Military Retirees' Health Care: Costs and Other Implications of Options
to Enhance Older Retirees' Benefits (Letter Report, 06/20/97,
GAO/HEHS-97-134).

Pursuant to a congressional request, GAO provided information on various
proposals that have been made to enhance older retirees' Department of
Defense (DOD) health care benefits, including: (1) enrolling
Medicare-eligible retirees in TRICARE Prime, TRICARE's health
maintenance organization (HMO), and paying for their care with Medicare
funds, referred to as Medicare subvention; (2) using DOD funds to pay
retirees' Medicare part B premiums and to furnish Medigap policies; (3)
providing the Civilian Health and Medical Program of the Uniformed
Services as a Medicare supplement; (4) extending the Federal Employees
Health Benefits Program to retirees as a Medicare supplement and using
DOD funds to pay part of the premium; and (5) expanding DOD's current
mail-order prescription program to Medicare-eligibles who do not live
near military medical facilities.

GAO noted that: (1) its analyses indicate that the proposals vary in
their potential costs, coverage, and other effects on DOD, eligible
beneficiaries, and Medicare; (2) DOD lacks the cost and care use data
needed to estimate its current spending level for Medicare-eligible
retirees, the level that would be DOD's spending limit under the
Medicare subvention proposal and that, once reached, would trigger the
Health Care Financing Administration's (HCFA) payments to begin; (3) it
is uncertain whether HCFA's subvention payment rates, which would be
lower than those it pays to Medicare HMOs, would equal DOD's actual care
costs; (4) relatively few retirees could be accommodated by subvention
at military medical facilities because of facility capacity and
financial constraints; (5) the three proposals to have DOD fund Medicare
supplemental coverage would cover all older retirees, and estimated
additional DOD costs would range from $1.6 billion to $2.2 billion per
year, in 1996 dollars, after they were fully implemented; (6) costs
would be likely to rise over time as health care costs rose and greater
numbers of Medicare-eligible retirees became eligible for programs; (7)
all three of these options could inadvertently create a disparity in
retirees' health care benefits by, in effect, providing older retirees
with more comprehensive benefits than younger retirees; (8) while these
options would provide retirees with enhanced benefits, none would
increase retirees' access to care in military medical facilities; (9)
the mail-order pharmacy option would address a significant gap in older
retirees' health coverage--Medicare's lack of outpatient prescription
drug coverage; (10) this proposal is unlike the others, which involve
many uncertainties or high potential costs; (11) under this proposal,
for an estimated cost of $229 million per year, DOD could extend the
current mail-order pharmacy program in base closure areas to
Medicare-eligible retirees who live far from military facility
pharmacies; (12) this option would reduce prescription expenses for
retirees living far from military pharmacies who have limited or no
prescription coverage; and (13) because the approach could be
implemented fairly easily as an extension of the current program, it
would offer some relief to beneficiaries without major system changes.

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

 REPORTNUM:  HEHS-97-134
     TITLE:  Military Retirees' Health Care: Costs and Other 
             Implications of Options to Enhance Older Retirees' Benefits
      DATE:  06/20/97
   SUBJECT:  Health care programs
             Retired military personnel
             Retirement benefits
             Health services administration
             Cost effectiveness analysis
             Drugs
             Employee medical benefits
             Military hospitals
IDENTIFIER:  DOD TRICARE Prime Program
             DOD TRICARE Program
             Medicare Hospital Insurance Trust Fund
             Medicare Program
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             Federal Employees Health Benefits Program
             Medigap
             
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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

June 1997

MILITARY RETIREES' HEALTH CARE -
COSTS AND OTHER IMPLICATIONS OF
OPTIONS TO ENHANCE OLDER RETIREES'
BENEFITS

GAO/HEHS-97-134

Military Retirees' Health Care

(101491)


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

  CBO - Congressional Budget Office
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CRS - Congressional Research Service
  DOD - Department of Defense
  FEHBP - Federal Employees Health Benefits Program
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  OPM - Office of Personnel Management

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


B-276905

June 20, 1997

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

Today, 4.3 million military retirees,\1 their dependents, and
survivors are eligible for care under the Department of Defense's
(DOD) health care system.  But this system has changed significantly
in the last decade.  As a result of these changes, which include the
establishment of a nationwide managed care program called TRICARE and
the closing or downsizing of many medical facilities, many military
retirees, especially those aged 65 and older, fear they will lose the
access they now have to care in military medical facilities. 

In recent testimony before your Subcommittee,\2 we reported that
military facilities and resources available to care for older
retirees will decrease and eventually disappear in many locations as
enrollment in TRICARE increases, leaving many retirees without
DOD-sponsored health care.  Because of your concern about this issue,
we agreed with your office to describe various proposals that have
been made to enhance older retirees' DOD health care benefits, as
well as to provide cost estimates, where possible, for implementing
the options, based on specific variables and assumptions.  The
options, each of which would require legislative action to implement,
include (1) enrolling Medicare-eligible\3 retirees in TRICARE Prime,
TRICARE's health maintenance organization (HMO), and paying for their
care with Medicare funds (referred to as "Medicare subvention"); (2)
using DOD funds to pay retirees' Medicare part B premiums and to
furnish Medigap policies; (3) providing the Civilian Health and
Medical Program of the Uniformed Services (CHAMPUS)\4 as a Medicare
supplement; (4) extending the Federal Employees Health Benefits
Program (FEHBP) to retirees as a Medicare supplement and using DOD
funds to pay part of the premium; and (5) expanding DOD's current
mail-order prescription program to Medicare-eligibles who do not live
near military medical facilities.  This report also discusses the
uncertainties about and limitations of these options, including their
potential effects on cost and administrative requirements as well as
considerations surrounding the military medical system's size and
mission. 

To do our work, we examined legislative proposals and available
studies relating to each option; analyzed DOD data; and interviewed
DOD health experts and officials from DOD, the Office of Personnel
Management (OPM), the Congressional Budget Office (CBO), the
Congressional Research Service (CRS), and military beneficiary
associations.  A more detailed discussion of our scope and
methodology and cost estimates for the options examined appear in
appendix I.\5


--------------------
\1 For the remainder of this report, the term "retirees" refers to
retirees and their dependents and survivors.  Further, the term
"older retirees" refers to retirees who are aged 65 or older. 

\2 Defense Health Care:  Limits to Older Retirees' Access to Care and
Proposals for Change (GAO/T-HEHS-97-84, Feb.  27, 1997). 

\3 Medicare is a national health insurance program for people 65
years of age and older, certain younger disabled people, and people
with kidney failure. 

\4 CHAMPUS is an insurance-like program administered by DOD that pays
for a portion of the care military families and retirees under age 65
receive from private sector health care providers. 

\5 We did not attempt to estimate the cost of implementing the
Medicare subvention option, for the reasons given in app.  I. 


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

Our analyses of the various proposals to improve DOD-sponsored health
care benefits for older retirees and their dependents indicate that
the proposals vary in their potential costs; coverage; and other
effects on DOD, eligible beneficiaries, and Medicare (see table 1). 
For example, Medicare subvention, under which DOD would receive
payment from Medicare for treating Medicare-eligible retirees in
TRICARE Prime, seeks to ensure that neither DOD nor the Health Care
Financing Administration (HCFA)\6 would incur added costs by
enrolling retirees.  However, DOD lacks the cost and care use data
needed to estimate its current spending level for Medicare-eligible
retirees--the level that would be DOD's spending limit under this
proposal and that, once reached, would trigger HCFA's payments to
begin.  Moreover, it is uncertain whether HCFA's subvention payment
rates, which would be lower than those it pays to Medicare HMOs,
would equal DOD's actual care costs.  Finally, relatively few
retirees (about 75,000) could be accommodated by subvention at
military medical facilities because of facility capacity and
financial constraints. 



                                         Table 1
                         
                         Comparison of Proposed Military Retiree
                                   Health Care Options

                                           Estimated annual cost   Estimated cost to
Option             Benefit description     to DOD                  beneficiary
-----------------  ----------------------  ----------------------  ----------------------
Medicare           Using Medicare funds,   The goal is to be       Medicare part B is
subvention         this option guarantees  budget neutral, but     required, costing
                   inpatient and           uncertainties remain    $526/year for each
                   outpatient care and     regarding (1) DOD's     covered beneficiary.
                   prescriptions at        actual costs for        The beneficiary pays
                   military medical        providing full care     TRICARE Prime
                   facilities or through   for all enrollees and   copayments when care
                   the TRICARE network.    the resulting           is received outside
                   We estimated            difficulty in setting   DOD facilities: $12
                   subvention at military  DOD's baseline          per outpatient visit;
                   facilities would        spending level and (2)  $11 per day, minimum
                   accommodate about       whether HCFA's payment  $25 per inpatient
                   75,000 participants.    levels would be         admission; and $9 per
                                           appropriately set to    prescription.
                                           ensure cost-
                                           neutrality.

Medicare part B    DOD pays for Medicare   $2.2 billion per year   Participant pays no
and Medigap        part B premium and a    ($629 million for part  copayments for
policy             Medigap policy to       B premiums and $1.6     Medicare-covered
                   supplement Medicare     billion for Medigap     inpatient and
                   for inpatient and       policies); $1,833 per   outpatient care but
                   outpatient care and     participant ($526 for   does pay a 50-percent
                   prescription drugs.     part B premium and      prescription
                   Offered to all          $1,307 for Medigap      copayment, with annual
                   Medicare-eligible       policy).                dollar limits.
                   retirees.

CHAMPUS as a       DOD extends CHAMPUS to  $1.8 billion per year;  Medicare part B is
Medicare           supplement Medicare     $1,520 per              required, costing
supplement         for inpatient and       participant.            $526/year for each
                   outpatient care and                             covered beneficiary.
                   prescription drugs.                             CHAMPUS covers most
                   Offered to all                                  out-of-pocket costs;
                   Medicare-eligible                               under the standard
                   retirees.                                       CHAMPUS program, there
                                                                   is a 25-percent
                                                                   copayment for
                                                                   prescriptions.

FEHBP as a         DOD pays part of the    $1.6 billion\ per       The participant pays
Medicare           premium for the         year; $1,571 per        about 29 percent of
supplement         participants' choice    participant.            the plan premium--
                   of FEHBP plans, which                           single annuitant
                   typically cover                                 average is about $680-
                   Medicare deductibles                            -just as a federal
                   and coinsurance,                                employee does.
                   prescription drugs,                             Copayments and
                   and some dental care.                           deductibles vary but
                   Offered to all                                  are close to $0 if the
                   Medicare-eligible                               participant also has
                   retirees, but we                                optional Medicare part
                   assumed 83-percent                              B.
                   participation.

Mail-order         DOD provides mail-      $229 million per year;  $8 per 90-day
pharmacy plan      order plan for          $561 per participant.   prescription.
                   prescription drugs,
                   primarily for
                   recurring medications,
                   to all Medicare-
                   eligible beneficiaries
                   not living near a
                   military pharmacy and
                   not having mail-order
                   service under a base
                   closure plan (about
                   408,000 retirees).
-----------------------------------------------------------------------------------------
The three proposals to have DOD fund Medicare supplemental coverage
would cover all older retirees, and estimated additional DOD costs
would range from $1.6 billion to $2.2 billion per year, in 1996
dollars, after they were fully implemented.  Costs would be likely to
rise over time as health care costs rose and greater numbers of
Medicare-eligible retirees became eligible for the programs. 
Specifically, the proposal to have DOD fund retirees' Medicare part B
premiums and a private Medigap policy, including prescription
coverage, would cost an estimated $2.2 billion per year.  A second
alternative--extending CHAMPUS coverage to older retirees as a
Medicare supplement--could cost as much as $1.8 billion per year. 
The third option--offering older military retirees a Medicare
supplement through enrollment in FEHBP--is attractive for its broad
coverage and cost-sharing provisions, but it could cost as much as
$1.6 billion per year.  Moreover, all three of these options could
inadvertently create a disparity in retirees' health care benefits
by, in effect, providing older retirees with more comprehensive
benefits than younger retirees.  Further, while these options would
provide retirees with enhanced benefits, none would increase
retirees' access to care in military medical facilities. 

Finally, the mail-order pharmacy option would address a significant
gap in older retirees' health coverage--Medicare's lack of outpatient
prescription drug coverage.  This proposal is unlike the others,
which involve many uncertainties or high potential costs.  Under this
proposal, for an estimated cost of $229 million per year, DOD could
extend the current mail-order pharmacy program in base closure areas
to Medicare-eligible retirees who live far from military facility
pharmacies.  This option would reduce prescription expenses for
retirees living far from military pharmacies who have limited or no
prescription coverage.  And, because the approach could be
implemented fairly easily as an extension of the current program, it
would offer some relief to beneficiaries without major system
changes. 


--------------------
\6 HCFA is the agency in the Department of Health and Human Services
responsible for administering the Medicare program. 


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

Today's DOD health care system provides coverage for about 8.2
million people, of whom over half are retirees and their dependents
and survivors.  (App.  II includes more detailed information on
military retirees, including population size and growth projections,
demographics, use of DOD health care, and extent of other insurance
coverage.) Under the terms of the 1956 Dependents' Medical Care Act,
DOD has authority to provide retirees of any age health care in its
medical facilities as long as space and resources are available. 
Retirees receive this care, referred to as "space-available" care, at
little or no cost.  The statute, however, does not entitle retirees
to care in military facilities. 

When DOD was given the authority to provide care to military
retirees, retirees made up only 8 percent of the population eligible
for military health care.  At that time, the military health care
system was sized for a large active-duty force, with enough capacity
that retirees were almost assured health care in military facilities
on a space-available basis.  Since then, however, downsizing of the
military medical system, coupled with increases in the size of the
retiree population, have contributed to a reduction in the
availability of care for retirees in DOD facilities. 

The introduction of TRICARE has also affected the amount of
space-available care in medical facilities.  The legislation
authorizing TRICARE gives beneficiaries who enroll in its HMO benefit
program called TRICARE Prime priority for care in military medical
facilities.  However, because retirees aged 65 and older are
ineligible for TRICARE Prime, they can obtain care in military
facilities only if space and resources remain after care is provided
to enrolled beneficiaries.  As TRICARE enrollment increases, the
amount of space-available care will decline. 

When space and resources are not available in DOD facilities,
retirees not enrolled in TRICARE Prime must seek care from other
providers.  DOD pays most of the cost of the care of those under age
65 who receive care from private health care providers through
CHAMPUS.  CHAMPUS was established in part so that military members,
once retired, could have health care coverage until eligible at age
65 for Medicare.  Retirees lose their CHAMPUS coverage at age 65,
and, when space and resources are not available within DOD
facilities, these older retirees must depend on non-DOD sources, such
as Medicare, Department of Veterans' Affairs facilities, and other
government-sponsored or private health insurance, for their health
care. 

As we reported in our February 1997 testimony, using a blend of
military facilities and other sources has created a patchwork system
that Medicare-eligible retirees must learn to navigate to receive
care.  Space-available care is episodic and lacks the regularity and
continuity that are often important to older retirees, who have more
frequent and chronic medical problems than younger ones.  And,
although retirees may also access care through Medicare and private
supplemental health insurance, many retirees experience coverage gaps
and high out-of-pocket costs.  Even older military retirees with more
generous coverage through private or other government
employer-sponsored insurance that acts as a Medicare supplement could
experience relatively high costs depending on the extent to which
their former employers share the costs.  To address these
availability, cost, and coverage issues, DOD and members of the
Congress have developed several proposals with various health care
program options for Medicare-eligible retirees. 


   DESPITE COST-NEUTRAL INTENT,
   MEDICARE SUBVENTION POSES
   FINANCIAL RISK TO THE
   GOVERNMENT
------------------------------------------------------------ Letter :3

Under Medicare subvention, DOD's HMO option--TRICARE Prime--would be
opened to Medicare-eligible retirees and would operate essentially as
a Medicare HMO--that is, as HMOs that are currently operated by
private companies under contract with HCFA and available to many of
DOD's older retirees.  DOD's subvention plan attempts to ensure
cost-neutrality for both DOD and HCFA in two ways.  First, it would
require DOD to maintain its current spending, or "level of effort,"
on Medicare-eligible retirees treated in military medical facilities. 
Second, the plan would require that HCFA's payment rate be set lower
than the per-person rate HCFA currently pays to private Medicare
HMOs.  If DOD's level of effort was accurately determined and the
Medicare payment rate was appropriately set, neither DOD or HCFA
would experience increased costs.  However, DOD's lack of information
with which to accurately determine its current level of effort raises
questions about whether the program would actually be cost neutral. 
Furthermore, DOD's capacity and financing constraints could
significantly limit the number of older retirees who would benefit
from this program. 


      ACCURATELY DETERMINING DOD'S
      LEVEL-OF-EFFORT BASELINE
      WOULD BE DIFFICULT
---------------------------------------------------------- Letter :3.1

DOD's role in attaining cost-neutrality under the subvention plan
would be to maintain its historic level of spending, or "level of
effort," for care it provided to Medicare-eligible retirees. 
According to the proposal, once the level of effort in dollar terms
was determined, it would be divided into two portions:  one that
would continue to fund space-available care for older retirees and
one devoted to fund care for beneficiaries who enrolled in TRICARE
Prime through subvention.\7 The dollars allocated for TRICARE
enrollees' care would then be divided by HCFA's per-person payment,
yielding the number of subvention enrollees that DOD remained
responsible for funding.  Once DOD's subvention enrollees reached
that number, DOD would receive monthly per-enrollee payments from
HCFA for each enrollee over the target.  At the end of each year, a
level-of-effort spending reconciliation would be conducted.  If DOD
had not spent all of its level-of-effort dollars, even if it had
enrolled more than the target number of beneficiaries, it would have
to reimburse HCFA for payments it made up to DOD's level-of-effort
threshold. 

After its review of Medicare subvention legislation, CBO reported
that the program's potential cost-neutrality critically hinges on how
accurately DOD would be able to establish its level-of-effort
baseline spending on Medicare-eligibles.\8 The risk of establishing
an inaccurate level-of-effort baseline would be great because of the
limitations of DOD's cost and utilization data.  DOD's current
systems capture information on the types and costs of medical
services provided by individual facilities but cannot attribute those
facility costs to specific patients or groups of patients.  If the
current spending was overestimated, the level-of-effort baseline
would be set too high, putting DOD at risk of guaranteeing care to
enrolled retirees without having adequate funding to provide it.  If
DOD underestimated its current spending, the level-of-effort baseline
would be set too low, and HCFA would pay for services that DOD now
pays for.  This would exacerbate the problems of the Medicare
Hospital Insurance trust fund, which is expected to be depleted in
2001. 

Even if the baseline was accurately set, DOD's historic level of
spending might not reflect the actual costs of guaranteeing
comprehensive health care coverage to retirees enrolled under
subvention.  That is, the level of effort reflects the past spending
on space-available care for Medicare-eligible beneficiaries.  If the
costs to provide the full range of Medicare-covered services to the
targeted number of enrollees were greater than the spending level
established by the baseline, DOD would have to find funds to provide
enrollees' care, possibly by taking funds from other DOD health
programs, by reducing space-available care for nonenrollees, or by
asking for supplemental appropriations. 


--------------------
\7 Under proposed legislation for a test of the subvention program,
the proportions for space-available care and enrolled care would be
70 percent/30 percent in the first year of subvention, 60 percent/40
percent in the second year, and 50 percent/50 percent in the third
year. 

\8 CBO, memorandum for the record, Feb.  21, 1996, and cost estimate
on H.R.  3142, Sept.  17, 1996. 


      MEDICARE PAYMENT LEVEL IS
      CRITICAL TO PROPOSAL'S
      COST-NEUTRALITY
---------------------------------------------------------- Letter :3.2

HCFA's role in attaining cost-neutrality under this proposal would be
to provide per-person payments for additional enrollees.  These
payments, which would be intended to reimburse DOD for the cost of
the care provided to Medicare-eligible enrollees above the level of
effort, are critical to the cost-neutrality of this proposal.  HCFA
currently pays Medicare HMOs a flat fee for each enrolled beneficiary
that is equal to 95 percent of Medicare's estimated average cost of
treating a similar beneficiary in the fee-for-service sector.  Under
this proposal, DOD has agreed to accept a payment rate from HCFA that
would be at least 2 percentage points lower than the rate HCFA pays
to private Medicare HMOs.\9 After the first year, HCFA's payment rate
would be further reduced by excluding allocations for graduate
medical education, indigent care, and capital costs--costs that DOD
does not incur or for which it is separately funded.  DOD has
estimated that, because of these adjustments, the resulting payment
rate could be 7 to 13 percent less than the rates HCFA pays private
Medicare HMOs. 

It is uncertain whether the proposed payment rates would be
appropriate to ensure that neither DOD nor HCFA incurred costs
greater than it would otherwise have incurred to care for this
population.  For example, DOD could incur additional costs if the
payment rate was lower than the actual cost of providing the full
range of care that Medicare subvention promises to the newly enrolled
beneficiaries, both at military facilities and through civilian
providers.  DOD believes that it can provide care to older retirees
in military medical facilities at a lower cost than Medicare HMOs
can.  This contention is based on the "733 study," which compared the
cost of providing care to DOD beneficiaries in military medical
facilities with the cost of providing care in the civilian sector.\10
The study compared military medical facilities only with the CHAMPUS
fee-for-service program, however, and not with Medicare
fee-for-service or HMO providers.  Moreover, the study developed
average costs of care as they pertain to the overall military
community, not to older retirees as a separate population. 
Therefore, the cost advantage attributed to military medical
facilities by the 733 study may not accurately reflect DOD's costs in
comparison with private sector HMOs or be generalizable to older
retirees treated in DOD facilities.\11

Even if DOD did not incur additional costs in delivering medical
facility care, it could incur additional costs if the cost of using
civilian providers was higher than the payment rate.  Although DOD's
intention under Medicare subvention is to enroll older retirees and
provide most of their care in military medical facilities, not all
facilities have the resources to provide the full range of enrollees'
care.  To meet its obligation, therefore, DOD would supplement
facility care with care purchased from private providers.  To ensure
that it did not incur additional costs, DOD would need to purchase
this care at rates commensurate with the rates HCFA would pay DOD. 
It is uncertain whether DOD could find providers who would accept
these lower rates.  If DOD could not find providers who would accept
the lower rates, it would either incur additional costs by buying
those services guaranteed under subvention at the higher rates or be
unable to offer subvention at some facilities. 

On the other hand, because many enrollees in a Medicare subvention
program would presumably be diverted from civilian fee-for-service
Medicare providers, HCFA could incur additional costs if its payments
to DOD were higher than what HCFA would have paid under standard
fee-for-service Medicare.  In April 1997, we reported that HCFA's
method for establishing HMO payment rates overstates the average cost
of all Medicare beneficiaries and leads to excess payments because it
does not fully correct for HMOs enrolling a less costly--more
favorable--selection of beneficiaries.\12 Thus, it would remain to be
seen whether the proposed payment rates for DOD would result in
excess payments. 


--------------------
\9 Current proposals for Medicare subvention contain payment rates
ranging from 90.25 percent to 93 percent. 

\10 Office of Program Analysis and Evaluation, "The Economics of
Sizing the Military Medical Establishment," Executive Report of the
Comprehensive Study of the Military Medical Care System (Washington,
D.C.:  DOD, Apr.  1994). 

\11 DOD officials told us that they are in the process of developing
patient-level accounting systems that may provide better information
on the cost of providing care to specific groups of patients, such as
older retirees. 

\12 Medicare HMOs:  HCFA Can Promptly Eliminate Hundreds of Millions
in Excess Payments (GAO/HEHS-97-16, Apr.  25, 1997). 


      COMPARATIVELY FEW RETIREES
      WOULD BENEFIT FROM
      SUBVENTION
---------------------------------------------------------- Letter :3.3

Under DOD's current proposal, subvention would only be offered to
Medicare-eligible beneficiaries who live near military medical
facilities.\13 Moreover, for the reasons described above, subvention
would be less financially feasible for facilities that had to
purchase significant amounts of care from private providers.  DOD
officials told us that each medical facility would have to carry out
a financial analysis before starting a subvention program to
determine the amount and cost of care it would have to purchase. 
They told us that, from a financial perspective, many smaller
facilities would not be able to afford to offer enrollment under
subvention.  It appears, then, that a smaller number of retirees than
is now being served--approximately 300,000--would be likely to
benefit from subvention.  In its plan for a test of the subvention
program at seven facilities, the number of enrollees that DOD
estimated it could accommodate equated to about 20 percent of the
Medicare-eligible beneficiaries in those areas, and DOD expected that
a similar proportion could be accommodated under a nationwide
implementation.  On the basis of the numbers of retirees living near
military facilities with sufficient capacity to operate a subvention
program, we estimated that about 75,000 older retirees could
participate nationwide if the subvention program was offered at all
but DOD's smallest hospitals.\14

Uncertainties about DOD's ability to establish a reliable
level-of-effort baseline and otherwise estimate its costs under
subvention point up the need for DOD to test this concept before
nationwide implementation.  DOD agrees and has already begun
exploring within its system the possible financial and capacity
limitations to subvention and planning for the administrative and
reimbursement mechanisms needed to test the concept in limited areas. 


--------------------
\13 According to DOD officials, over the longer term DOD would seek
to offer subvention outside of military medical facilities using
civilian providers, if the program proved feasible once tested. 

\14 We defined "smallest hospitals" as those with fewer than 50 beds. 
According to DOD population data for 1996, 381,788 Medicare-eligible
retirees lived within the DOD-designated 40-mile catchment area of a
military hospital with 50 beds or more.  DOD defines "catchment area"
as the area within a 40-mile radius surrounding a military medical
facility.  In addition, we removed from consideration any facilities
that were currently in operation but scheduled to close because of
base closure actions. 


   SUPPLEMENTAL INSURANCE WOULD
   FILL MEDICARE GAPS BUT BE
   EXPENSIVE
------------------------------------------------------------ Letter :4

Another option to improve older retirees' DOD-sponsored health
benefits is for DOD to offer increased insurance coverage beyond that
provided through the Medicare program, given the likelihood that many
older retirees will be unable to access care from military
facilities.  As suggested in three proposals, if DOD funded the cost
of supplemental insurance provided by private insurers, CHAMPUS, or
FEHBP, many of the gaps in Medicare coverage could be filled, and
some retirees could experience lower out-of-pocket costs.  However,
DOD's costs to provide this additional coverage could be substantial,
from $1.6 billion to $2.2 billion per year, depending on the type of
supplemental insurance plan offered.  Moreover, the costs of these
programs would probably rise with health care costs and as greater
numbers of retirees reached age 65 and became eligible for the
benefits.  Providing this type of supplemental coverage would require
some changes in the current administrative systems, but the
administrative costs should be relatively minor for the CHAMPUS and
FEHBP options, with somewhat higher administrative costs associated
with the private supplemental insurance option. 


      PAYING FOR MEDICARE PART B
      PREMIUMS AND PRIVATE MEDIGAP
      POLICIES
---------------------------------------------------------- Letter :4.1

Upon reaching age 65, retirees' eligibility for CHAMPUS ends, and
Medicare becomes the primary insurer.  Under Medicare part A, which
is paid for through employer/employee payroll taxes, retirees receive
coverage for inpatient hospital, skilled nursing facility, home
health, and hospice care.  Most retirees also purchase Medicare part
B (which costs $525.60 per person in 1997) to receive coverage for
services including physician visits, outpatient care, laboratory
tests, and medical equipment needed in the home.  However,
requirements for copayments and deductibles and limitations in the
Medicare benefit, such as no coverage for outpatient prescriptions
and no cap on out-of-pocket costs, have led many retirees to purchase
additional insurance policies--"Medigap" policies--specifically to
fill the gaps in coverage.  According to a 1995 survey of military
beneficiaries, about 31 percent of those aged 65 and older reported
having this supplemental insurance. 

The cost of these supplemental policies can be significant to the
retiree.  The annual premiums of plans that include coverage for
prescription drugs can range from $750 to almost $3,000, with the
more expensive plans generally providing the greatest coverage and
filling in more of the gaps in Medicare coverage.  We calculated the
1996 average annual premium for a Medigap policy that included
coverage for outpatient prescriptions to be approximately $1,307.\15

Assuming financial responsibility for part B premiums as well as
paying for Medigap policies for all Medicare-eligible retirees would
cost DOD an estimated $2.2 billion, or about $1,833 per participant. 
This cost estimate is based on coverage under a Medigap policy that
includes a prescription benefit. 

The cost for this option could be even higher if DOD also paid the
premium penalty assessed for late enrollment in Medicare part B. 
Retirees who do not enroll in Medicare part B during their initial
enrollment period\16 are subject to a 10-percent surcharge on their
monthly premiums for each year between the one in which they turned
age 65 and the one in which they enrolled.  Paying these additional
surcharges could be a significant cost to DOD.  In a report on a 1995
study related to base closure activities,\17 DOD estimated that the
11,000 Medicare-eligible beneficiaries living near military medical
facilities who did not enroll in Medicare part B during their initial
enrollment period would be subject to $10 million in surcharges over
a 5-year period.  According to a recent DOD survey of beneficiaries,
about 10 percent of retirees aged 65 and older, or approximately
120,000, did not have Medicare part B. 

To offer Medigap policies, DOD would need to establish some new
administrative structures.  Because Medigap policies' premiums and
insurers vary across the states, DOD would need to establish a
mechanism for coordinating and managing the program, such as OPM has
for administering FEHBP.  The cost to create this mechanism is
unknown but could be considerable.  An alternative would be to
solicit bids on and award a national contract for a Medigap policy,
although this would not be without cost. 


--------------------
\15 We based our calculation on the premiums of plans offered through
Blue Cross/Blue Shield and Prudential in most states, as presented in
a study by the Families USA Foundation, a health care advocacy group,
and weighted those premiums to reflect differences in plan costs by
age relative to the age distribution of DOD retirees. 

\16 The initial enrollment period is generally a 7-month period that
begins 3 months before the retiree turns age 65. 

\17 Office of the Assistant Secretary for Health Affairs, DOD,
"Possible Financial Relief From Medicare Part B Late Enrollment
Surcharges for Medicare-eligible Military Retirees Who Have Been
Adversely Affected by a BRAC," Report to Congress (Washington, D.C.: 
DOD, 1996). 


      EXTENDING CHAMPUS AS A
      MEDICARE SUPPLEMENTAL POLICY
---------------------------------------------------------- Letter :4.2

Another option to increase insurance coverage of military retirees is
to extend their coverage under the CHAMPUS program beyond age 64. 
Under this extension, the CHAMPUS benefit would serve as a
supplemental policy to Medicare, covering most out-of-pocket costs as
well as medical services included in CHAMPUS but not covered by
Medicare, such as prescriptions.  The extension of CHAMPUS would
provide retirees continued coverage under a plan familiar to many of
them.  Additionally, even though current legislative proposals would
require retirees to enroll in Medicare part B, retirees could
experience lower out-of-pocket costs. 

Providing CHAMPUS as a supplemental policy to all Medicare-eligible
beneficiaries could cost DOD as much as $1.8 billion, or about $1,520
per participant.  This estimate is based on the assumption that
CHAMPUS would pay the costs remaining after Medicare paid its
allowable amount for covered services and that CHAMPUS would pay for
the services not covered by Medicare.  As a result, retirees would
generally have no out-of-pocket costs for Medicare-covered services. 
For example, if the cost of a medical procedure was $100 and the
maximum amount allowed by Medicare and CHAMPUS was $100, Medicare
would first pay its customary 80 percent of the allowable ($80) and
CHAMPUS would pay the difference, up to its customary 75 percent of
the allowable.  In this example, the retiree would have no
out-of-pocket costs.  For those services covered by CHAMPUS but not
by Medicare, such as prescription drugs, retirees would pay the
customary CHAMPUS copayment of 25 percent. 

Because CHAMPUS is an established program within DOD, the existing
administrative structure could be used after modifications were made
to various information and claims processing systems.  According to
DOD, these modifications would not significantly increase the costs
of the program but could take between 6 and 12 months to implement. 


      OFFERING ENROLLMENT IN FEHBP
      TO OLDER RETIREES
---------------------------------------------------------- Letter :4.3

Another option is to offer military retirees enrollment in FEHBP, the
nationwide health care plan administered by OPM that is available to
federal civil servants during employment and, as a supplement to
Medicare, after retirement.  Through FEHBP, military retirees could
choose from at least a dozen plan options including fee-for-service
plans such as Blue Cross/Blue Shield and the Government Employees
Hospital Association, regional HMOs, and point-of-service plans.\18
As with active and retired federal employees, military retirees who
enrolled would be required to pay a premium.  The amount of the
premium would vary depending on which plan was chosen and the
government and beneficiary share in the cost of the selected plan. 
In 1996, for example, the government paid, on average, 71 percent of
the premium for non-Postal Service federal employees and retirees,
and beneficiaries were responsible for the remaining 29 percent. 

Offering Medicare-eligible retirees the opportunity to participate in
FEHBP could provide additional coverage for services not covered
under Medicare.  For example, many of the plans provide coverage for
prescriptions and have catastrophic limits on out-of-pocket costs,
and some offer dental benefits, none of which is covered by Medicare. 
Additionally, even with the same cost-sharing provision as federal
employees have, under FEHBP, retirees could pay a lower premium for
increased coverage than they would under private Medigap policies,
depending on the plan chosen.  For example, in 1997 an enrollee's
share of premiums for the five largest plans in FEHBP with
comprehensive coverage, including prescription and dental coverage,
ranges from about $370 to $1,750, compared with Medigap plans, which
have premiums ranging from $750 to almost $3,000 but offer no dental
benefits and have limits on prescription coverage. 

Providing this additional coverage to Medicare-eligible retirees,
however, could cost DOD as much as $1.6 billion, or about $1,571 per
beneficiary.  This estimate is based on our assumption that 83
percent of DOD's Medicare-eligible population would enroll in
FEHBP.\19 Because the remaining 17 percent would have insurance paid
in full or in part by their former employers, and most
employer-sponsored plans require lower out-of-pocket costs than
FEHBP, we assumed that very few of these retirees would opt for FEHBP
coverage. 

Premium amounts, and thus the government and beneficiary costs, are
determined by such characteristics of the covered beneficiary
population as gender mix, health status, and health care utilization. 
According to OPM, however, this information has not been developed
for the military retiree population.  Therefore, the legislative
proposals for this option require that the premiums for DOD retirees
be determined separately from the premiums for the retired federal
employee population covered through FEHBP.  As a result, the cost for
this option could be affected by the extent to which certain
characteristics of the military retiree population are similar to or
different from those of retired federal employees.  If military
retirees and other FEHBP participants, on average, used the same
types and amounts of health care, then their premiums would be
similar.\20

Offering Medicare-eligible retirees enrollment in FEHBP would impose
new administrative responsibilities and related costs on DOD and OPM,
such as managing enrollments, withholding premiums from annuities,
and preparing and distributing plan materials.  Although the
administrative costs associated with this option have not been
determined, they should not be substantial, according to DOD and OPM. 

Another consideration related to the supplemental coverage approach
used in all these proposals is whether DOD would be creating a
disparity between the benefits offered to its Medicare-eligible
retirees and those offered to its other beneficiaries.  For example,
organizations representing military beneficiaries have reported that
many retirees under the age of 65 would prefer FEHBP coverage to
CHAMPUS because under FEHBP, for example, they would not have to pay
for additional supplemental insurance, as some do under CHAMPUS.  To
the extent that DOD funds supplemental coverage for older retirees,
younger retirees could view this as an inequity in benefits. 


--------------------
\18 Point-of-service plans are HMOs that permit enrollees to use
non-HMO providers if they pay higher copayments. 

\19 This is based on our analysis of the 1994-95 Health Care Survey
of DOD Beneficiaries, which indicates that 17 percent of military
retirees have private health insurance for which the premiums are
paid either in full or in part by their former employer. 

\20 A study by the Rand Corporation (Susan D.  Hosek and others, The
Demand for Health Care:  Supporting Research for a Comprehensive
Study of the Military Health-Care System (Santa Monica, CA:  RAND
Corporation, 1994)) provides evidence that military families tend to
use more health care than comparable civilian families.  However, it
is not clear whether this pattern holds for older retirees, let alone
whether it would persist under the conditions of the proposed FEHBP
option. 


   MAIL-ORDER PHARMACY BENEFIT
   WOULD FILL A MAJOR COVERAGE GAP
------------------------------------------------------------ Letter :5

The Medicare program does not provide coverage for outpatient
prescriptions, a major expense for older people, who tend to use more
prescription drugs as they age.  Military retirees can get
prescriptions filled at military treatment facility pharmacies for
free, but these facilities are not readily accessible to all older
retirees.  Retirees who live near facilities that have been closed
through base closure actions can get prescription drug refills
through the base closure mail-order benefit program.  Further
expanding this mail-order benefit to those who do not live near
military facilities and do not currently have a mail-order benefit
would fill an important health coverage gap.  It would cost about
$229 million per year and would not require major changes in the DOD
medical program. 


      CURRENT MAIL-ORDER PROGRAM
      COULD BE EXPANDED AT
      RELATIVELY MODEST COST
---------------------------------------------------------- Letter :5.1

DOD currently operates a mail-order prescription program in base
closure areas for all beneficiaries affected by the closing of
military medical facilities.  Older retirees who live in these areas
or who can demonstrate prior use of a now-closed military pharmacy
are eligible to use this mail-order benefit.  By expanding this
mail-order program, this benefit could be provided to older retirees
outside base closure areas who live too far from a military pharmacy
to easily use that source for recurring prescriptions. 

Expanding the current program would result in additional cost to DOD. 
We calculated the added annual cost of expanding the current
mail-order benefit to older retirees who live outside the catchment
area of a military facility, and who do not already have the benefit
through the base closure medical program, at about $229 million, or
about $561 per participant.  The mail-order pharmacy proposal would
allow these retirees to receive a 90-day supply of a drug for an $8
copayment.  We assumed that all the beneficiaries eligible for the
program would participate because there would be no premium and a
small copayment.  However, it is possible that fewer would actually
participate.  According to DOD officials, only about half of those
eligible for the existing mail-order program in base closure areas
have used it.  Many choose not to participate either because they
prefer to travel to a military facility to receive their
prescriptions for free or because they are using other health
insurance that they currently hold for their prescriptions.  To the
extent that beneficiaries chose to continue using other health care
coverage, the added costs to DOD for this program would be less. 
And, if beneficiaries chose to no longer travel to military
facilities to refill their prescriptions, the added cost of
implementing this proposal would be somewhat offset by savings at
those military facilities' pharmacies.  We were not able to estimate
this effect because DOD currently does not collect data on the amount
or cost of prescriptions supplied to older retirees through its
military pharmacies. 


      A FORMULARY AND A DRUG
      UTILIZATION SYSTEM COULD
      HELP DOD MANAGE MAIL-ORDER
      PROGRAM COSTS
---------------------------------------------------------- Letter :5.2

A common method used by private sector payers to control prescription
drug costs is a formulary--a list of prescription drugs that are
preferred by a health plan sponsor for reasons of medical value and
price.\21 The mail-order pharmacy programs now operating in base
closure sites allow beneficiaries to obtain the broad selection of
pharmaceuticals available under CHAMPUS.  The one exception is that
pharmacies that contract with DOD to carry out these programs are
required to dispense the generic equivalent of a brand-name drug
unless a doctor specifically requires that the brand-name item be
dispensed as written for clinical reasons.  The use of a formulary
appropriate for older retirees would be one way for DOD to contain
the costs of a mail-order program. 

Carefully tracking the number of older retirees using pharmacy
benefits--collecting data on where they receive their prescriptions,
what types of medications they use, and what those prescriptions cost
DOD--is another way to manage the cost of a pharmacy program.  DOD
could use this information to develop a cost-effective formulary and
to adjust copayments to control costs.  Although DOD currently has no
drug utilization information system in place, we believe DOD could
use a participant enrollment mechanism and point-of-service software
to better track the use of a mail-order pharmacy benefit. 


--------------------
\21 For more information on formularies and their use in managing
pharmacy costs, see Pharmacy Benefit Managers:  Early Results on
Ventures With Drug Manufacturers (GAO/HEHS-96-45, Nov.  9, 1995) and
Pharmacy Benefit Managers:  FEHBP Plans Satisfied With Savings and
Services, but Retail Pharmacies Have Concerns (GAO/HEHS-97-47, Feb. 
21, 1997). 


   MEDICAL SYSTEM SIZE, STRUCTURE,
   AND MISSION CONSIDERATIONS
------------------------------------------------------------ Letter :6

As we testified in February 1997, the military health system's
current size and structure relative to its primary wartime mission
are now being evaluated.  Further downsizing and restructuring of the
system in line with reduced wartime requirements are being predicted. 
It is important to factor the potential for such changes into the
choices DOD makes about providing care for its aging population
through major new benefit programs.  Before deciding on proposals
that either retain care for older beneficiaries in military
facilities or provide for them entirely through civilian sources, the
training needs of DOD physicians may have to be evaluated.  Upholding
the "medical readiness" tenet that military medical facilities have a
mix of patients of all ages to keep physicians prepared for wartime
may be difficult if more care for older beneficiaries is provided
through civilian sources.  Moreover, it is important to consider the
broad issue of whether the physician mix of the military medical
system is adequately equipped or trained for geriatric care, and
whether it should be realigned to be so in light of its primary
wartime mission. 


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

Over the last decade, DOD health care system changes have included
the introduction of managed care programs that altered access-to-care
priorities, numerous facility closures, and significant downsizing of
military medical staff.  Older retirees, who cannot participate in
TRICARE Prime, have grown concerned about their current, and even
more so, their future ability to access space-available care in
military facilities.  The proposals made thus far to improve older
retirees' health benefits and access to DOD-sponsored health care to
varying degrees increase either the number of retirees receiving such
care or the amount of care that many now receive.  The proposals'
anticipated costs would vary markedly, from the Medicare subvention
option, which is designed to be budget neutral, to the relatively
moderately priced mail-order pharmacy option, to the high-price-tag
options of using Medigap, CHAMPUS, or FEHBP as Medicare supplements. 
Each of the options would have differing effects on the military
health system.  All would introduce the need for such structural
changes as new enrollment and reimbursement mechanisms, and some
raise questions about the "military readiness" consequences of caring
for all older retirees outside military facilities.  Furthermore, the
Medicare subvention option has generated concern about the system's
ability to provide comprehensive geriatric care at its facilities. 
Given these considerations and the likelihood that the military
medical system will undergo further downsizing, the mail-order
pharmacy option appears comparatively attractive for the near term. 
The lack of a prescription benefit under Medicare is a major void in
older retirees' coverage that could be filled at a comparatively
modest cost and without major system change. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, DOD generally agreed with
our representation of the issues.  It did, however, have several
concerns.  First, DOD suggested that our mail-order pharmacy cost
estimate be updated and provided us with more current prescription
expenditure and usage data for the current base closure area program. 
As appropriate, we used these more recent data to recalculate our
estimate. 

Relatedly, DOD stated that our apparent assumption that catchment
area retirees now have 100 percent of their prescription drug needs
met by military facilities was incorrect.  Also, DOD questioned the
feasibility--from an operational and customer service standpoint--of
offering the mail-order program only to retirees living outside
catchment areas and thus denying it to those within such areas.  We
were asked to evaluate the pharmacy option only as it pertained to
retirees outside catchment areas and not to all retirees regardless
of their proximity to military facilities.  In doing so, our
evaluation did not assume that those within catchment areas now have
all of their prescription drug needs met, nor did it assume that
those who would receive the mail-order pharmacy benefit would have
100 percent of their prescription drug needs met.  We do believe,
however, that such a program would help fill a major Medicare
coverage gap for those most needing such coverage.  We are currently
planning a review of all of DOD's pharmacy operations that will
include such issues as current benefit uniformity.  Regarding the
operational difficulties of establishing geographic eligibility for
the mail-order program, we note that the existing base closure area
program defines eligibility primarily by service area.  Thus, we
believe any such eligibility-related difficulties could be overcome
for a limited expansion of this program to beneficiaries outside
catchment areas. 

DOD also commented that our report failed to mention that, under the
Medicare subvention proposal, DOD's ultimate goal would be to offer
enrollment in TRICARE Prime to Medicare-eligible beneficiaries
wherever TRICARE Prime was offered.  We agree, and have amended the
text accordingly.  DOD went on to say that such an expansion could be
made by using the TRICARE contractors or existing Medicare HMOs. 
Regarding such an expansion, however, even if subvention was tested
at military facilities and proved cost neutral, it would remain to be
seen whether DOD could administer subvention using civilian providers
and achieve the same cost-neutral result--that is, provide services
costing less than or the same as services from other Medicare
providers.  We continue to question whether any government cost
advantage would result from DOD's making such arrangements with
civilian providers.  Further, extending subvention this way could
involve a rather complex financing arrangement whereby HCFA might
provide payments to DOD for its use in paying civilian contractors or
HMOs.  These organizations might, in turn, reimburse DOD for any care
DOD provided in its own facilities.  And each year, DOD would attempt
to reconcile these funding transfers with HCFA to ensure
cost-neutrality.  Moreover, DOD's use of civilian providers for this
purpose could duplicate, and thus compete with, the existing Medicare
HMO program administered by HCFA. 

Finally, DOD stated that the option providing CHAMPUS as a Medicare
supplement might enable beneficiaries to obtain prescription drugs
with a lower copayment than the standard CHAMPUS copayment of 25
percent--the percentage we used to estimate costs--from retail
pharmacies and mail-order programs operating under TRICARE.  DOD said
that, if beneficiaries were able to take advantage of these programs,
their costs would be lower, but the cost to DOD would increase. 
While we agree that beneficiaries might avail themselves of TRICARE
pharmacy programs under this option, we disagree that DOD's costs
would necessarily increase.  TRICARE programs are aimed at reducing
DOD and beneficiary costs through negotiated discounts such that
providing prescription benefits through these programs might not be
more costly than under standard CHAMPUS.  For these reasons, and
because DOD does not have data available on how many prescriptions
retirees would obtain at various copayment amounts or what DOD's cost
would be, we continue to believe that using the standard CHAMPUS
copayment is a reasonable approach to estimating this option. 

DOD also made several technical comments, which we incorporated as
appropriate.  DOD's comments in their entirety are included as
appendix III. 


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

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

Please contact me on (202) 512-7111 or Dan Brier, Assistant Director,
on (202) 512-6803 if you or your staff have any questions concerning
this report.  Other contributors to this report include Catherine
O'Hara, Evaluator-in-Charge; Timothy Carr; Sandra Davis; James
Espinoza; Elsie Picyk; Mary Reich; Dayna Shah; and Nancy Toolan. 

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


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

In conducting our review, we examined, where available, the
legislative history of each proposal under consideration.  We
interviewed Department of Defense (DOD) headquarters officials,
military medical facility managers, and health care providers
nationwide to gain perspective on the effects of system changes on
retirees and to obtain cost data relevant to the different proposals. 
We analyzed DOD population and health care use data for the period
between 1994 and 2004 and the results of the 1994-95 Health Care
Survey of DOD Beneficiaries to obtain demographic characteristics and
information about sources of care and insurance coverage relating to
eligible retiree populations.  We did not verify DOD's data for
accuracy or consistency. 

We also interviewed Department of Veterans Affairs officials
regarding the Department's pharmacy program, and reviewed DOD
contractor reports and studies of the military health system and
interviewed their authors.  These contractors included the Rand
Corporation, the Institute for Defense Analyses, the Logistics
Management Institute, and the Center for Naval Analysis.  We also
interviewed representatives of military retiree associations and
advocacy groups to obtain their perceptions of problems
Medicare-eligible retirees face and solutions to improve their health
care benefits.  In addition, we interviewed Health Care Financing
Administration (HCFA) officials and reviewed agreements between HCFA
and DOD regarding the Medicare subvention proposal.  We also
interviewed Congressional Budget Office (CBO) officials about CBO's
efforts to estimate the budgetary effects of Medicare subvention and
Office of Personnel Management (OPM) officials about the cost and
structural implications of the Federal Employees Health Benefits Plan
(FEHBP) option.  In addition, we reviewed our reports on the military
health care system and those of DOD, the Congressional Research
Service (CRS), and CBO.  We conducted our work from June 1996 through
May 1997 in accordance with generally accepted government auditing
standards. 


      METHODOLOGY FOR ESTIMATING
      COSTS OF PROPOSALS
------------------------------------------------------- Appendix I:0.1

The information and assumptions we used to estimate the cost of the
various options were derived from studies and evaluations conducted
by DOD, CBO, CRS, and private consultants as well as from DOD data
systems.  We made certain general assumptions, in addition to
assumptions that are specific to the analysis of each of the options. 
First, we assumed that these options would be implemented in an
environment in which very little or no space-available medical care
could be provided to older retirees in military medical facilities,
because virtually all available care would be devoted to TRICARE
Prime enrollees.  Thus, the cost of each option was evaluated
relative to a baseline scenario in which older retirees relied almost
exclusively on civilian Medicare-funded care. 

Also, we recognized that, to the extent that each of these options
would lower beneficiaries' cost of health care, beneficiaries could
use more health care, a phenomenon known as induced demand.  However,
we did not incorporate induced demand effects in our estimates
because we lacked specific data on the behavior of DOD's
Medicare-eligible population, its total health care use, and its
current insurance coverage and cost.  Further, we recognized that a
change in the benefit options offered to older retirees might result
in an increased use of Medicare-funded health care services by
beneficiaries who previously were reliant on DOD for care.  However,
because of the lack of appropriate data, we have not estimated the
potential increases in costs to the Medicare program.  Neither did we
assess the impact that these proposed changes might have on the
future solvency of the Medicare Hospital Insurance trust fund. 

Finally, we did not attempt to produce an estimate of the cost of
implementing a Medicare subvention program because we determined that
sufficient data are not available on certain crucial variables (for
example, the cost of treating older retirees inside DOD facilities). 
Further, a substantial portion of the effect of implementing a
subvention option would consist of the effect on the Medicare
Hospital Insurance trust fund.  But uncertainties related to DOD's
ability to reliably set its level-of-effort baseline and price out
its per-enrollee care, as well as other problems discussed in this
text, seriously limit the reliability of estimates of subvention's
potential effects on the Medicare Hospital Insurance trust fund. 


      ESTIMATING THE POPULATION
------------------------------------------------------- Appendix I:0.2

To determine the population eligible for each option, we used DOD's
Resource Analysis and Planning System, Version 10.0.1 (Feb.  1997). 
We limited the population for each proposal to the 1,196,346
Medicare-eligible retirees, their dependents, and survivors (referred
to hereafter as "retirees") living in the continental United States. 
We excluded those living overseas (about 12,000) because their health
care options differ significantly from those of retirees in the
United States.  For example, Medicare is not available overseas, and
few military facilities are available. 


      COST FOR DOD TO PAY THE
      MEDICARE PART B PREMIUM AND
      PURCHASE MEDIGAP POLICIES
      FOR OLDER RETIREES
------------------------------------------------------- Appendix I:0.3

Medigap policies are offered by private insurers under 10 standard
plans, referred to as plans A through J, which provide progressively
greater coverage at increasingly higher premiums.  Only plans H, I,
and J offer coverage for outpatient prescription drugs.  We assumed
that DOD would purchase the lowest cost plan providing prescription
coverage:  plan H.  For our estimate, we used the 1996 average annual
premium of $1,307 for plan H policies offered by Blue Cross/Blue
Shield and Prudential.  We obtained this figure from the Families USA
Foundation, a national nonprofit consumer health care organization. 

Further, to purchase a Medigap policy, beneficiaries are required to
enroll in Medicare part B.  The 1997 annual premium for Medicare part
B is $525.60.  We assumed that DOD would offer this benefit to the
entire population of Medicare-eligible retirees.  Although many
retirees already have both Medicare part B and Medigap coverage,
because DOD would pay the premiums for both the Medigap policy and
the Medicare part B premium, unlike most employers, we assumed that
all 1,196,346 beneficiaries would participate.\22


--------------------
\22 Because some retirees would not have previously elected Medicare
part B coverage, they would face penalties for late enrollment.  If
DOD paid the cost of these penalties, there would be an additional
cost in the initial years of the program. 


         MEDICARE PART B AND
         MEDIGAP PLAN H COST
         ESTIMATE CALCULATION
----------------------------------------------------- Appendix I:0.3.1

$525.60 (annual Medicare part B premium) x 1,196,346
(Medicare-eligible beneficiaries) = $628,799,458. 

$1,307 (average annual Medigap plan H premium) x 1,196,346
(Medicare-eligible beneficiaries) = $1,563,624,222. 

$628,799,458 (for Medicare part B) + $1,563,624,222 (for Medigap plan
H) = $2,192,423,680 (total estimated cost). 


      COST FOR CHAMPUS AS A
      MEDICARE SUPPLEMENT
------------------------------------------------------- Appendix I:0.4

Under the proposal that would make the Civilian Health and Medical
Program of the Uniformed Services (CHAMPUS) a Medicare supplement,
DOD would pay beneficiaries' out-of-pocket costs for copayments and
deductibles for services covered by Medicare parts A and B and a
portion of the cost of outpatient prescription drugs, which are not
covered by Medicare.  HCFA estimates that aged Medicare-eligible
beneficiaries' out-of-pocket costs for Medicare-covered services will
be $877.44 in 1997.  Annual prescription costs for Medicare-eligible
beneficiaries in 1997 are estimated to be $819, according to HCFA. 
Under this proposal, beneficiaries would pay the standard CHAMPUS
copayment of 25 percent for prescription drugs, with DOD paying the
remaining 75 percent, or $614.25.  Finally, because physicians can
charge more than the maximum amount Medicare allows--up to 115
percent--CHAMPUS, as supplementary coverage to Medicare, would pay
these additional costs up to its allowed amount.  DOD estimates that
these additional physician charges would amount to about $34 million. 

We assumed DOD would offer this benefit to the entire population of
Medicare-eligible retirees.  Because there are no premiums for
CHAMPUS coverage and DOD would pay most of the out-of-pocket costs
for retirees, we assumed that all 1,196,346 Medicare-eligible
beneficiaries would participate. 


         CHAMPUS AS A MEDICARE
         SUPPLEMENT COST ESTIMATE
         CALCULATION
----------------------------------------------------- Appendix I:0.4.1

$877.44 (average Medicare beneficiary out-of-pocket cost per year) x
1,196,346 (Medicare-eligible beneficiaries) = $1,049,721,834 (for
medical costs). 

$819.00 (annual retail prescription cost for each Medicare-eligible
beneficiary) - 25 percent (beneficiary copayment) = $614.25 (DOD
annual prescription cost for each Medicare-eligible beneficiary). 

$614.25 (DOD annual prescription cost for each Medicare-eligible
beneficiary) x 1,196,346 (Medicare-eligible beneficiaries) =
$734,855,531 (total annual cost of prescription coverage). 

$1,049,721,834 (medical costs) + $734,855,531 (prescription coverage)
+ $34,000,000 (additional physician charges) = $1,818,577,365 (total
estimated cost). 


      COST TO ENROLL OLDER
      RETIREES IN FEHBP
------------------------------------------------------- Appendix I:0.5

For our estimate, we assumed DOD would pay an annual premium of
$1,571 per person.  This represents the government's portion of the
fiscal year 1996 self-only premium for federal government retirees
enrolled in FEHBP, of whom about 75 percent are aged 65 or older.  We
obtained this figure from OPM.  This premium cost could be higher or
lower for DOD, depending upon demographic and medical use
characteristics as well as beneficiary plan choices.  In the absence
of a specific plan and beneficiary data, OPM could not provide us
with an estimate of the actual premiums, so we assumed that the costs
would be the same as for the federal retiree population. 

We assumed that DOD would offer this benefit to the entire population
of Medicare-eligible retirees.  According to a DOD survey, 17 percent
of Medicare-eligible retirees have insurance coverage fully or
partially paid by their post-military employers.  Because FEHBP
requires beneficiaries to pay a higher portion of the premium than
most private employers do, it is likely that the 17 percent would not
enroll in FEHBP.  Therefore, we assumed that 992,967, or 83 percent
of the 1,196,346 Medicare-eligible retirees, would participate. 


         FEHBP COST ESTIMATE
         CALCULATION
----------------------------------------------------- Appendix I:0.5.1

$1,571 (average annual premium cost to DOD) x 992,967 (83 percent of
Medicare-eligible beneficiaries) = $1,559,951,157. 


      COST FOR THE MAIL-ORDER
      PHARMACY BENEFIT
------------------------------------------------------- Appendix I:0.6

For our estimate, we used DOD's cost per prescription, dispensing
fee, copayment, and prescription usage rates under the current base
closure mail-order pharmacy benefit program.  We assumed that the
benefit would be provided to all Medicare-eligible beneficiaries aged
65 and older who live outside a DOD military treatment facility
catchment area (568,885 of the total 1,196,346).  But, 160,531 of
these are already eligible for the benefit under the current base
closure mail-order program.  Therefore, we assumed that a maximum of
408,354 older retirees would participate in the program. 


         MAIL-ORDER PHARMACY
         BENEFIT COST ESTIMATE
         CALCULATION
----------------------------------------------------- Appendix I:0.6.1

$35.00 (average cost per 90-day supply prescription) + $7.00
(dispensing fee) - $8.00 (copayment) = $34 (average cost per 90-day
supply prescription). 

$34.00 (average cost per 90-day supply prescription) x 16.5 (average
number of 90-day supply prescriptions per person annually) = $561.00
(average annual prescription cost for each Medicare-eligible
beneficiary). 

$561.00 (average annual prescription cost for each Medicare-eligible
beneficiary) x 408,354 (Medicare-eligible beneficiaries) =
$229,086,594 (total estimated cost). 


PROFILE OF THE MILITARY RETIREE
POPULATION
========================================================== Appendix II


   RETIREE POPULATION, MORE THAN
   HALF OF DOD BENEFICIARIES, IS
   EXPECTED TO GROW
-------------------------------------------------------- Appendix II:1

In 1996, military retirees\23 made up over 50 percent of the
population eligible for DOD health care (see fig.  II.1).  Since
1994, the number of retirees and their families has increased 5
percent, and the number of active duty members and their families has
decreased about 12 percent; this trend is projected to continue (see
fig.  II.2).  Most of the 1996 retiree population was younger than
age 65 (see fig.  II.3).  However, the number of retirees aged 65 and
older is expected to increase dramatically, while the number of those
under age 65 remains essentially the same (see fig.  II.4). 

   Figure II.1:  Population
   Eligible for Military Health
   Care by Beneficiary Category,
   1996

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Resource Analysis and Planning System
data. 

   Figure II.2:  Active Duty and
   Retiree Population Trends,
   1994-2004

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Resource Analysis and Planning System
data. 

   Figure II.3:  Age Distribution
   of Retiree Population, 1996

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Defense Medical Information System
data. 

   Figure II.4:  Projected Change
   in Retiree Population Through
   2004

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Resource Analysis and Planning System
data. 


--------------------
\23 We continue to use the term "retirees" to refer to retirees and
their dependents and survivors. 


   MOST OLDER RETIREES DO NOT LIVE
   NEAR LARGE MILITARY MEDICAL
   FACILITIES
-------------------------------------------------------- Appendix II:2

In 1996, about 60 percent of retirees under age 65 lived within the
40-mile catchment area\24 of a military medical facility, as compared
with slightly more than half (52 percent) of the retirees aged 65 and
older (see fig.  II.5).  Of the older retirees, about 14 percent
lived near a large facility (200 beds or more) that offered a wide
variety of specialty care services.  About 10 percent lived near
facilities with 100 to 199 beds, about 8 percent lived near
facilities with 50 to 99 beds, and about 21 percent lived near small
medical facilities of less than 50 beds that had little inpatient
capacity.  (See fig.  II.6.)

   Figure II.5:  Proximity of
   Retirees to Military Medical
   Facilities by Retirees' Age,
   1996

   (See figure in printed
   edition.)

Note:  Retirees living outside the continental United States are not
included. 

Source:  Our analysis of DOD's Resource Analysis and Planning System
data. 

   Figure II.6:  Percentage of
   Older Retirees Living Near a
   Military Medical Facility, by
   Facility Size, 1996

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Resource Analysis and Planning System
and the Joint Cross Service Working Group on Military Medical
Facilities of the Base Realignment and Closure Commission data. 


--------------------
\24 A catchment area is defined as the area within a 40-mile radius
surrounding a military medical facility. 


   FEW OLDER RETIREES USE THE
   MILITARY MEDICAL SYSTEM; MANY
   USE ONLY PHARMACY SERVICES
-------------------------------------------------------- Appendix II:3

In 1996, about two thirds of retirees under age 65 used the military
health system, including military medical facilities and the CHAMPUS
program.  In comparison, only about a quarter of the retirees aged 65
and older used military medical facilities for their care (CHAMPUS
eligibility ends at age 65).  (See fig.  II.7.) For retirees aged 65
and older who did use the military medical system, a significant
percentage used pharmacy services only, regardless of their proximity
to a military medical facility (see fig.  II.8). 

   Figure II.7:  Retirees' Use of
   Military Health System by
   Retiree Age, 1996

   (See figure in printed
   edition.)

Source:  DOD's Resource Analysis and Planning System data. 

   Figure II.8:  Type of Service
   Older Retirees Received at
   Military Medical Facilities by
   Retirees' Proximity to
   Facility, 1996

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's Semi-Annual User Survey data. 


   ALMOST HALF OF MILITARY
   RETIREES HAVE PRIVATE HEALTH
   INSURANCE
-------------------------------------------------------- Appendix II:4

According to a 1994-95 survey of DOD beneficiaries, over 40 percent
of military retirees, regardless of age, had private health insurance
coverage.  About a third of retirees aged 65 and older also reported
having additional insurance coverage to supplement their Medicare
benefits.  A smaller proportion of retirees under age 65, about 14
percent, also had insurance to supplement their CHAMPUS coverage. 
(See fig.  II.9.) For those retirees who had private health
insurance, many had part or all of that coverage paid for by their
current or former employer; however, many more older retirees paid
the entire cost of that coverage themselves (see fig.  II.10). 

   Figure II.9:  Retiree Private
   and Supplemental Insurance
   Coverage by Age, 1994-95

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's 1994-95 Survey of DOD Beneficiaries
data. 

   Figure II.10:  Retirees With
   Private Insurance by Age and by
   Who Paid the Premium, 1994-95

   (See figure in printed
   edition.)

Source:  Our analysis of DOD's 1994-95 Survey of DOD Beneficiaries
data. 




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



(See figure in printed edition.)


*** End of document. ***