Defense Health Care: Actions Under Way to Address Many TRICARE Contract
Change Order Problems (Letter Report, 07/14/97, GAO/HEHS-97-141).
Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) process for managing TRICARE contract change orders to
determine: (1) the number of, nature of, and reasons for the orders; (2)
whether DOD is adequately managing the change order process; and (3) if
appropriate, how DOD can improve the process.
GAO noted that: (1) since the 1994 award of the first TRICARE contract,
357 change orders, which cumulatively have increased tasks and overall
costs, have been made to the five TRICARE contracts now in place; (2)
DOD has settled 134 of the orders at a cost of about $336,000; (3) DOD
estimated costs for the 223 orders that are yet to be settled at $38
million, but DOD's initial cost estimates differ markedly from the
contractors' estimates; (4) the change orders, which averaged 43 per
contract in 1996, have entailed policy, automated data processing, and
operational changes to the contracts; (5) about one-third of the change
orders have resulted from legislative or regulatory requirements and the
remainder were DOD-initiated changes; (6) rather than separately
budgeting for the costs of individual change orders, DOD has used funds
budgeted for other Defense Health Program activities to pay for them--an
approach that could potentially create a need for supplemental funding;
(7) in addition, DOD's initial cost estimates for new orders, the basis
for obligating funds for the orders, have not been sound, and as a
result, DOD has not developed a reliable estimate of the total federal
liability for the contract changes; (8) DOD has neither systematically
reviewed the need for each order nor considered the likely costs and
other effects; (9) DOD has not evaluated alternatives to amending the
contracts that could achieve the same end, thus DOD has no assurance
that only needed orders are issued and that their costs are minimized;
(10) although DOD's goal is to settle orders within 180 days of
issuance, the average TRICARE order settlement time has been 340 days;
(11) as of May 1, 1997, the average age of the 223 orders yet to be
settled is 273 days; (12) failure to settle orders on time can reduce
the contractor's cost control incentives and limit DOD's ability to
negotiate prices after the contractor has incurred actual costs; (13) to
prepare new order cost estimates, DOD has engaged a consultant to
independently estimate the cost of implementing each order before its
issuance; (14) DOD now requires that once, a potential order's cost has
been estimated, the Deputy Assistant Secretary of Defense for Health
Services Financing review its appropriateness before approval; (15) DOD
has formed a task force and engaged an outside contractor to streamline
the overall change order process; and (16) in view of the leadership ch*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-97-141
TITLE: Defense Health Care: Actions Under Way to Address Many
TRICARE Contract Change Order Problems
DATE: 07/14/97
SUBJECT: Health care cost control
Cost effectiveness analysis
Defense budgets
Defense cost control
Health care programs
Managed health care
Health maintenance organizations
Contract modifications
Contract costs
IDENTIFIER: DOD TRICARE Program
DOD Enrollment Eligibility Reporting System
CHAMPUS
Civilian Health and Medical Program of the Uniformed
Services
Defense Health Program
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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
July 1997
DEFENSE HEALTH CARE - ACTIONS
UNDER WAY TO ADDRESS MANY TRICARE
CONTRACT CHANGE ORDER PROBLEMS
GAO/HEHS-97-141
TRICARE Contract Change Orders
(101498)
Abbreviations
=============================================================== ABBREV
ADP - automated data processing
CHAMPUS - Civilian Health and Medical Program of the Uniformed
Services
DFAR - Defense Federal Acquisiton Regulation Supplement
DHP - Defense Health Program
DOD - Department of Defense
FAR - Federal Acquisition Regulation
HMO - health maintenance organization
TSO - TRICARE Support Office
Letter
=============================================================== LETTER
B-276226
July 14, 1997
The Honorable Steve Buyer
Chairman
The Honorable Gene Taylor
Ranking Minority Member
Subcommittee on Military Personnel
Committee on National Security
House of Representatives
To help contain health care costs, in late 1993 the Department of
Defense (DOD) initiated TRICARE, its nationwide managed health care
program for military beneficiaries. Under TRICARE, health care for
about 8 million eligible beneficiaries is coordinated and managed on
a regional basis using all available military hospitals and clinics,
supplemented by contracted civilian services. By mid-1998, DOD
expects to have implemented seven TRICARE managed care support
contracts at an estimated total cost of $17 billion. The dynamic
nature of health care, the fact that contracts are awarded for 5-year
periods, the uniqueness of the contracts, and other factors have
resulted in the contracts' being continually modified. Change orders
are a mechanism used by DOD to require its contractors to accept a
DOD modification of the original contract.
Because of the large volume of change orders and their potential
costs, you requested that we review DOD's process for managing change
orders to determine (1) the number of, nature of, and reasons for the
orders; (2) whether DOD is adequately managing the change order
process; and (3) if appropriate, how DOD can improve the process.
To do this work, we interviewed DOD Health Affairs and TRICARE
Support Office (TSO) officials as well as TRICARE contractors. We
reviewed individual change orders and related DOD policies and
regulations that apply to the orders and examined pertinent contract
files for the five DOD TRICARE contracts that have been awarded. We
also obtained and analyzed statistical data from DOD monthly change
order status reports and discussed with officials the number of
change orders, how long DOD has taken to settle--or complete
negotiations with the contractors on--the orders, and reasons for the
changes.
During our review, DOD instituted many actions to address problems we
identified with the change order process. We discussed these efforts
with DOD officials. Accordingly, to prepare a more timely report on
the issues being addressed, we reduced the scope of our work,
including our review of the appropriateness of individual orders.
Also, as agreed with your office, we did not attempt to independently
estimate the orders' costs or their possible effects on TRICARE's
need to be budget neutral.\1 We conducted our review between October
1996 and May 1997 in accordance with generally accepted government
auditing standards.
--------------------
\1 In referring to the TRICARE program and its health maintenance
organization (HMO) type option, sec. 731 of the National Defense
Authorization Act for FY 1994 (as amended) states that the HMO option
must be administered so that the costs incurred under TRICARE are no
greater than the costs that would otherwise have been incurred to
provide health care to covered beneficiaries.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Since the 1994 award of the first TRICARE contract, 357 change
orders, which cumulatively have increased tasks and overall costs,
have been made to the five TRICARE contracts now in place.\2 DOD has
settled 134 of the orders at a cost of about $336,000. DOD estimated
costs for the 223 orders that are yet to be settled at $38 million.
But DOD's initial cost estimates differ markedly from contractors'
estimates. For example, contractor-submitted cost proposals for 85
of the 223 orders amounted to $423 million.
The change orders, which averaged 43 per contract in 1996, have
entailed policy, automated data processing (ADP), and operational
changes to the contracts. About one-third have resulted from
legislative or regulatory requirements; for example, legislation
establishing a hospice benefit.\3 The remainder were DOD-initiated
changes, such as changing contractor reporting requirements.
Although there have been numerous change orders, DOD has not
adequately managed the process. For example, rather than separately
budgeting for the costs of individual change orders, DOD has used
funds budgeted for other Defense Health Program (DHP) activities to
pay for them--an approach that could potentially create a need for
supplemental funding. In addition, DOD's initial cost estimates for
new orders, the basis for obligating funds for the orders, have not
been sound. As a result, DOD has not developed a reliable estimate
of the total federal liability for the contract changes.
Also, DOD has neither systematically reviewed the need for each order
nor considered its likely costs and other effects. Moreover, DOD has
not evaluated alternatives to amending the contracts that could
achieve the same end. Thus, DOD has no assurance that only needed
orders are issued and that their costs are minimized.
Finally, although DOD's goal is to settle orders within 180 days of
issuance,\4 the average TRICARE order settlement time has been 340
days. As of May 1, 1997, the average age of the 223 orders yet to be
settled was 273 days. Failure to settle orders on time can reduce
the contractors' cost control incentives and limit DOD's ability to
negotiate prices after the contractor has incurred actual costs.
During our review, DOD attempted to address the problems we were
identifying. For example, regarding budgeting for the orders, DOD is
now developing a method to estimate anticipated change order costs
for inclusion in future DOD budgets. To prepare new order cost
estimates, DOD has engaged a consultant to independently estimate the
cost of implementing each order before its issuance. Also, DOD now
requires that, once a potential order's cost has been estimated, the
Deputy Assistant Secretary of Defense for Health Services Financing
review its appropriateness before approval. Finally, DOD has formed
a task force and engaged an outside contractor to settle the orders
in a more timely way and suggest ways to streamline the overall
process.
We believe that DOD is taking needed steps to improve the change
order process, and we urge DOD's continued efforts to bring the
process under control. But the longer term efficacy of these efforts
remains to be seen. In view of the leadership changes under way in
DOD offices that manage the change order process, DOD's continued
high-level management attention to implementing needed process
improvements is essential.
--------------------
\2 In addition to the 357 change orders that require cost estimates
and negotiated prices, DOD has issued over 70 change orders that
typically involve minor changes related to administrative information
contained in the contractual documents and that do not materially
affect the requirements of the contracts or contract prices.
\3 The National Defense Authorization Act for fiscal years 1992 and
1993, P.L. 102-190, authorized a hospice benefit for beneficiaries.
\4 Sec. 43.204(b)(1) of the Federal Acquisition Regulation states
that "contracting officers shall negotiate equitable adjustments
resulting from change orders in the shortest practicable time."
BACKGROUND
------------------------------------------------------------ Letter :2
TRICARE is DOD's managed health care program operated in partnership
with civilian contractors. The goals of TRICARE are to ensure
high-quality, consistent health care benefits; preserve
beneficiaries' choice of health care providers; improve access to
care; and contain health care costs. Under TRICARE, seven managed
care support contracts covering DOD's 12 health care regions will
have been awarded to civilian contractors by mid-1998. Contracts are
awarded for 5 years (1 year plus 4 option years), and DOD estimates
that these contracts together will cost about $17 billion. TSO,
within DOD's Office of the Assistant Secretary of Defense (Health
Affairs), has the responsibility for administering the TRICARE
contracts. Each contract is administered by a contracting officer.
An administrative organization, called a lead agent, is designated
for each of the 12 regions to coordinate the health care provided by
all military treatment facilities in the region.
Since September 1994, DOD has awarded five TRICARE contracts totaling
over $11 billion: three contracts were awarded to Foundation Health
Federal Services, one contract was awarded to Humana Military
Healthcare Services, and one contract was awarded to TriWest
Healthcare Alliance (see table 1).
Table 1
TRICARE Contracts, 1997
(Dollars in Billions)
Date of
Region/area of contract Amount of
coverage award Contractor award
---------------- ------------ ------------ ------------
11/Northwest September Foundation $0.66
1994 Health
Federal
Services
6/Southwest April 1995 Foundation 1.81
Health
Federal
Services
9, 10, and 12/ August 1995 Foundation 2.59
California and Health
Hawaii Federal
Services
3 and 4/ November Humana 3.65
Southeast and 1995 Military
Gulf South Healthcare
Services
7 and 8/Desert June 1996 TriWest 2.32
States and North Healthcare
Central Alliance
==========================================================
Total $11.03
----------------------------------------------------------
Two additional TRICARE contracts are scheduled for implementation by
mid-1998.
Because the nature of health care is dynamic, the contracts are
awarded for 5-year periods, and the contracts are unique, contracts
are continually being modified. Change orders, which are issued by
contracting officers at TSO,\5 are a mechanism DOD uses to require
its contractors to accept a DOD modification of the original
contract. Typically, change orders are the result of policy, ADP,
operations, and other changes to the TRICARE program. Some orders
occur because of new laws or regulations. Most change orders affect
all of the TRICARE contracts.
The Federal Acquisition Regulation (FAR), the Defense Federal
Acquisition Regulation Supplement (DFAR), and other internal DOD
guidance set forth the requirements governing the administration of
change orders. The requirements include time frames within which
government cost estimates must be obtained, orders must be settled,
and interim payments to contractors must be made.
The change order process involves many steps. First, DOD Health
Affairs directs TSO to initiate an order, which involves drafting
language; obtaining comments from contractors; and, when costs are
involved, developing the government cost estimate. On the basis of
this estimate, funds are obligated. At this point, the TSO
contracting officers provide the change order to their contractors.
The contractors must respond with a cost proposal within 60 days.
After receiving the contractors' cost proposal, DOD conducts a
technical review and cost analysis and then negotiates with the
contractors to determine the final price of the order.
In many cases, Health Affairs directs TSO to implement a single
change to the TRICARE program but that change necessitates a separate
change order for each contract. When this occurs, each of the orders
has to be negotiated separately because the change's costs can vary
by contract.
In October 1996, at the start of our review, TSO had 722 change
orders that needed to be negotiated with contractors. Of these, 226
were for TRICARE contracts, and 496 were for other contracts that TSO
administers, such as fiscal intermediary and dental contracts.
Changes in the leadership of DHP are now under way. The Assistant
Secretary of Defense (Health Affairs) retired in March 1997, and, as
of June 1, 1997, a permanent replacement had not been nominated. In
January 1997, a new director reported to TSO and was charged with,
among other matters, streamlining the change order process.
--------------------
\5 Lead agents can issue change orders that are small in scope and
pertain to lead agent requirements in the contracts. However, we
included in our review only those change orders issued by TSO.
HUNDREDS OF CHANGE ORDERS
ISSUED TO MODIFY TRICARE
CONTRACTS
------------------------------------------------------------ Letter :3
As of October 1996, a total of 248 change orders that could affect
the cost of the TRICARE contracts had been issued. By May 1997, this
number had increased to 357. Table 2 shows the number of orders
issued for each TRICARE contract and region.
Table 2
TRICARE Change Orders by Contractor,
Region, and Status, May 1, 1997
Contractor/ To be
region settled Settled Total
---------------- ------------ ------------ ============
Foundation/11 56 56 112
Foundation/6 46 30 76
Foundation/9, 47 29 76
10, and 12
Humana/3 and 4 52 19 71
TriWest/7 and 8 22 0 22
==========================================================
Total 223 134 357
----------------------------------------------------------
For the 134 settled orders, most of which cost DOD little or nothing,
the total negotiated price was about $336,000. DOD's estimated costs
for the 223 to-be-settled orders is $38 million. But this estimate
differs markedly from the contractors' estimates. At the time of our
review, contractors had submitted cost proposals for only 85 of the
223 open orders, and their estimates amounted to $423 million.
TRICARE contract change orders averaged 43 per contract in 1996.
Figure 1 shows the variety of kinds of change orders for TRICARE
contracts.
Figure 1: Types of TRICARE
Change Orders, May 1997
(See figure in printed
edition.)
Source: GAO analysis of data provided by TSO.
Policy changes include the authorization of new benefits or changes
in the administration or payment of current benefits. Examples of
such orders include revising the definition of medically necessary
ambulance services and issuing new guidance on heart and lung
transplants.
ADP orders involve creating, maintaining, or reporting data and
changes to systems requirements. Such orders have included changes
to the Defense Enrollment Eligibility Reporting System and changes to
implement the Health Care Service Records.
Change orders classified by TSO as operational in nature include
changes to the administration of the TRICARE program. Such orders
have included changes to regional participation in clinical trials
for a cancer demonstration project and revisions to home health care
billing procedures.
Some orders incorporate policy and ADP changes, for example, or ADP
and operational changes. An example is an order expanding the
definition of foreign medical claims to include claims for services
provided on a ship outside U.S. territorial waters.
In addition to these types of orders, DOD has issued others
applicable to one or more contracts. Examples include authorizing
travel costs incurred by contractors for government training and
orders directing contractors to report information about ongoing
provider fraud investigations. Table 3 shows the number of each type
of change order that has not yet been settled.
Table 3
Types of Change Orders Not Yet Settled,
May 1, 1997
Type Number
-------------------------------------------------------------- ------
Policy 31
ADP 14
Operations 22
Multiple 77
Other 79
======================================================================
Total 223
----------------------------------------------------------------------
TSO data indicate that about one-third of all TRICARE change orders
were required by law or regulation. Examples are implementation of a
hospice benefit and revision of the active duty dependent inpatient
cost-sharing provisions for mental health services. Two-thirds were
DOD-initiated change orders, such as changing contractor reporting
requirements, establishing a new TRICARE logo, and requiring
contractors to distribute dental program brochures.
DOD NOT MANAGING PROCESS
EFFECTIVELY
------------------------------------------------------------ Letter :4
DOD has not managed change orders in an effective manner. Among the
problems are, first, that DOD has not separately budgeted for the
estimated costs of orders, so its budget does not reflect TRICARE's
total cost. Second, DOD has not methodically estimated costs of new
orders; therefore, its estimates have not reliably reflected the
actual federal liability for the orders. Also, DOD has issued orders
without a formal review of their impact on TRICARE, their costs, and
the availability of funds. Consequently, DOD cannot be assured that
each change order is necessary, is issued at the most reasonable
cost, and can be funded. Finally, DOD has not settled orders within
its own time frame of 180 days. Of the 134 orders settled as of May
1, 1997, the average finalization time was 340 days. Such delays in
settling costs may reduce the contractor's incentive to control costs
and place DOD at a disadvantage when negotiating change orders
because contractors have already incurred actual costs.
DOD NOT BUDGETING FOR ORDERS
---------------------------------------------------------- Letter :4.1
DOD does not include in its budget the estimated costs for new change
orders or the out-year costs of settled orders. Only the award price
of TRICARE contracts is reflected in DOD's budget justification
documents. Thus, DHP's budget does not reflect the TRICARE program's
total cost. Although the 134 change orders settled so far have
increased TRICARE's price by about $336,000, the change orders still
outstanding are potentially far more costly: Contractors' estimates
for about 38 percent of the open orders amount to $423 million.
Since orders are not separately budgeted for, when new orders have
been obligated or settled, they have been funded from monies budgeted
for other DHP programs.\6 While significant funding problems have not
yet surfaced, the potential for them has increased considerably now
that DOD is actively seeking to reduce its order backlog and is
settling many more orders far sooner than it had been. And, a number
of costly orders simultaneously going to settlement could potentially
create the need for supplemental funding. Similarly, the failure to
reliably estimate the costs of new orders and adequately fund them
can delay their implementation and protract their settlement times.
According to a DOD official, change orders have not been budgeted for
because DOD has lacked a reliable basis for projecting the cost of
change orders. DOD has also lacked experience predicting the volume,
frequency, and types of changes that would be made to the TRICARE
contracts once under way.
--------------------
\6 Ninety-seven percent of the FY 1997 DHP appropriation of $10.2
billion is operations and maintenance funds. The TRICARE program,
including TRICARE contract change orders, is funded with operations
and maintenance monies.
NEW ORDER COST ESTIMATES
HAVE BEEN UNRELIABLE
---------------------------------------------------------- Letter :4.2
DOD has not had a reliable approach for estimating the costs of new
orders because, according to DOD officials, it has lacked the
in-house expertise. TSO personnel, who initiate the change order
paperwork and make the initial estimates, told us they were
unschooled in estimating such costs. They told us they often guessed
at what the government's costs might be or requested an informal
estimate from the contractor and used a variation of that figure for
their estimate. As a result, DOD has had little confidence in the
reliability of individual order estimates and less in the potential
aggregate government costs of unsettled orders. Thus, DOD has lacked
a sound estimate of the actual federal liability for the contract
changes it has made.
DOD requirements state that when each change order is initiated, a
government cost estimate should be prepared. This estimate becomes
the basis for obligating funds for the order. A poor estimate can
result in either underobligating funds for the order, resulting in
the need for more funds upon the order's settlement, or
overobligating funds, resulting in unnecessarily tying up funds
needed for another DHP program activity. These cost estimates also
provide the basis for contractors to receive provisional payments for
work completed before the order has been settled. Contractors may
receive from 50 to 75 percent of the government cost estimate upon
submission of valid invoices. Poor cost estimates result in
overpaying or underpaying contractors for work completed on the order
before it is settled, at which time an adjustment is made on the
basis of the final negotiated amount.
COST/BENEFIT ANALYSES NOT
PERFORMED
---------------------------------------------------------- Letter :4.3
DOD has modified TRICARE contracts without first reviewing the
potential effects on the program of each order, its cost, whether
less costly alternatives were available, or the availability of
funds. Thus, DOD has had no assurance that each change order is
needed, its costs have been minimized, potentially more
cost-effective alternatives to the order have been considered, or
funds are available. Under these conditions, Health Affairs has
initiated about two-thirds of the contract change orders. And, once
directed to go ahead with the order, TSO has then attempted to
estimate the order's costs, obligate funds, and instruct the
contractor to submit a cost proposal and proceed with the new work
tasks.
Knowing the likely costs and other information about the orders would
position Health Affairs to consider changing an order in some way to
lessen its prospective expense. In some cases, it would also allow
Health Affairs to wait until the region's contract was re-bid and
build the change into the new request for proposal, thus subjecting
the order to the competitive bid process. In other cases, Health
Affairs could simply not proceed with the order. Moreover, knowing
the funding availability for each new order would enable Health
Affairs to consider delaying, expediting, or otherwise timing change
order issuance to correspond with availability of funds. Finally,
more complete information would position DOD officials to weigh an
order's effects on the entire program.
ORDERS NOT SETTLED IN A
TIMELY WAY
---------------------------------------------------------- Letter :4.4
DOD's goal is to settle orders within 180 days after issuance. But
only 23 of the 134 orders settled as of May 1, 1997, have met this
timeframe. As a result, at our review's outset, DOD had a backlog of
over 226 TRICARE contract orders and 496 outstanding orders from
other contracts. Delaying the settlement of orders can reduce the
contractor's incentive to control costs and places the government at
a disadvantage when negotiating orders because the contractor has
performed the work at no risk and is paid for actual costs incurred.
DOD's average settlement time for the 134 settled orders was 340
days. Change orders were settled in as few as 17 or as many as 1,055
days. As of May 1, 1997, the average age of the 223 orders to be
settled was 273 days. Historically, TSO has not achieved its
settlement time goal either. We analyzed change orders to a Civilian
Health and Medical Program of the Uniformed Services (CHAMPUS) Reform
Initiative contract under which health care services were delivered
between August 1988 and January 1994.\7 We found that DOD's average
settlement time for 41 change orders was 1,504 days--over 4 years.
Failure to promptly settle orders is problematic for both DOD and the
contractors. First, DOD funds are tied up for long periods, since
final prices remain unknown until orders are settled. In addition,
contractors who submit initial cost proposals later have to update
their estimates to reflect actual costs incurred. This takes
contractor time and resources and can potentially increase DOD costs
because the contractors' cost control incentive has been reduced.
DOD officials told us that the order backlog was caused by staff
shortages and the generally ambitious schedule to award all the
TRICARE contracts before the end of fiscal year 1997. They said that
TSO staff, normally assigned to contract administration functions,
including change order management, were diverted by tasks associated
with awarding the new TRICARE contracts.
--------------------
\7 The CHAMPUS Reform Initiative contract was a forerunner of the
TRICARE contracts.
OTHER RELATED PROBLEMS
---------------------------------------------------------- Letter :4.5
Since many of the change orders must be implemented upon issuance,
contractors essentially have been funding the contract changes with
little or no DOD reimbursement until the orders are settled.
Contractors are entitled to receive provisional payments for actual
work completed before orders are settled. So far, only one
contractor has done so. However, it took DOD 8 months to pay four of
the invoices submitted by this contractor because the invoices were
not properly tracked by TSO. Finally, by delaying order settlement,
some smaller health care companies lacking the capital to fund orders
for such protracted periods may be discouraged from bidding on
TRICARE contracts.
Relatedly, DOD requires contractors to submit cost proposals within
60 days of an order's issuance, but DOD has not enforced this
requirement. Currently, contractor cost proposals have yet to be
submitted on 186 orders that are older than 60 days. Without such
proposals, settlement negotiations cannot begin. A representative of
one contractor told us it has not submitted cost proposals in a
timely way because (1) it has not received needed clarification from
DOD on the orders' specifics and (2) it did not anticipate the volume
of DOD orders and lacked the staff to cost out new contract changes.
DOD IS ACTING TO CORRECT
IDENTIFIED PROBLEMS
------------------------------------------------------------ Letter :5
During our review, DOD initiated a host of actions to address the
problems we identified in the change order process. Specifically,
Health Affairs is developing a methodology to estimate and budget for
the cost of new orders; has engaged a consulting firm to prepare
independent government cost estimates for new change orders; and has
implemented procedures to review and evaluate proposed orders before
going ahead with them. Also, a team of contract specialists was
formed at TSO to focus on and expedite the settlement of open orders,
and other efforts are under way to streamline the process.
FISCAL YEAR 1999 BUDGET TO
INCLUDE COST ESTIMATE FOR
ANTICIPATED ORDERS
---------------------------------------------------------- Letter :5.1
Health Affairs is now attempting to develop a methodology that will
enable it to budget for orders expected to be issued in future years.
DOD officials told us that its implementation goal is fall 1997.
Thus, DOD plans to include such order cost estimates in its fiscal
year 1999 budget. Also, DOD will include out-year costs for settled
orders beginning with its fiscal year 1999 budget.
DOD officials told us that budgeting for the change orders will
provide a more structured funding process. It will also facilitate
order issuance decisions with improved information on whether funds
are available to support the TRICARE contracts.
NEW ORDER COST ESTIMATES TO
BE IMPROVED
---------------------------------------------------------- Letter :5.2
Instead of continuing to make "guesstimates" or basing its cost
estimates for new orders on contractors' informal cost estimates, DOD
has acted to obtain independent government cost estimates for TRICARE
change orders. In November 1996, DOD engaged a consulting firm to
prepare cost impact statements for each order and to analyze contract
cost effects for use in developing independent government cost
estimates. This information should enable DOD to assess the costs
and technical effects of new changes, and it should be especially
useful in negotiating orders with the contractors. As of April 1997,
the consultant had been assigned to prepare 22 cost estimates on
proposed change orders.
HEALTH AFFAIRS TO REVIEW AND
APPROVE ORDERS BEFORE
ISSUANCE
---------------------------------------------------------- Letter :5.3
In March 1997, DOD established a new requirement that all proposed
orders be reviewed and approved by Health Affairs before issuance.
The review will evaluate each order's effects on the health care
system, its costs, and the availability of funds. In short, the
Deputy Assistant Secretary, Health Services Financing, will evaluate
the need for the order and decide whether to implement it.
Thus, program managers initiating orders are now required to provide
documentation (1) describing the proposed change in detail and
including draft contract modification language, (2) ensuring that an
independent government cost estimate has been performed, and (3)
earmarking funding sources to defray the order's estimated cost.
According to DOD, the new procedures are aimed at bringing discipline
to the process and ensuring that appropriate funding is available for
each TRICARE contract change.
TEAM FORMED TO EXPEDITE
ORDER SETTLEMENT
---------------------------------------------------------- Letter :5.4
A team of contract specialists has been assembled at TSO to expedite
the settlement of all open change orders. TSO officials told us that
the team is focused on reducing the order backlog to a manageable and
consistent level--the goal is 100 to 150 open orders--by 1999.
In August 1996, TSO formed a team to settle the mounting change order
backlog. In October 1996, the team had 7 members; by May 1997, it
had 10 members. The team consists of five specialists hired under
contract with TSO, three TSO employees, and two specialists
temporarily assigned from the Defense Contract Management Command.\8
A TSO official told us it plans to hire two additional team members
to help reduce the change order backlog. Before October 1996, only
22 TRICARE orders had been settled. As figure 2 shows, the team has
increased the number of TRICARE orders settled since that time and
has settled orders for other contracts administered by TSO as well.
Figure 2: Number of Change
Orders Settled, October
1996-April 1997
(See figure in printed
edition.)
Source: GAO Analysis of data provided by TSO.
Figure 3 shows the number of change orders that remained to be
settled, by month.
Figure 3: Number of Change
Orders That Remained to Be
Settled, October 1, 1996-May 1,
1997
(See figure in printed
edition.)
Source: GAO analysis of data provided by TSO.
--------------------
\8 Defense Contract Management Command is located within the Defense
Logistics Agency. Its mission is to provide contract administration
services in support of DOD and other designated federal
organizations. The Denver Defense Contract Management Command office
does price and cost analysis work for TSO.
OTHER CORRECTIVE ACTIONS
TAKEN
---------------------------------------------------------- Letter :5.5
In March 1997, DOD hired a management consulting firm to review and
recommend improvements to TSO's change order process. The firm's
study is to develop ways to help further reduce the current backlog
and prevent future backlogs.
TSO also notified contractors to begin submitting overdue (beyond the
60 day post-issuance requirement) cost proposals for low-cost or
no-cost change orders. Contractors were told that proposals not
received within 30 days could be unilaterally settled by DOD. A TSO
official told us most contractors have attempted to respond to this
effort to reduce the backlog.
Additionally, TSO is revising its provisional payment procedures so
that contractors can be paid more quickly for actual costs incurred.
Further, TSO is attempting to develop a standard format for
contractors' use when submitting cost proposals in order to expedite
TSO's evaluation of proposals and shorten order settlement times.
CONCLUSIONS
------------------------------------------------------------ Letter :6
The hundreds of change orders that have been made to the TRICARE
contracts are likely to have a significant effect on program costs
and operations. Yet DOD has not reliably estimated the costs of the
orders, separately budgeted for such costs, or systematically
reviewed the need for each order and whether more cost-effective
alternatives existed. Moreover, new TRICARE change orders and
previously existing orders have backlogged, and change order
settlement times have greatly exceeded requirements. The process, in
short, has been managed ineffectively.
DOD has now initiated actions to reduce the number of orders that
have not been settled and address the other problems we identified
with the change order process. When fully implemented, these actions
should bring needed discipline to the system: They should position
DOD to better ensure the need for, cost-effectiveness of, and timely
settlement of contract change orders. But the long-term efficacy of
these efforts remains to be seen.
RECOMMENDATION
------------------------------------------------------------ Letter :7
We recommend that the Secretary of Defense direct the Assistant
Secretary of Defense (Health Affairs) to continue providing the
high-level management attention that DOD has begun to focus on
implementing the needed change order process improvements.
AGENCY COMMENTS
------------------------------------------------------------ Letter :8
In commenting on a draft of this report, DOD officials concurred with
our recommendation that both the Acting and incoming Assistant
Secretary of Defense (Health Affairs) continue providing high-level
management attention to needed change order process improvements.
DOD officials also raised four points related to technical accuracy.
First, DOD officials took exception to our assertion that DOD's
corrective actions were initiated during our review, pointing out
that DOD acted to improve the change order process well before our
review began. While it is true that in 1995 DOD assigned one TSO
individual to negotiate all change orders, as the report indicates,
the change order settlement team was not formed until August of 1996
or expanded to its needed strength until October 1996. DOD's other
actions, such as its attempt to develop budgeting methodologies for
orders slated for issuance in future years and for settled orders'
out-year costs in future years' budgets; its new requirement that
Health Affairs review and approve all proposed orders before
issuance; its revision of provisional payment procedures; and its
hiring of a consulting firm to recommend improvements to the entire
process each occurred during our review. Rather than disputing when
DOD took these actions, our more important concerns--and we believe
DOD's, as well--are such issues as the yet-unknown extent of federal
liability for TRICARE contract change orders and whether DOD's
actions to fix the broken process will succeed.
DOD officials also believed our report did not adequately convey that
DOD now has an approach for reliably estimating new order costs. We
disagree. As we reported, not until November 1996, when DOD's hired
consultant started preparing Independent Government Cost Estimates
for new orders, did DOD have a reliable approach for estimating new
order costs because it lacked the needed in-house expertise. We
believe that this effort appears to be working reasonably well and
should help DOD make sound cost estimates for each new order and, in
time, for the total federal liability for the numerous contract
changes DOD has made.
Further, regarding our references to contractors' estimated costs of
$423 million for only a fraction of the open orders, DOD officials
said we should have pointed out that contractors have an incentive to
submit high estimates to build a bargaining position for negotiating
with the government. We agree that contractors may behave this way
in some cases, but certainly not in all. We found, moreover, that
for about 91 percent of the settled TRICARE orders, contractors'
initial cost estimates were the same as or lower than DOD's
estimates. Also, for the 32 percent of settled orders for which
contractors' estimates were lower than DOD's estimates, all were
settled at or below the contractors' estimates. For example, for
Foundation Health Federal Services' region 11 contract, the
contractor's initial estimate for an order requiring shockwave
lithotripsy reimbursement was $9,067, while DOD's cost proposal was
$125,000, yet the final settled price was $9,067. Similarly, the
contractor's initial estimate for a change order implementing hospice
benefits was $30,971, while DOD's estimate was $265,563, yet the
final settled price was $28,758. Thus, we did not make the change to
our report that DOD suggested.
Finally, DOD pointed out that the report's reference to DFAR change
order settlement times was incorrect, and we corrected the citation.
DOD's comments appear in the appendix in their entirety.
---------------------------------------------------------- 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) 512-7101 if you or your staff have any questions concerning
this report. Other major contributors to this report include Daniel
M. Brier, Assistant Director; Cheryl A. Brand, Evaluator-in-Charge;
William Temmler; Arthur Trapp; and Alan Wernz.
Stephen P. Backhus
Director, Veterans' Affairs and
Military Health Care Issues
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter
(See figure in printed edition.)
*** End of document. ***