available at the Pacific Medical USTF
in Seattle, members there were asked whether they would leave the
USTF and choose TRICARE Prime, TRICARE Extra, or TRICARE Standard. 

\7 DOD has exempted active duty families and eligible USTF members
who are paying Medicare part B premiums from paying TRICARE's annual
enrollment fee. 


      USTFS OVERESTIMATED
      DISENROLLMENT RESULTING FROM
      ADVERSE SELECTION
---------------------------------------------------------- Letter :3.2

According to actuarial research, any time a health plan increases a
member's out-of-pocket costs relative to competing plan choices, some
adverse selection can occur.  But for the USTFs to experience the
40-percent disenrollment rate they estimated, the cost differences
would have to be significantly higher than what would exist between
the USTFs' new cost shares and TRICARE Standard.  As table 2 shows,
the USTF households that face the greatest out-of-pocket
increase--$460--relative to TRICARE Standard are those incurring no
medical expenditures.  Most USTF households, or those incurring some
medical expenditures, will have even lower relative cost differences. 
According to actuarial experience, such relative cost difference
levels will not result in major enrollment shifts.  Moreover, a
Congressional Research Service study of the 1987 FEHBP open season
found that out-of-pocket cost differences among plans had to be at
least $1,000--$2,000 in 1996 dollars--to result in more than a
10-percent plan disenrollment rate.\8 But as table 2 shows, no USTF
household will reach an out-of-pocket cost difference that high when
compared with TRICARE Standard. 



                          Table 2
          
           Comparison of Household Out-of-Pocket
           Costs Under the USTFs' New Cost Shares
                    and TRICARE Standard


Annual medical      USTFs' new       TRICARE
costs              cost shares      Standard    Difference
----------------  ------------  ------------  ------------
0                       $460\a             0          $460
$400                       520          $325           195
600                        550           375           175
800                        580           425           155
1,000                      610           475           135
5,000                      890         1,475         (585)
10,000                   1,140         2,725       (1,585)
15,000                   1,390         3,975       (2,585)
25,000                   1,890         6,475       (4,585)
30,000                   2,140       7,500\b       (5,360)
50,000                 3,000\b         7,500       (4,500)
----------------------------------------------------------
\a The annual enrollment fee. 

\b The catastrophic limit to out-of-pocket costs. 

The disenrollment rate that will likely result from the USTFs'
adopting the new cost shares will be less than 10 percent.  But to be
actuarially conservative, we allowed for a 20-percent outcome and
reestimated the USTFs' disenrollment and cost increases.  Table 3
shows the comparative results of these adjustments. 



                          Table 3
          
          Estimated Cost Increases With 20-and 40-
                Percent Disenrollment Rates


                                                     Total
                                                respondent
                At 40%  At 20%  At 40%  At 20%           s
--------------  ------  ------  ------  ------  ----------
Number of        1,095   1,456     721     360       1,816
 respondents
Monthly claims  $206.5  $193.5  $155.3  $155.3     $185.78
 cost                1       1       1       1
Estimated cost     11%      4%
 increase\a
----------------------------------------------------------
\a Derived by subtracting the total respondents' monthly claims cost
from the claims cost of those respondents who would remain in USTF,
and dividing this increase by the total respondents' cost. 

As shown, the 20-percent disenrollment estimate reduces the USTFs'
estimated 11-percent cost increase to 4 percent.  Reductions in the
USTFs' estimated cost increases are greater for the USTFs that may
experience the most adverse selection, such as Pacific Medical. 
(App.  IV provides a breakdown on the effects for each USTF.)

Also, although active duty and Medicare-eligible family members are
not subject to the new enrollment fee, the USTFs estimated that some
of these family members will also disenroll.  The USTFs estimated up
to 5-percent cost increases for each group as a result of adverse
selection.  We found, however, that there would be negligible or no
adverse selection of such members and thus no cost increase would
occur with the new cost shares.  Family members of active duty
personnel would incur the same out-of-pocket costs at the USTFs as
elsewhere in the TRICARE system and thus would not have a relative
cost difference incentive to disenroll.\9 Medicare-eligible family
members would incur the same costs but have better benefits and
better access to care at the USTFs than in TRICARE.  We believe,
moreover, that individuals from these two categories would replace
those retirees under age 65 and their dependents who disenroll
because of adverse selection. 


--------------------
\8 Congressional Research Service, Federal Employees Health Benefits
Team, The Federal Employees Health Benefits Program and Possible
Strategies for Reform, House Committee Print 101-5 (Washington, D.C.: 
House Committee on Post Office and Civil Service, Subcommittee on
Compensation and Employee Benefits, 1989). 

\9 Any care provided in a military hospital or clinic does not
require a copayment. 


      ESTIMATING THE USTFS'
      NEXT-YEAR COSTS WITH LAST
      YEAR'S CLAIMS DISTORTS
      RESULTS
---------------------------------------------------------- Letter :3.3

In estimating an 11-percent cost increase resulting from the new cost
shares, the USTFs assumed that each affected member would have the
same claims costs in the year after adverse selection occurred as
they had in the year before.  Also, they concluded that members with
the most costly claims would be most likely to stay with the USTF,
and new enrollees would have the same claims costs as those
respondents who said they would stay.  According to actuarial
research, however, individuals that incur a large claim in one year
will not necessarily do so the following year.  This is because large
claims may be for one-time high-cost events.  A recent study of
year-to-year health care expenditures for a large manufacturing firm
showed that most large claims incurred in a given year are from
individuals incurring much lower claims the prior year.\10

Conversely, most of the future large claims will come from
individuals with low claims in the current year.  According to the
USTFs' estimates of adverse selection, members with the least costly
claims will be most likely to disenroll. 

Also, in any given year, a small number of enrollees will have large
claims.  If enrollees could predict such claims--and some can--when
faced with choosing between competing plans, they would join the plan
most cost-beneficial to them (the USTFs, in this case).  According to
actuarial research, however, many such claims cannot be predicted, so
many of the USTF members with high claims in the year after adverse
selection would have had no reason to have selected the USTF plan
before adverse selection occurred. 

To illustrate the sensitivity of the USTF analysis to the inclusion
of all high-cost claims, we recomputed the USTFs' cost estimates by
removing the two largest claimants from each facility.  The largest
claimants' costs ranged from about $49,000 to $337,000.  The
comparative results are shown in table 4. 



                          Table 4
          
             Estimated Cost Increases With and
             Without the Two Largest Claimants


            Estima
               ted
              cost             Monthly             Monthly
            increa              claims              claims
              se\a    Number      cost    Number      cost
----------  ------  --------  --------  --------  --------
Including      11%     1,095   $206.51     1,816   $185.78
 all
 claimants
Excluding       4%     1,084   $157.31     1,802   $151.75
 two
 largest
 claimants
 at each
 facility
----------------------------------------------------------
\a Derived by subtracting the total respondents' monthly claims cost
from that of the respondents who stay, and dividing this increase by
the total respondents' cost. 

As shown, removing such high claims costs from the USTFs' estimating
base reduces their 11-percent cost increase estimate to 4 percent.\11
Coincidentally, this is the same effect produced by reducing their
estimated disenrollment rate from 40 percent to our conservatively
applied 20 percent rate.  Because less than 1 percent of the surveyed
households had high claims that accounted for almost 20 percent of
the total claims costs, including or removing such claimants from the
estimating base significantly affects the estimating outcome. 
Moreover, on the basis of the actuarial assumption that individuals
who have large cost claims in one year are likely to have lower
claims the following year, the USTFs' 11-percent cost increase
estimate appears to be unnecessarily high. 

Finally, actuarial studies focusing on adverse selection and ways to
predict the effects of beneficiary choice have concluded that
future-year costs resulting from adverse selection cannot be
accurately predicted by any set of known characteristics and
circumstances from past years.\12

According to actuarial research, the most reliable way to gauge the
effects of adverse selection is to examine actual experience under
the benefit change in question. 


--------------------
\10 Matthew Eichner, Mark McClellan, and David Wise, Insurance or
Self-Insurance?:  Variation, Persistence, and Individual Health
Accounts (Cambridge, Mass.:  National Bureau of Economic Research,
1995). 

\11 Another approach would be to assume such large claims were
randomly distributed between respondents saying they would stay and
those who would disenroll, but the cost-increase effect also would
approximate 4 percent. 

\12 Daniel Dunn and others, A Comparative Analysis of Methods of
Health Risk Assessment--Final Report (Schaumburg, Ill.:  Society of
Actuaries, 1995). 


      CAPITATION ADJUSTMENTS WILL
      LIKELY OFFSET USTF COST
      INCREASES
---------------------------------------------------------- Letter :3.4

Our adjustments to the USTFs' estimated 11-percent cost increase
covering the adverse selection for retirees and their dependents
under 65 years old resulted in a reduced estimate of 4 percent. 
Using the 4-percent cost increase, we estimated that the weighted
average cost effect of adverse selection for the USTFs in 1996 would
be less than 2 percent of their 1996 reimbursement level, or about
$5.5 million dollars. 

This estimated increase, however, will likely have no lasting
negative financial impact on USTFs because DOD's current
reimbursement approach automatically adjusts USTF payments to account
for changes in members' age and gender.  For example, our analysis of
the survey data available for Johns Hopkins beneficiaries\13 who had
a claims history shows that the facility may gain financially from
adverse selction.  The Johns Hopkins data indicate that respondents
who said they would stay there are, on average, 1.7 years older than
all respondents.  Because USTF capitation rates generally increase as
the members age, some of the older remaining members would cause
substantial payment increases as they move to higher capitation
bands.  For example, DOD pays the Johns Hopkins USTF $885 more per
year for a 55-year-old male than a 54-year-old male.  For females,
the difference between 55- and 54-year-olds is $483 per year (see
DOD's capitation bands by age and gender category in app.  V).  Thus,
if its remaining members' average age increases by 1.7 years, we
estimate that capitation payments would automatically rise by 4.9
percent.  The higher revenue would exceed the USTFs' 4-percent
estimate of Johns Hopkins' cost increase resulting from adverse
selection.\14

DOD's current reimbursement approach also allows for negotiated
adjustments in reimbursement rates for the effects of benefit and
cost-sharing revisions, which may result in adverse selection.  DOD's
current USTF capitation rates were set through intensive negotiations
with each USTF, and the process for periodically adjusting them is
set forth in their participation agreements with DOD.\15


--------------------
\13 Other than limiting its study to households with members aged 45
to 64, Milliman did not request age data or include an analysis of
the claims by age.  However, we received such data on files provided
to us by Market Street Research, which conducted the telephone
survey. 

\14 The average age of USTF respondents with a claims history
electing to stay at Johns Hopkins is 54.53 years compared with 52.82
years for the entire Johns Hopkins population surveyed.  The average
increase in capitation between the 25-to-34 age group ($1,047, the
mid-point at age 30) and the 55-to-64 age group ($2,495, the
mid-point at age 60) is 2.9 percent.  The total increase over the
30-year period (age 30 to age 60) is 138 percent (the annual rate of
2.9 percent compounded:  1.029\30 = 2.38).  As a result, the
capitation increase resulting from a 1.7-year age increase would be
4.9 percent (1.7 years x 2.9 percent per year). 

\15 We did not evaluate DOD's current capitation rates to determine
their actuarial soundness. 


   TRICARE COST SHARES ARE
   APPROPRIATE FOR THE USTFS
------------------------------------------------------------ Letter :4

The TRICARE cost shares are appropriate for the risks to be borne by
the USTFs.  The cost shares would create some problems for a managed
care plan unable to adjust its capitation.  But any initial USTF loss
would be covered through automatic capitation adjustments based on
members' age and gender, and later losses could be offset by future
negotiated capitation adjustments.  As a result, the TRICARE cost
shares will not create a financial burden on the USTFs. 

Furthermore, the TRICARE cost sharing is similar to HMO plans in the
FEHBP.  However, the new $230 to $460 USTF enrollment fees are lower
than the employee shares of the typical private sector HMO and
signficantly less than those in the FEHBP (see table 5). 



                                Table 5
                
                Comparison of USTFs' New Enrollment Fee
                  With Enrollee Premiums for FEHBP and
                       Other Private Sector HMOs

                                                                  Cost
                                                                differ
                                                        Enroll    ence
                                                            ee    with
Plan type                                                 cost    USTF
------------------------------------------------------  ------  ------
USTF enrollment fee
----------------------------------------------------------------------
Single                                                    $230
Family                                                     460

Typical private sector HMO premium in 1995\a
----------------------------------------------------------------------
Single                                                     237      $7
Family                                                     804     344

1996 premiums for FEHBP HMOs with largest enrollment in a UST
location\b
----------------------------------------------------------------------

GHI Health Plan (Bayley Seton USTF)
----------------------------------------------------------------------
Single                                                     722     492
Family                                                   1,917   1,457

Harvard CHP (Brighton Marine USTF)
----------------------------------------------------------------------
Single                                                     812     582
Family                                                   2,958   2,498

Kaiser (Johns Hopkins USTF)
----------------------------------------------------------------------
Single                                                     451     221
Family                                                   1,136     676

HMP/Ohio (Lutheran Medical USTF)
----------------------------------------------------------------------
Single                                                     640     410
Family                                                   1,941   1,481

HMO Maine (Martin's Point USTF)
----------------------------------------------------------------------
Single                                                   2,875   2,645
Family                                                   7,435   6,975

Group Health (Pacific Medical USTF)
----------------------------------------------------------------------
Single                                                     464     234
Family                                                   1,074     614

Humana (Sisters of Charity USTF)
----------------------------------------------------------------------
Single                                                     440     210
Family                                                   1,131     671
----------------------------------------------------------------------
\a Source:  The Hay Group, Hay/Huggins Benefits Report:  Prevalence
of Benefits Practices and Executive Summary, Vol.  1 (Philadelphia: 
Hay/Huggins Company, 1995). 

\b The FEHBP HMOs with the largest enrollments in 1994. 


   COST SHARING COULD MAKE USTF
   AND DOD POPULATIONS MORE ALIKE
------------------------------------------------------------ Letter :5

The USTFs believe that adoption of the new cost shares will result in
their enrolling an older, perhaps less healthy beneficiary population
than is enrolled under TRICARE.  This in their opinion will increase
USTF costs.  The USTF and DOD beneficiary populations are already
dissimilar.  The USTFs serve proportionately more retirees and their
dependents.  At issue, therefore, is to what degree this
dissimilarity is likely to change as a result of the USTFs' new cost
shares.  In 1994, the USTF population consisted of a larger
proportion of retirees and dependents under age 65 than the DOD
populations in the USTF regions.  This disparity grew during the 1996
USTF enrollment period, as shown in table 6. 



                                Table 6
                
                 Comparison of USTF and DOD Beneficiary
                 Populations Within a 60-Mile Radius of
                       the USTF, FY 1994 and 1996


                                                   DOD             DOD
                                                popula          popula
                                                  tion            tion
                                                    in              in
                                          USTF    USTF    USTF    USTF
                                        enroll  region  enroll  region
Enrollee group                             ees       s     ees       s
--------------------------------------  ------  ------  ------  ------
Active duty dependents                      20      37      18      36
Retirees and non-active duty                55      47      59      47
 dependents under age 65
Retirees and non-active duty                25      16      22      18
 dependents aged 65 and over
----------------------------------------------------------------------
Note:  The percentages for each beneficiary group may not add to 100
because of rounding. 

Thus, the USTF population, already dissimilar to the DOD population,
is becoming more so.  But with the new USTF cost shares, the USTF
population will actually move closer to the general DOD population as
the healthy retirees under age 65 seek less costly medical coverage. 
Further, those who disenroll will likely be replaced by new enrollees
who are dependents of active duty personnel or Medicare-eligible
retirees and their families over age 64.  But no matter how
dissimilar the populations are, DOD's reimbursement approach will
account for USTF population changes and offset any resulting negative
financial effect. 


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

The establishment of uniform benefits and cost sharing for DOD
beneficiaries is a key component of the TRICARE program and something
that we and others have long advocated.  Such uniformity would, in
our view, eliminate inequities and confusion that now exist among
beneficiaries of military health plans.  While adopting the TRICARE
cost shares may cause some minor adverse selection for the USTFs, our
analysis indicates that there will be no lasting negative financial
effect on USTF operations.  Further, the new cost shares, which are
similar to HMOs, are appropriate for the risks to be borne by the
USTFs and will likely make the USTF population more similar to DOD's
general beneficiary population.  More importantly, should there be a
financial impact, DOD's current USTF capitation methodology takes
into account and allows for adjusted reimbursement levels for such
higher costs that result from changes in the enrollee cost shares and
population characteristics. 


   COMMENTS FROM DOD AND THE USTFS
   AND OUR EVALUATION
------------------------------------------------------------ Letter :7

We received comments on a draft of the report from DOD's Principal
Deputy Assistant Secretary for Health Affairs and other DOD
officials, and on the USTFs' behalf from officials of the Seattle and
Texas facilities. 

DOD officials stated that they agreed with the report's analysis and
findings.  They pointed out, however, that the draft report's
language discussing DOD's reimbursement approach should clearly set
forth that the capitation rates make automatic age and gender
adjustments and also allow for negotiated rate adjustments to cover
the possible adverse selection effects of benefit/cost-sharing
revisions.  We clarified the report's language on this matter and
incorporated the officials' other suggested technical report changes
as appropriate. 

USTF officials also took issue with the report's discussion of
factors for which the capitation rates automatically adjust.  They
stated that there is no provision in their participation agreements
with DOD that allows for negotiated capitation rate adjustments for
possible adverse selection due to cost-sharing changes.  The
officials stated that, while the agreements allow for negotiated rate
changes due to benefit revisions, the USTFs do not consider the new
cost shares to be benefit changes--although they stated they have not
consulted DOD on the matter.  We believe that because the new cost
shares represent a change in the health care package offered to USTF
beneficiaries and materially affect the actuarial value or cost of
the package, the new cost shares constitute a benefit change.  Also,
as pointed out, DOD considers the effects of such changes to be
subject to negotiated capitation rate adjustments. 

USTF officials stated that, contrary to our assertion that the USTFs'
survey should have included questions on quality and access along
with the questions on higher cost shares, such additional questions
were not relevant.  They stated that their annual member surveys
repeatedly show high member satisfaction with the USTFs, tending to
affirm their historic 2-percent disenrollment rate.  Adding questions
on quality and access would have, in our view, added perspective for
more fully understanding why survey respondents gave the answers they
did.  Moreover, the high levels of member satisfaction referred to by
the USTF officials tend to raise further questions as to whether
members would disenroll at the USTFs' estimated 40 percent rate. 

The USTF officials stated that our removing the two highest claimants
per USTF from their database and reestimating the potential cost
increase is incorrect.  They stated that there will be high claims in
each year--or new enrollees with high claims--so that removing the
two highest claimants would not reflect the USTFs' actual costs. 
Also, the officials stated that while it is true that a member with
high claims in one year will not necessarily have such claims the
next year because the member may have died, the costs should be
included in the estimating base to have a true picture of the total
costs. 

We disagree.  The USTFs' cost-effect estimates assume that all
claims, including the high claims, for all members whether they said
they would stay or leave will be the same in the year after the
choice as before the choice.  According to actuarial research,
however, many of the high claims in one year will not be for the same
individuals as in the prior year, which, for example, as the USTFs
point out, would occur if the member died. 

To illustrate the major impact that a few respondents with high
claims costs had on the USTFs' estimated cost increases, we removed
the two largest claimants in each USTF.  We agree that the USTFs will
have some high claims each year.  But the level of cost increase the
USTFs estimated as a result of adverse selection will depend on the
same members (with the highest claims in the year before the choice)
staying and having the same high claims in the year after the choice. 
The USTFs' assumption is actuarially questionable and greatly
overstates the adverse selection effect.  Even if we had included the
two highest claimants per USTF in our illustration, but distributed
them randomly among those who stay and those who leave, the net
adverse selection effect would have only been approximately 4
percent. 

USTF officials also said we were incorrect in basing the estimated
cost increase due to adverse selection on their total reimbursement. 
They said it should be based only on reimbursement for the segment of
the USTF members most affected by adverse selection--the retirees and
their dependents under age 65. 

We disagree.  One purpose of our evaluation was to determine if the
new cost shares would be inappropriate for fully at-risk managed care
facilities.  To do so, it is necessary to consider the financial
impact of adverse selection on the facilities' total income--in this
case, DOD's total capitation payments for all USTF members.  Also,
since the active duty dependents and retirees and their dependents
aged 65 and over will not pay any enrollment fee, the impact of
adverse selection on these two groups would be negligible.  Thus, in
our view it is appropriate to compare the potential adverse selection
cost increase for the retirees and dependents under age 65 ($5.5
million) to the total income of the USTF facilities ($323.5 million)
in determining the 1.7-percent increase in financial risk to the
facilities. 

Finally, the USTF officials stated that their members cannot be
compared to FEHBP or private plan enrollees; that their members are
used to and believe they are entitled to free care such that the
enrollment fees would be strongly resisted; and that our use of a
20-percent disenrollment rate is not substantiated nor valid. 

We disagree.  Fewer than 10 percent of the USTFs' members would
disenroll, but to be actuarially conservative, we used a 20-percent
rate to estimate the cost shares' effects.  We based our approach on
actuarial research and experience with a wide range of private and
public health plans.  As the report states, there is very little
disenrollment as a result of relative increases in out-of-pocket
differences of $460 or less per family.  While plans do vary widely
in structure and demographics, the relative effect of changes in
out-of-pocket costs on choice is similar, and one set of plans can
safely be used to predict the results in another set.  Also, neither
the USTF officials nor their report cited any evidence or studies
that showed that disenrollment had been higher than 10 percent for
similar out-of-pocket changes in any other plan. 

We will send 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 major contributors are listed in appendix VI. 

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


COST-SHARING PROVISIONS IN TRICARE
AND USTF PLANS
=========================================================== Appendix I



                                                                      Table I.1
                                                       
                                                          TRICARE Prime, Extra, and Standard
                                                                       Benefits


                                 Active duty                                   Active duty                                  Active duty
                   Active duty        family  Retirees and     Active duty          family   Retirees and   Active duty          family  Retirees and
                        family      members,       retiree          family        members,        retiree        family        members,       retiree
                      members,  ranks E5 and        family        members,           ranks         family      members,           ranks        family
Benefits           ranks E1-E4         above     members\a     ranks E1-E4    E5 and above      members\a   ranks E1-E4    E5 and above     members\a
----------------  ------------  ------------  ------------  --------------  --------------  -------------  ------------  --------------  ------------
Enrollment fee              $0            $0      $230(S),              $0              $0             $0            $0              $0            $0
                                                   $460(F)
Deductible                  $0            $0            $0         $50(S),        $150(S),       $150(S),       $50(S),        $150(S),      $150(S),
                                                                   $100(F)         $300(F)        $300(F)       $100(F)         $300(F)       $300(F)
Inpatient             $11/day,      $11/day,      $11/day,     $10.50/day,     $10.50/day,  The lesser of       $10.50/     $10.50/day,    The lesser
 hospitalization      $25 min.      $25 min.      $25 min.        $25 min.        $25 min.    $250/day or          day,        $25 min.   of $330/day
                                                                                                      25%      $25 min.                        or 25%
                                                                                              institution                                 institution
                                                                                                  charges                                     charges
Inpatient                   $0            $0            $0              $0              $0            20%            $0              $0           25%
 physician
Outpatient                 $25           $25           $25             $25             $25            20%           $25             $25           25%
 surgery--
 hospital
Emergency room             $10           $30           $30             15%             15%            20%           20%             20%           25%
Ambulance                  $10           $15           $20             15%             15%            20%           20%             20%           25%
Physician office            $6           $12           $12             15%             15%            20%           20%             20%           25%
Outpatient                  $6           $12           $12             15%             15%            20%           20%             20%           25%
 surgery--
 office
Inpatient             $20/day,      $20/day,       $40/day     The greater     The greater            20%   The greater     The greater           25%
 psychiatric          $25 min.      $25 min.                       of $25/         of $25/    institution       of $25/         of $25/   institution
                                                                 admission       admission      charges +     admission       admission     charges +
                                                                or $20/day      or $20/day            20%    or $20/day      or $20/day           25%
                                                                                               prof. fees                                  prof. fees
Outpatient                 $10           $20           $25             15%             15%            20%           20%             20%           25%
 psychiatric       individual,   individual,   individual,
                      $6 group     $12 group     $17 group
Prescription                $5            $5            $9            15%,            15%,           20%,     20% after       20% after     25% after
 drugs                                                       no deductible   no deductible  no deductible    deductible      deductible    deductible
Vision exams                $6           $12           $12             15%             15%            20%           20%             20%           25%
Durable medical            10%           15%           20%             15%             15%            20%           20%             20%           25%
 equipment
Catastrophic            $1,000        $1,000        $3,000          $1,000          $1,000         $7,500        $1,000          $1,000        $7,500
 limits (single
 or family)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Notes:  For TRICARE Prime, any care provided in a military hospital
or clinic does not require a copayment.  Some beneficiaries are
required to pay a subsistance allowance. 

(S) = single; (F) = family. 

\a Retirees must be under 65 years old to be eligible for TRICARE. 

Source:  DOD. 



                                    Table I.2
                     
                       Comparison of USTFs' Current and New
                             Cost-Sharing Provisions


                          Active                          Active
                  Active    duty                  Active    duty
                    duty  family                    duty  family
                  family  member          Retire  family  member          Retire
                  member      s,               e  member      s,               e
                      s,   ranks          family      s,   ranks          family
                   ranks  E5 and  Retire  member   ranks  E5 and  Retire  member
Category           E1-E4   above      es       s   E1-E4   above    es\a     s\a
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Enrollment fee        $0      $0      $0      $0      $0      $0  $230(S  $230(S
                                                                      ),      ),
                                                                  $460(F  $460(F
                                                                       )       )
Deductible            $0      $0      $0      $0      $0      $0      $0      $0
Inpatient             $0    $25/    $25/    $25/    $11/    $11/    $11/    $11/
 hospitalization          admiss  admiss  admiss    day,    day,    day,    day,
 (includes                   ion     ion     ion     $25     $25     $25     $25
 physicians)                                        min.    min.    min.    min.
Outpatient            $0     $25      $0     $25     $25     $25     $25     $25
 surgery--
 hospital
Emergency             $0     $25      $0     $25     $10     $30     $30     $30
 room
Ambulance             $0      $0      $0      $0     $10     $15     $20     $20
Physician office      $0      $5      $0      $5      $6     $12     $12     $12
Outpatient            $0     $25      $0     $25      $6     $12     $12     $12
 surgery--
 office
Inpatient             $0    $50/    $50/    $50/    $20/    $20/    $40/    $40/
 psychiatric              admiss  admiss  admiss    day,    day,     day     day
                             ion     ion     ion     $25     $25
                                                    min.    min.
Outpatient            $0     $10      $0     $10    $10/    $20/    $25/    $25/
 psychiatric                                          $6     $12     $17     $17
                                                   group   group   group   group
Prescription          $0      $5      $0      $5      $5      $5      $9      $9
 drugs
Vision exams          $0     $10      $0     $10      $6     $12     $12     $12
Durable medical       $0     10%      $0     10%     10%     15%     20%     20%
 equipment
Catastrophic         Not     Not     Not     Not  $1,000  $1,000  $3,000  $3,000
 limit (single    applic  applic  applic  applic
 or family)         able    able    able    able
--------------------------------------------------------------------------------
Note:  (S) = single; (F) = family. 

\a Retirees aged 65 and older who are paying Medicare part B premiums
do not have to pay an enrollment fee. 


USTF FUNDING AND ENROLLMENT, FY
1994-96
========================================================== Appendix II



                         Table II.1
          
          Allocation of USTF Managed Care Program
                          Budget\

USTF                   FY 1994       FY 1995       FY 1996
----------------  ------------  ------------  ------------
Bayley Seton       $29,695,800   $45,600,000   $53,236,085
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          75,756,000    72,100,000    75,022,395
 Charity
Total             $295,000,000  $321,000,000  $339,347,700
----------------------------------------------------------
Note:  Data include appropriations 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.  This table lists the budget ceiling DOD has
established for each USTF program on the basis of the total USTF
appropriation. 

Source:  DOD. 



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

                                                    FY      FY      FY
USTF                                              1994    1995    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
Total                                           94,692  118,50  124,01
                                                             6       2
----------------------------------------------------------------------
Source:  DOD. 




(See figure in printed edition.)APPENDIX III
QUESTIONNAIRES USED TO SURVEY
MEMBER REACTIONS TO PROPOSED COST
SHARES
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


ADJUSTMENTS TO USTF ESTIMATED COST
INCREASES DUE TO ADVERSE SELECTION
========================================================== Appendix IV

This appendix contains estimates of the cost impact on each USTF
resulting from adverse selection (1) with and without the two largest
claimants of each facility in the computation and (2) using
disenrollment rates of 20 percent and 40 percent. 

The cost impact with and without the two largest claimants is derived
by subtracting the cost for total respondents' monthly claims from
the monthly claims cost of the respondents who stay and dividing this
increase by the total respondents' monthly claims costs.  For
example, as shown in table IV.1, the cost for total respondents'
monthly claims (including all claimants) is $257.  The monthly claims
cost of the respondents who stay is $279.  Subtracting $257 from $279
yields a cost increase of $22, which is about 8 percent of $257. 

The cost impact of using different disenrollment rates is derived by
subtracting the total respondents' monthly claims costs from those of
the respondents who stay and dividing this increase by the total
respondents' costs.  For example, as shown in table IV.2, the cost
for the total respondents' monthly claims is $257.  For a 20- percent
disenrollment rate, the monthly claims cost of the respondents who
stay is $265.  Subtracting $257 from $265 yields a cost increase of
$8, which is about 3 percent of $257. 



                               Table IV.1
                
                 Estimated Bayley Seton Cost Increases
                    With and Without the Two Largest
                               Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants             8%      75    $279     128    $257
Excluding two largest               8%      74    $215     126    $198
 claimants
----------------------------------------------------------------------


                               Table IV.2
                
                 Estimated Bayley Seton Cost Increases
                  With 20-and 40-Percent Disenrollment
                                 Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Number of respondents             75     102      53      26       128
Monthly claims cost             $279    $265    $225    $225      $257
Estimated cost increase           8%      3%
----------------------------------------------------------------------


                  Table IV.3 Estimated Brighton Marine
                Cost Increases With and Without the Two
                           Largest Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants            24%     192    $230     300    $186
Excluding two largest               6%     190    $132     298    $124
 claimants
----------------------------------------------------------------------


                               Table IV.4
                
                Estimated Brighton Marine Cost Increases
                  With 20-and 40-Percent Disenrollment
                                 Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Respondents                      192     246     108      54       300
Monthly claims cost             $230    $203    $112    $112      $186
Estimated cost increase\         24%      9%
----------------------------------------------------------------------


                               Table IV.5
                
                 Estimated Johns Hopkins Cost Increases
                    With and Without the Two Largest
                               Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants             4%     111    $193     194    $185
Excluding two largest              -9%     109    $143     192    $157
 claimants
----------------------------------------------------------------------


                               Table IV.6
                
                 Estimated Johns Hopkins Cost Increases
                  With 20-and 40-Percent Disenrollment
                                 Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Respondents                      111     153      83      41       194
Monthly claims cost             $193    $188    $176    $176      $185
Estimated cost increase           4%      1%
----------------------------------------------------------------------


                               Table IV.7
                
                    Estimated Lutheran Medical Cost
                   Increases With and Without the Two
                           Largest Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants            20%     188    $159     294    $133
Excluding two largest              11%     186    $122     292    $110
 claimants
----------------------------------------------------------------------


                               Table IV.8
                
                    Estimated Lutheran Medical Cost
                    Increases With 20-and 40-Percent
                          Disenrollment Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Respondents                      188     241     106      53       294
Monthly claims cost             $159    $143     $90     $90      $133
Estimated cost increase          20%      8%
----------------------------------------------------------------------


                               Table IV.9
                
                Estimated Martin's Point Cost Increases
                    With and Without the Two Largest
                               Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants           -16%     200     $98     300    $116
Excluding two largest              -1%     200     $98     298     $99
 claimants
----------------------------------------------------------------------


                              Table IV.10
                
                Estimated Martin's Point Cost Increases
                  With 20-and 40-Percent Disenrollment
                                 Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Respondents                      200     250     100      50       300
Monthly claims cost              $98    $109    $152    $152      $116
Estimated cost increase         -16%     -6%
----------------------------------------------------------------------


                              Table IV.11
                
                Estimated Pacific Medical Cost Increases
                    With and Without the Two Largest
                               Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants            53%     142    $293     300    $192
Excluding two largest              30%     140    $179     298    $137
 claimants
----------------------------------------------------------------------


                              Table IV.12
                
                Estimated Pacific Medical Cost Increases
                  With 20-and 40-Percent Disenrollment
                                 Rates


                                                                 Total
                                                                respon
                                At 40%  At 20%  At 40%  At 20%   dents
------------------------------  ------  ------  ------  ------  ------
Respondents                        142     221     158      79     300
Monthly claims cost               $293    $224    $101    $101    $192
Estimated cost increase            53%     17%
----------------------------------------------------------------------


                              Table IV.13
                
                   Estimated Sisters of Charity Cost
                   Increases With and Without the Two
                           Largest Claimants


                                Estima
                                   ted          Monthl          Monthl
                                  cost               y               y
                                increa          claims          claims
                                    se  Number    cost  Number    cost
------------------------------  ------  ------  ------  ------  ------
Including all claimants             2%     187    $280     300    $275
Excluding two largest              -4%     185    $241     298    $251
 claimants
----------------------------------------------------------------------


                              Table IV.14
                
                   Estimated Sisters of Charity Cost
                    Increases With 20-and 40-Percent
                          Disenrollment Rates


                                                                 Total
                                                              responde
                              At 40%  At 20%  At 40%  At 20%       nts
----------------------------  ------  ------  ------  ------  --------
Respondents                      187     244     113      56       300
Monthly claims cost             $280    $277    $267    $267      $275
Estimated cost increase           2%      1%
----------------------------------------------------------------------

USTF CAPITATION RATES, FY 1996
=========================================================== Appendix V

                                                  Luther          Pacifi  Sister
                                  Bright   Johns      an  Martin       c    s of
                          Bayley      on  Hopkin  Medica      's  Medica  Charit
Gender/age                 Seton  Marine       s       l   Point       l       y
------------------------  ------  ------  ------  ------  ------  ------  ------
Male
--------------------------------------------------------------------------------
<2                        $3,706  $3,828  $3,059  $3,381  $3,447  $3,505  $3,346
2-14                       1,073   1,108     886     978     998   1,014     969
15-24                      1,170   1,209     966   1,067   1,088   1,107   1,057
25-34                      1,263   1,310   1,047   1,157   1,180   1,199   1,141
35-44                      1,554   1,612   1,287   1,424   1,452   1,475   1,403
45-54                      1,949   2,015   1,610   1,780   1,814   1,845   1,760
55-64                      3,023   3,123   2,495   2,758   2,812   2,859   2,730
65-69                      7,252   6,089   5,975   5,377   4,123   4,538   5,482
70-74                      8,631   7,202   7,117   6,365   4,821   5,330   6,497
75-79                     10,372   8,574   8,512   7,539   5,648   6,243   7,694
80-84                     11,092   9,143   9,092   8,029   5,994   6,626   8,194
85+                       11,692   9,610   9,563   8,418   6,267   6,922   8,587

Female
--------------------------------------------------------------------------------
<2                         3,706   3,828   3,059   3,381   3,447   3,505   3,346
2-14                       1,073   1,108     886     978     998   1,014     969
15-24                      1,656   1,814   1,448   1,601   1,632   1,660   1,497
25-34                      2,330   2,519   2,012   2,224   2,268   2,306   2,103
35-44                      2,161   2,317   1,851   2,046   2,086   2,121   1,952
45-54                      2,438   2,519   2,012   2,224   2,268   2,306   2,201
55-64                      3,023   3,123   2,495   2,758   2,812   2,859   2,730
65-69                      6,112   5,183   5,051   4,592   3,568   3,920   4,679
70-74                      7,372   6,193   6,084   5,478   4,195   4,625   5,588
75-79                      8,511   7,098   7,008   6,264   4,749   5,243   6,391
80-84                      9,713   8,031   7,951   7,041   5,296   5,834   7,178
85+                       10,433   8,601   8,531   7,531   5,641   6,217   7,678
--------------------------------------------------------------------------------
Source:  DOD. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

Daniel M.  Brier, Assistant Director, (202) 512-6803
Carolyn R.  Kirby, Senior Evaluator, (202) 512-9843
Jean N.  Chase, Evaluator


*** End of document. ***