Defense Health Care: TRICARE Resource Sharing Program Failing to Achieve
Expected Savings (Letter Report, 08/22/97, GAO/HEHS-97-130).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) use of support contracts to help deliver health care and
to control costs, focusing on: (1) whether resource sharing savings are
meeting DOD's projections and thus helping control TRICARE costs; (2)
what problems DOD might be encountering in pursuing resource sharing;
and (3) actions and alternatives pursued by DOD to overcome those
problems. GAO also considered the implications of resource sharing
within the broader context of TRICARE's overall cost-effectiveness.

GAO noted that: (1) DOD and the contractors have made agreements likely
to save about 5 percent of DOD's overall resource sharing savings goals;
(2) new agreements are being considered, but neither DOD nor the
contractors are confident that pending agreements will be reached or
that further cost savings can be attained; (3) because resulting TRICARE
contract costs may be greater than anticipated, both parties may
experience related financial losses; (4) problems impeding progress on
resource sharing agreements and the related savings have included lack
of clear program policies and priorities, uncertainty about cost effects
on military hospitals, lack of financial rewards for the hospitals
entering into such agreements, and changes in military hospital
capacities after contractors developed bids; (5) in response, DOD has
revised policies, improved training and analytical tools, and taken
other steps to promote resource training under the contracts, but to
date, these efforts have not been sufficient to bring needed results;
(6) for the last two contracts, DOD is applying a revised financing
approach that includes resource sharing but at a reduced level; (7) the
new approach allocates more funds to the military hospitals and less to
the contractors, enabling the hospitals to directly acquire and use
outside resources rather than use resource sharing with the contractor;
(8) how the military hospitals, other sources, and contractors interact
under the new approach is still being defined and has not been tested;
resource sharing problems will not be automatically eliminated and may
be exacerbated when used in combination with revised financing; (9) for
the future, DOD plans even broader changes intended to simplify military
hospital budgeting and support contract operations; (10) while the
military hospitals and contractors could still use resource sharing, it
no longer would be the basis for projecting major savings and lowering
bids at the contract's outset; (11) DOD officials acknowledged their
resource sharing savings problems but told GAO that lower than expected
contract award prices have led to over $2 billion in unexpected,
offsetting savings; (12) while TRICARE's overall cost-effectiveness was
beyond GAO's review scope, there are reasons to question the currency
and analytical completeness of DOD's preliminary savings claims; and
(13) GAO supports DOD's current plans to undertake a detailed analysis,
based on more up-to-date cost data and estimates, of TRICARE's overall
cost-effectiveness.

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

 REPORTNUM:  HEHS-97-130
     TITLE:  Defense Health Care: TRICARE Resource Sharing Program 
             Failing to Achieve Expected Savings
      DATE:  08/22/97
   SUBJECT:  Managed health care
             Defense cost control
             Health care programs
             Service contracts
             Health services administration
             Health care cost control
             Health resources utilization
             Military hospitals
             Cost effectiveness analysis
IDENTIFIER:  DOD TRICARE Program
             DOD TRICARE Prime Program
             DOD TRICARE Extra Program
             CHAMPUS
             DOD TRICARE Financial Management Education Program
             Civilian Health and Medical Program of the Uniformed 
             Services
             DOD TRICARE Standard Program
             CHAMPUS Reform Initiative
             
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Cover
================================================================ COVER


Report to the Chairman and Ranking Minority Member, Subcommittee on
Military Personnel, Committee on National Security, House of
Representatives

August 1997

DEFENSE HEALTH CARE - TRICARE
RESOURCE SHARING PROGRAM FAILING
TO ACHIEVE EXPECTED SAVINGS

GAO/HEHS-97-130

TRICARE Resource Sharing

(101493)


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

  ADD - active duty dependent
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CPT - current procedural terminology
  CRI - CHAMPUS Reform Initiative
  DCP - data collection period
  DOD - Department of Defense
  DRG - diagnosis-related group
  HCF - Health Care Finder
  HMO - health maintenance organization
  MCS - managed care support
  MEPRS - Medical Expense and Performance Reporting System
  MHSS - Military Health Services System
  MTF - military treatment facility
  NADD - nonactive duty dependent
  NAS - Non-Availability Statement
  RSA - resource sharing agreement

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


B-276961

August 22, 1997

The Honorable Stephen E.  Buyer
Chairman
The Honorable Gene Taylor
Ranking Minority Member
Subcommittee on Military Personnel
Committee on National Security
House of Representatives

The Department of Defense's (DOD) nationwide managed care program,
called TRICARE, is intended to improve the military community's
access to health care while maintaining quality and controlling
costs.  TRICARE represents a significant effort to reform DOD's $15
billion per year health system.  DOD's approach to this reform
involves a unique partnership between military and civilian health
care entities that will include seven multistate managed care support
contracts together estimated to cost about $17 billion over 5 years. 
In that partnership arrangement, resource sharing is an important
cost-saving feature.  To share resources, the contractor supplements
the capacity of a military hospital or clinic by providing civilian
personnel, equipment, or supplies.  DOD has estimated that resource
sharing could save about $700 million\1 over 5 years for the
contracts under way during our review. 

Because of your Subcommittee's continuing interest in DOD's use of
support contracts to help deliver health care and, specifically, to
control costs, we reviewed the cost-saving feature of resource
sharing.  In particular, we focused on (1) whether resource sharing
savings are meeting DOD's projections and thus helping control
TRICARE costs, (2) what problems DOD might be encountering in
pursuing resource sharing, and (3) actions and alternatives pursued
by DOD to overcome those problems.  Also, we considered the
implications of resource sharing within the broader context of
TRICARE's overall cost-effectiveness. 

In doing our work, we held discussions and examined records at DOD
headquarters in Washington, D.C.; TRICARE regional offices; military
hospitals and clinics; and contractor offices.  We focused on
resource sharing experiences under the first four contracts,
involving seven TRICARE regions that had been active long enough for
us to draw conclusions about the progress of resource sharing.  We
also examined TRICARE policies and plans DOD has devised or is
considering that will affect resource sharing's future.  Finally, we
reviewed data, which DOD provided in response to our findings,
suggesting that TRICARE savings other than from resource sharing were
occurring.  Appendix I further describes our work's scope and
methodology.  Appendix III shows the contract start dates and related
TRICARE regions. 


--------------------
\1 This does not include expected savings from the most recently
awarded contract, which began operating April 1, 1997, or from the
remaining two contracts yet to be awarded. 


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

Thus far, DOD and the contractors have made agreements likely to save
about 5 percent of DOD's overall resource sharing savings goal.\2 At
that rate, after 9 to 24 months of operations, about $36 million of
the expected $700 million in savings will be realized.  New
agreements are being considered, but neither DOD nor the contractors
are confident that pending agreements will be reached or that further
cost savings can be attained.  Because resulting TRICARE contract
costs may be greater than anticipated, both parties may experience
related financial losses. 

Problems impeding progress on resource sharing agreements and the
related savings have included lack of clear program policies and
priorities, uncertainty about cost effects on military hospitals,
lack of financial rewards for the hospitals entering into such
agreements, and changes in military hospital capacities after
contractors developed bids.  In response, DOD has revised policies,
improved training and analytical tools, and taken other steps to
promote resource sharing under the contracts, but to date, these
efforts have not been sufficient to bring needed results. 

For the last two contracts, soon to be awarded, DOD is applying a
revised financing approach that includes resource sharing but at a
reduced level.  The new approach allocates more funds to the military
hospitals and less to the contractors, enabling the hospitals to
directly acquire and use outside resources rather than use resource
sharing with the contractor.  But how the military hospitals, other
sources, and contractors would interact under the new approach is
still being defined and has not been tested.  Therefore, it is not
possible to say whether it will work.  Moreover, resource sharing
problems will not be automatically eliminated and may be exacerbated
when used in combination with revised financing. 

For the future, DOD plans even broader changes intended to simplify
military hospital budgeting and support contract operations.  DOD has
concluded that the current approach, including resource sharing, does
not provide adequate accountability and incentives for delivering
cost-effective care.  While the military hospitals and contractors
could still use resource sharing, it no longer would be the basis for
projecting major savings and lowering bids at the contract's outset. 
But, as DOD goes about the budgeting and contracting changes, unless
they are specifically addressed, the kinds of policy, priority, and
procedural problems that plagued resource sharing may continue to
impair any new initiatives' cost-savings efforts.  In addition, such
TRICARE efforts may be made even more challenging by leadership
changes in health care management now under way in DOD. 

DOD officials acknowledged their resource sharing savings problems
but told us that lower than expected contract award prices have led
to over $2 billion in unexpected, offsetting savings.  They said that
the contract amounts have underrun cost projections, made as early as
1993, of what CHAMPUS\3 costs would have been during the contract
periods.  While TRICARE's overall cost-effectiveness was beyond our
review's scope, there are reasons to question the currency and
analytical completeness of DOD's preliminary savings claims.  Thus,
we support DOD's current plans\4 to undertake a detailed analysis,
based on more up-to-date cost data and estimates, of TRICARE's
overall cost-effectiveness. 


--------------------
\2 Resource sharing also includes support contractor conversions of
previous agreements DOD hospitals had with civilian providers.  But
these agreements existed before TRICARE, such that savings associated
with them were not part of DOD's new projected TRICARE resource
sharing savings. 

\3 The Civilian Health and Medical Program of the Uniformed Services,
a DOD-administered insurance-like program that has traditionally
supplemented DOD's direct care system. 

\4 Also, as required by the National Defense Authorization Act for
Fiscal Year 1996, DOD has contracted for an independent study to,
among other things, review TRICARE's cost-effectiveness.  Under the
contract, the first results report is due by January 31, 1998. 


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

DOD's primary medical mission is to maintain the health of 1.6
million active duty service personnel\5 and provide health care
during military operations.  Also, as an employer, DOD offers health
care to 6.6 million other military-related beneficiaries, including
dependents of active duty personnel and military retirees and their
dependents.  Most care is provided in about 115 hospitals and 470
clinics--referred to as military treatment facilities, or
MTFs--worldwide, operated by the Army, Navy, and Air Force.  DOD's
direct care system is supplemented by care paid for by DOD but
provided in civilian facilities.  In fiscal year 1997, DOD expects to
spend about $12 billion providing care directly and about $3.5
billion for care in civilian facilities. 

In response to increasing health care costs and uneven access to
care, in the late 1980s, DOD initiated, under congressional
authority, a series of demonstration programs to evaluate alternative
health care delivery approaches.  On the basis of this experience,
DOD designed TRICARE as its managed health care program. 

The TRICARE program uses regional managed care support contracts to
augment its MTFs' capacities by having contractors perform some
managed care functions, including arranging civilian sector care. 
Altogether, seven managed care support contracts will be awarded
covering 11 TRICARE regions (see app.  II).  To coordinate MTF and
contractor services and monitor care delivery, each region is headed
by a joint-service administrative organization called a "lead agent."

Thus far, DOD has awarded five contracts to three health care
companies covering eight TRICARE regions.  The contracts are
competitively awarded and fixed price, although the price is subject
to specified adjustments for changes in beneficiary population, MTF
workload, and other factors beyond the contractor's control. 

DOD officials believe that care provided to its patients at military
facilities is less expensive than such patients' care at civilian
facilities.  Resource sharing arrangements are designed to permit DOD
and the contractor to share contractor-provided personnel, equipment,
supplies, and other items in an effort to maximize savings.  To
identify resource sharing opportunities, contractors analyze such
data as historical health care costs, workload, and care use, and
visit military facilities.  They then project the expected savings
from providing care in military facilities rather than in potentially
more expensive civilian settings.  The contract is designed so that
the contractor's expected savings over the contract's life from the
resource sharing are deducted from the contractor's final offer when
bidding on a contract.  The contract price thus reflects such
anticipated savings through shared resources. 

The contract also is subject to a risk-sharing arrangement under
which the government and the contractor share responsibility for
health costs that overrun the contract price.  Contractors are at
risk for their bid amount of health care profit plus up to 1 percent
of the bid health care price.  Beyond that, the contractor and the
government share in losses until an amount prepledged by the
contractor, called "contractor equity," is depleted.  At that time
the government becomes fully responsible for any further losses. 

Thus, DOD's initially realized savings in the form of a lower
contract price could be reduced or lost if actual health care
expenses are higher than anticipated.  Accordingly, DOD encourages
MTFs to help the contractor achieve projected resource sharing volume
and savings. 

Resource sharing savings, along with expected savings from other
sources, such as negotiated provider discounts; better health care
utilization management; and better claims management, including
collections from other health insurance plans, contribute to
government and contractors' overall financial gains.  The combined
expected savings from resource sharing and other sources are
important as offsets to the increased costs of managing care under
TRICARE.  Also, statutorily, TRICARE costs cannot be greater than the
health costs DOD otherwise would have incurred under CHAMPUS and the
direct care system in the program's absence (National Defense
Authorization Acts for Fiscal Years 1994 and 1996, P.L.  103-160 and
P.L.  104-106, 10 U.S.C.  1073 note). 

We reported last year that lack of resource sharing progress was one
area that could impair efforts to contain related TRICARE costs and
achieve savings.  We reported that resource sharing was a complex and
difficult process and that the process' details were not well
developed or understood, including uncertainty about how resource
sharing agreements may affect contract price adjustments.\6


--------------------
\5 Also includes members of the Coast Guard and the Commissioned
Corps of the Public Health Service and the National Oceanic and
Atmospheric Administration, who are also eligible for military health
care. 

\6 Defense Health Care:  Managed Care Plan Progressing, but Cost and
Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996). 


   RESOURCE SHARING SAVINGS
   FALLING SHORT OF PROJECTIONS
------------------------------------------------------------ Letter :3

DOD and the contractors are not attaining major new savings through
resource sharing agreements, and the potential for new agreements and
further savings appears limited.  On the basis of progress to date
and discussions with DOD and contractor officials, achieving overall
projected resource sharing savings appears highly unlikely. 

For the contracts under way, DOD projected saving about $700 million,
including $116 million through the current operating years.  The
contractors' projections were similar.  But by March 1997, after 9-
to 24-month contract operating periods, new resource sharing
agreements represented only about 5 percent of the savings needed to
achieve DOD's projected savings.  In addition to the new agreements,
contractors have also converted into resource sharing agreements
previously existing agreements that MTFs had with civilian providers
before TRICARE became operational.  At one MTF, for example, on the
day the support contract became operational, seven existing
agreements were converted to resource sharing agreements.  But
savings associated with those converted agreements do not represent
new TRICARE savings and thus were not part of DOD's new projected
savings. 

Support contractors and DOD are aware of the lack of progress in
resource sharing.  One contractor's representative told us that
achievements so far are just previous agreement conversions and that
a more aggressive approach toward new agreements is needed.  Another
said lack of progress in negotiating new agreements remains their
greatest TRICARE contract concern.  DOD officials expressed mixed
views ranging from optimism that resource sharing momentum will build
to the belief that the approach simply will not work as envisioned. 

At this time, the potential for further resource sharing savings
appears limited.  In March 1997, the contractors had about 170 new
resource sharing possibilities in some stage of cost and workload
data gathering or analysis, or in some way being considered as
potential agreements.  For example, one region had 39 resource
sharing possibilities under development, covering an array of
services such as cardiology, radiology, and internal medicine. 
Officials told us, however, that considerable analysis was needed
before potential savings could be reliably estimated and that some of
the proposals likely would not prove cost-effective.  Meanwhile,
additional proposals are being added and existing ones deleted as the
proposal and evaluation processes continue.  But, as previously
indicated, savings to date show that not enough is being done to
reach DOD's projected resource sharing savings levels. 


   PROBLEMS ENCOUNTERED IN
   ESTABLISHING AGREEMENTS
------------------------------------------------------------ Letter :4

In addition to agreements already implemented or under consideration,
by March 1997, over 260 other resource sharing proposals had been
either rejected or otherwise not further pursued.  Our analysis
indicated that various impediments exist to resource sharing,
including lack of clear policies, program complexity, lack of MTF
incentives, and military downsizing. 

Issued in December 1994, DOD resource sharing guidance stated that
MTFs had an obligation to help contractors reach the bid amount of
resource sharing savings.  But the guidance also instructed MTFs to
look for other, possibly more cost-effective ways to increase MTF
resource use, such as by reallocating existing resources, referring
patients to other MTFs, or directly contracting with civilian care
providers other than the support contractor.  When some MTFs pursued
such alternatives, one contractor objected, stating its belief that
resource sharing was the first alternative for increasing MTF use. 
In November 1996, DOD issued new guidance stating that resource
sharing was the first alternative and that MTF commanders should make
good faith efforts to work with contractors to execute such
agreements. 

MTF and contractor officials cited the resource sharing approach's
complexity as another factor limiting progress.  The agreements
require considerable financial analysis to assess their
cost-effectiveness potential (see app.  IV).  Also, the agreements
involve intricate issues of how much credit contractors should
receive for adding to the MTFs' workload and how that credited
workload will affect the contract price.  MTF officials told us they
did not understand all of the agreements' financial implications,
largely because they did not control or understand all the data and
analyses used.  They were concerned that workload shifts between MTFs
and contractors, and ensuing bid price adjustments, would enable
contractors to gain at MTFs' workload and budgetary expense.  At two
MTFs, for example, proposed gastroenterology assistance agreements,
projected to save over $400,000, were rejected because of
unresolvable MTF concerns about possible effects on the overall
contract price. 

Both contractor and MTF officials expressed concerns--and resulting
hesitance to enter into agreements--about the reliability of data
used to analyze agreements' potential cost-effectiveness.  According
to contractors, for example, several MTFs supplied inappropriate
data, such as personnel salaries and hospital maintenance, that
hampered their analyses of the proposals' likely costs and other
effects.  At one of the MTFs, eight proposed agreements were rejected
because of data problems. 

Tied to the complexity and data problems, a lack of incentive to
enter into agreements because MTFs do not share in resulting savings
was also cited by MTF officials.  DOD and the Services have not
established a savings return policy for MTFs that have resource
sharing agreements.  Instead, after consideration, the Services
decided that any such savings are to be retained at the Service level
for reallocation as needed within the system. 

Still another MTF resource sharing disincentive is that the
agreements can actually increase facility costs.  For example, an
agreement to provide an anesthesiologist, so the MTF can do more
surgeries, will in turn result in related radiology, laboratory, and
pharmacy costs.  Unless contractors compensate MTFs for such costs,
MTFs' overall costs may increase.  While the contracts provide for
such contractor compensatory payments, a July 1996 DOD policy
clarification was issued to help facilitate such payments.  A
remaining challenge has been MTF and contractor negotiations on what
costs to apply to individual agreements. 

Both DOD and the contractors cited military downsizing, including at
the MTFs, as another limiting factor.  Resource sharing opportunities
identified during the contract bidding process may no longer exist as
military forces are reduced or relocated and as MTFs are closed,
downsized, or converted to clinics.  For example, one MTF rejected
five proposals because it had subsequently reduced its operating
rooms from eight to four, thus obviating the need for agreements. 

Resource sharing problems have prompted one contractor to request a
contract price adjustment.  In June 1996, near the start date of
health care delivery, the contractor reported that while the other
care delivery preparations had progressed well, the lack of resource
sharing progress was a major problem.  Projecting millions of dollars
in financial losses, the contractor requested a price renegotiation. 
In a letter to DOD, the contractor complained about changing DOD
rules on how the approach was to work, inadequate data, improper MTF
incentives, insufficient MTF training in developing agreements, and
postaward MTF workload and capacity changes that reduced resource
sharing opportunities.  DOD generally agreed that problems existed,
committed to work collaboratively to resolve them, and scheduled
meetings with the contractor to pursue the issues in more detail. 
DOD said, however, that a price renegotiation was premature at the
time.  As of May 1997, the contractor was still pursuing a price
adjustment. 


   DOD'S ACTIONS TO ADDRESS
   RESOURCE SHARING PROBLEMS
------------------------------------------------------------ Letter :5

DOD has acted to increase resource sharing under current contracts. 
For the latest two contracts, soon to be awarded, DOD will be
applying an alternative approach, referred to as "revised financing,"
that relies less on resource sharing for savings but adds other
challenges.  For the future, DOD is planning far broader changes in
MTF budgeting and support contracting, which are expected to further
reduce reliance on resource sharing. 


      ATTEMPTS TO IMPROVE RESOURCE
      SHARING UNDER CURRENT
      CONTRACTS
---------------------------------------------------------- Letter :5.1

DOD has worked to facilitate resource sharing through policy
issuances and provision of analytical tools.  Since issuing resource
sharing guidance in December 1994, DOD headquarters officials visited
the regions to provide briefings, used a focus group to help make
resource sharing easier to use, developed standardized training, and
attempted to promote better DOD and contractor cooperation.  Also,
the contractors have continued to work with the MTFs to identify and
pursue resource sharing opportunities. 

In November 1996, DOD issued clarifying policy stating that resource
sharing is to be the first alternative for recapturing private sector
workload into the MTF.  Lead agents and MTFs are to ensure that any
other MTF actions to add or retain workload do not prevent the
TRICARE support contractor from entering into cost-effective
agreements and reaching their resource sharing bid amounts. 

In July 1996, DOD clarified its policy regarding cash payments by
support contractors to MTFs for marginal costs stemming from
agreements.  In a related move, DOD recently made available $25
million to the Services to help pay such marginal costs, or for the
MTFs to otherwise invest in agreements, and asked the Services to
submit potential projects for the funds' use.  In April 1997, DOD
told us that some funds had been approved for only two or three
requests. 

To help reduce resource sharing complexities, DOD provided a
financial analysis worksheet for determining whether an agreement
might be cost-effective and whether the amount of recaptured workload
credited to the contractor is appropriate (see app.  IV).  DOD later
revised the worksheet to, among other things, account for different
agreement types.  DOD also provided an analytical model further
showing the MTFs' resource sharing's potential financial effects. 
The model was introduced to the MTFs in July 1996. 

DOD created a resource sharing focus group after a lead agent
reported in January 1996 that resource sharing was complicated and
presented MTFs with disincentives.  The group worked for about 6
months and recommended improvements in such areas as training, the
financial analysis worksheet, and the data used to make agreements. 

In early 1996, DOD began developing a TRICARE Financial Management
Education Program curriculum that included resource sharing and the
bid price adjustment process.  Program testing was completed in
December and presentations have begun. 

In November 1996, DOD initiated a new ï¿½partneringï¿½ effort with the
contractors.  DOD saw a need to help MTFs and contractors work
through data problems, contract ambiguities, resource constraints,
and other TRICARE difficulties.  The partnering approach calls for a
more cooperative, trusting, teamwork relationship between MTFs and
support contractors, including ways to avoid disputes and to
informally resolve, rather than possibly litigate, those that occur. 
Early actions included DOD meetings with contractors at headquarters
and regional levels, contractor participation in a national TRICARE
conference, and consideration of assigning representatives of lead
agents and the contractors to work together at each other's
locations. 

The bottom-line measure of DOD's and the contractors' efforts is in
the progress made entering new resource sharing agreements.  But
progress remains slow, and the prospects for additional agreements
are questionable.  These outcomes, along with one contractor's
request for financial relief and DOD's recognized need to improve
teamwork, indicate a need for more concerted efforts under the
current contracts to reach the agreements that are pending while
seeking acceptable alternatives to resource sharing. 


      REVISIONS UNDER THE LATEST
      CONTRACTS REDUCE RELIANCE ON
      RESOURCE SHARING BUT ADD
      COMPLICATIONS
---------------------------------------------------------- Letter :5.2

DOD's revised financing approach, conceived before the first support
contract began operating but applied only in the latest two, is
intended to strengthen MTF health care management.  Under this
approach, MTFs' direct funding and financial responsibilities will be
increased.  The funding increase will be determined by the amount of
previous CHAMPUS expenditures for MTF-based TRICARE Prime\7
enrollees, which DOD expects will include most MTF service areas'
beneficiaries.  Thus, rather than sharing responsibility for Prime
enrollees with the support contractor, the MTFs will have full
funding and full responsibility for their Prime enrollees and will
pay the contractor for care required from the contractor's network. 
One result of this approach will be to reduce reliance on resource
sharing to lower support contract costs; but it also adds new
challenges and does not eliminate, and may even exacerbate, resource
sharing problems. 

Giving the MTFs direct financial control for TRICARE Prime enrollees
is aimed at providing them with clearer incentives to efficiently
manage care use and to behave more like private sector HMOs.  DOD saw
the need for this while still arranging the earlier contracts and
later viewed it as a way to relieve emerging resource sharing
problems.  But, under revised financing's current approach, DOD will
continue sharing care costs with the contractor for beneficiaries not
enrolled with the MTFs.  Also, the MTFs will continue working with
the new contractor toward signing resource sharing agreements.  Thus,
to the extent contractor reliance on resource sharing continues, the
difficulties already experienced are also likely to continue. 

DOD believes revised financing gives MTFs added cost-saving
incentives to engage in resource sharing by reducing the need for
referral of their enrollees to the TRICARE support contractor. 
However, revised financing may add further complexity to resource
sharing's use.  Because the new approach's potential effects on
resource sharing are not now known, TRICARE contract offerors must
make their own assumptions and projections about such effects.  Much
will depend, for example, on how MTFs' funding levels may change and
the consequent alterations in their beneficiary service priorities. 
And the added extent of funding going to MTFs rather than to
contractors will in turn depend on the MTFs' capacities and ability
to enroll beneficiaries and serve as their primary care manager--all
of which have yet to be determined. 

Revised financing's effects on resource sharing are uncertain and
were at issue during the two affected contracts' bidding processes. 
One bidder, a current TRICARE contractor, wrote to DOD to clarify
what portion of the funds the MTFs and contractor respectively would
control and how revised financing would affect resource sharing.  In
earlier discussions, the bidder told DOD the company could be
creative and assume resource sharing opportunities would still exist
or assume none would exist.  DOD replied that the new approach's
effects on resource sharing were uncertain but that the successful
bidder should work creatively with the MTFs to achieve resource
sharing.  DOD also amended the request for a bid proposal to provide
more description and examples of how revised financing and resource
sharing might be integrated.  But, as with resource sharing under the
current contracts, the new approach's actual effects will not be
known until it is implemented. 

While DOD officials in regions with contracts generally favored
revised financing, they expressed concerns about poor accounting
systems and lack of data on patient care costs and outcomes that MTFs
will need to become effective, cost-competitive providers.  Some had
concerns about the general lack of MTF health care management
experience and control over their staffing.  MTF officials in regions
about to apply revised financing have stated that they recognize
their increased need for accountability, adequate staffing to support
their enrollees, and better information systems to support resource
sharing decisions. 

While theoretically possible, revised financing's potential has yet
to be demonstrated.  Also, while revised financing reduces reliance
on resource sharing, it does not eliminate or necessarily alleviate
resource sharing problems and may exacerbate such problems under the
new contracts. 


--------------------
\7 TRICARE is designed to give beneficiaries a choice among TRICARE
Prime, which is similar to a health maintenance organization (HMO);
TRICARE Extra, which is similar to a preferred provider organization;
and TRICARE Standard, which is the current fee-for-service-type
benefit.  Beneficiaries who select TRICARE Prime must enroll to
receive care under this option. 


      MORE CONTRACTING AND RELATED
      BUDGETING CHANGES PLANNED,
      WITH BROADER IMPLICATIONS
---------------------------------------------------------- Letter :5.3

For the future, DOD plans other changes to simplify TRICARE
contracting and MTF budgeting.  The changes would incorporate revised
financing and further reduce reliance on resource sharing but also
would have far broader implications for current and future contracts. 
Adding to such TRICARE initiatives' challenges are changes in DOD's
top leadership in Health Affairs. 

DOD is now considering alternative structures for future contracts,
on the basis of our recommendations\8 and those from lead agents,
contractors, and others in the health care industry.  The
alternatives include smaller, shorter, and less prescriptive
contracts, allowing contractors to rely more on their own
"off-the-shelf" commercial practices.  DOD has held several forums to
discuss ideas and the alternative approaches' potential advantages
and disadvantages.  The issues involved include effects on
beneficiary choice of providers, assurance of contractor
qualifications, quality of care, DOD and contractors' risk sharing,
administrative complexity, adequacy of bid competition, and DOD
costs.  No final decisions have been made yet. 

The new contract structures likely will include an approach similar
to revised financing.  Basically, each MTF would be funded to cover
all its enrollees in TRICARE Prime, and the contractor would be
funded for all other beneficiaries.  Thus, each MTF and contractor
would be responsible for its share of the beneficiary population's
care costs, and would reimburse each other when one provides services
to the other's beneficiaries.  For example, the contractor would
reimburse an MTF for caring for a nonenrollee, and one MTF would
reimburse another upon referring its own enrollee for care there. 
One aim of the funding approach would be to eliminate reliance on
resource sharing as a major source for TRICARE savings. 

In April 1997, DOD accelerated the planned change in MTF budgeting
and contract financing and announced it would be effective at the
start of fiscal year 1998.  This means that not only will the changes
apply to future contracts but also current contracts will have to be
amended.  DOD expects that changing the current contracts may have
cost implications of unknown extent at this time for both the
government and the contractors. 

Commenting on a February 1997 DOD policy draft, one contractor said
that any change that would avoid reliance on resource sharing, bid
price adjustments, and resulting MTF disincentives would be positive. 
The contractor added, however, that DOD needs to involve the
contractors in weighing the new budgeting and financing approach's
assumptions and risks to ensure it will work; otherwise contract
prices may increase to cover the unknown risks.  Another contractor
said that many of the details had yet to be worked out and that two
remaining questions are how funding will be split between MTFs and
contractors and how resource sharing will be affected. 

Such budgeting and contracting changes reach far beyond an
expectation that they will reduce the need for resource sharing. 
This notwithstanding, DOD lacks a simple, stable, long-term approach
to TRICARE budgeting and contracting that provides clear managed care
incentives and accountability and avoids the complexities and
disincentives of resource sharing.  As the contractors indicated,
whether the contemplated system changes succeed will depend upon how
these details are worked out and how well DOD and the contractors
manage the system and support each other. 

In addition, both the Assistant Secretary of Defense (Health Affairs)
and the Principal Deputy Assistant Secretary, who have actively and
forcefully led TRICARE since its beginning, have left their
positions.  The former Principal Deputy has taken the Assistant
Secretary position in an acting capacity.  The Principal Deputy
position has been filled, but to date no successor to the Assistant
Secretary has been nominated.  These top DOD leadership changes may
add to the challenge of successfully reducing reliance on resource
sharing and adopting broader budgeting and contracting changes. 


--------------------
\8 Defense Health Care:  Despite TRICARE Procurement Improvements,
Problems Remain (GAO/HEHS-95-142, Aug.  3, 1995). 


   DOD VIEWS RESOURCE SHARING AS
   ONE OF SEVERAL COST-SAVING
   FEATURES
------------------------------------------------------------ Letter :6

DOD officials acknowledged that resource sharing has not achieved the
expected savings, but told us that lower than expected contract award
amounts have led to more than $2 billion in other savings.  They
explained that the contract award amounts consistently have underrun
DOD's projections, required before each contract is awarded, of what
CHAMPUS costs would be over the contracts' lives.  As an example, one
region's estimated CHAMPUS costs without the contract would have been
about $2.1 billion, compared with the contract award amount of $1.8
billion; so, according to DOD, the savings would be $0.3 billion. 
These officials also said that overall health care data show downward
MTF cost trends, further supporting managed care's cost-saving
effects--despite resource sharing's limited showing.  For example,
they provided a graph showing that both direct care and CHAMPUS total
costs declined steadily--by 10 percent overall--from fiscal years
1991 through 1996. 

While assessing TRICARE's overall cost-effectiveness was beyond our
review's scope, there are reasons at this time to question the
currency and analytical completeness of DOD's savings claims.  First,
DOD's preaward estimates of CHAMPUS costs, a key component of its
savings claim, may now be outdated.  The first estimate--for the
Northwest Region contract--was based on cost data prior to August
1993.  Over the 4 years since then, changes in such areas as benefits
and allowed payments to providers would affect the results of that
estimate.  Second, in a separate review,\9 we found that as of May
1997, the existing five contracts had been modified as many as 350
times, with the resulting potential for substantial contract cost
increases attributable to TRICARE.  These potential cost increases,
just like the potential losses from lack of resource sharing, also
would offset DOD's projected savings. 

Furthermore, we recently questioned\10 DOD's cumulative 5- to
7-percent utilization management\11 savings estimate in its near $15
billion to $18 billion health care budget totals for fiscal years
1998 to 2003.  We reported that DOD lacked a formal methodology for
developing the estimates, and we concluded overall that future health
care costs likely would be greater.  Lastly, DOD's available health
care cost data do not indicate whether apparent downward shifts might
be due to managed care effectiveness or to such other factors as
reductions in allowed provider payments that would have occurred in
TRICARE's absence.  Thus, we support DOD's plans to undertake a more
current and complete cost analysis of MTF direct and
contractor-provided care, based on recent program data, to
bottom-line TRICARE's current and future-year cost-effectiveness. 


--------------------
\9 We plan to report shortly on DOD's overall management of TRICARE
contract change orders. 

\10 Defense Health Care:  Future Costs Are Likely to Be Greater Than
Estimated (GAO/NSIAD-97-83BR, Feb.  21, 1997). 

\11 Utilization management employs such techniques as preadmission
hospital certification, concurrent and retrospective reviews, and
case management to determine the appropriateness, timeliness, and
medical necessity of an individual's care. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

At their present results levels, for the existing contracts, DOD and
the support contractor will achieve only about 5 percent of the
expected $700 million in new savings, potentially causing shared
financial losses and higher TRICARE costs.  Progress in achieving new
agreements is slow, and neither DOD nor the contractors know what
resource sharing potential remains under these contracts.  While DOD
now seems to be moving toward a view that the approach will not work
as designed, the contractors and DOD are still pursuing about 170
resource sharing possibilities in an effort to discover additional
savings with which to reduce their costs. 

Many problems have contributed to resource sharing's lack of success. 
DOD's policies, processes, and tools for use at the local level as
well as the degree of DOD and contractor collaboration have not yet
been sufficient to effectively resolve the approach's obstacles. 

While revised financing is feasible though unproven, its potential
effects on resource sharing and on other expected savings under the
latest two contracts remain to be seen.  Under the new approach,
resource sharing may be reduced, but its problems will remain and may
become more complex as new MTF and contractor management
responsibilities are introduced. 

DOD's more broadly proposed MTF budgeting and support contracting
changes would greatly affect future and current contracts, including
further reducing resource sharing.  Clearly, a simple, accountable,
incentive-based approach is lacking, yet the potential effectiveness
of DOD's considered changes will largely depend on how well they are
designed and implemented.  As such changes further reduce resource
sharing as a potential savings mechanism and as DOD looks to
alternative savings sources, lessons learned from resource sharing
will need to be carefully heeded and skillfully incorporated. 
Carrying such lessons forward may be particularly challenging as DOD
changes the top leadership in Health Affairs. 

DOD officials acknowledged that resource sharing has not, and likely
will not, produce the projected savings, but contended that TRICARE's
managed care approach has produced offsetting savings in other ways. 
We question, however, the currency and analytical completeness of
these claims and thus believe it is important that DOD proceed with
its plans to reestimate TRICARE costs versus projected costs without
TRICARE. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

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

  -- determine whether any further resource sharing savings remain
     under the current contracts and, as appropriate, consummate
     promising agreements while seeking other mutually acceptable
     alternatives to resource sharing;

  -- determine, to the extent the new contracts with revised
     financing use resource sharing, whether any such agreements are
     available and, as appropriate, enter promising agreements while
     seeking effective alternatives to resource sharing; and

  -- incorporate, while planning for and implementing the next wave
     of MTF financing and contract management initiatives, such
     resource sharing lessons learned as the need for coherent,
     timely policies; clearly understood procedures; mutually
     beneficial incentives; and effective collaboration. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

DOD agreed with our recommendations and said, without elaborating, it
had already implemented each of them.  Nevertheless, while agreeing
with the recommendations, DOD disagreed with the way we presented
certain issues. 

DOD said, for example, that the report does not note the tremendous
resource sharing success during the "CHAMPUS Reform Initiative" (CRI)
in California and Hawaii (which preceded TRICARE) and does not note
the continued success in region 9 (Southern California).  Thus, DOD
said the reader is led to assume that problems occurred in other
regions because resource sharing was implemented on a broad scale
without the requisite examination.  We did not evaluate CRI resource
sharing because our focus was whether resource sharing under TRICARE
was producing new savings to help offset added TRICARE costs.  Also,
as the report notes, DOD's reference to continued success in region 9
is basically a conversion of CRI resource sharing agreements, which
do not reflect new savings under TRICARE. 

Furthermore, DOD said the resource sharing program as currently
structured was based on the best available information at the time
and that the report should note that the TRICARE support contractors
came to the same conclusion as DOD regarding resource sharing's
potential cost-effectiveness, even with their years of experience
with managed care.  But our report does not question whether DOD's
structure for TRICARE resource sharing was based on the best
information available at the time.  Instead, the report discusses the
complex issues that arose during the implementation of resource
sharing.  Also, the report notes that the contractors as well
initially concluded that resource sharing would be cost-effective. 

Also, DOD said the report treats resource sharing in isolation, as
opposed to one component of a comprehensive system that has proven to
be cost-effective.  While we focused on resource sharing because it
was expected to be a major cost-saving mechanism, we also noted that
it was one of several ways in which DOD expected to achieve savings
to offset TRICARE's costs.  DOD went on to state that efficiencies
not achieved through resource sharing were otherwise achieved by
increased MTF capability and efficiency brought about by TRICARE.  As
the report points out, during our review DOD presented information
showing downward MTF cost trends, but these data do not show whether
the trends were due to TRICARE managed care efforts or whether the
costs would have declined anyway in TRICARE's absence. 

DOD said managed care support (MCS) contracts have resulted in
savings of $2.3 billion when compared with projected costs without
the contracts.  It said that we acknowledged this savings estimate
but that our placement of it in the report diluted its significance. 
While a detailed review of overall TRICARE savings was beyond the
scope of our review, as our report states, we question that savings
estimate's currency and analytical completeness, and we support DOD's
plans to undertake more current and complete analysis of TRICARE's
cost-effectiveness.  We have revised the report to discuss DOD's
overall savings estimate in a separate section. 

DOD took issue with the report statement that, while revised
financing reduces reliance on resource sharing, it does not eliminate
or necessarily alleviate resource sharing problems and may exacerbate
such problems under the new contracts.  DOD said revised financing,
in conjunction with its planned change to enrollment-based capitated
budgeting for MTFs, increases incentives for MTFs to engage in
resource sharing by expanding MTF funding while reducing support
contractor costs.  We agree that revised financing, in conjunction
with enrollment-based capitation, has the potential to create more
incentive for the MTFs to engage in resource sharing and may
similarly provide incentive to the support contractors.  Still, those
approaches add their own complexities and do not automatically
eliminate the difficulties experienced with resource sharing.  As we
said in the report, the approaches are still being defined and are
yet to be tested.  Nonetheless, we revised the relevant text to
better recognize DOD's views on revised financing's potential. 

DOD's comments in their entirety are included as appendix V. 

We also obtained comments from the three current TRICARE support
contractors.  All expressed general agreement with the report's
overall content and completeness of subject coverage. 

In its comments, one contractor also offered a minor technical
comment about lack of clarity in a statement defining limits on
resource sharing agreement profits, which is part of the procedural
description in appendix IV.  The contractor pointed out, however,
that there is no misunderstanding between it and DOD as to what is
intended.  We made no change because the appendix was presented to
illustrate DOD's guidance as it was offered. 

A second contractor expressed concern about its limited progress in
resource sharing and about the problems and lack of success in
resource sharing elsewhere, as conveyed in our report, and expressed
hope that the report would help bring about favorable resolution of
the problems. 

While stating that the report otherwise accurately portrays the
resource sharing situation, the third contractor disagreed with the
report's statement that the prospects for additional resource sharing
agreements are questionable.  The contractor informed us that it had
recently made a presentation to DOD on resource sharing shortfalls,
but it also asserted that, with the right incentives and education at
the MTF commander level, resource sharing is still an extremely
viable program with current savings opportunities.  On the basis of
our analysis of the problems and overall limited resource sharing
progress, the prospects for reaching new agreements seem to us to be
limited.  Still, the report urges DOD to identify and pursue
promising resource sharing opportunities while also seeking other
mutually acceptable alternatives to resource sharing. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Secretary of Defense and
interested congressional committees, and will make copies available
to others upon request. 

Please contact me at (202) 512-7111 or Dan Brier, Assistant Director,
at (202) 512-6803 if you or your staff have any questions concerning
this report.  Other major contributors are Elkins Cox,
Evaluator-in-Charge; Allan Richardson; Beverly Brooks-Hall; and
Sylvia Jones. 

Stephen P.  Backhus
Director, Veterans' Affairs and
 Military Health Care Issues


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

To assess the Department of Defense's (DOD) experiences with resource
sharing, we visited 5 (of the 7) regions where TRICARE support
contractors had begun delivering health care and 11 military
treatment facilities (MTF) within those regions.  We also met with
the two civilian TRICARE contractors that were providing health care
support to the MTFs.  A third contractor began providing health care
on April 1, 1997, in two other regions (since combined into one
region), but because of the newness of the operations, we met with
this contractor briefly but did not include it in our detailed
assessment of resource sharing progress and problems.  Two other
contracts, covering the remaining three regions, were still pending
at the time of our review. 

We reviewed DOD and contractor projections of resource sharing costs
and savings, TRICARE policies and guidance, and various efforts by
DOD to promote the overall resource sharing effort.  This included
discussions with officials of the Office of the Assistant Secretary
of Defense for Health Affairs, DOD's TRICARE cost consultant, and
contractor officials.  At the contractors' offices, we reviewed
individual resource sharing project files to analyze the progress
being made and determine the specific reasons why some potential
agreements were not being implemented.  The project files consisted
of both agreements existing before TRICARE, referred to as
"partnerships," and new resource sharing agreements.  Many of the
partnership agreements were converted to resource sharing agreements
as TRICARE became operational.  To assess progress in achieving new
savings under TRICARE, we identified the expected savings from the
new agreements and compared the result to DOD's overall projected
TRICARE savings. 

We discussed information, training, and other needs with DOD
officials at DOD's Washington, D.C., headquarters and at regional and
MTF levels, focusing on the factors that affected progress in
resource sharing.  Especially at the MTF level, we discussed
officials' understanding of, and amount of confidence in, the
financial aspects of resource sharing agreements, including effects
on the MTF workload and bid price adjustment.  Through discussions
with DOD and contractor officials and examination of records, we
reviewed their experiences with planning and establishing resource
sharing agreements, including the problems they encountered.  We also
discussed with DOD and contractor officials alternatives DOD has
undertaken for the current contracts as well as policies and plans
DOD has devised or is considering that will affect the future of
resource sharing. 

At the completion of our work, we briefly reviewed DOD-provided data
suggesting that TRICARE savings other than from resource sharing were
occurring that more than offset the resource sharing savings
shortfalls we had found.  Determining TRICARE's overall
cost-effectiveness was beyond the scope of our review.  Nonetheless,
upon reviewing the data, we asked follow-up questions of DOD,
obtained status information on DOD's planned and under way internal
and contracted studies aimed in whole or in part at determining
TRICARE's cost-effectiveness, and reviewed pertinent information from
our other work in process and our issued reports. 

We conducted our review between June 1996 and May 1997 in accordance
with generally accepted government auditing standards. 


REGIONS SERVED BY THE SEVEN
MANAGED CARE SUPPORT CONTRACTS
========================================================== Appendix II



   (See figure in printed
   edition.)


TRICARE SUPPORT CONTRACTS AND
START DATES
========================================================= Appendix III

                                                              Health
                                                              care
                                                              delivery
                                                              start
Region         Lead agent     Contract status                 date
-------------  -------------  ------------------------------  --------
Northwest      Madigan        Awarded to Foundation Health    March
                              Federal Services, Inc.,         1995
                              September 1994, for $475
                              million

Southwest      Wilford Hall   Awarded to Foundation Health    November
                              Federal Services, Inc., April   1995
                              1995, for $1.8 billion

Southern       San Diego,     Awarded to Foundation Health    April
California,    David Grant,   Federal Services, Inc.,         1996
Golden Gate,   Tripler        September 1995, for $2.5
and                           billion
Hawaii-
Pacific

Southeast and  Eisenhower,    Awarded to Humana Military      July
Gulf South     Keesler        Healthcare Services, November   1996
                              1995, for $3.8 billion

Central        Evans          Awarded to Triwest Healthcare   April
                              Alliance, Inc., July 1996, for  1997
                              $2.3 billion

Northeast      National       Award expected by September     May 1998
               Capital        1997

Mid-Atlantic   Portsmouth,    Award expected by September     May 1998
and            Wright-        1997
Heartland      Patterson
----------------------------------------------------------------------

GUIDANCE ON DEVELOPING RESOURCE
SHARING AGREEMENTS
========================================================== Appendix IV

To further explain the resource sharing agreement development
process, the following information was condensed from selected
guidance offered by lead agents.  The guidance includes preparation
of proposals, a chart showing the flow of agreement development (fig. 
IV.1), and application of a financial analysis worksheet. 

GUIDANCE ON PREPARATION OF
PROPOSALS

The Resource Sharing Program is a mechanism for providing contracted
civilian health care personnel, equipment, and/or supplies to enhance
the capabilities of MTFs to provide necessary inpatient and
outpatient care to beneficiaries of the Civilian Health and Medical
Program of the Uniformed Services (CHAMPUS). 

Resource sharing is a cooperative activity between the contractor,
the lead agent, and the MTF commander.  A variety of information
sources and databases may be examined in looking for and evaluating
resource sharing opportunities that may subsequently be developed
into resource sharing proposals and agreements. 


      ANALYSIS OF CHAMPUS
      UTILIZATION AND COST DATA
------------------------------------------------------ Appendix IV:0.1

Analysis of CHAMPUS utilization and cost data may identify diagnoses,
procedures, or specialty health care, which account for significant
numbers of patient encounters or high costs.  A variety of reports
may be useful in this regard. 

CHAMPUS Cost and Utilization Reports.  These reports are generated by
the Office of the Civilian Health and Medical Program of the
Uniformed Services from health care service record data to show
CHAMPUS costs and utilization, by type of health care service, for
each catchment area.  Those services showing high costs and/or
utilization may be excellent candidates for resource sharing
considerations. 

Non-Availability Statement (NAS) Reports.  NASs authorize
beneficiaries to seek certain care in civilian facilities when the
MTF cannot provide the care.  These reports show the numbers and
types of NASs generated by each MTF.  Those health care services
showing large numbers of NASs being issued over time may be excellent
candidates for resource sharing consideration. 

Health Care Finder (HCF) Referral Reports.  These reports show the
numbers and types of referrals of CHAMPUS-eligible beneficiaries to
both MTF and civilian health care providers.  High numbers of
referrals to civilian providers for specific health care services may
indicate resource sharing opportunities. 

CHAMPUS Ad Hoc Claims Reports.  CHAMPUS historical data may be
obtained from claims data files.  These data can be tailored to
provide greater detail for the types of services being provided under
CHAMPUS.  Information from CHAMPUS Cost and Utilization Reports, NAS
Reports, and HCF Referral Reports may indicate those health care
specialties that warrant more detailed examination to identify
potential resource sharing opportunities. 

MTF Capability Reports.  These reports are developed by HCFs and
indicate MTF capabilities.  They are used by the HCFs to guide
referrals into and out of MTFs.  They may also provide insight into
potential resource sharing opportunities. 

Composite Health Care System Professional Activity Study Reports. 
These reports may be used to identify gaps in MTF services or high
referral patterns from the MTF to outside health care providers. 
These gaps and referral patterns may indicate additional
opportunities for resource sharing. 

Network Provider Directory.  This directory provides the numbers and
types of health care providers by location.  Gaps and shortages in
the civilian provider network may be identified that may indicate
resource sharing opportunities. 


      ANALYSIS OF MTF CAPABILITIES
------------------------------------------------------ Appendix IV:0.2

MTF capabilities, staffing, workload, and backlog--both current and
projected--should be identified and evaluated to determine potential
opportunities for resource sharing.  MTF capabilities may be assessed
using the following reports: 

MTF Capability Reports.  (See prior description of reports.)

MTF Staffing Reports.  These reports are developed by MTFs and show
the numbers and types of personnel assigned to, and employed by, the
MTF.  Careful review of staffing reports over time may indicate
staffing trends, which may provide insight into both current and
future resource sharing opportunities.  A baseline report of
regionwide staffing, by MTF, was compiled from computer tapes
provided by the government to the contractor for fiscal year 1993. 

MTF Operations Study.  This report shows the historical number of
health care services provided by MTFs for both inpatient and
outpatient services.  This report is derived from data compiled on a
computer tape provided to the contractor by the government for fiscal
year 1993.  This information can be used to identify both current and
future opportunities for resource sharing. 

Potential Resource Sharing Opportunities List.  This list, developed
during site visits at each MTF, provides resource sharing
opportunities that had been identified by the MTF, after examining
the demand for services and identifying shortfalls in meeting those
demands. 


      THE WRITTEN RESOURCE SHARING
      PROPOSAL
------------------------------------------------------ Appendix IV:0.3

Once a resource sharing opportunity has been identified, the MTF
completes a written request for consideration of the potential
resource sharing agreement (RSA). 

The proposal is to show the project title, requesting MTF, point of
contact, and desired start date.  The expected accomplishment is to
be described.  For example, "This project is intended to expand
Family Practice services within the hospital.  This MTF currently
averages 200 ambulatory care visits a month, and the implementation
of this project should increase the monthly visits by an additional
200 visits.  This should decrease the number of NASs issued and the
concomitant CHAMPUS visits and costs."

The proposal is to include the estimated resources required,
including personnel, equipment, and supplies, along with the
following: 

Direct Workload.  Provide the number of outpatient visits and/or
inpatient admissions, by type of CHAMPUS beneficiary (active duty
dependent [ADD], or nonactive duty dependent [NADD]) that the project
is expected to provide per year.  Note that the NADD category
includes retirees, family members of retirees, survivors of deceased
service members, and others.  If possible, provide a detailed
breakdown of workload numbers by current procedural terminology (CPT)
or diagnosis-related group (DRG).  If possible, provide the estimated
cost to the MTF for each CPT and DRG code. 

Ancillary Workload.  Provide the anticipated additional ancillary
workload that the project will develop for the MTF, by type of
CHAMPUS beneficiary (ADD or NADD), per year.  If possible, provide a
detailed breakdown of ancillary workload numbers by CPT or DRG.  If
possible, also provide the estimated cost to the MTF for each CPT and
DRG code. 

MTF Cost/Expense Data.  Provide specific Medical Expense and
Performance Reporting System (MEPRS) cost elements for the clinical
function of the project.  If possible, provide a detailed breakdown
of MEPRS cost elements by CPT or DRG. 

CHAMPUS Workload Data.  Provide CHAMPUS workload, within the
catchment area, currently being accomplished for the clinical
function of the project.  If possible, provide a detailed breakdown
of CHAMPUS workload and cost data by CPT or DRG. 

Signature and Date.  Provide signature of the MTF commander, or his
agent, and the date the document was signed. 


      EXAMPLE OF A RESOURCE
      SHARING PROPOSAL
------------------------------------------------------ Appendix IV:0.4

Project Title.  Internal Medicine Augmentation and Support. 

Purpose.  The MTF had three internists assigned in fiscal year 1994,
two in fiscal year 1995, and will decrease to one by June 1996.  MTF
workload has shown a concomitant decrease in the average number of
outpatient visits, admissions, and occupied bed days.  The number of
NASs and visits to civilian providers under CHAMPUS has risen to
absorb the demand for internal medicine services in the face of
decreasing supply within the MTF. 

This proposed RSA, if approved, would expand the internal medicine
services within the MTF and should increase the number of monthly
outpatient visits by approximately 900 per month and the number of
inpatient admissions by 37 per month.  These increases should avoid a
shift of approximately 425 outpatient visits per month to CHAMPUS
with the loss of a military provider.  They should also add an
additional 475 outpatient visits per month to the MTF workload. 
Recognizing that approximately 44 percent of our CHAMPUS
beneficiaries are ADDs and that 56 percent are NADDs, and using the
appropriate volume trade-off factors, it should also reduce the
number of visits that had previously been paid for through CHAMPUS by
approximately 212 visits per month. 

Resources Required.  To implement the proposed RSA, additional
providers and support personnel will be required.  Also, a financial
offset for increased costs in ancillary services and supply costs
will be necessary.  Facility space and equipment are adequate to
support the additional workload. 

Personnel.  Internist (board certified or eligible), Nurse (Licensed
Vocational Nurse), with attached example of position description. 

Equipment.  None. 

Supplies.  No direct supplies, but, based on fiscal year 1995 MEPRS
data, reimbursement for the costs of ancillary services and supplies
for outpatient visits above that achieved during the data collection
period, fiscal year 1995 (10,188 outpatient visits per year). 
Estimated at up to 5,700 visits.  (For outpatient visits, example
shows costs per procedure and per visit for pharmacy, laboratory,
radiology, medical supplies, and other supplies.)

Also, reimbursement for the cost of ancillary services and supplies
for inpatient admissions above that achieved during the data
collection period, fiscal year 1995 (404 admissions per year). 
Estimated at up to 226 admissions.  (Example shows ancillary service
and supply costs--based upon fiscal year 1995 MEPRS data--per
procedure and per admission for same categories as for outpatient
admissions.)

MTF Workload Data.  (Example shows internal medicine direct workload,
based on fiscal year 1995 MEPRS data, in terms of outpatient visits
and inpatient admissions.  It shows also the internal medicine
ancillary workload, based on fiscal year 1995 MEPRS data, in terms of
pharmacy prescriptions, laboratory procedures, and radiology films
per year for outpatient visits and inpatient admissions.)

MTF Cost/Expense Data.  (Example refers to attachments for MEPRS data
for outpatient and inpatient care, based on fiscal year 1995 MEPRS
data.)

CHAMPUS Workload Data.  (Example refers to attachment for CHAMPUS
claims data for this catchment area based on claims data from
September 1994 through August 1995.)

   Figure IV.1:  Resource Sharing
   Development Flowchart

   (See figure in printed
   edition.)

   Source:  TRICARE Desert States
   Financial Guide (Jan.  1997).

   (See figure in printed
   edition.)

USING THE FINANCIAL ANALYSIS
WORKSHEET


      PURPOSE OF WORKSHEET
------------------------------------------------------ Appendix IV:0.5

The standardized Internal Resource Sharing Financial Analysis
Worksheet is structured to take into account three different types of
proposed agreements:  (1) the recapture of new workload, (2) the
conversion of a partnership agreement, and (3) the replacement of a
lost provider. 

For all of these different situations, the resource sharing worksheet
is designed to help the MTF answer two questions:  (1) Is the
proposed agreement projected to be cost-effective and (2) is the
proposed contractor workload credit appropriate? 

An agreement is deemed cost-effective from the Military Health
Services System (MHSS) perspective if the MHSS cost for the agreement
(the sum of the MTF's marginal expenditures and the contractor's
expenditures for the proposed RSA) is less than the government's
share of projected CHAMPUS savings. 

Assuming the cost-effectiveness test is satisfied, there are two
additional criteria for evaluating whether the contractor's workload
credit is appropriate.  First, the contractor credit shall not exceed
the full credit (that is, 100 percent credit) that would be counted
under the Guidelines for Resource Sharing Workload Reporting. 
Second, a prospective profit rate limit applies to RSAs for which the
savings exceed those assumed in the contractor's best and final
offer.  For these agreements, the contractor's projected profit rate
on resource sharing expenditures (as calculated by the worksheet)
should not exceed the contractor's overall proposed health care
profit rate (on a prospective basis).  For example, if a contractor
proposed a 5-percent profit rate for health care costs, then the
projected contractor profit on resource sharing expenditures
exceeding the up-front bid price assumptions should also not exceed 5
percent. 

A prospective profit limit also applies to an RSA that converts an
inpatient partnership agreement that existed in the data collection
period (DCP) and for which CHAMPUS admissions were not counted in the
DCP data.  (In this case, workload credit should be negotiated as
necessary to produce a projected contractor net gain approximately
equal to zero, since otherwise the contractor would receive an upward
price adjustment for additional NASs simply for maintaining the same
workload done in the DCP under the partnership agreement.)

If both of the previous questions cannot be answered "yes" for the
proposed RSA, then the MTF should either renegotiate some of the
terms of the proposed agreement (for example, the contractor's
workload credit) or consider other alternatives to the proposed
agreement (for example, the task order resource support option). 

In addition to answering both previous questions for resource sharing
in isolation, the resource sharing worksheet is designed to project
the cost impact of implementing the agreement under task order
resource support rather than resource sharing, including a summary
comparison of cost-effectiveness under the two options.  Similarly,
the worksheet shows the relative financial impact on the managed care
support (MCS) contractor of resource sharing versus resource support. 
(Details on resource support analysis are excluded from this
condensed version of the guidance.)


      ACCRUAL OF SAVINGS
------------------------------------------------------ Appendix IV:0.6

Under the MCS contracts, resource sharing savings can accrue to the
government in three ways, each of which is addressed in the
worksheet. 

First, for those resource sharing savings investments assumed as part
of the contractor's best and final offer proposal, the contractor's
bid price includes a cost-per-eligible trend factor for resource
sharing savings (that is, claims avoidance).  Net of the contractor's
expected expenditures on resource sharing, this creates a lower
up-front bid price (claims
avoidance - resource sharing expenditures = net savings).  These net
savings are calculated in section I of the worksheet on an average
basis (that is, using the contractor's best and final offer
assumption about the average savings to cost ratio for resource
sharing). 

Second, if partial contractor workload credit is negotiated, the
government will realize savings in the bid price adjustment for MTF
utilization (the "O" factor).  This can result in a more favorable
bid price adjustment for the government.  These savings are
calculated in section II of the worksheet. 

Third, the government will also realize 0, 80, 90, or 100 percent of
any residual savings in the risk-sharing corridor, depending on which
tier of the risk-sharing corridor applies to the bid price adjustment
for the option period.  (The contract's risk-sharing provisions are
specified in detail in section G-5 and in appendix C in the Bid Price
Adjustment Procedures Manual.) This will result in the government
sharing any risk-sharing savings realized by the contractor.  These
savings are calculated in section IV of the worksheet. 


      REQUIRED COMPLETION OF THE
      FINANCIAL ANALYSIS WORKSHEET
------------------------------------------------------ Appendix IV:0.7

MTF commanders or their designated representatives are required to
complete the standardized Resource Sharing Financial Analysis
Worksheet in negotiating each proposed RSA, in addition to any other
analyses prepared by the contractor or the MTF (as specified in
section G-5g(2) of the contract). 

In completing the resource sharing worksheet, users should not be
lulled into a false sense of security by focusing on numerical
results rather than on underlying assumptions.  The accuracy of
assumptions such as the number of admissions and/or visits to be
recaptured, the MTF's marginal costs in recapturing these units, and
the costs avoided in CHAMPUS are crucial to the accuracy of the
spreadsheet's projections.  If estimates are too optimistic, even
though the spreadsheet may project net gains for the government, in
reality the government may experience net losses.  Of course, overly
pessimistic estimates can lead the government to miss out on
cost-effective opportunities. 


      THE MTF INPUTS PAGE
------------------------------------------------------ Appendix IV:0.8

To use the Financial Analysis Worksheet, the MTF must enter the boxed
values on the "MTF Inputs" page.  These include (1) the type of RSA,
(2) whether the agreement converts an inpatient partnership agreement
that previously existed, (3) the option period (year) covered by the
proposed agreement, (4) the number of outpatient visits or inpatient
admissions enabled by the agreement, (5) the expected government
risk-sharing responsibility percentage, (6) the estimated volume
trade-off factor used to estimate CHAMPUS avoidance savings, (7) the
estimated average government cost per unit for admissions and/or
outpatient visits avoided in CHAMPUS for care covered by the
agreement, (8) the expected contractor expenditure under the
agreement, (9) the projected MTF marginal expenditures, (10) the
contractor resource sharing workload credit assumed in the analysis,
(11) the sum of the projected resource sharing expenditures for those
agreements approved for the lead agent region as a whole, and (12)
the expected MTF payment for the contractor's costs and the MTF's
marginal costs if the resource is acquired under task order resource
support rather than resource sharing. 

As part of the negotiation of the RSA, the MTF commander and the
contractor must agree on each estimate or assumption entered on the
"MTF Inputs" page before the worksheet is finalized. 

The remaining sections of the Financial Analysis Worksheet do not
require the MTF to enter any data or assumptions.  Depending on the
results shown on the "summary" page for resource sharing, however, it
may be appropriate to revise some of the MTF inputs (for example, the
contractor workload credit) on an iterative basis. 


      RESOURCE SHARING SUMMARY
      PAGE
------------------------------------------------------ Appendix IV:0.9

The "Summary--Resource Sharing" page lists the key results for the
proposed agreement under resource sharing.  This summary shows (1)
whether the proposed contractor workload credit is appropriate, (2)
whether government gains exceed government expenditures, (3) the
projected contractor net gain under the RSA, (4) the projected
government net gain, and (5) whether the proposed agreement reduces
the contractor's actual costs even if the contractor's net gain is
negative due to the average savings assumed up front in the
contractor's best and final offer.  (Because the contractor reduced
its best and final offer bid price based on an assumption about
average savings for each RSA, some actual agreements are expected to
produce savings that are smaller than this assumed average, but are
still positive.  This perspective is particularly relevant for
conversion of partnership agreements, since the contractor is not
likely to achieve new savings simply for continuing previous
partnership agreements under the same terms as RSAs.  The net
contractor gain after taking account of average up-front savings from
the best and final offer is likely to be negative, yet converting a
cost-effective partnership agreement allows the contractor to avoid
an increase in CHAMPUS claims costs that would otherwise result.)

If the "Summary--Resource Sharing" page shows that the contractor
workload credit is not appropriate and/or government gains do not
exceed government expenditures, then one option for the MTF is to
adjust the proposed contractor workload credit on an iterative basis
until the proposed agreement satisfies both requirements.  It may
also be appropriate for the MTF to renegotiate other terms of the
proposed agreement (for example, the level of resources to be
provided by the contractor).  If it is not possible to determine a
workload credit percentage that results in a "yes" response to both
questions, given all of the other input assumptions agreed upon by
the MTF commander and the contractor, then the proposed RSA should
not be approved (unless the lead agent determines that the proposed
agreement still warrants approval due to compelling circumstances). 


      RESOURCE SHARING PAGE
----------------------------------------------------- Appendix IV:0.10

The resource sharing worksheet page has five sections.  Section I
estimates the net resource sharing savings under this agreement that
would already be reflected in the contractor's proposed bid price,
based on the average-savings-to-cost ratio used to develop the
resource sharing savings trend factor in the contractor's best and
final offer. 

Section II estimates the effect of the RSA, including the
contractor's workload credit, on the MTF utilization adjustment in
the bid price adjustment formula (that is, the "O" factor
adjustment). 

Section III estimates the actual savings (that is, cost avoidance) in
CHAMPUS health care costs as a result of the RSA. 

Section IV estimates the residual gain in CHAMPUS (that is, the
difference between the adjusted bid price for health care costs and
the actual health care costs) under the proposed RSA.  The section
also estimates the government and contractor portions of these gains,
since the gains would be subject to risk sharing between the
government and contractors. 

Section V provides the two necessary results of this analysis (for an
assessment of resource sharing in isolation).  First, is the
contractor credit for resource sharing workload assumed in the
analysis appropriate?  Second, does the analysis indicate that the
proposed RSA would be cost-effective for the government from the MHSS
perspective? 




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



(See figure in printed edition.)


*** End of document. ***