Defense Health Care: Reimbursement Rates Appropriately Set; Other
Problems Concern Physicians (Letter Report, 02/26/98, GAO/HEHS-98-80).

Pursuant to a legislative requirement, GAO examined: (1) whether the
Department of Defense's (DOD) methodology for setting the Civilian
Health and Medical Program of the Uniformed Services (CHAMPUS) maximum
allowable charge (CMAC) rates complies with statutory requirements and
how current CMAC rates compare with Medicare rates for similar services;
(2) the basis for physicians' concerns about CMAC rates and how these
concerns affect physicians' willingness to treat military beneficiaries;
(3) the basis for other concerns physicians have about TRICARE that
could also affect their willingness to treat military beneficiaries; and
(4) how balance billing limits are being enforced.

GAO noted that: (1) the methodology used by DOD to transition CMAC rates
to the Medicare level of payment complies with statutory requirements
and generally conforms with accepted actuarial practice; (2) these
adjustments will result in DOD saving about three-quarters of a billion
dollars in fiscal year 1998 in health care expenditures; (3) as of the
most recent available CMAC rate adjustment in March 1997, 80 percent of
CMAC rates nationwide were at the same level as Medicare, with about 20
percent higher and less than 1 percent below the Medicare level of
payment; (4) the CMAC rates at each of the four locations GAO selected
were generally consistent with Medicare rates; (5) while physicians'
initial concerns about low obstetric and pediatric rates have been
addressed by DOD, current physician complaints about reimbursement
levels are focused on the discounted CMAC rates paid to network
physicians under DOD's TRICARE program; (6) because most CMAC rates are
now equivalent to Medicare rates, the discounted CMAC rates that TRICARE
network physicians agree to accept are typically below the Medicare
level of payment; (7) some physicians told GAO that they considered the
discounts unacceptable, and as a result, they would not join the TRICARE
network but would continue to treat military beneficiaries as nonnetwork
physicians; (8) the discount rates physicians were willing to accept in
each of the four locations were largely dependent on local health care
market factors such as the degree of health maintenance organization
penetration and the dependence of local physicians on the military
beneficiary population; (9) physicians GAO met with also expressed
concerns about administrative hassles, which contributed to their
frustration with the TRICARE program; (10) in many cases, physicians
said that while they would be willing to accept discounted CMAC rates,
the administrative impediments provided significant disincentives to
joining the TRICARE network; (11) DOD and managed care support
contractors (MCSC) officials acknowledged these complaints and are
making efforts to address them and alleviate physicians' concerns; (12)
DOD and MCSC officials told GAO that they were aware of only a very
small number of balance billing infractions--all of which had been
easily resolved; (13) while the MCSC's attempt to educate beneficiaries
about balance billing limits, the explanation of benefits statement does
not include information on the balance billing limits; and (14)
Medicare, which has the same balance billing limit, sends notice of
balance billing limitations on the statements it provides to

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

 REPORTNUM:  HEHS-98-80
     TITLE:  Defense Health Care: Reimbursement Rates Appropriately Set; 
             Other Problems Concern Physicians
      DATE:  02/26/98
   SUBJECT:  Managed health care
             Medical fees
             Health care cost control
             Military personnel
             Physicians
             Health care services
             Medical services rates
IDENTIFIER:  Civilian Health and Medical Program of the Uniformed 
             Services
             Medicare Program
             DOD TRICARE Program
             CHAMPUS
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1998

DEFENSE HEALTH CARE -
REIMBURSEMENT RATES APPROPRIATELY
SET; OTHER PROBLEMS CONCERN
PHYSICIANS

GAO/HEHS-98-80

DOD's Physician Reimbursement Rates

(101603)


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

  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CMAC - CHAMPUS maximum allowable charge
  DOD - Department of Defense
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  MCSC - managed care support contractor
  MEI - Medicare Economic Index
  MTF - military treatment facility
  PPO - preferred provider organization

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


B-276418

February 26, 1998

The Honorable Strom Thurmond
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd D.  Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on National Security
House of Representatives

In response to escalating health care costs, the Congress urged the
Department of Defense (DOD), beginning with the DOD Appropriations
Act for Fiscal Year 1991 (P.L.  101-511), to gradually lower
reimbursement rates paid to civilian physicians under the Civilian
Health and Medical Program of the Uniformed Services (CHAMPUS) for
medical care provided to active duty dependents and retirees and
their dependents.\1 These adjustments were to be based on comparisons
with the rates established under another nationwide federal health
program--the Department of Health and Human Services' (HHS) Medicare
program.  Previously, many of the rates paid under CHAMPUS, a
DOD-administered fee-for-service type program, were significantly
higher than those paid for identical services under Medicare.\2 As
DOD has implemented its payment revisions, however, some physicians
have complained that the CHAMPUS maximum allowable charge (CMAC) is
too low--particularly for obstetric and pediatric rates. 

Under DOD's new managed care program called TRICARE, CMAC rates
represent DOD's maximum physician reimbursement level.  Under
TRICARE, civilian physicians--some of whom join the TRICARE
network--are used to supplement care provided in military treatment
facilities. 

The National Defense Authorization Act for Fiscal Year 1998 (P.L. 
105-85, Nov.  18, 1997) directed that we study the adequacy of the
maximum allowable charges for physicians established under the
CHAMPUS program and the effect of such charges on physician
participation in CHAMPUS.  In response to this mandate, we examined
(1) whether DOD's methodology for setting CMAC rates complies with
statutory requirements\3 and how current CMAC rates compare with
Medicare rates for similar services, (2) the basis for physicians'
concerns about CMAC rates and how these concerns affect physicians'
willingness to treat military beneficiaries, (3) the basis for other
concerns physicians have about TRICARE that could also affect their
willingness to treat military beneficiaries, and (4) how balance
billing limits are being enforced.\4

To examine these issues, we reviewed documentation explaining DOD's
methodology for setting CMAC rates and contracted with a consulting
firm that provides actuarial services to evaluate the methodology's
compliance with U.S.  Code requirements.  To compare CMAC and
Medicare rates, we obtained rates for specific high-volume procedures
at four locations:  Abilene, Texas; Jacksonville, Florida; Ozark,
Alabama; and San Diego, California.  Each of these locations has
military treatment facilities; together, they represent a mix of
urban and rural areas as well as different degrees of health
maintenance organization (HMO) penetration.  To determine how
reimbursement levels and other administrative factors affect
physicians' decisions to treat military beneficiaries, we interviewed
physician and beneficiary advocacy groups as well as members of
medical societies in each of the four selected locations.  In
addition, we interviewed DOD and its managed care support contractors
(MCSC), who help administer the TRICARE program, to obtain
information on the extent and difficulty of balance billing
enforcement.  For a further description of the scope and methodology
of our work, see appendix I.  We conducted our review between March
1997 and January 1998 in accordance with generally accepted
government auditing standards. 


--------------------
\1 This act specified that reductions were not to exceed 15 percent
in a given year. 

\2 CHAMPUS payments were previously based on a yearly calculation of
the 80th percentile of physicians' actual charges statewide.  Using
this approach, CHAMPUS reimbursement rates were, in many cases,
significantly higher--50 percent higher, on average--than those paid
for identical treatment under the Medicare program. 

\3 Statutory requirements are established under section 1079(h) of
title 10, U.S.C. 

\4 Physicians who do not join the TRICARE network are allowed to
charge the beneficiary an additional fee, or "balance bill," up to 15
percent above the allowed CMAC rate. 


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

The methodology used by DOD to transition CMAC rates to the Medicare
level of payment complies with statutory requirements and generally
conforms with accepted actuarial practice.  These adjustments will
result in DOD saving about three-quarters of a billion dollars in
fiscal year 1998 in health care expenditures.  As of the most recent
available CMAC rate adjustment in March 1997, 80 percent of CMAC
rates nationwide were at the same level as Medicare, with about 20
percent higher and less than 1 percent below the Medicare level of
payment.  Also, the CMAC rates at each of the four locations we
selected were generally consistent with Medicare rates. 

While physicians' initial concerns about low obstetric and pediatric
rates have been addressed by DOD, current physician complaints about
reimbursement levels are focused on the discounted CMAC rates paid to
network physicians under DOD's TRICARE program.  Because most CMAC
rates are now equivalent to Medicare rates, the discounted CMAC rates
that TRICARE network physicians agree to accept are typically below
the Medicare level of payment.  Some physicians told us that they
considered the discounts unacceptable, and as a result, they would
not join the TRICARE network but would continue to treat military
beneficiaries as nonnetwork physicians.  We found that the discount
rates physicians were willing to accept in each of the four locations
were largely dependent on local health care market factors such as
the degree of HMO penetration and the dependence of local physicians
on the military beneficiary population. 

Physicians we met with also expressed concerns about administrative
"hassles," which included untimely reimbursement, lack of fee
schedules with which to verify reimbursement accuracy, a slow
preauthorization process to approve medical treatment, and unreliable
customer telephone service--all of which contributed to their
frustration with the TRICARE program.  In many cases, physicians said
that while they would be willing to accept discounted CMAC rates, the
administrative impediments provided significant disincentives to
joining the TRICARE network.  Although they continue to treat
military beneficiaries as nonnetwork physicians, some physicians told
us that, out of frustration, they dropped out of the network, and
others decided not to join.  DOD and MCSC officials acknowledged
these complaints and are making efforts to address them and alleviate
physicians' concerns.  It is too soon, however, to determine the
effectiveness of these efforts. 

DOD and MCSC officials told us that they were aware of only a very
small number of balance billing infractions--all of which had been
easily resolved.  However, MCSC officials told us that although they
adjudicate the claim and pay the physician, they cannot ensure that
physicians are not balance billing beneficiaries more than 15 percent
above the allowed CMAC rate because they do not receive notice of any
subsequent bill that the physician may send the beneficiary.  While
the MCSCs attempt to educate beneficiaries about balance billing
limits, the explanation of benefits statement does not include
information on the balance billing limits--information that would
notify the beneficiary and the physician of the maximum balance
billing amount.  Medicare, which has the same balance billing limit,
sends notice of balance billing limitations on the statements it
provides to beneficiaries and physicians. 


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

DOD's primary medical mission is to maintain the health of 1.6
million active duty service personnel and to provide health care
during military operations.  Also, DOD offers health care to 6.6
million non-active duty beneficiaries, including dependents of active
duty personnel, military retirees, and dependents of retirees.  Most
care is provided in about 115 hospitals and 470 clinics
worldwide--collectively referred to as military treatment facilities
(MTF)--operated by the Army, Navy, and Air Force.  The DOD direct
care system is supplemented by care that is mostly paid for by DOD
but is provided by civilian physicians under the CHAMPUS program. 
DOD is currently transitioning to a nationwide managed care program
called TRICARE, under which the CHAMPUS program is now offered as one
of three health care options called TRICARE Standard. 

In response to the rapid escalation of CHAMPUS costs in the 1980s,
the Congress urged DOD, beginning with the Appropriations Act for
Fiscal Year 1991 (P.L.  101-511), that physician payments under
CHAMPUS be gradually brought in line with payments under Medicare,
with reductions not to exceed 15 percent in a given year.  Starting
with the DOD Appropriations Act for Fiscal Year 1993 (P.L.  102-396),
the Congress also enacted provisions (1) directing DOD, through
regulations, to limit beneficiaries' out-of-pocket costs through
balance billing limits and (2) authorizing waivers to "freeze" CMAC
rates at current levels if DOD determines that further rate
reductions would impair beneficiaries' adequate access to health
care.  DOD set balance billing limits for nonparticipating physicians
at 115 percent of CMAC, which is the same limitation used for the
Medicare program.  By basing physician reimbursement on the Medicare
fee schedule, DOD estimates that beneficiaries will save about $155
million in out-of-pocket costs in fiscal year 1998. 

To further contain rising health care costs, the Congress directed
DOD in the National Defense Authorization Act for Fiscal Year 1994
(P.L.  103-160) to prescribe and implement a nationwide managed
health care benefit program modeled on HMOs.  Drawing from its
experience with demonstrations of alternative health care delivery
approaches, DOD designed TRICARE.  As a triple-option benefit
program, TRICARE is designed to give beneficiaries a choice among an
HMO, a preferred provider organization (PPO), and a fee-for-service
benefit.  The HMO option, called TRICARE Prime, is the only option
for which beneficiaries must enroll.  TRICARE Extra is the PPO
option, and TRICARE Standard is the fee-for-service option, which
remains identical in structure to the previous CHAMPUS program. 
Regional MCSCs help administer the TRICARE program.  The MCSCs' many
responsibilities include claims processing, customer service, and
developing and maintaining an adequate network of civilian
physicians. 

CMAC rates serve as the maximum level of reimbursement under each of
TRICARE's three options.  To treat military beneficiaries under the
Prime and Extra options, civilian physicians must join a network
through the MCSC.  The MCSC individually contracts with physicians or
physician groups at a negotiated reimbursement rate, which is usually
discounted from the CMAC rate.  Network physicians are reimbursed at
their negotiated rate regardless of whether they are providing care
to enrollees under Prime or nonenrollees under the Extra option. 
Network physicians must accept their negotiated rate as payment in
full.  Physicians who do not join the network may still provide care
to military beneficiaries under TRICARE Standard, for which they are
reimbursed up to the full CMAC rate.  Under this option, physicians
may choose, on a case-by-case basis, whether to participate on a
claim, that is, accept the CMAC rate as payment in full, less any
applicable copayment.  By law, physicians who decide not to
participate on a particular claim under TRICARE Standard will receive
the full CMAC rate and can balance bill the beneficiary for up to an
additional 15 percent above that rate. 


   CMAC METHODOLOGY COMPLIES WITH
   STATUTORY REQUIREMENTS AS THE
   TRANSITION NEARS COMPLETION
------------------------------------------------------------ Letter :3

The methodology DOD uses to set and transition CMAC rates to the
Medicare level of payment complies with statutory requirements
established under section 1079(h) of title 10 U.S.C.  and generally
conforms with accepted actuarial practice.  Since 1991, DOD has
annually adjusted and set CMAC rates on the basis of the Medicare fee
schedule, which will result in a savings of about $770 million in
fiscal year 1998.  The methodology used to adjust CMAC rates is
described in appendix II. 

As of March 1997, the most recent available CMAC rate update,
approximately 80 percent of the national CMAC rates were at the same
level as Medicare and about 20 percent were higher than Medicare
because the transition for these rates is not yet complete.  Only the
rates for 61 of about 7,000 procedures--less than 1 percent--were
below the Medicare level of payment.  DOD has proposed a new rule (62
Fed.  Reg.  61058 (1997)) to increase the payment amounts for the 61
procedures to the Medicare fee schedule amounts.  The proposed rule
is expected to be finalized in March 1998 after comments are received
and analyzed.  See appendix III for a list of these procedures. 

While CMAC rates are initially set at the national level, adjustments
are made for each procedure code for 225 different localities within
the United States.\5

The locality-adjusted CMAC rates are the rates actually used to
reimburse physicians.  We found that the selected high-volume CMAC
rates at each of the four locations were generally consistent with
Medicare rates. 


--------------------
\5 Beginning with the 1998 update, adjustments will be made for 89
localities, consistent with Medicare. 


   INITIAL REIMBURSEMENT
   COMPLAINTS ADDRESSED, BUT
   NETWORK DISCOUNTS NOW CONCERN
   PHYSICIANS
------------------------------------------------------------ Letter :4

DOD began using CMAC rates to reimburse civilian physicians on May 1,
1992.  During the initial CMAC transition process to the Medicare
level of payment, some physicians expressed concern about the low
level of payment for certain obstetric and pediatric procedures, but
payment levels for these procedures have since been addressed by DOD
and HHS' Health Care Financing Administration (HCFA).  Current
physician complaints about the CMAC level of reimbursement are
primarily directed at the discounted CMAC rates paid to TRICARE
network physicians under the Prime and Extra options rather than the
full CMAC rate used to reimburse nonnetwork physicians under the
Standard option.  DOD reports that the vast majority of physicians
who accept military beneficiaries as patients under the Standard
option agree to accept the CMAC rate as payment in full for their
services and do not balance bill for additional payment. 


      DOD ADDRESSED INITIAL
      COMPLAINTS ABOUT OBSTETRIC
      AND PEDIATRIC CMAC RATES
---------------------------------------------------------- Letter :4.1

During the transition of CMAC rates, physicians initially complained
about the CMAC reimbursement levels for obstetric and pediatric
procedures.  In response to complaints about obstetric rates, HCFA
reexamined and adjusted the Medicare fee schedule's obstetric cost
components and increased the reimbursement rates for some obstetrical
delivery procedures.  DOD, in turn, made corresponding adjustments to
obstetric fees during its yearly CMAC revision. 

DOD did not, however, adjust pediatric rates.  Physicians argued that
CMAC rates for pediatric procedures should not be set at the same
levels as services provided to adults because physician costs for
caring for children are higher.  To determine the validity of this
concern, DOD commissioned a study, which concluded that only 12.3
percent of all payments would be for services for which there is a
higher cost for children, and 56.2 percent of all payments would be
for services for which there is a lower cost for children.  The study
found that 31.5 percent of payments were the same for children and
adults.  Consequently, DOD concluded that no payment differential was
needed.  According to the actuaries, DOD's decision conforms with
common insurance industry practice. 


      PHYSICIAN COMPLAINTS NOW
      FOCUSED ON DISCOUNTED CMAC
      RATES
---------------------------------------------------------- Letter :4.2

Because most CMAC rates are equivalent to Medicare rates, the
discounted CMAC rates that TRICARE network physicians agree to accept
are typically below the Medicare level of payment.  The American
Medical Association and some medical society members we interviewed
told us that they considered the discounted CMAC rates network
physicians were being asked to accept by the MCSCs to be too low, but
that the full CMAC rate paid under Standard, though not desirable, is
acceptable.  Because of this, some physicians told us that they would
not join the TRICARE network but would continue to see military
beneficiaries under the Standard option.  In the four locations, we
found that the differences in the discounted CMAC rates physicians
are willing to accept depend largely upon local health care market
conditions such as the degree of HMO penetration as well as the
dependence of the local physicians on the military beneficiary
population.  Physicians whose practices include a large percentage of
military beneficiaries are more likely to join the network and accept
the discounted rates offered by the MCSCs to maintain their patient
base. 

For example, in Ozark, Alabama, one of the two rural,
low-HMO-penetration locations we selected, the median discount rate
physicians were willing to accept to maintain their patient base was
10 percent.  In Abilene, Texas, the other rural, low-HMO-penetration
location we visited, most physicians said that they did not need to
join the network to maintain their patient base, and consequently,
many of those who did agree to join did so only on the condition that
their fee would not be discounted.  In each of these locations, DOD
and MCSC officials told us that the local physicians also tended to
be unfamiliar with and averse to managed care.  In contrast, however,
network physicians in the two urban, high-HMO-penetration
locations--San Diego, California, and Jacksonville, Florida--accepted
higher median discounts of 15 and 20 percent, respectively. 

According to the actuaries, in areas with significant competition
among managed care plans such as the states of Florida, California,
Minnesota, and Massachusetts, physician reimbursement is approaching
the Medicare level of payment, and in some of these areas, typical
reimbursement is based on 80 percent of the Medicare level of
payment.  Likewise, a study conducted by Milliman and Robertson
concluded that HMO reimbursement rates are approaching those of the
Medicare fee schedule in many states.\6 For example, an analysis of
HMO payments as a percentage of Medicare showed that HMOs in
California pay at 105 percent of Medicare and those in Florida pay at
95 percent of Medicare, on average. 


--------------------
\6 Mark Crane, "How Low Can Fees Go?" Medical Economics (Apr.  7,
1997), pp.  26-38.  Milliman and Robertson is a firm of actuaries and
consultants who assist health care payers and providers such as
hospitals, insurance companies, HMOs, PPOs, government agencies, and
support institutions. 


      DESPITE COMPLAINTS, DOD
      REPORTS HIGH PARTICIPATION
      LEVELS
---------------------------------------------------------- Letter :4.3

DOD reported in April 1997 a physician participation rate of 86
percent for the TRICARE Standard option, based on an analysis of
claims submitted from July 1995 through June 1996.  This
participation rate means that the vast majority of physicians
accepted the allowed charges as payment in full and did not balance
bill beneficiaries for services rendered.  As a safeguard to ensure
participation, DOD also monitors participation for individual
procedures for each locality during the yearly CMAC update process. 
If participation on claims falls below 60 percent for a particular
procedure for which there are at least 50 claims, DOD uses a waiver
to automatically "freeze" the rate for that procedure at the current
level with no downward adjustments for that year.  During 1997, 167
automatic waivers for physician payments were in effect, which
represents less than 1 percent of the approximately 1.6 million
locality-specific CMAC rates.  Waivers can also be requested through
written petitions.  To date, DOD has received about 20 waiver
petitions but has approved only 1 on the basis of the information
provided. 


   ADMINISTRATIVE PROBLEMS
   CONTRIBUTE TO PHYSICIANS'
   FRUSTRATION WITH TRICARE
------------------------------------------------------------ Letter :5

Our discussions with physician groups, physicians, and physician
office staff revealed considerable concern with several other aspects
of TRICARE administration--all of which negatively affected their
opinion of the program.  The administrative concerns range from slow
claims payment to unreliable customer telephone service.  And while
these concerns resulted in some physicians dropping out of the
network or not joining, these physicians told us that they continue
to treat military beneficiaries as nonnetwork physicians under the
Standard option.  DOD and MCSC officials acknowledged these
complaints and told us they are in the process of addressing them. 
Consequently, the success of these efforts will not be known for some
time. 


      PHYSICIANS COMPLAIN ABOUT
      SLOW CLAIMS PROCESSING
---------------------------------------------------------- Letter :5.1

Slow reimbursement was a common physician complaint about TRICARE
and, when combined with discounted payment levels, has resulted in
some physicians dropping out of the TRICARE network and others
choosing not to join.  During the start-up phase of health care
delivery, the MCSCs for the four selected locations experienced to
varying degrees some problems regionwide in meeting their contractual
timeliness requirement that 75 percent of claims be processed within
21 days, primarily because of higher-than-expected claims volume. 

To begin meeting claims processing timeliness standards, the MCSC for
Abilene, Texas, told us it closed its understaffed claims processing
center for DOD's Southwest region and subcontracted with a company
that specializes in claims processing to clear a backlog of about
200,000 claims.  In addition, it sent a team of claims adjudicators
to Abilene to resolve physicians' individual claims.  The MCSC's
claims processing center for the regions encompassing Ozark, Alabama,
and Jacksonville, Florida, hired an additional 200 staff to
adjudicate the larger-than-expected workload.  The MCSC responsible
for these regions also told us that it has teams of claims processors
that can be sent to specific locations when needed. 

Although the MCSCs for the four locations reported to DOD that they
are now meeting the contractual claims processing requirements,
physicians in all four locations still complained to us about slow
and cumbersome reimbursement.  Physicians and their office staffs
told us they spend considerable time refiling and appealing TRICARE
claims as a result of denials and partial payments.  Physicians and
their office staffs also complained that there seem to be no distinct
or specific TRICARE requirements on how a treatment should be coded
on a claim to receive payment.  DOD and MCSC officials responded that
although the MCSCs use national Current Procedural Terminology coding
standards, some of the coding confusion is due to the use of Claim
Check, a software program that DOD requires all MCSCs to use for
claims review.  Claim Check performs an initial claim review and
edits the procedure codes to eliminate nonreimbursable and duplicate
procedures to prevent overpayment.  According to DOD, all Claim Check
determinations are considered final and, as such, are not appealable. 
These edits may result in the denial or recoding of submitted
procedure codes, which may cause physicians to receive
lower-than-expected payments.  DOD and MCSC officials also said that
payments are delayed for other reasons, such as the lack of
preauthorization for treatment.  To help remedy this, MCSC officials
told us that they are conducting educational seminars on proper
claims submission techniques for physicians and their office staffs. 


      PHYSICIANS LACK FEE
      SCHEDULES NECESSARY TO
      VERIFY REIMBURSEMENT
      ACCURACY
---------------------------------------------------------- Letter :5.2

Contributing to physicians' discouragement with the TRICARE program
is that they are not routinely provided with fee schedules, and as a
result, they do not always know what they should be paid.  MCSC
officials responded that physicians can request fee information up
front for their high-use procedures and that CMAC rates are available
on the Internet.\7 They also told us that physicians may request fee
information for specific procedures through a toll-free customer
service telephone line.  In addition, fee information can be
purchased from the federal government in hard copy for $75 or as an
electronic file for $152.  These sources contain over 1.6 million
CMAC rates--representing approximately 7,000 procedure codes for each
of the 225 localities.\8 However, some physician offices may be
unwilling to pay these prices for information they believe should be
provided by the MCSC or DOD--especially since physicians would only
be interested in the rates for their specific locality.  Furthermore,
we were told by physician office staff that not every physician's
office has access to the Internet and that repeatedly requesting
specific fees by telephone is time consuming. 


--------------------
\7 Locality-specific CMAC rates are available on the Internet via the
TRICARE Support Office home page at http://www.ochampus.mil. 

\8 The hard copy file of CMAC rates can be obtained from the Defense
Technical Information Center.  The electronic file is available from
the U.S.  Department of Commerce's National Technical Information
Center. 


      PREAUTHORIZATION DELAYS AND
      CUSTOMER SERVICE PROBLEMS
      ADD TO PHYSICIAN FRUSTRATION
      WITH THE PROGRAM
---------------------------------------------------------- Letter :5.3

Physicians complained that other administrative problems, such as
slow preauthorizations for care and unreliable customer service
telephone lines, have also resulted in increased paperwork and staff
time, which is not cost-effective.  Physicians at each of the
locations we examined cited the slow and paperwork-intensive
preauthorization process, which is used to approve certain types of
care for reimbursement.  Some of the physicians told us they have had
to delay treatment to obtain preauthorization, and some said that
they went ahead and treated patients who, in their opinion, needed
immediate attention, thereby running the risk of not being reimbursed
for their services. 

DOD and MCSC officials responded that the preauthorization process
takes time because it is a two-level review.  The local MTF must
review the request to determine whether the care could be provided
within that facility, then MCSC officials must perform a medical
necessity review.  MCSC officials also stated that incomplete
information could require resubmission and thus a delayed
determination.  Recognizing physicians' concerns, MCSC officials are
working on ways to streamline and improve the preauthorization
process.  For example, in Ozark, Alabama, local MCSC personnel
rerouted preauthorization requests to first obtain the medical
necessity decision, thus giving the MTF staff information necessary
to make a faster determination as to whether the care could be
provided at the MTF.  And in Abilene, Texas, a team of military and
MCSC officials evaluated the preauthorization process.  Their review
resulted in the retraining of civilian network physicians and their
staffs on a case-by-case basis to ensure complete initial submissions
of patient identification and clinical data. 

Some physicians also complained that their office staffs spent
inordinate amounts of time trying to get through to customer service
on the telephone, and once connected, they had a long wait for a
representative.  In one location, some office staff told us that they
called the customer service line repeatedly over a 2-day period
trying to get through to a representative.  Other office staff told
us that they typically stayed on hold 30 to 45 minutes for a
representative after being connected.  The MCSC told us they are
trying various approaches to address these problems.  For example,
the MCSC for Abilene, Texas, responded that the telephone system at
the TRICARE Service Center had been improved by adding more telephone
lines, modifying the automated telephone menu, and streamlining the
rerouting process.  The MCSC in San Diego, California, installed an
additional toll-free telephone line dedicated solely for physician
use, and the MCSC for Ozark, Alabama, and Jacksonville, Florida, more
than doubled the staff at its central telephone center. 


   DOD LACKS INFORMATION ON THE
   EXTENT OF BALANCE BILLING
   INFRACTIONS
------------------------------------------------------------ Letter :6

On the basis of congressional direction, DOD limited beneficiaries'
out-of-pocket costs by setting balance billing limits for
nonparticipating physicians at 115 percent of the CMAC rate, which is
the same limitation used for the Medicare program.  This provision
became effective for all care provided on and after November 1, 1993. 
An infraction of this requirement will result in a physician possibly
losing his or her status as a TRICARE authorized provider.\9

DOD has proposed a new rule (62 Fed.  Reg.  61058 (1997)) that
noncompliant physicians also be excluded from other federal health
care and benefit programs such as Medicare and Medicaid.\10 According
to a recent DOD analysis of claims submitted under the TRICARE
Standard option, physicians who did not participate balance billed
for 14 percent of claims filed during the period of July 1, 1995,
through June 30, 1996.  For these nonparticipating claims,
beneficiaries saved approximately $78.6 million dollars as a result
of balance billing limits. 

DOD and MCSC officials told us they were aware of only a very small
number of balance billing infractions--all of which were easily
resolved.  However, MCSC officials told us that after adjudicating
the claim and paying the physician, they did not receive notice of
any bill the physician may have subsequently sent to the beneficiary. 
Consequently, the MCSC does not know whether physicians are balance
billing beneficiaries in excess of the 115 percent limit unless
beneficiaries complain.  While the MCSCs have attempted to educate
beneficiaries about balance billing limits through briefings and
written materials such as benefit booklets, the explanation of
benefits statement, which contains information on claim adjudication,
does not contain information on the balance billing limits for
TRICARE Standard claims submitted by nonparticipating physicians. 
Including this information on the explanation of benefits statements
for both beneficiaries and physicians, as Medicare does, would
educate both parties about the amount that can be balance billed. 

For the few cases in which beneficiaries notified DOD and the MCSCs
that physician charges exceeded the balance billing limits, DOD and
the MCSCs reported that these excess charges were due to either
billing mistakes or ignorance of procedures rather than deliberate
intent.  Each of the MCSCs has procedures in place on how to resolve
excessive balance billing through a series of notifications to the
physician and the beneficiary.  To date, all of the identified
infractions have been easily resolved, and, according to DOD
officials, no physicians have been sanctioned under TRICARE for
excessive balance billing practices. 


--------------------
\9 Pharmacies, ambulance companies, independent laboratories, and
portable X-ray companies are currently exempt from the 115 percent
limitation.  However, DOD has proposed a new rule (62 Fed.  Reg. 
61058 (1997)) to extend balance billing limit authority to these
noninstitutional, nonprofessional providers.  A beneficiary may also
request a waiver of the 115-percent requirement if the beneficiary is
willing to pay the full billed charge for a particular physician. 

\10 Currently, all physicians who have been convicted of defrauding
other federal health care or benefit programs are automatically
excluded from TRICARE. 


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

By lowering CMAC rates to levels comparable to rates paid under the
Medicare program, DOD will save nearly three-quarters of a billion
dollars in fiscal year 1998 in health care expenditures.  And
throughout the nearly complete transition process, DOD has
appropriately set and adjusted CMAC rates in compliance with
statutory requirements using a methodology that also generally
complies with accepted actuarial practice. 

Although physicians complained about the level of reimbursement under
TRICARE, their complaints are focused on the discounted rates paid to
network physicians under TRICARE Prime and Extra--rates that are
typically lower than Medicare.  However, it is the combination of low
payments and administrative impediments associated with untimely
payments and slow authorizations for treatment that has negatively
affected many physicians' opinions of the TRICARE program. 
Furthermore, when physicians are reimbursed, they do not always know
how much to expect or whether they are being paid correctly because
written or published fee schedules are not routinely furnished by the
MCSCs. 

While most of the physicians we spoke with continue to treat military
beneficiaries, addressing physicians' concerns is crucial to the
development and maintenance of TRICARE networks.  Because of
administrative and cost issues, physicians are becoming disillusioned
with the program.  Although DOD and MCSCs are addressing these
problems, if they are not resolved, DOD could face increasing
problems in the future attracting the number of physicians necessary
to ensure that beneficiaries have adequate access to care. 

While balance billing limits under the Standard option are intended
to protect beneficiaries from excessive out-of-pocket costs, DOD,
MCSCs, and beneficiaries do not always know when physicians charge
above the 115 percent limit.  Although the MCSCs attempt to educate
beneficiaries on balance billing limits, this information could be
easily communicated by following Medicare's practice of including
balance billing information on explanation of benefits statements
sent to both the beneficiaries and physicians. 


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

To improve the administration of the TRICARE program, we recommend
that the Secretary of Defense direct the Assistant Secretary of
Defense for Health Affairs to

  -- require MCSCs to provide to physicians written or published
     locality-specific fee schedules after each yearly CMAC update to
     help eliminate confusion about CMAC reimbursement rate amounts
     and

  -- require MCSCs to notify beneficiaries and physicians of balance
     billing limits on the explanation of benefits statements for all
     TRICARE Standard claims submitted by nonparticipating
     physicians. 


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

In commenting on a draft of our report, the Deputy Assistant
Secretary of Defense (Health Services Financing) concurred with our
findings and stated that the draft fairly and thoroughly addresses a
complex set of issues related to the reimbursement of physicians.  In
response to our first recommendation, DOD agreed to seek additional,
cost-effective methods to ensure that all physicians have access to
accurate, timely information about CMAC rates.  In response to our
second recommendation, DOD agreed to develop balance billing
information statements for inclusion on the explanation of benefits
forms.  We incorporated several technical revisions as suggested by
DOD.  DOD's comments are presented in their entirety in appendix IV. 


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

As agreed with your offices, 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 or Michael T.  Blair, Jr.,
Assistant Director, on (404) 679-1944 if you or your staff have any
questions concerning this report.  Other major contributors to this
report include Cynthia M.  Fagnoni, Associate Director; Bonnie W. 
Anderson, Evaluator-in-Charge; Jonathan Ratner, Senior Health
Economist; and Dayna K.  Shah, Assistant General Counsel. 

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


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

To evaluate the compliance of DOD's rate-setting methodology with
statutory requirements, we obtained assistance from an actuarial
consulting firm.  It reviewed documentation of the methodology used
in developing CHAMPUS maximum allowable charges (CMAC) along with the
requirements of section 1079(h) of title 10, U.S.C.  In addition to
assessing compliance, the actuary made a determination of whether
DOD's methodology is generally consistent with accepted actuarial
practice and reviewed and provided observations on DOD's approach for
setting pediatric rates.  We reviewed and discussed with DOD
officials the changes made to obstetric procedure fees by the Health
Care Financing Administration (HCFA). 

We obtained information from DOD officials regarding the status of
the CMAC transition process.  To determine whether reimbursement
levels differed between CMAC and Medicare rates, we compared a number
of high-volume procedures for the following four selected locations: 
(1) Abilene, Texas; (2) Jacksonville, Florida; (3) Ozark, Alabama;
and (4) San Diego, California.  In addition, we obtained the
discounted rates paid to network physicians in each of the four
locations.  We used specific criteria to select the locations to
ensure that they were representative of the various health care
markets where military beneficiaries reside, within regions with the
most extensive TRICARE experience.  Our selection criteria included
the level of HMO penetration, whether the area was rural or urban,
the military facility branch of service, and the size and mix of the
beneficiary population.  These four locations also served as the
focus for our evaluation of physician complaints and balance billing
enforcement.  We selected the high-volume procedures on the basis of
an analysis of claim data for each location for the time period of
July 1995 through June 1996.  For each location, we used the top five
high-use specialties in addition to obstetrics and pediatrics for a
total of seven specialties.  For each specialty, we then used the top
procedures on the basis of the frequency, or volume, of claims
received for the service.  For each procedure, we calculated the CMAC
rate as a percentage of Medicare. 

To determine the basis of physician complaints about CMAC rates and
to identify other physician complaints about TRICARE, we spoke with
members of the local medical societies for each of the four
locations.  To obtain an overall perspective of physician concerns,
we met with officials from the American Medical Association.  We also
interviewed officials from the National Military Family Association
and The Retired Officers Association.  To determine whether and how
physicians' concerns were being addressed, we interviewed local
military and MCSC officials for each of the locations as well as DOD
officials at the Office of the Assistant Secretary of Defense for
Health Affairs.  We also reviewed DOD's physician participation
report to determine the extent to which physicians were willing to
accept the CMAC rate as full payment.  We discussed the report's
methodology with DOD officials along with DOD's use of participation
rates to waive rate reductions for procedures in locations where
participation is low. 

To determine the extent and difficulty of balance billing
enforcement, we interviewed the local military and MCSC officials for
the four locations.  We met with officials at the TRICARE Support
Office to discuss the methods of enforcement and the extent of
infractions.  We also met with officials at HCFA to determine how
they enforce Medicare's balance billing limits. 

We performed our work between March 1997 and January 1998 in
accordance with generally accepted government auditing standards. 


METHODOLOGY FOR SETTING CMAC RATES
========================================================== Appendix II

CMAC rates for a particular year are calculated using actual charge
data submitted on DOD claims for service dates during a 12-month
period starting July 1 and ending June 30.  A national prevailing
charge for each procedure is then calculated at the 80th percentile
of these actual billed charges.\11 For each procedure, the previous
year's national CMAC is then compared with the lesser of the
current-year prevailing charge or the current-year Medicare fee
schedule amount.  Depending on the outcome, one of the following
three scenarios applies: 

  -- If the current-year prevailing charge is lower than the Medicare
     fee schedule amount, the prevailing charge becomes the new CMAC
     rate. 

  -- If the current-year prevailing charge is above the Medicare
     amount, the previous year's CMAC is cut the lesser of 15 percent
     or the amount necessary to reach the Medicare amount, and thus
     becomes the new CMAC rate. 

  -- If the previous year's CMAC is below the Medicare amount, it is
     updated by the Medicare Economic Index (MEI),\12 either in full
     or by the amount necessary to reach the Medicare level of
     payment. 

After CMAC rates are calculated at the national level,
locality-specific adjustments are made for each procedure code. 


--------------------
\11 The National Defense Authorization Act for Fiscal Year 1998 (P.L. 
105-85, Nov.  18, 1997) changed statutory requirements for setting
CMAC rates.  As a result, DOD will be able to simplify the process
and establish rates based on the Medicare fee schedule. 

\12 The MEI is a measure of annual growth in physician practice costs
as well as general earning trends in the economy. 


1997 NATIONAL CMAC REIMBURSEMENT
RATES THAT ARE LOWER THAN
MEDICARE'S RATES
========================================================= Appendix III

                                  1997      1997  Ratio of
Procedure                     Medicare      CMAC   CMAC to
code        Procedure              fee      rate  Medicare
----------  ----------------  --------  --------  --------
10040       Acne surgery        $57.53    $40.24      0.70
11954       Therapy for         122.74    108.67      0.89
             contour defects
15788       Chemical peel of    139.16    104.04      0.75
             face
16025       Burn treatment       89.97     80.48      0.89
16030       Burn treatment      102.70     91.98      0.90
17360       Skin peel            64.46     40.24      0.62
             therapy
20500       Injection of         50.16     44.26      0.88
             sinus tract
20615       Treatment of         87.83     86.23      0.98
             bone cyst
24220       Injection for        59.61     52.56      0.88
             elbow X ray
28234       Incision of foot    188.22    160.96      0.86
             tendon
29740       Wedging of cast      60.09     33.48      0.56
30400       Reconstruction      811.14    647.44      0.80
             of nose
46500       Injection into       73.03     57.49      0.79
             hemorrhoids
46900       Destruction of       86.42     68.98      0.80
             anal lesions
51720       Treatment of         94.10     74.73      0.79
             bladder lesion
53600       Dilate urethra       60.19     47.41      0.79
             stricture
53601       Dilate urethra       49.92     43.69      0.88
             stricture
53661       Dilation of          38.51     34.49      0.90
             urethra
54160       Circumcision        167.87    124.49      0.74
57150       Treat vaginal        30.08     29.94      1.00
             infection
59051       Interpret fetal      55.46     51.00      0.92
             monitor
59430       Care after           98.44     56.98      0.58
             delivery
66830       Removal of lens     623.52    614.94      0.99
             lesion
66983       Remove cataract,    807.79    628.32      0.78
             insert lens
69000       Drain external       68.15     57.49      0.84
             ear lesion
69401       Inflate middle       35.13     33.99      0.97
             ear canal
80101       Lab procedure        20.20     17.30      0.86
80438       Lab procedure        71.52     68.76      0.96
82775       Lab procedure        30.90     25.39      0.82
83840       Lab procedure        23.94     13.20      0.55
83898       Lab procedure        39.91     30.15      0.76
84600       Lab procedure        23.57     22.01      0.93
85576       Lab procedure        31.51     25.67      0.81
86353       Lab procedure        71.90     56.59      0.79
88261       Lab procedure       259.26    238.01      0.92
88285       Lab procedure        27.86     15.40      0.55
90835       Special             107.43    100.44      0.93
             interview
90842       Psychotherapy:      137.76    137.70      1.00
             75-80 minutes
92015       Refraction           23.30     21.62      0.93
92100       Serial tonometry     37.35     33.34      0.89
             exams
92130       Water                42.40     33.48      0.79
             provocation
             tonometry
96440       Chemotherapy,       103.00     69.05      0.67
             intracavitary
96542       Chemotherapy         85.36     62.42      0.73
             injection
96913       Photo-               47.05     38.03      0.81
             chemotherapy
99186       Total body           75.14     54.06      0.72
             hypothermia
99355       Prolonged            87.74     78.03      0.89
             service, office
99357       Prolonged            84.55     78.03      0.92
             service,
             inpatient
99375       Care plan            76.41     67.63      0.89
             oversight
99381       Preventive           81.27     59.77      0.74
             visit, new,
             infant
99382       Preventive           92.98     70.63      0.76
             visit, new, age
             1-4
99383       Preventive           92.98     89.76      0.97
             visit, new, age
             5-11
99384       Preventive          104.68     92.37      0.88
             visit, new, age
             12-17
99386       Preventive          119.95    117.30      0.98
             visit, new, age
             40-64
99391       Preventive           69.90     49.99      0.72
             visit,
             established,
             infant
99392       Preventive           81.27     57.22      0.70
             visit,
             established,
             age 1-4
99393       Preventive           81.27     71.40      0.88
             visit,
             established,
             age 5-11
99394       Preventive           92.98     81.60      0.88
             visit,
             established,
             age 12-17
99395       Preventive           87.22     86.70      0.99
             visit,
             established,
             age 18-39
99396       Preventive           97.92     86.93      0.89
             visit,
             established,
             age 40-64
99401       Preventive           31.14     25.50      0.82
             counseling,
             individual
99432       Newborn care,        86.15     66.30      0.77
             not in hospital
----------------------------------------------------------



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



(See figure in printed edition.)


*** End of document. ***