Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration (Testimony, 05/04/99, GAO/T-HEHS/GGD-99-119).

Pursuant to a congressional request, GAO discussed the Department of
Defense's (DOD) Medicare subvention demonstration program, focusing on:
(1) the early phases of implementing the DOD demonstration; (2) issues
raised by that experience for DOD subvention; and (3) lessons from the
DOD demonstration for a possible Department of Veterans Affairs (VA)
demonstration.

GAO noted that: (1) subvention holds the potential to benefit military
retirees and veterans, DOD and VA, and Medicare; (2) although it got off
to a slow start, DOD has initiated its subvention demonstration and is
now serving Medicare-eligible military retirees at six sites; (3)
several key operational issues remain; (4) these include development of
more understandable payment rules, viable for the longer term, and
development of data to manage the demonstration and support its
evaluation; (5) most important, the demonstration's final results, in
terms of access to health care, quality of patient care, and costs to
DOD, Medicare, and retirees, will not be known until the evaluation is
completed, several months after the end of the demonstration in December
2000; (6) DOD's early experience with subvention does offer insights if
proposals are acted on to permit Medicare subvention for VA; (7) in
particular, it would need to consider, in collaboration with the Health
Care Financing Administration, how to determine its baseline costs and
payment rules, as well as the need for good data for implementation,
management, and controlling costs; (8) moreover, VA would need to make
its regular enrollment of veterans who wish to use VA health care
services interface smoothly with subvention demonstration enrollment;
(9) VA would also need to be concerned about potential crowding-out of
other, higher-priority veterans by subvention enrollees; and (10) GAO's
early work on DOD subvention suggests that VA would have a greater
chance of success if it has sufficient time to plan and establish the
demonstration, and if the value and feasibility of implementing
fee-for-service and managed care subvention models simultaneously were
reconsidered.

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

 REPORTNUM:  T-HEHS/GGD-99-119
     TITLE:  Medicare Subvention Demonstration: DOD Experience and
	     Lessons for Possible VA Demonstration
      DATE:  05/04/99
   SUBJECT:  Veterans benefits
	     Health insurance cost control
	     Health care programs
	     Managed health care
	     Cost sharing (finance)
	     Veterans
	     Patient care services
	     Retired military personnel
IDENTIFIER:  Medicare Program
	     DOD TRICARE Program
	     DOD Medicare Subvention Demonstration Program

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MEDICARE SUBVENTION DEMONSTRATION: DOD Experience and Lessons for
Possible VA Demonstration GAO/T-HEHS/GGD-99-119 United States
General Accounting Office

GAO Testimony Before the Committee on Finance, U. S. Senate

For Release on Delivery Expected at 10: 00 a. m. Tuesday, May 4,
1999 MEDICARE SUBVENTION

DEMONSTRATION DOD Experience and Lessons for Possible VA
Demonstration

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

GAO/ T- HEHS/ GGD- 99- 119

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

Mr. Chairman and Members of the Committee: We are pleased to be
here today as you review the Medicare subvention demonstration for
the Department of Defense (DOD), as well as subvention
demonstration proposals for the Department of Veterans Affairs
(VA). The stated goal of subvention is to implement an alternative
for delivering accessible and quality care to Medicare- eligible
military retirees and certain Medicare- eligible veterans, without
increasing the cost to DOD or VA, or to Medicare. In principle,
Medicare- eligible military retirees who enrolled in the
subvention program would get higher priority at military
facilities than before, permitting them to get Medicare- covered
care from DOD a new alternative to retirees' current Medicare
options. Similarly, proposals have surfaced to allow certain
Medicare- eligible veterans to use their Medicare benefits at VA
facilities. Subvention could allow DOD and VA to augment
appropriated funds with Medicare payments and to use excess
capacity where it exists. Medicare might gain because under
subvention it would pay DOD and VA less than the rate paid to
private Medicare providers and managed care plans.

The 3- year DOD demonstration involves about 30,000 enrolled
retirees and limits Medicare payments to DOD to at most $65
million a year. A nationwide DOD subvention program with all
eligibles participating could potentially provide military health
care to at least 600,000 retirees and might generate, by one
estimate, as much as $2 billion a year in Medicare payments to
DOD. (Experience to estimate the percentage of eligibles who would
enroll does not exist.) In VA, the potential may be even greater.

These outcomes are not, however, guaranteed, so the Balanced
Budget Act of 1997 (BBA) authorized a large- scale, 3- year
demonstration of DOD subvention and directed GAO to evaluate the
demonstration's results. The BBA posed 15 evaluation questions
about the demonstration, including its effects on cost to DOD and
Medicare as well as on access to and quality of care. We are
currently surveying approximately 20,000 military retirees,
dependents, and survivors so we can profile the characteristics of
those who enrolled and did not enroll, their access to health
care, and their satisfaction with it. We are also analyzing the
costs to DOD and to Medicare compared with what the costs would
have been without the demonstration for the 125,000 people
eligible for the demonstration. A team visited all the
demonstration sites to evaluate implementation and progress. We
will be providing you with interim reports on aspects of the
demonstration. Our final results will not, however, be available
until several months after the demonstration ends in December
2000.

GAO/ T- HEHS/ GGD- 99- 119 Page 1

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

Our testimony today focuses on the lessons from the experience to
date of the DOD demonstration and its implications for a possible
VA demonstration. Specifically, we report on the early phases of
implementing the DOD demonstration, issues raised by that
experience for DOD subvention, and lessons from the DOD
demonstration for a possible VA demonstration.

In summary, subvention holds the potential to benefit military
retirees and veterans, DOD and VA, and Medicare. Although it got
off to a slow start, DOD has initiated its subvention
demonstration and is now serving Medicare- eligible military
retirees at six sites. Several key operational issues remain.
These include development of more understandable payment rules,
viable for the longer term, and development of data to manage the
demonstration and support its evaluation. Most important, the
demonstration's final results, in terms of access to health care,
quality of patient care, and costs to DOD, Medicare, and retirees,
will not be known until the evaluation is completed, several
months after the end of the demonstration in December 2000.

DOD's early experience with subvention does offer insights if
proposals are acted on to permit Medicare subvention for VA. In
particular, it would need to consider, in collaboration with the
Health Care Financing Administration (HCFA), how to determine its
baseline costs and payment rules, as well as the need for good
data for implementation, management, and controlling costs.
Moreover, VA would need to make its regular enrollment of veterans
who wish to use VA health care services interface smoothly with
subvention demonstration enrollment. VA would also need to be
concerned about potential crowding- out of other, currently
higher- priority veterans by subvention enrollees. Our early work
on DOD subvention suggests that VA would have a greater chance of
success if it has sufficient time to plan and establish the
demonstration, and if the value and feasibility of implementing
fee- for- service and managed care subvention models
simultaneously were reconsidered.

Background Medicare Most military retirees age 65 and over are
eligible for Medicare, a federally

financed health insurance program for the elderly, some disabled
people, and people with end- stage kidney disease. Medicare covers
about

GAO/ T- HEHS/ GGD- 99- 119 Page 2

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

39 million beneficiaries and spends about $212 billion a year. Its
benefits include hospital, physician, and other services such as
home health and limited skilled nursing facility care. HCFA
administers Medicare and regulates participating providers and
health plans.

Original, or traditional, Medicare reimburses private providers on
a fee- for- service basis and allows Medicare beneficiaries to
choose their own providers without restriction. A newer option
within Medicare 1 allows beneficiaries to choose among private,
managed care health plans. Currently, 17 percent of beneficiaries
use Medicare managed care. In original Medicare, beneficiaries
must pay a share of the costs for various services. Most Medicare
managed care plans have only modest beneficiary cost- sharing and
many offer extra benefits, such as prescription drugs.

DOD Health Care DOD received an appropriation for military health
care of almost $16 billion in fiscal year 1999. Of that, an
estimated $1.2 billion is spent on the 1.3 million Medicare-
eligible military retirees. Under its TRICARE program, DOD
provides health benefits to active duty military, retirees, and
their dependents, but most retirees 65 and over lose their
eligibility for comprehensive, DOD- sponsored health coverage. DOD
delivers most of the health care needed by active duty personnel
and military retirees 2 through its military hospitals and
clinics. DOD gives priority for care to active duty personnel and
their dependents, and to certain retirees under 65. Retirees who
turn 65 and become eligible for Medicare can get military care if
space is available (called space- available care) that is, after
other DOD beneficiaries are treated. 3 Some military facilities
have little or no space- available care.

Since the early 1990s, DOD health care has shifted toward managed
care. DOD established its own managed care plan, TRICARE Prime,
which uses military providers, supplemented by a network of
civilian providers. However, it is not available to retirees aged
65 and over. 4 TRICARE Prime

1 The BBA expanded this option to include plans in addition to
health maintenance organizations and labeled it Medicare+ Choice.
2 We use retirees to refer to military retirees, their dependents,
and their survivors. 3 A partial, unofficial exception to this
rule occurs at teaching hospitals, where aged retirees with
serious, persisting conditions are treated on an ongoing basis, in
large measure so that medical residents can be given the clinical
experience required.

4 Active duty members of the armed forces receive their health
care through TRICARE Prime. Dependents of active duty military can
choose among three DOD- run health plans that include TRICARE
Prime. Retirees under 65 can pay a premium and buy in to TRICARE
Prime.

GAO/ T- HEHS/ GGD- 99- 119 Page 3

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

covers services of military physicians as well as civilian network
providers by drawing on DOD's appropriated funds and premiums and
copayments charged to some enrollees. In TRICARE Prime, DOD
generally organizes the delivery of care on managed care
principles for example, an emphasis on a primary care manager for
each enrollee. DOD has gained considerable experience with managed
care, but it relies heavily on contractors to conduct marketing,
build a network of providers, and perform other critical
functions.

The DOD Subvention Demonstration

The BBA established a 3- year demonstration of Medicare
subvention, to start on January 1, 1998, and end on December 31,
2000. Within the BBA's guidelines, DOD and HCFA negotiated a
Memorandum of Agreement (MOA). The MOA stated the ways in which
HCFA would treat DOD like any other Medicare health plan and the
ways in which HCFA would treat it differently. The MOA also
spelled out the benefit package and the rules for Medicare's
payments to DOD. After DOD and HCFA signed the MOA, they selected
six demonstration sites. They would be able to serve about 30,000
of the 125,000 people eligible for both Medicare and military
health benefits in these areas.

The subvention demonstration made DOD responsible for creating a
DOD- run Medicare managed care organization for elderly retirees.
This pilot health plan, which DOD named Senior Prime, is built on
DOD's existing managed care model. By enrolling in Senior Prime,
Medicare- eligible military retirees obtain priority for services
at military facilities an advantage, compared to nonenrollees.
Senior Prime's benefit package is Medicare- plus the full Medicare
benefits package supplemented by some other benefits, notably
prescription drugs.

The BBA provides the basic rules by which, under the
demonstration, Medicare pays DOD. First, Medicare is to pay DOD
for each enrollee the Medicare managed care rate, less several
adjustments and a 5- percent discount. Second, in order to receive
Medicare payments, DOD must at least match its baseline costs, or
level of effort (LOE) that is, devote at least the same resources
as it did in the recent past to providing care to 65- and- over
retirees. The MOA translated these guidelines into a complex
payment system. For example, it allows any demonstration site to
earn monthly interim payments if its Senior Prime enrollment
exceeds a threshold derived from baseline LOE. But at the end of
the year, DOD can

GAO/ T- HEHS/ GGD- 99- 119 Page 4

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

only retain a portion of these payments if that year's costs for
the six sites together exceed baseline LOE. 5

VA Health Care VA provides a comprehensive array of health
services to veterans with service- connected disabilities or low
incomes. Since 1986, VA has also offered health care to higher-
income veterans, who must however make copayments for services.
Overall, VA serves over 13 percent of the total veteran population
of 25 million, with the remaining veterans receiving their health
care through private or employer health plans or other public
programs. Many of the veterans whom VA serves also get part of
their care from other sources, such as DOD, Medicaid, and private
insurance. The administration has requested $17.3 billion for VA
medical care in fiscal year 2000. To make up the differences
between appropriated funds and projected costs, VA estimates that,
by fiscal year 2002, it can derive almost 8 percent of the medical
care budget from nonappropriated sources, including Medicare
reimbursement.

Since the early 1990s, VA has shifted its focus from inpatient to
outpatient care. At the same time, it implemented managed care
principles, emphasizing primary care. In 1995, VA accelerated this
transformation by realigning its medical centers and outpatient
clinics into 22 service delivery networks and empowering these
networks to restructure the delivery of health services.

In 1996, the Congress passed the Veterans' Health Care Eligibility
Reform Act that established, for the first time, a system to
enroll or register veterans. Enrollment is in effect a
registration system for veterans who want to receive care. The law
establishes seven priority groups, with Priority Group 1 the
highest and Priority Group 7 the lowest. Priority Group 7 includes
veterans whose incomes and assets exceed a specified level and (a)
do not have a service- connected disability or (b) do not qualify
for VA payments for those disabilities. Priority Group 7 veterans
must agree to make copayments for health services.

Each year, VA determines, on the basis of available resources,
which priority groups of enrolled veterans will be eligible for VA
care in the coming year. Currently, VA serves all seven priority
categories, but in the future that will not necessarily be true.
Enrolled veterans in any of the priority groups are eligible for
the VA Uniform Benefits Package. This is a

5 These issues are discussed in greater detail in a forthcoming
report on the DOD demonstration of Medicare subvention.

GAO/ T- HEHS/ GGD- 99- 119 Page 5

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

broad package that covers inpatient and outpatient care;
rehabilitative care and services; preventive services; respite and
hospice care; and pharmaceuticals, durable medical equipment, and
prosthetics.

Enrolled veterans remain free to get some or all of their care
from other private or public sources, including Medicare. VA, on
the other hand, is committed to serving all enrolled veterans.

Possible VA Subvention Demonstration

The structure of any VA subvention demonstration would depend upon
the principles and directions that the Congress incorporates in
authorizing legislation. We have found certain common elements in
all demonstration proposals we reviewed. A VA subvention
demonstration would serve certain higher- income 6 , Medicare-
eligible veterans (effectively, Priority Group 7 veterans):

 for a limited time period, such as 3 years;  in a limited number
of locations; and  in compliance with Medicare rules that HCFA
applies to the private sector,

although HCFA could waive rules that were inappropriate or
irrelevant to VA.

Regarding Medicare payments to VA,  HCFA would pay VA at a lower
rate than it currently pays to private

Medicare providers or health plans;  HCFA would pay VA for care of
veterans in the demonstration only after VA

exceeds its historic spending, or level of effort, for higher-
income veterans; and  HCFA payments to VA would be limited to a
predetermined annual amount,

such as $50 million. Several current proposals also  direct VA to
establish at least one demonstration site near a closed military

base;  direct VA to establish at least one demonstration site that
serves a

predominantly rural area; and 6 Those who exceed VA's income
thresholds. For example, the current threshold for a single
veteran without dependents is $22,350.

GAO/ T- HEHS/ GGD- 99- 119 Page 6

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

 direct VA to maintain reserves against the risk that appropriated
funds would be needed to pay for the care of veterans enrolled in
the subvention demonstration.

Some proposals authorize VA to establish both fee- for- service
and managed care subvention sites, while at least one only
authorizes managed care.

DOD Demonstration Launched After Delay, but Key Issues Remain

In implementing the subvention demonstration, DOD and HCFA
completed numerous and substantial tasks. DOD sites had to gain
familiarity with HCFA regulations and processes, prepare HCFA
applications, prepare for and host a HCFA site visit to assess
compliance with managed care plan requirements, develop and
implement an enrollment process, market the program to potential
enrollees, establish a provider network (for care that cannot be
provided at the military treatment facilities), assign Primary
Care Managers to all enrollees, conduct orientation sessions for
new enrollees, and begin service. The national HCFA and DOD
offices developed a Memorandum of Agreement, spelling out program
guidelines in broad terms. They also developed payment mechanisms,
and translated the BBA requirement that DOD maintain its
historical LOE in serving dual eligibles into a reimbursement
formula. HCFA accelerated review procedures and assigned
additional staff so that timelines could be met. But these
accomplishments were not without difficulties, and several issues
remain that are likely to impact the demonstration's results.
These include the extent to which payment rules can be made more
understandable and workable, and the extent to which DOD can
operate successfully and efficiently as a Medicare managed care
organization.

Implementation Delayed by Several Factors

In view of the steep learning curve that DOD faced it started
without any Medicare experience it is not surprising that the
demonstration did not start on time. The BBA was enacted in August
1997 and authorized a demonstration beginning in January 1998. The
first site started providing service in September 1998, and all
sites were providing service by January 1999. Officials at all DOD
sites emphasized to us that the process of establishing a Medicare
managed care organization at their facility was far more complex
than they had expected. They noted several issues that caused
difficulty during this accelerated startup phase, including the
following:

 Delayed notification to sites of their selection for the
demonstration.

GAO/ T- HEHS/ GGD- 99- 119 Page 7

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

 Difficulties in learning and adapting to HCFA rules, procedures,
and terms for managed care organizations. For example, DOD had to
significantly rework grievance and appeals procedures to comply
with HCFA requirements.  Difficulties due to shifts in Medicare
requirements. All sites started

planning as HCFA was developing the new Medicare managed care
regulations to replace the rules for the former risk contract
managed care program. Consequently, the sites had to adapt to
changed rules when they were published.

Capacity and Enrollment Sites vary significantly in their capacity
for caring for Medicare- eligible retirees, how close enrollment
is to capacity, and what fraction of eligibles has enrolled. This
variation suggests that potential demand for a subvention program
is uncertain. Retirees' enrollment decisions reflect several
factors, some that DOD may be able to influence but others such as
the extent of managed care presence in an area outside its
control.

In establishing their enrollment capacity which effectively became
an enrollment target some sites were more conservative than
others. Sites' assessment of their resources focused on the
availability of primary care managers physicians and other
clinicians who both provide primary care and serve as gatekeepers
to specialist care. Additionally, the national TRICARE office
developed a model to show how many enrollees a site would need to
meet its LOE threshold and start receiving increased resources
from subvention, and these results were made available to sites.
Capacity varied from San Antonio, the largest site with four
hospitals and a capacity of 12,700, to Dover, which provides only
outpatient care in its military health facility and set its
capacity at 1,500.

Many DOD officials and other observers expected that sites would
be deluged with applications and would rapidly reach capacity, but
this did not happen. One site is currently at capacity, but only
after several months. Other sites have enrolled between 44 percent
and 91 percent of capacity as of the end of April 1999.

As table 1 shows, there is a four- fold difference in sites'
enrollment as a percentage of eligibles in their catchment areas
from 8 percent (San Diego) to 35 percent (Keesler). Several
factors may explain this variation:

 Enrollment in other Medicare managed care plans varies widely,
from one site with a low percentage of eligible enrollees (San
Diego) where nearly

GAO/ T- HEHS/ GGD- 99- 119 Page 8

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

50 percent of dual eligibles are in private Medicare managed care
plans to two sites with higher percentages of enrollees (Keesler
and Dover) where no one is in managed care because no plans are
available.  The availability of military care varies. Several
sites emphasized in their

marketing that retirees who did not enroll could not count on
receiving space- available care. This information might spur
retirees who prefer military care to enroll in Senior Prime. At
other sites, space- available care was less of an issue. At these
sites, prospective enrollees who believe that they can continue to
receive space- available care may not see an advantage in
enrollment but rather a disadvantage especially because enrolling
in Senior Prime locks them out of other Medicare- paid care.
Sites may differ in the amount of space- available care they have
given in

the past and in beneficiaries' satisfaction with that care. These
factors could also affect the decision to enroll.  Some retirees
expressed reluctance to enroll because the demonstration is

due to end in December 2000. They also noted that they did not get
information about how, after the demonstration ends, enrollees
would transition back to space- available care, traditional fee-
for- service Medicare, or a Medicare managed care organization.

Table 1: TRICARE Senior Prime Enrollment Enrolled a Capacity b

Enrolled as a percentage of

capacity Total eligible Enrolled as a

percentage of eligibility

Madigan Army Medical Center, WA 3,296 3,300 99.9% 21,709 15.2%

San Antonio, TX 11,534 12,700 90.8% 41,215 28.0% Naval Medical
Center, San Diego, CA 2,767 4,000 69.2% 35,619 7.8%

Keesler Medical Center, MS 2,563 3,100 82.7% 7,361 34.8% Colorado
Springs, CO 2,744 3,200 85.8% 13,689 20.0% Dover, DE 661 1,500
44.1% 3,905 16.9%

Total 23,565 27,800 84.8% 123,498 19.1%

Note: Status as of April 26, 1999. a Includes only people who were
65 years old at the beginning of the demonstration. b Capacity at
the beginning of the demonstration. Does not include capacity for
those who turned 65 after the demonstration started.

GAO/ T- HEHS/ GGD- 99- 119 Page 9

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

Managed Care Issues The subvention demonstration for military
retirees aged 65 and over is a new endeavor that highlights
challenges for DOD to operate as a Medicare managed care
organization. The first is operational putting in place
procedures, organization, and staff to deliver a managed care
product to these seniors. The second is economic and
organizational creating the business culture that reconciles
delivering services to this illness- prone population with cost-
consciousness.

DOD's reliance on contractors (like Foundation Health and Humana)
has both enabled it to accomplish key managed care tasks and
brought risks with it. DOD overcame obstacles in launching TRICARE
Senior Prime as a managed care organization. Specifically, to
establish and run a managed care plan requires infrastructure the
ability to market the plan, enroll members, and recruit, manage,
and pay a provider network. In building Senior Prime organizations
at the six sites, DOD has benefited from its TRICARE Prime
experience, and from its contractors who help with or perform many
of these tasks. 7 Sites with well- established TRICARE Prime
organizations that had worked with the same contractor for several
years seemed to us to have a sizeable advantage in establishing
Senior Prime. It is not yet known what effect DOD's extensive use
of contractors will have on DOD costs for Senior Prime. But an
expanded, permanent subvention program would require establishing
and monitoring contractors at many new sites. That would make
contractor quality, relationships, and costs a pivotal and
uncertain feature of a potential DOD subvention program.

Cost- consciousness matters greatly to managed care plans,
especially because they do not use much cost- sharing by enrollees
to curb excess use of services. Managed care plans have an
incentive to control costs because they are paid a fixed rate per
member per month. If the plan cannot provide all services within
that amount, it will not survive. However, in the DOD setting,
several factors undermine this incentive to be cost- conscious.
First, as long as facilities are still providing some space-
available care, they have a safety valve: if resources become too
strained, they can reduce the amount of space- available care
spreading a fixed appropriation over fewer patients. This gives
facilities considerable flexibility to cover costs that are higher
than expected, but the downside is that they have less incentive
to be efficient. Second, military treatment facility commanders do
not have as much control over their budgets as their civilian
counterparts. Many decisions about budgets and personnel are made
independently of the local facility, and it can be difficult, for
example, to

7 The DOD sites relied on the TRICARE contractors for handling
enrollment, claims processing, and network management. They have
also, to varying degrees, assisted with the application, site
visit, quality assurance, and utilization review areas.

GAO/ T- HEHS/ GGD- 99- 119 Page 10

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

get more military primary care doctors or to set up a new program
with large up- front costs, even if these actions would promote
longer- term efficiency.

Payment Issues DOD and HCFA have devised payment rules to meet the
statutory requirement that Medicare should pay DOD only after its
spending on retirees' care reaches predemonstration levels that
is, after it has met its baseline, or LOE. These rules have added
to the difficulty and the complexity of the demonstration.
Furthermore, they have resulted in Medicare payments to DOD not
being immediately distributed to the sites. As a result, DOD site
managers tend to view DOD appropriations as the sole funding
source for all Senior Prime care delivered at military health
facilities; the managers are likely to consider Medicare
subvention payments as irrelevant to their plans for dealing with
capacity bottlenecks or other resource needs in TRICARE Senior
Prime.

The demonstration's payment system requires extensive cost and
workload data data that are often problematic and difficult to
retrieve and audit. It also involves a complicated sequence of
triggers and adjustments for interim and final payments from
Medicare to DOD.

Interim payments are made to DOD for care delivered at each site
that is above a monthly LOE threshold. A reconciliation after the
end of the year to determine final Medicare payments can result in
DOD returning a portion of those interim payments if the LOE for
all sites for the entire year is not reached. DOD would also
return Medicare payments if data showed that the demonstration
population was in better health than that allowed for in the
Medicare payment rates, or if payments exceed the statutory cap ($
50 million in the first year, $60 million in the second, and $65
million in the third). 8

Because of the potential for adjustments after the close of the
year, the payment rules create some uncertainty for DOD. DOD
cannot be certain that it will retain all or even part of the
monthly interim payments at the end of the year. DOD has been slow
to distribute interim payments to the sites, in part because some
of the money may have to be returned to HCFA. This creates great
uncertainty for DOD sites and means that care under subvention is
currently paid for with DOD's appropriated funds. The
demonstration's payment method differs significantly from the
Medicare

8 The enrollment targets for each site reflect the statutory caps.
Consequently, rebates (from DOD to Medicare) as a result of
payments exceeding the cap are unlikely.

GAO/ T- HEHS/ GGD- 99- 119 Page 11

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

managed care payment system, in which payments are made at the
beginning of the month to cover care delivered during the month.

Based on experience to date with the demonstration, any payment
approach for subvention must be even- handed (that is, it should
favor neither HCFA nor DOD); straightforward and readily
understandable; and prospective (DOD and its sites should receive
payment in advance of delivering care to enrollees). The
demonstration's payment mechanism, which relies on LOE, is
functional in the short term although the calculation of LOE has
weaknesses. 9 However, this payment mechanism may not be
appropriate over the longer term for an extended or expanded
subvention program. Moreover, a credible long- term payment system
should start with a zero- based budgeting approach: first,
determining the cost to DOD of providing TRICARE Senior Prime care
to dual eligibles and then deciding how much care will be provided
from DOD's appropriations and how much from Medicare
reimbursement.

Proposed VA Demonstration Can Benefit From DOD Experience

One of the key issues for VA under the proposed demonstration
would be how to market subvention and persuade veterans in
subvention sites to enroll in the demonstration. This issue is
complicated by VA's own enrollment process and the broad benefits
package it offers to all priority groups. VA is committed, as a
matter of policy, to serving all enrolled veterans in 1999 and has
indicated a desire to do so next year. As a result, it has
relatively few options if veterans in a subvention demonstration
consume so many resources that they crowd out or at least put
pressure on VA's capacity for serving other veterans. Two models
are possible for the demonstration fee for service and managed
care. Although fee for service is, in principle, easier to
implement and operate, VA's past difficulties with billing third-
party payers raise concern. Proposals for a VA demonstration could
be strengthened by taking account of DOD's difficulties in
establishing a subvention demonstration. In particular, DOD
experience shows that implementation is difficult and that enough
time should be allowed to undertake the numerous operational steps
needed to get a demonstration started. Furthermore, payment rules
need to be as simple as possible, and data systems are key to
managing and evaluating a subvention demonstration.

Veteran Enrollment in Demonstration

For VA, an important issue is why veterans would want to enroll in
a subvention plan that would not give them significantly more
services than

9 Our first interim report on the demonstration will discuss the
payment rules and LOE.

GAO/ T- HEHS/ GGD- 99- 119 Page 12

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

they can currently receive from VA. Priority Group 7 veterans the
only ones eligible for subvention can now get all services in VA's
broad Uniform Benefits Package. Veterans who are eligible for
Medicare can also get care from non- VA providers either under
fee- for- service or through a managed care plan. If it needed to
make subvention benefits more attractive, VA could either reduce
copayments or increase benefits.

However, VA officials tell us that, due to resource constraints,
VA may not serve Priority Group 7 veterans in the future. If this
happens, these veterans could only get VA services through a
subvention demonstration and hence would probably be more likely
to enroll. (To make this exception possible, legislation would be
required, as eligibility for VA enrollment is uniform nationally.)
Some VA officials have suggested to us that, to give Priority
Group 7 veterans a reason to enroll, it may be necessary to
exclude them from VA services except through the demonstration.

The greatest risk in a VA subvention program is that subvention
enrollees could consume so many services that VA patients in
higher priority groups would be crowded out. However, VA,
according to its policy, cannot deny care to an enrolled veteran
(that is, one who is registered with VA), even if it does not have
sufficient capacity. In the short term, waiting times for
appointments would probably increase, or care could be limited to
certain facilities, which might be inconvenient for some veterans.
VA could also reduce its benefits package, although that would
require a change in regulations. In the longer term, some veterans
could be denied all VA care if VA excludes one or more priority
groups. This would be particularly serious for veterans who lack
other insurance.

Managed Care and Fee- for- Service Models

Current proposals for a VA subvention demonstration permit both
managed care and fee- for- service sites. Of the two, fee for
service appears to be easier to implement, because it only
requires submitting claims for covered services to HCFA for
payment. However, in the past, VA has had difficulty in collecting
from insurance companies because its bills have not had enough
detail (for example, diagnosis, service, procedure, and
individually identified provider). 10 While VA is moving toward a
billing system that will more closely approximate private sector
counterparts, its success remains to be seen.

10 See VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult (

GAO/HEHS-98-4
, Oct. 17, 1997).
10 See VA Medical Care: Increasing Recoveries From Private Health
Insurers Will Prove Difficult (  GAO/HEHS-98-4 , Oct. 17, 1997).

GAO/ T- HEHS/ GGD- 99- 119 Page 13

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

Managed care, by definition, places VA at financial risk, and it
is also, as DOD's experience demonstrates, difficult to implement.
On the other hand, managed care is highly compatible with the
direction in which VA is currently moving. Moreover, VA does not
have the experience that DOD gained from TRICARE, and it does not
have broad- based managed care contractors that appear to have
greatly facilitated implementing and managing the DOD
demonstration.

If a VA subvention demonstration were to include both managed care
and fee- for- service sites, a phased implementation, with one
type of delivery system being successfully implemented before the
other started, would allow both HCFA and VA to focus their
resources. The requirements for Medicare fee for service and
managed care differ considerably. As a result, implementing both
types of sites simultaneously may place significant strains on
both HCFA and VA staffs, particularly at the national level.

Lessons From DOD Subvention Demonstration

We see three main lessons for VA in DOD's experience in
establishing its subvention demonstration.

 Officials at every DOD site told us that establishing a Medicare
managed care organization was more difficult and required more
effort than they had expected. Months into the implementation,
they continue to encounter new issues. Even though the sites took
13 to 17 months after the legislation was passed to establish
Senior Prime, hindsight suggest that the goals to get it running
earlier were unrealistic. If a VA demonstration is authorized, it
should have 12 to 18 months to implement its plans for the
demonstration; both VA headquarters and the sites will need that
much time.  The complexity of the LOE definition and Medicare
payment rules, as well

as ambiguity about what sites could earn and whether earnings
would be distributed to the sites, were issues for DOD. These
factors caused many site managers and physicians to largely
disregard the potential changes in available financial resources
and focus their attention primarily on implementation and patient
care issues. As a result, the demonstration may not produce the
cost savings and efficiencies that are expected from managed care.
VA and HCFA have tentatively agreed to rules that are consistent
with the DOD rules and still contain many of the elements that
have made it difficult for DOD to manage the demonstration. In
particular, payments would be retrospective and an annual
reconciliation process could lead to VA returning money to HCFA.

GAO/ T- HEHS/ GGD- 99- 119 Page 14

Medicare Subvention Demonstration: DOD Experience and Lessons for
Possible VA Demonstration

 DOD's experience shows that data systems are a point of
vulnerability for a successful and credible program. The extent to
which data quality would pose an obstacle to a VA demonstration
depends in part on how the payment rules are specified. Good data,
consistent across sites, would also be needed to manage and
evaluate the demonstration. Data quality problems would probably
vary by site, with some sites having better data than others. The
types of data systems needed would depend in part on the
subvention model that is selected. For example, in a fee- for-
service model, billing systems are critical.

In addition, both DOD and VA will need to develop a strategy to
inform and assist beneficiaries with their options in the
postdemonstration period. Further, as Medicare enrollment in
managed care plans is shifting to an annual open season, it would
be desirable to coordinate enrollment in and termination of the
demonstration with Medicare's open season.

Concluding Observations

Subvention holds significant potential for giving military
retirees and veterans an additional option for health care
coverage, for giving DOD and VA additional funds, and for saving
Medicare money. However, at this point with little systematic data
yet available these outcomes are uncertain. This uncertainty
underlines the value of demonstrations of subvention, such as the
one that the BBA established for DOD. If a VA demonstration were
authorized, VA would clearly need sufficient time to plan and
initiate it. VA could also increase its chance of successfully
establishing the demonstration if it took advantage of DOD's
experience.

Mr. Chairman, this concludes our prepared statement. We will be
happy to answer any questions that you or Members of the Committee
may have.

(101829) GAO/ T- HEHS/ GGD- 99- 119 Page 15

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