Defense Health Care: Operational Difficulties and System Uncertainties
Pose Continuing Challenges for TRICARE (Testimony, 02/26/98,
GAO/T-HEHS-98-100).

GAO discussed the status of the Department of Defense's (DOD)
implementation of its managed health care program, TRICARE, focusing on:
(1) DOD's progress in implementing TRICARE; (2) whether DOD is
adequately assessing TRICARE'S effects on military health care access,
quality, and cost; and (3) the implications of ongoing and proposed
changes in the military health care system itself for TRICARE's future.

GAO noted that: (1) TRICARE was established in an era of military
downsizing and rapidly escalating DOD health costs; (2) it was
envisioned as a way to maintain beneficiary access to high-quality care
while containing costs; (3) designing and implementing TRICARE to
achieve these objectives, however, has proven to be a complex and
difficult undertaking involving many stakeholders, including Congress,
the individual services and their many facilities and contractors, and
the more than 8 million beneficiaries of the military health care
system; (4) DOD has taken steps to improve the program as it has
evolved, but much remains to be done before TRICARE becomes the
smooth-running and beneficiary-friendly endeavor envisioned by its
developers; (5) moreover, many questions concerning its
cost-effectiveness and ability to meet beneficiary access and quality of
care concerns are still to be answered; (6) in addition to operational
difficulties, TRICARE is likely to continue to be implemented amid many
changes that could profoundly affect not only the program but the entire
military health care system; and (7) the result of the continuing
evolution of TRICARE and the collective effects of these individual
changes on it remain to be seen.

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

 REPORTNUM:  T-HEHS-98-100
     TITLE:  Defense Health Care: Operational Difficulties and System 
             Uncertainties Pose Continuing Challenges for TRICARE
      DATE:  02/26/98
   SUBJECT:  Managed health care
             Health care cost control
             Health care services
             Medical services rates
             Health care programs
             Service contracts
             Military personnel
             Health services administration
             Beneficiaries
IDENTIFIER:  DOD TRICARE Program
             CHAMPUS
             Civilian Health and Medical Program of the Uniformed 
             Services
             
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Cover
================================================================ COVER


Before the Subcommittee on Military Personnel, Committee on National
Security, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Thursday, February 26, 1998

DEFENSE HEALTH CARE - OPERATIONAL
DIFFICULTIES AND SYSTEM
UNCERTAINTIES POSE CONTINUING
CHALLENGES FOR TRICARE

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

GAO/T-HEHS-98-100

GAO/HEHS-98-100T


(101605)


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

  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  DOD - Department of Defense
  FEHBP - Federal Employees Health Benefits plans
  HMO - health maintenance organization
  MTF - military treatment facility
  PA&E - Program Analysis and Evaluation

DEFENSE HEALTH CARE:  OPERATIONAL
DIFFICULTIES AND SYSTEM
UNCERTAINTIES POSE CONTINUING
CHALLENGES FOR TRICARE
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the status of the
Department of Defense's (DOD) implementation of its managed care
program called TRICARE.  Following years of demonstration programs
that tested alternative health care delivery mechanisms, DOD began
completely restructuring its system into TRICARE in 1993.  TRICARE
represents a redesign of DOD's $15.5 billion health care system and
is being implemented to improve beneficiaries' access to health care
while maintaining quality and controlling costs in a time of military
downsizing and budgetary concerns.  Under TRICARE, health care for
over 8.2 million eligible beneficiaries is coordinated and managed on
a regional basis using military hospitals and clinics, supplemented
by contracted civilian services. 

My statement today will focus on (1) DOD's progress in implementing
TRICARE; (2) whether DOD is adequately assessing TRICARE's effects on
military health care access, quality, and cost; and (3) the
implications of ongoing and proposed changes in the military health
care system itself for TRICARE's future.  The information presented
is based on completed and ongoing GAO studies as well as discussions
with DOD and contractor officials.  (See Related GAO Products at the
end of this statement for a list of products related to TRICARE and
its predecessor programs.)

In summary, TRICARE was established in an era of military downsizing
and rapidly escalating DOD health costs.  It was envisioned as a way
to maintain beneficiary access to high-quality care while containing
costs.  Designing and implementing TRICARE to achieve these
objectives, however, has proven to be a complex and difficult
undertaking involving many stakeholders, including the Congress, the
individual services and their many facilities and contractors, and
the more than 8 million beneficiaries of the military health care
system.  DOD has taken steps to improve the program as it has
evolved, but much remains to be done before TRICARE becomes the
smooth-running and beneficiary-friendly endeavor envisioned by its
developers.  Moreover, many questions concerning its
cost-effectiveness and ability to meet beneficiary access and
quality-of-care concerns are still to be answered. 

In addition to operational difficulties, TRICARE is likely to
continue to be implemented amid many changes that could profoundly
affect not only the program but the entire military health care
system.  The result of the continuing evolution of TRICARE and the
collective effects of these individual changes on it remain to be
seen. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

DOD's primary military medical mission is to maintain the health of
1.6 million active duty service personnel\1 and be prepared to
deliver health care during wartime.  Also, as an employer, DOD offers
health care services to 6.6 million non-active duty beneficiaries,
including active duty members' dependents and military retirees and
their dependents.  Most care is provided in 115 hospitals and 471
clinics--called military treatment facilities (MTF)--operated by the
Army, Navy, and Air Force worldwide.  This direct delivery system is
supplemented by DOD-funded care provided in civilian facilities.  In
fiscal year 1997, DOD spent about $12 billion for direct care and
about $3.5 billion for civilian care. 

In response to such challenges as increasing health care costs and
uneven beneficiary access to care, in the late 1980s DOD initiated a
series of congressionally directed demonstration programs to evaluate
alternatives to its existing health care delivery approaches. 
Drawing from its experience with the demonstration projects, DOD then
designed TRICARE as its managed care health program.  The Office of
the Assistant Secretary of Defense for Health Affairs sets TRICARE
policy and has overall responsibility for the program.  The Army,
Navy, and Air Force Surgeons General have authority over the MTFs in
their respective services. 

TRICARE is designed to give beneficiaries a choice of three benefit
options.  These are TRICARE Prime, the health maintenance
organization (HMO) option; TRICARE Standard, a fee-for-service
benefit replacing the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS) program;\2 and TRICARE Extra, a
preferred provider option. 

TRICARE Prime, the option in which care is most actively managed, is
designed to provide comprehensive medical care to beneficiaries
through a network of military and contracted civilian providers. 
Beneficiaries who select TRICARE Prime must enroll annually to
receive care under this option; once enrolled, they must go through
an assigned military or civilian primary care manager for all care. 
Active duty members and their families do not pay an enrollment fee;
retirees under age 65 and their dependents and survivors pay an
annual enrollment fee of $230 for an individual and $460 for a
family.\3 Copayments under Prime are lower than under the other
options.  TRICARE Standard provides beneficiaries with the greatest
freedom in selecting civilian physicians but requires the highest
beneficiary cost share.  Under TRICARE Extra, beneficiaries do not
enroll or pay annual premiums but, by using physicians in the TRICARE
network, are charged copayments that are 5 percent less than under
TRICARE Standard. 


--------------------
\1 This number includes members of the Coast Guard and the
Commissioned Corps of the Public Health Service and the National
Oceanic and Atmospheric Administration, who are also eligible for
military health care. 

\2 CHAMPUS is a DOD program to finance private sector care for
dependents of active duty members, retirees and their dependents, and
survivors under age 65. 

\3 When retirees become eligible for Medicare at age 65, they are no
longer eligible for TRICARE.  They may, however, still seek care on a
space-available basis in MTFs. 


   TRICARE IMPLEMENTATION FALLING
   SHORT OF DOD'S EXPECTATIONS
---------------------------------------------------------- Chapter 0:2

In restructuring its health care program, DOD designed a program that
has proven difficult to implement.  More than 4 years after
initiating TRICARE, DOD is now 1 year behind its schedule for fully
implementing the nationwide program, and that schedule may slip
further.  As DOD implements TRICARE, it is also continuing to make
significant changes to the program's design.  While these changes are
aimed at improving TRICARE and addressing problems we and others have
identified, they also create new implementation challenges. 
Moreover, DOD's progress in implementing TRICARE has been hampered by
enrollment shortfalls and administrative problems. 


      RECURRING CONTRACT AWARD
      PROBLEMS
-------------------------------------------------------- Chapter 0:2.1

As part of its implementation of TRICARE, DOD has awarded large,
complex, competitively bid contracts to supplement and support the
health care provided in MTFs.  These 5-year contracts are estimated
to cost a total of about $15 billion.  DOD had planned to award a
total of seven contracts for the 11 TRICARE regions nationwide by
September 30, 1996, and health care delivery under TRICARE was
expected to have begun in all regions by May 1997.  (The appendix
contains a map of the 11 TRICARE regions.)

DOD's efforts to award contracts have been hindered by some problems. 
All seven contract awards have been protested at substantial cost to
both DOD and the offerors.  Three of the bid protests have been
sustained, as shown in table 1.  The two most recently sustained
protests occurred earlier this month.  DOD and the contract awardees
have asked for reconsideration of the decisions sustaining these
protests.  Resolving the reconsideration requests, and implementing
the corrective action recommended in the sustained protests if the
reconsideration requests are denied, could further delay
implementation of TRICARE in three regions. 



                                     Table 1
                     
                      TRICARE Contract Implementation Status

                          5-year
                          contract                  Expected     Actual
TRICARE      Region       award        Bid protest  implementat  implementation
contractor   covered      amount       sustained    ion date     date
-----------  -----------  -----------  -----------  -----------  ---------------
Foundation   Northwest    $475         No           March 1995   March 1995
Health                    million
Federal
Services

Foundation   Southwest    1.8 billion  No           November     November 1995
Health                                              1995
Federal
Services

Foundation   Southern     2.5 billion  Yes          October      April 1996
Health       California,                            1995
Federal      Golden
Services     Gate, and
             Hawaii-
             Pacific

Humana       Southeast    3.8 billion  No           May 1996     July 1996
Military     and Gulf
Healthcare   South
Services

Triwest      Central      2.3 billion  No           November     April 1997
Healthcare                                          1996
Alliance

Sierra       Northeast    1.2 billion  Yes          May 1997     Scheduled for
Military                                                         May 1998
Health
Services

Anthem       Mid-         3.1 billion  Yes          May 1997     Scheduled for
Alliance     Atlantic                                            May 1998
for Health   and
             Heartland
--------------------------------------------------------------------------------
In 1995, we reported that such problems as DOD's failure to evaluate
offerors' bids according to solicitation criteria led to the
sustained protest of a pre-TRICARE contract award covering California
and Hawaii.\4 In response, DOD put in place such improvements as a
revised methodology for evaluating bids, which it believed would
reduce the chance of protests being sustained.  The recent sustained
protests indicate, however, that problems with bid evaluations
continue. 

We also concluded in 1995 that DOD's managed care procurement process
is extremely costly, complex, and cumbersome for all affected.  We
noted, for example, that DOD's solicitation requirements are so
prescriptive that offerors cannot fully propose innovative and
cost-saving managed care techniques or best practices now available
in the private sector.  DOD acknowledged the need to simplify its
procurement requirements to be less prescriptive and more focused on
outcomes.  In response to recommendations from DOD health care
managers, current contractors, industry experts, and us, DOD is
developing a more simplified procurement approach, which it will
begin to use this summer as the first of the existing TRICARE
contracts is recompeted.  This new approach is designed to
incorporate performance-based requirements and best commercial
practices. 


--------------------
\4 This contract was awarded in July 1993 to Aetna Government Health
Plans under the CHAMPUS Reform Initiative (DOD's pre-TRICARE
program).  The award was subsequently protested, and the protest was
sustained in December 1993.  The contract was recompeted, although
Aetna's contract was allowed to proceed until a new award was made to
Foundation Health Federal Services.  As shown in table 1, this award
was also protested, and the protest was sustained. 


      PRIME ENROLLMENT--A KEY
      COST-SAVING FEATURE--IS
      BELOW DOD'S TARGETS
-------------------------------------------------------- Chapter 0:2.2

DOD expected that, to take full advantage of cost-effective managed
care principles and practices, significant numbers of beneficiaries
would enroll in TRICARE Prime--especially those who rely on the
military system for their health care.  However, as of October 1997,
only about half of the eligible beneficiaries using the military
health care system had enrolled in TRICARE Prime. 

DOD set targets to help ensure high enrollment in Prime.  It
expected, for example, that 100 percent of active duty members would
enroll in Prime by the end of 1996.  However, as of October 1997,
only about 70 percent of active duty members had enrolled.\5
Moreover, DOD expected that at least 90 percent of non-active duty
beneficiaries targeted for enrollment\6 would enroll in Prime within
1 year of TRICARE's implementation in each region.  However, as of
October 1997, in those regions where TRICARE had been implemented for
at least a year, only about 57 percent of those targeted, or about
1.1 million beneficiaries, had enrolled.\7

This less-than-optimal enrollment has several important implications. 
For example, DOD is less able to manage the utilization of health
care for beneficiaries not enrolled in Prime.  Under managed care,
costs are contained in part through the use of primary care managers
who ensure that beneficiaries receive necessary and appropriate care
in the most cost-effective manner.  Moreover, beneficiaries may
sustain higher out-of-pocket health care costs if they choose not to
enroll. 

Also, DOD is beginning to implement a new funding system--
enrollment-based capitation--that is designed to motivate and reward
MTF commanders for maximizing their enrolled population.  Under this
approach, DOD will fund MTFs on the basis of the number of
beneficiaries enrolled in Prime at the MTF.  Previously, DOD had set
per capita rates according to past levels of military spending.  This
new capitation method is designed to better mirror private sector
managed care funding methods.  Under enrollment-based capitation,
MTFs will continue to receive funding for the care they provide to
nonenrollees, but at a lower rate than for those enrolled. 

We have identified a number of reasons why beneficiaries may not be
enrolling in Prime.  Beneficiaries who are accustomed to receiving
care in MTFs may not see the need to enroll.  Retirees under 65 years
of age and their dependents, who must pay an annual enrollment fee,
may opt not to enroll for that reason.  In addition, Prime is not
available in all areas of the country--for example, in areas where
there is no MTF and no civilian provider network.  Also, some
beneficiaries may choose to continue receiving care under TRICARE's
traditional fee-for-service option. 

DOD asserts that it can provide care more cost-effectively in its
MTFs than through civilian providers, and for that reason, TRICARE
was designed to maximize the use of the MTFs before relying on
civilian care.  However, although enrollment capacity still exists in
MTFs, beneficiaries are being allowed to enroll in civilian
facilities that are near MTFs.\8

As of late last year, about 74 percent of MTFs' primary care capacity
had been assigned to Prime enrollees.  Thus, it appears that DOD
could more fully and cost-effectively use its facilities before
enrolling beneficiaries in civilian-provided care. 


--------------------
\5 Although all active duty members are considered "automatically"
enrolled in TRICARE Prime, the enrollment figures represent only
those who have had their enrollment paperwork processed.  While all
active duty members are not yet administratively enrolled, they do
receive health care--but not in a managed care environment. 

\6 As of October 1997, the target population represented about 67
percent of eligible non-active duty beneficiaries, or about 2.3
million people.  The target population does not include beneficiaries
who report having non-DOD health insurance. 

\7 TRICARE contractors are measured against the number of people they
estimated in their bid that they would enroll in TRICARE Prime during
each of the contract option periods.  Overall, enrollment has
exceeded these estimates. 

\8 MTFs estimate their capacity for Prime enrollment by the number of
primary care managers in the MTF and the specified enrollee workload. 
About 1,200 enrollees are assigned to each primary care manager. 


      PHYSICIANS COMPLAIN ABOUT
      ADMINISTRATIVE DIFFICULTIES
-------------------------------------------------------- Chapter 0:2.3

An important component of TRICARE is to attract and retain civilian
physicians to supplement the care provided in MTFs.  In a report we
are issuing today, we have identified administrative problems
physicians have encountered under TRICARE, which, if not resolved,
could affect DOD's ability to attract the number of physicians needed
to ensure adequate access to quality care.\9 Physicians raised
concerns about untimely claims reimbursement, a slow preauthorization
process to approve medical treatment, and unreliable customer
telephone service, among other things.  Some physicians also
complained about the lower, "discounted" rates paid to TRICARE
network physicians under its Prime and Extra options.  Because of
these administrative and cost issues, some physicians are becoming
disillusioned with TRICARE. 


--------------------
\9 Defense Health Care:  Reimbursement Rates Appropriately Set; Other
Problems Concern Physicians (GAO/HEHS-98-80, Feb.  26, 1998). 


   DOD NOT ADEQUATELY ASSESSING
   PROGRESS IN ACHIEVING PROGRAM
   GOALS
---------------------------------------------------------- Chapter 0:3

As we have noted, DOD's goals in establishing TRICARE were to improve
access while maintaining quality and controlling costs.  DOD efforts
to set goals and to measure access and quality are incomplete,
however, and do not enable DOD or others to fully assess whether
TRICARE has improved beneficiaries' access to and quality of health
care.  Moreover, DOD's failure to achieve expected cost savings under
TRICARE raises questions about DOD's cost-savings claims. 


      DOD ACCESS AND QUALITY GOALS
      AND MEASURES ARE INCOMPLETE
-------------------------------------------------------- Chapter 0:3.1

DOD has not set programwide goals and performance measures to track
its progress in meeting TRICARE access and quality program goals for
care provided in MTFs and by contractors.  DOD has developed a
military health system performance report card that includes goals
and measures for some aspects of access and quality, such as
95-percent beneficiary satisfaction with access to appointments and
system resources.  However, this report card applies only to MTFs and
does not include care provided through civilian contractors--an
estimated one-third of DOD's peacetime health care delivery efforts. 
Under its managed care support contracts, DOD does set
performance-related requirements, and contractors report to DOD their
performance in meeting these requirements.  However, this information
is not yet compiled or consolidated with military facility data to
provide a programwide picture. 

Through its annual beneficiary survey, DOD does have some programwide
data on beneficiaries' satisfaction with military health care.  DOD
has conducted this survey since 1994 to provide a comprehensive look
at how beneficiaries view their health care.  As shown in figure 1,
the most recent survey results show that, despite their overall
satisfaction with military health care, beneficiaries are somewhat
less satisfied with quality and even less satisfied with access.  DOD
also conducts a monthly survey of beneficiary satisfaction with
outpatient care in MTFs.  As figure 2 shows, the beneficiary
satisfaction levels, on average, exceed those in civilian HMOs. 
However, DOD survey officials told us it is too soon to use the
surveys' results to assess TRICARE because the program is new and not
yet implemented nationwide.  Also, they said the results from surveys
conducted to date constitute an insufficient basis from which to
identify trends. 

   Figure 1:  Comparison of
   Beneficiaries' Satisfaction
   With Specific Aspects of
   TRICARE, 1996 Annual Survey

   (See figure in printed
   edition.)

Notes:  Results for beneficiaries not enrolled in TRICARE Prime are
for only those who had the option of enrolling and therefore do not
include regions without TRICARE or any beneficiaries aged 65 and
over. 

"Quality of care" focuses on individuals' satisfaction with skill,
thoroughness, and outcomes on health care.  "Access to appointments"
addresses convenience of arranging appointments. 

   Figure 2:  Beneficiary
   Satisfaction With MTF
   Outpatient Care
   Visits--April/May/June 1997

   (See figure in printed
   edition.)

Note:  Satisfaction is measured on a 5-point scale, with 1 equaling
"poor" and 5 equaling "excellent."

Although important, beneficiaries' perceptions do not totally measure
DOD's actual performance.  To supplement beneficiary satisfaction
information on access to care, we recommended in 1996 that DOD
collect data on the timeliness of appointments.  While DOD agreed
with our recommendation, it has yet to fully implement this data
collection effort.  Moreover, the beneficiary satisfaction
information DOD uses in its report card to measure access is based on
monthly surveys of patients receiving outpatient care.  Relying on
the outpatient survey provides limited information on access and may
mask the extent of difficulty beneficiaries face since it only
collects information from those patients who were able to obtain care
at a military facility. 

As required by the Congress, DOD has contracted for independent
evaluations of TRICARE's progress in improving access, maintaining
quality, and controlling costs.  These studies are currently under
way but are not expected to be completed until June 1999.  Given the
importance of TRICARE, and concerns about access and quality raised
by beneficiary groups and recent media reports, we are also planning
to examine DOD health care access and quality issues. 


      TRICARE INITIATIVES ARE NOT
      ACHIEVING EXPECTED SAVINGS
-------------------------------------------------------- Chapter 0:3.2

When TRICARE was designed, the Congress required that the program be
cost neutral--that is, that TRICARE costs not exceed the health care
costs DOD would have incurred without the program.  To control
TRICARE costs, DOD planned to achieve cost savings from managed care
efforts and initiatives.  However, there are reasons now to question
how current and analytically complete DOD's savings claims are. 

An important cost-saving feature of DOD's partnership between
military and civilian health care entities under TRICARE is resource
sharing.  To share resources, the contractor supplements the capacity
of a military hospital or clinic by providing civilian personnel,
equipment, or supplies.  DOD had estimated that resource sharing
could save about $700 million over 5 years.\10 We reported last
summer, however, that DOD and the contractors had made agreements
likely to save about 5 percent of DOD's overall resource sharing
goal.\11 At that rate, after 9 to 24 months of operation, DOD could
have expected to realize only about $36 million. 

DOD officials acknowledged that resource sharing has not achieved the
expected savings but told us that lower-than-expected contract award
amounts have led to more than $2 billion in other savings.  However,
we found that as of May 1997, the existing five contracts had been
modified as many as 350 times, with the resulting potential for
substantial contract cost increases in TRICARE.  These potential cost
increases, just like the potential losses from lack of resource
sharing, would also offset DOD's projected savings.  Furthermore,
last year we questioned DOD's utilization management savings
estimate, which is set at a cumulative 5 to 7 percent, in its health
care budget totals for fiscal years 1998 through 2003.  We reported
that DOD lacked a formal methodology for developing the estimates,
and we concluded that, overall, future health care costs likely would
be greater.  Given these questions about TRICARE costs, we support
DOD's plans to undertake a more current and complete cost analysis of
MTF direct and contractor-provided care to determine TRICARE's
cost-effectiveness.  Until this analysis is completed, questions will
remain regarding the extent to which the legislative objective for
TRICARE's cost-effectiveness is being achieved. 


--------------------
\10 This amount does not include expected savings from the three most
recently awarded contracts. 

\11 Defense Health Care:  TRICARE Resource Sharing Program Failing to
Achieve Expected Savings (GAO/HEHS-97-130, Aug.  22, 1997). 


   ONGOING AND PLANNED MILITARY
   HEALTH SYSTEM CHANGES LIKELY TO
   AFFECT TRICARE
---------------------------------------------------------- Chapter 0:4

DOD's efforts to fully implement TRICARE are occurring at a time when
not only are changes being made in the organization to manage the
program but other, perhaps more significant, changes are being
contemplated for the military health care system itself.  Planning
for these changes and incorporating them into TRICARE is making an
already complex task even more difficult. 


      ORGANIZATIONAL CHANGES
-------------------------------------------------------- Chapter 0:4.1

On February 10, 1998, as part of a DOD-wide reform initiative to
consolidate headquarters functions, DOD established within the Office
of the Assistant Secretary of Defense for Health Affairs what it
called the TRICARE Management Activity.  This activity unifies
several Health Affairs operational elements with two field
activities, including the TRICARE Support Office, which is
responsible for TRICARE procurement activities.  The activity is
expected to strengthen program oversight and performance by
developing and using specific performance measures for the program's
costs, quality, and health care access.  We have found such measures
to be needed. 

A second significant organizational change that may affect the future
of TRICARE relates to the imminent retirement of the now Acting
Assistant Secretary of Defense, who has served in Health Affairs for
the past 9 years and has been a key force in the design and
development of TRICARE.  Strong leadership will be needed in the
future as implementation of TRICARE proceeds, and filling this void
will be a major challenge. 


      LEGISLATIVE INITIATIVES
-------------------------------------------------------- Chapter 0:4.2

The military health care system has changed continually over the
years as a result of legislative initiatives designed to enhance
coverage for military beneficiaries.  For example, within the last 2
weeks, DOD and the Department of Health and Human Services announced
that six demonstration sites have been selected for a 3-year test of
the concept of enrolling Medicare-eligible military retirees and
their (Medicare-eligible) dependents in TRICARE Prime.\12 Medicare
will reimburse DOD for the care provided to enrollees above the
amount DOD currently spends for them.  Under this concept--known as
Medicare subvention--DOD believes it can provide care to older
retirees in MTFs at a lower cost than Medicare HMOs can.  Medicare
subvention will improve enrollees' access to care in MTFs and will
allow Medicare HMOs to contract with DOD to provide specialty and
inpatient care.  While this program adds to the health care options
available to certain military beneficiaries, it also introduces
additional administrative complexities to the already complex TRICARE
program, such as the need for new contracts with Medicare HMOs. 

Many legislative proposals have been introduced in the 105th Congress
that would authorize, either for all Medicare-eligible military
beneficiaries or for Medicare eligibles and certain other non-active
duty beneficiaries, enrollment in one of the many Federal Employees
Health Benefits Program (FEHBP) plans.  Enactment of an FEHBP option
for these beneficiaries could dramatically alter TRICARE by reducing
beneficiaries' demand for military health care. 


--------------------
\12 This demonstration was authorized by the Balanced Budget Act of
1997. 


      DOWNSIZING OF THE MILITARY
      MEDICAL FORCE
-------------------------------------------------------- Chapter 0:4.3

The most significant change in the system may occur if and when DOD
completes its now overdue update of what is known as its "733 study,"
which was completed in April 1994.  In this study, conducted pursuant
to section 733 of the National Defense Authorization Act for fiscal
years 1992 and 1993, DOD's Office of Program Analysis and Evaluation
(PA&E) challenged the Cold War assumption that all military medical
personnel employed during peacetime are needed for wartime.  The
study concluded that DOD's wartime medical requirements are far
lower--by as much as half--than the medical system then programmed
for fiscal year 1999. 

Although no action was taken by DOD as a result of that study, the
Deputy Secretary of Defense, in August 1995, directed that the study
be updated and improved.  We understand that PA&E has nearly
completed the study and that DOD top management will likely review it
before its release.  If the updated review results in conclusions
similar to those in the 733 study, and if DOD acts on those
conclusions, the potential reductions in military medical personnel
and facilities could be significant.  TRICARE's primary cost-saving
advantages are rooted in the delivery of managed care at military
facilities, and any significant reduction in such capacity would
necessitate that beneficiaries be provided care in the contractors'
networks.  This would alter the potential cost-effectiveness of the
program. 


-------------------------------------------------------- Chapter 0:4.4

Mr.  Chairman, this concludes my prepared statement.  I will be glad
to respond to any questions you or other Subcommittee members may
have.  We look forward to continuing to work with the Subcommittee as
it exercises its oversight of this important program. 


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



   (See figure in printed
   edition.)

RELATED GAO PRODUCTS

Defense Health Care:  Reimbursement Rates Appropriately Set; Other
Problems Concern Physicians (GAO/HEHS-98-80, Feb.  26, 1998). 

Defense Health Care:  DOD Could Improve Its Beneficiary Feedback
Approaches (GAO/HEHS-98-51, Feb.  6, 1998). 

Defense Health Care:  TRICARE Resource Sharing Program Failing to
Achieve Expected Savings (GAO/HEHS-97-130, Aug.  22, 1997). 

Defense Health Care:  Actions Under Way to Address Many TRICARE
Contract Change Order Problems (GAO/HEHS-97-141, July 14, 1997). 

Military Retirees' Health Care:  Costs and Other Implications of
Options to Enhance Older Retirees' Benefits (GAO/HEHS-97-134, June
20, 1997). 

Defense Health Care:  Dental Contractor Overcame Obstacles, but More
Proactive Oversight Needed (GAO/HEHS-97-58, Feb.  28, 1997). 

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

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

Defense Health Care:  Medicare Costs and Other Issues May Affect
Uniformed Services Treatment Facilities' Future (GAO/HEHS-96-124, May
17, 1996). 

Defense Health Care:  Effects of Mandated Cost Sharing on Uniformed
Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141,
May 13, 1996). 

Defense Health Care:  TRICARE Progressing, but Some Cost and
Performance Issues Remain (GAO/T-HEHS-96-100, Mar.  7, 1996). 

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

Defense Health Care:  Issues and Challenges Confronting Military
Medicine (GAO/HEHS-95-104, Mar.  22, 1995). 


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