Defense Health Care: Opportunities to Reduce TRICARE Claims Processing
and Other Costs (Testimony, 06/22/2000, GAO/T-HEHS-00-138).

Pursuant to a congressional request, GAO discussed opportunities to
reduce claims processing and other costs of the Department of Defense's
(DOD) managed health care program--TRICARE, focusing on: (1) the cost of
processing TRICARE claims; (2) opportunities that potentially can reduce
costs and improve service to beneficiaries, namely increased anti-fraud
efforts and more joint procurement of pharmaceuticals and medical
supplies with the Department of Veterans Affairs (VA); and (3) the
process beneficiaries use to make medical appointments.

GAO noted that: (1) processing TRICARE claims costs several times as
much as processing Medicare claims--$7.50 compared to $1.78 per claim on
average; (2) however, much of the cost difference appears to be
attributable to differences in program design and processing
requirements; (3) for example, TRICARE offers three different benefit
packages, with reimbursement rates that are established for each
provider, and a complex system of authorizations and referrals; (4) the
program also experiences frequent changes to coverage and operating
policies that make it difficult to administer; (5) nonetheless, GAO and
others believe that opportunities exist to reduce some of the
approximately $225 million spent annually to process claims; (6) in
response to the House version of the fiscal year 2001 Defense
Authorization bill, and through several of its own initiatives that
mirror private-sector practices, DOD has adopted and is planning several
actions to reduce claims processing costs, including increasing
electronic claims submission and web-based services to reduce the costs
of claims review and to deal with the large number of inquiries received
by providers and beneficiaries; (7) beyond claims processing, GAO
believes there are other opportunities to reduce TRICARE costs and
improve services; (8) for example, although DOD has efforts under way to
combat health care fraud and abuse, these efforts have only been
marginally effective; (9) additional opportunities exist to save
potentially hundreds of millions of dollars that could be used to
purchase care for military beneficiaries; (10) also, GAO believes that
additional cooperation with VA to procure pharmaceuticals and medical
supplies could yield substantial savings; and (11) different systems are
in place throughout the military health system for making medical
appointments, and beneficiaries sometimes are unsure as to how to make
such appointments, leading to frustration with TRICARE.

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

 REPORTNUM:  T-HEHS-00-138
     TITLE:  Defense Health Care: Opportunities to Reduce TRICARE
	     Claims Processing and Other Costs
      DATE:  06/22/2000
   SUBJECT:  Managed health care
	     Health services administration
	     Department of Defense contractors
	     Internal controls
	     Health care cost control
	     Joint ventures
	     Claims processing costs
IDENTIFIER:  DOD TRICARE Program
	     Medicare Program

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GAO/T-HEHS-00-138

For Release on Delivery Expected at 10: 00 a. m. Thursday, June 22, 2000

GAO/ T- HEHS- 00- 138

DEFENSE HEALTH CARE Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Statement of Stephen P. Backhus, Director Veterans' Affairs and Military
Health Care Issues Health and Human Services Division Testimony

Before the Task Force on Defense and International Relations, Committee on
the Budget, House of Representatives

United States General Accounting Office

GAO

Page 1 GAO/ T- HEHS- 00- 138

Mr. Chairman and Members of the Task Force: I am pleased to be here today to
discuss opportunities to reduce claims processing and other costs of
TRICARE- the Department of Defense's (DOD) managed health care program.
Today more than 8.2 million activeduty personnel, retirees, and their
dependents are eligible to receive care under this $16 billion- per- year
health care system. As the costs of delivering health care continue to
increase and as beneficiaries demand improved and expanded services,
significant pressures have been placed on the system, and DOD continues to
search for ways to address them.

Since TRICARE's inception, we have reported on the challenges DOD faces in
delivering health care. DOD considers health care to be one of its major
quality- of- life issues important to maintaining a quality force. As a
result, DOD has continually striven to deliver this health care benefit and
to respond to suggestions made for improving its health care system.
Currently, DOD is facing increasing pressures to improve customer service.
Improvements in areas such as claims processing not only have the potential
to make the health care system more user- friendly and efficient, but also
to reduce costs.

At your request, my testimony today will focus primarily on the cost of
processing TRICARE claims. Additionally, I will briefly discuss two other
opportunities that potentially can reduce costs and improve service to
beneficiaries, namely increased anti- fraud efforts and more joint
procurement of pharmaceuticals and medical supplies with the Department of
Veterans Affairs (VA). You also asked that I discuss our ongoing study of
the process beneficiaries use to make medical appointments. The information
I am presenting is based on a substantial body of work we have undertaken
over the past several years on TRICARE operations.

In summary, processing TRICARE claims costs several times as much as
processing Medicare claims–$ 7.50 compared to $1.78 per claim on
average. However, much of the cost difference appears to be attributable to
differences in program design and processing requirements. For example,
TRICARE offers three different benefit packages, with reimbursement rates
that are established for each provider, and a complex system of
authorizations and referrals. The program also experiences frequent changes
to coverage and operating policies that make it difficult to administer.
Nonetheless, we and others believe that opportunities exist to reduce some
of the approximately $225 million spent annually to process claims. In
response to the House version of the fiscal year 2001 Defense Authorization
bill, and through several of its own initiatives that mirror Defense Health
Care: Opportunities to

Reduce TRICARE Claims Processing and Other Costs

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 2 GAO/ T- HEHS- 00- 138

private- sector practices, DOD has adopted and is planning several actions
to reduce claims processing costs, including increasing electronic claims
submission and web- based services to reduce the costs of claims review and
to deal with the large number of inquiries received by providers and
beneficiaries.

Beyond claims processing, we believe there are other opportunities to reduce
TRICARE costs and improve services. For example, although DOD has efforts
under way to combat health care fraud and abuse, these efforts have only
been marginally effective. Additional opportunities exist to save
potentially hundreds of millions of dollars that could be used to purchase
care for military beneficiaries. Also, we believe that additional
cooperation with the VA to procure pharmaceuticals and medical supplies
could yield substantial savings. Lastly, different systems are in place
throughout the military health system for making medical appointments, and
beneficiaries sometimes are unsure as to how to make such appointments,
leading to frustration with TRICARE. We are currently reviewing this process
and anticipate making recommendations for improving it at the conclusion of
our study.

DOD's primary medical mission is to maintain the health of active- duty
service personnel and to provide health care during military operations. DOD
also offers health care to non- active- duty beneficiaries, including
dependents of active- duty personnel, military retirees, and dependents of
retirees, if space and resources are available. The Army, Navy, and Air
Force provide most of the system's care through their own medical centers,
hospitals, and clinics, totaling about 580 treatment facilities worldwide.
Civilian providers supply the remaining care. TRICARE is a triple- option
benefit program designed to give beneficiaries a choice among a health
maintenance organization (TRICARE Prime), a preferred provider organization
(TRICARE Extra), and a fee- for- service benefit (TRICARE Standard).

TRICARE is organized geographically into 11 health care regions administered
by five managed- care support contractors. Among the contractors' many
responsibilities are claims processing, for which all have subcontracted
with one of two companies. DOD requires contractors to meet specific
timeliness and accuracy standards when processing claims. The tasks required
to process claims include claims receipt, data entry, claims adjudication,
and claims payment or denial. During 1999, contractors processed about 30
million health claims submitted by institutions, health care providers, and
beneficiaries. Background

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 3 GAO/ T- HEHS- 00- 138

To help safeguard against health care fraud and abuse in its system, DOD
established a Program Integrity unit in 1982 to coordinate its antifraud
activities. This unit is responsible for developing policies and procedures
regarding the prevention and detection of TRICARE fraud and abuse. DOD's
Office of Inspector General and the Department of Justice work together with
this unit (and sometimes also with the Department of Health and Human
Services) to investigate and prosecute alleged health care fraud and abuse.
DOD's contracts with its five managed- care support contractors also require
them to perform antifraud and abuse activities to help ensure that TRICARE
dollars are used to pay only claims that are appropriate.

Claims processing activities have generated a great deal of dissatisfaction
among providers and beneficiaries, as well as among various congressional
committees, and DOD recognizes that problems exist. Complaints and
frustrations stem from perceived inaccurate and late payments; complex
program rules, processes, and reporting requirements; and high costs. All
agree that the claims adjudication system needs to be simplified and made
more user- friendly, and that it could benefit from increased use of
technology. A number of administrative and legislative actions are under
way, which, if properly implemented, should reduce TRICARE claims processing
costs.

In August 1999, at the request of the House Subcommittee on Military
Personnel, Committee on Armed Services, we reported on the complexity of the
TRICARE program and benefit structure. 1 This complexity manifests itself in
many aspects of claims processing such as high rates of manual review, low
electronic submission rates, and high customer inquiry rates. These factors,
in addition to the relatively small program size when compared with
Medicare, increase TRICARE claims processing costs because fixed costs are
spread over a smaller number of claims. Currently, TRICARE claims cost an
average of $7.50 per claim to process- double the industry average and more
than four times the $1.78 Medicare claims processing cost.

Contractors told us that of the many programs they administer, including
Medicare and private plans, TRICARE is the most complicated, contributing to
claims processing difficulties and high costs. For example,

1 Defense Health Care: Claims Processing Improvements are Under Way but
Further Enhancements are Needed( GAO/ HEHS- 99- 128, Aug. 23, 1999). Program
Complexity

Impedes Claims Processing Efficiency; Improvements Under Way

Program Complexity and Size Contribute to High Claims- Processing Costs

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 4 GAO/ T- HEHS- 00- 138

each of TRICARE's three options has a different array of benefits,
copayments, and deductibles. Claims require different adjudication
procedures, depending on which option is involved, and contractual
requirements for prepayment review further complicate the process.
Complexities such as these are manifested as thousands of edits in the
adjudication logic of the claims processing system. These edits result in
claims being “kicked out” of the system for manual review, which
extends processing time and increases administrative costs. Over half of
TRICARE's claims are manually reviewed, a rate significantly higher than the
industry average of 25 percent.

Program complexities also contribute to numerous beneficiary and provider
inquiries, which add considerably to the cost of processing a claim. TRICARE
claim inquiry rates average about one for every 4.5 claims- four times
higher than Medicare inquiries. Documentation shows that beneficiaries
frequently inquire about their benefits and cost shares because they do not
understand the program. Providers inquire most often about payment issues
primarily because the same services might be reimbursed at different amounts
depending on which TRICARE option the beneficiary is using. TRICARE has
thousands of unique fee schedules and contracts that change frequently. In
contrast, Medicare reimbursement is more consistent because it has national
standard physician and hospital payment methodologies. In addition, Medicare
inquiries are handled almost entirely by automated systems.

TRICARE's per- claim processing costs are higher than Medicare's also
because TRICARE's fixed costs are spread over a smaller claims base.
Medicare costs are spread over about 900 million claims per year, whereas
TRICARE processes only about 30 million claims per year.

Under TRICARE less than 20 percent of hospital and professional claims are
submitted electronically, compared to the Medicare average of about 85
percent. Electronic claim submissions are faster, involve less chance of
data input error, and are less expensive to process than paper claims.
Paper- based claims require significant front- end handling in the mailroom,
document preparation, imaging, data entry, and storage. However, because
TRICARE is usually a small percentage of providers' income- often less than
5 percent- providers have no incentive to incur the expense of adapting
their computer systems to permit electronic TRICARE claim submission.
Furthermore, because 98 percent of claims are paid within timeliness
standards, the incentive to submit electronic claims is further reduced.

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 5 GAO/ T- HEHS- 00- 138

Nevertheless, we believe that some opportunities exist to reduce the
administrative costs associated with processing a TRICARE claim. One of the
claims processing subcontractors reported that $4.46 of each claim
processed- totaling about $125 million per year- is paid for services
provided or processes required by the program above the costs of determining
payment outcomes. For example, responding to TRICARE inquiries reportedly
costs $1 per claim more than responding to Medicare inquiries. Other costs
that we consider to be targets of opportunity include mailroom handling,
document preparation, imaging, paper storage, data entry, and certain
reporting requirements. A number of initiatives are currently under way or
planned that may reduce these costs as described below.

Several legislatively directed and DOD- initiated efforts are under way to
simplify the claims adjudication process, improve provider and beneficiary
education, and increase electronic claims submission. If properly
implemented, these actions should reduce TRICARE claims processing costs.

For example, the House version of the fiscal year 2001 Defense Authorization
bill would direct that the Secretary of Defense take action to require high-
volume TRICARE providers to submit claims electronically, and increase the
use of automated voice response systems for provider inquiries on claims
status. Also, the bill would direct that certain administrative reporting
requirements be reduced.

With the assistance of a consultant, DOD has developed and is implementing a
plan that calls for eliminating unnecessary or duplicative processes that
interfere with optimal performance, emphasizing the use of commercial best
practices and Medicare standards. For example, the plan calls for adopting
Medicare's standards for processing timeliness and the elimination of DOD
required edits that should help decrease the number of manually reviewed
claims. According to one of the claims processing subcontractors, some of
these edits are unnecessary while others should be modified or retained. For
example, claims for electrocardiograms must be manually reviewed, but in
every case so far, the claims have been paid after review. Last year, for
one TRICARE contract, almost 14, 000 claims for this procedure were
submitted. While DOD has issued formal contract modifications for all the
changes it wants to make, contractors have not yet had time to implement all
of them.

Additionally, DOD is pursuing the possible use of Medicare's provider
identification numbers to encourage and facilitate electronic claims
Initiatives Under Way to

Improve Claims Processing Efficiencies

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 6 GAO/ T- HEHS- 00- 138

submission. Also, DOD now permits contractors to delay the payment of paper
claims (as an incentive for providers to submit electronically) so long as
the contractors continue to meet standards. This initiative mirrors
Medicare's process for increasing the number of claims submitted
electronically. Further, to reduce the number of manual reviews, DOD is
encouraging contractors to limit prepayment review of certain types of
claims if appropriate.

DOD and the contractors are also looking at ways to use new technology on
the World Wide Web to reduce administrative costs and increase provider and
beneficiary satisfaction. Currently, TRICARE claims processing
subcontractors have developed comprehensive Web sites containing information
on policy and benefits, electronic claims submissions, and claim status. 2
In addition, DOD and contractor officials are considering future use of the
Internet as a means to submit claims for processing. This method, which is
similar to that used for electronic claims, might provide a more expedient,
less expensive means of handling claims. However, before this Web- based
technology can be utilized, the government must define security requirements
to ensure privacy.

Nonetheless, because TRICARE makes up such a small percentage of most
providers' business, neither Web- based nor electronic claims submissions
are likely to significantly increase in volume without specific incentives
or mandates. However, mandates may increase providers' reluctance to
participate in the program. In the future these problems may be mitigated as
a result of industry- wide requirements to adopt uniform standards for
electronic health care transactions, including claims. 3 Uniform standards
for electronic claim submissions will enable providers to submit claims for
any health insurance plan in the same filing format.

2 One subcontractor's Web site ( www. mytricare. com) allows beneficiaries
to access claim status while the other subcontractor's site ( www. wpsic.
com) gives providers access. Both sites are designed to ensure the privacy
of beneficiary information.

3 The Health Insurance Portability and Accountability Act of 1996 (P. L.
104- 191) requires the industrywide adoption of uniform standards for
electronic transactions, including claims filing.

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 7 GAO/ T- HEHS- 00- 138

While DOD does not know the precise extent of fraud and abuse in its health
care system, it estimates potential annual losses to its TRICARE program to
be in the hundreds of millions of dollars. In addition to the financial
loss, health care fraud and abuse also affects the quality of care provided
and may cause serious harm to patients' health. Despite its responsibility
to prevent and detect health care fraud and abuse, DOD has not been
effective in doing so, recovering less than 3 percent of its estimated
losses to fraud and abuse between 1996 and 1998. DOD has the opportunity to
improve its antifraud efforts by developing clear and measurable goals and
ensuring that contractors comply with the antifraud requirements in their
contracts.

DOD estimates that losses due to fraud and abuse could account for 10 to 20
percent of military health care expenditures. These ranges are consistent
with estimates of other public and private- sector organizations, such as
the Health Care Financing Administration, the U. S. Chamber of Commerce, the
Health Insurance Association of America, and the National Health Care Anti-
Fraud Association. Given TRICARE's expenditure of about $2.9 billion for
contracted civilian- provided care in fiscal year 1999, DOD could be losing
between $290 million and $580 million annually to fraud and abuse. DOD
officials acknowledged that they could be more effective in combating fraud
and abuse if their TRICARE contractors were more proactive in identifying
and referring potential fraud cases. They also agreed that they should
expedite the implementation of revised antifraud policies and requirements
that place greater demands on contractors to identify and prevent fraud and
abuse. However, although DOD provided contractors with antifraud software,
not all contractors are using the software. Further, DOD required
contractors to develop and submit antifraud plans, but most contractors'
initial antifraud plans were deficient. Current statistics do not indicate
any significant improvements in DOD's antifraud efforts. Out of over 40
million claims processed from January 1999 through April 2000, only 17 fraud
referral cases from the contractors have been accepted by DOD for
investigation. 4

4 These 17 cases all involved high dollars or had the potential to cause
patient harm. In addition, contractors submitted numerous small dollar cases
that DOD has returned, believing they should be handled as overpayments
rather than as fraud. DOD Could Save

Hundreds of Millions of Dollars With a More Effective Antifraud Program

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 8 GAO/ T- HEHS- 00- 138

We recently testified that DOD and VA would benefit through additional
cooperative efforts to procure pharmaceuticals and through the use of VA's
Consolidated Mail Outpatient Pharmacy (CMOP) for DOD's prescription refill
workload. 5 As the largest direct federal drug purchasers, the Departments
already enjoy varying, though significant, discounts on their drug
purchases. The expectation is that, as the two agencies buy more of a
particular drug, their leverage- particularly under competitively bid
contracts- would permit them to obtain even greater discounts from drug
manufacturers and to save funds for both Departments. Currently, the two
agencies have awarded 18 joint and 51 separate national contracts
representing 19 percent of their combined drug expenditures of $2.4 billion
in fiscal year 1999. We believe that VA and DOD could potentially save $150
to $300 million more each year by jointly purchasing other medications they
both use.

Further, additional savings could be achieved by utilizing VA's mail- out
pharmacy program to handle DOD's annual refill workload of about 23 million
prescriptions. For example, VA has the capability for mail order refills
through its CMOP and documentation shows that CMOP refills cost about one-
half of DOD's current costs of refilling prescriptions at military
pharmacies. CMOPs potentially could reduce military pharmacy refill
dispensing costs by about $45 million annually.

Since the inception of TRICARE, beneficiaries have complained about the
difficulties they encounter in making appointments for health care. For
years beneficiaries seeking to make appointments in military treatment
facilities accessed care by calling the desired clinic directly. Over the
past several years however, DOD has been moving towards a centralized
appointment system. In some military medical facilities an appointment
center has been created and beneficiaries call that center to schedule
various types of appointments. In four TRICARE regions though, TRICARE
contractors have established regional appointment centers which
beneficiaries call to schedule appointments with physicians in military
medical facilities. The contractors perform this function as part of their
administrative tasks under their contracts with DOD. We are currently
reviewing the appointment making process in TRICARE.

We are finding that the lack of uniform appointment names and requirements
for scheduling appointments has resulted in confusion for

5 DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals
Could Save Millions of Dollars( GAO/ T- HEHS- 00- 121, May 25, 2000).
Additional Joint

Procurement of Pharmaceuticals With VA Would Yield Substantial Savings

Improving the Medical Appointment Process Would Likely Increase Beneficiary
Satisfaction

Defense Health Care: Opportunities to Reduce TRICARE Claims Processing and
Other Costs

Page 9 GAO/ T- HEHS- 00- 138

both appointment clerks and beneficiaries, with beneficiaries sometimes
being transferred from the appointment center to the military clinic, or
told to call the clinic themselves.

Thus, what is meant to be a simplified, more user- friendly appointment
process appears to be a complex and confusing process, where beneficiaries
are unsure as to whether to call the contractor or the military medical
facility to schedule appointments. We expect to be making recommendations at
the conclusion of our work.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer questions you or other Task Force members may have.

For more information regarding this testimony, please call Stephen P.
Backhus at (202) 512- 7101. Key contributors include Michael T. Blair, Jr.,
Lois L. Shoemaker, and Bonnie W. Anderson.

(101645) GAO Contacts and

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