Medicare Subvention: Challenges and Opportunities Facing a Possible VA
Demonstration (Testimony, 07/01/1999, GAO/T-HEHS/GGD-99-159).

A Medicare subvention under the Department of Veterans Affairs (VA)
would have the goal of providing an alternative for delivering
accessible and quality care to certain veterans eligible for Medicare
without increasing the cost to Medicare or VA. Subvention would allow VA
to supplement its funds with Medicare payments. In principle, by paying
VA a discounted rate, the Medicare program might save money, so long as
it does not pay for services that VA would have previously covered. A
three-year Department of Defense (DOD) subvention demonstration program
involves about 30,000 retirees and limits Medicare payments to DOD to
$65 million a year. However, a nationwide DOD subvention program could
potentially involve Medicare payments of several hundred million dollars
or more. The potential size of a nationwide VA program may be even
greater, with nearly all the nine million veterans aged 65 and older
covered by Medicare. Proposed legislation before the House and the
Senate would authorize VA subvention demonstrations. Under either bill,
VA will (1) be challenged to attract veterans who currently enjoy a
generous VA benefits package, (2) need to strengthen its billing
systems, and (3) need to ensure that access to services is not reduced.
VA will need sufficient time to implement a demonstration, and it must
carefully design and implement its payment methods to protect Medicare
trust funds and to promote cost consciousness and efficiencies at the
demonstration sites. Finally, sound data systems are essential for
managing and evaluating a subvention demonstration.

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

 REPORTNUM:  T-HEHS/GGD-99-159
     TITLE:  Medicare Subvention: Challenges and Opportunities Facing a
	     Possible VA Demonstration
      DATE:  07/01/1999
   SUBJECT:  Veterans benefits
	     Health insurance cost control
	     Health care programs
	     Managed health care
	     Veterans
	     Comparative analysis
	     Health insurance
	     Proposed legislation
IDENTIFIER:  Medicare Program
	     VA TRICARE Program
	     DOD TRICARE Prime Program
	     DOD Senior Prime Program
	     VA Uniform Benefits Package
	     VA Medicare Subvention Demonstration Program
	     DOD Medicare Subvention Demonstration Program

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Cover
================================================================ COVER

Before the Subcommittee on Health, Committee on Ways and Means, House
of Representatives

For Release on Delivery
Expected at 10:30 a.m.
Thursday, July 1, 1999

MEDICARE SUBVENTION - CHALLENGES
AND OPPORTUNITIES FACING A
POSSIBLE VA DEMONSTRATION

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

GAO/T-HEHS/GGD-99-159

GAO/HEHS-99-159T

(101868)

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

  BBA - Test
  BRAC - Test
  DOD - Test
  HCFA - Test
  HHS - Test
  IG - Test
  OIG - Test
  TRICARE - Test
  VA - Test

MEDICARE SUBVENTION:  CHALLENGES
AND OPPORTUNITIES FACING A
POSSIBLE VA DEMONSTRATION
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today as you review proposals for a
Medicare subvention demonstration for the Department of Veterans
Affairs (VA).  The stated goal of VA subvention is to provide an
alternative for delivering accessible and quality care to certain
Medicare-eligible veterans, without increasing the cost to Medicare
or to VA. 

Several VA subvention proposals resemble in many respects the current
Department of Defense (DOD) demonstration.  Medicare-eligible
military retirees who enroll in the DOD subvention program are able
to get Medicare-covered services from DOD.  Similar proposals would
allow certain Medicare-eligible veterans to use their Medicare
benefits at VA facilities.  Subvention could allow VA, like DOD, to
supplement its funds with Medicare payments.  In principle, by paying
VA a discounted rate, the Medicare program might save money, so long
as it does not pay for services that VA previously would have
covered. 

Although the DOD and the proposed VA demonstrations are relatively
small, full-scale subvention programs could significantly affect the
Medicare trust funds and the costs of VA and DOD.  The 3-year DOD
demonstration involves about 30,000 enrolled retirees and limits
Medicare payments to DOD to, at most, $65 million a year.  By
contrast, a nationwide DOD subvention program could potentially
involve substantially more in Medicare payments.  In VA, the
potential size of a nationwide program may be even greater.  There
are about 9 million veterans aged 65 and older, and nearly all of
them are covered by Medicare. 

Favorable outcomes for Medicare, VA, and DOD, as well as military
retirees and veterans\1

are not, however, guaranteed.  For DOD subvention, the Balanced
Budget Act of 1997 (BBA) authorized a large-scale, 3-year
demonstration and directed GAO to evaluate the demonstration's
effects on access to care, quality, and the cost to DOD and to
Medicare.  We have recently reported on data quality and payment
issues affecting the DOD demonstration and the potential for Medicare
overpayments.\2 We will be providing you with further 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. 

Our testimony today focuses on a possible VA subvention demonstration
and on issues that VA subvention raises.  Specifically, we will
compare the 1998 House Ways and Means Committee bill on VA subvention
with the Senate Finance Committee proposal and discuss the unique
characteristics of VA health care that bear on subvention.  We will
also discuss lessons learned from the design and early implementation
of the DOD demonstration that may be relevant to the proposed VA
demonstration. 

In summary, the 1998 House Ways and Means bill and the current Senate
Finance proposal are similar in that both provide for time-limited
subvention demonstrations in which Medicare pays VA at a discounted
rate to care for veterans who are aged 65 and older and who are
covered by Medicare.  However, there are also significant differences
between the two proposals.  For example, the Ways and Means bill
includes a permanent program for veterans in rural areas who have low
incomes or severe service-connected disabilities, while the Finance
proposal would establish two demonstration models--fee-for-service
and coordinated (managed) care--for lower-priority veterans.  Under
any proposal, subvention holds several challenges for VA.  It would
be challenged to attract to a subvention coordinated care program
veterans who currently enjoy a generous VA benefits package.  VA
would also need to strengthen its billing systems to operate a
fee-for-service model and would need to ensure that veterans' access
to services--whether or not they are in the demonstration--is not
reduced.  Learning from DOD's experience to date, VA would need
sufficient time to implement a subvention demonstration--officials at
every DOD site told us that establishing the demonstration was more
difficult than they had expected.  DOD's experience also shows that
VA payment methods must be carefully designed and implemented both to
protect the Medicare trust funds and to promote cost consciousness
and efficiencies at VA demonstration sites.  Finally, as DOD's
experience underscores, sound data systems are essential for managing
and evaluating a subvention demonstration. 

--------------------
\1 Military retirees are those who have completed a military career
and are entitled to retirement pay.  Veterans include all who served
and who did not receive a dishonorable discharge. 

\2 Medicare Subvention Demonstration:  DOD Data Limitations May
Require Adjustment and Raise Broader Concerns (GAO/HEHS-99-39, May
29, 1999). 

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

      MEDICARE
-------------------------------------------------------- Chapter 0:1.1

Most military retirees aged 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 39 million beneficiaries and spends about $212 billion a
year.  Benefits include hospital, physician, and other services, such
as home health and limited skilled nursing facility care.  The Health
Care Financing Administration (HCFA) administers Medicare and
regulates participating providers and health plans. 

Medicare was originally set up to reimburse private providers on a
fee-for-service basis and to allow Medicare beneficiaries to choose
their own providers without restriction.  A newer option\3 allows
Medicare beneficiaries to choose among private, managed care health
plans.  Currently, 17 percent of beneficiaries use Medicare managed
care.  In fee-for-service 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. 

--------------------
\3 BBA expanded this option to include plans in addition to health
maintenance organizations and labeled it Medicare+Choice.

      VA HEALTH CARE
-------------------------------------------------------- Chapter 0:1.2

VA has traditionally provided 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 without service-connected disabilities. 
However, those veterans must make copayments for services.  Overall,
VA currently registers in its health care system over 15 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 who VA
serves also get part of their care from other sources, such as DOD,
Medicare, 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 other sources, such as reimbursements
from health insurers and, if subvention is enacted, from Medicare. 

Since the early 1990s, VA has shifted its focus from inpatient to
outpatient care.  At the same time, it implemented many of the
principles of coordinated--that is, managed--care, emphasizing
primary care, although many veterans use VA for only a portion of
their 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, which established, for the first time, a system to enroll
veterans.  Enrollment is, in effect, a registration system for
veterans who want to receive care.  Currently, registration is
continuous--a veteran may choose to register at any time and start
receiving services--although VA has the authority to limit the
enrollment period if it chooses.  The law established seven priority
groups, with priority group 1 the highest and priority group 7 the
lowest.  Priority group 1 includes those veterans with the most
severe service-connected disabilities; priority group 7 includes
veterans whose incomes and assets exceed a specified level and who do
not qualify for VA payments for a service-connected disability. 
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 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.  Veterans in any of the
priority groups are eligible for the VA Uniform Benefits Package, a
comprehensive array of services ranging from hospital care to home
health. 

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 veterans within the priority groups
it has designated for that year, although capacity varies by region. 

      DOD HEALTH CARE
-------------------------------------------------------- Chapter 0:1.3

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 personnel and retirees,\4 but most retirees lose their
eligibility for comprehensive, DOD-sponsored health coverage at age
65.  DOD delivers most of the health care needed by active duty
personnel through its military hospitals and clinics.  DOD gives
priority for care at military facilities to active duty personnel and
to dependents of active duty personnel and those retirees under 65
who are enrolled in DOD's managed care program.  Retirees who turn 65
and become eligible for Medicare can get military care if space is
available (called space-available care) after higher-priority
beneficiaries are treated.\5 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.\6 TRICARE Prime 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. 

--------------------
\4 We use retirees to refer to military retirees, their dependents,
and their survivors. 

\5 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. 

\6 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. 

      DOD SUBVENTION DEMONSTRATION
-------------------------------------------------------- Chapter 0:1.4

BBA established a 3-year demonstration of Medicare subvention, to
start on January 1, 1998, and end on December 31, 2000.  Within BBA's
guidelines, DOD and HCFA negotiated a "memorandum of agreement." The
agreement 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 agreement also spelled out the benefits package and
the rules for Medicare's payments to DOD.  After DOD and HCFA signed
the agreement, they selected six demonstration sites.  DOD estimated
that it would be able to serve nearly 30,000 of the approximately
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. 

BBA provides the basic rules by which, under the demonstration,
Medicare pays DOD.  First, Medicare is to pay DOD the Medicare
managed care rate, less several adjustments and a 5-percent discount
for each enrollee.  Second, in order to receive Medicare payments,
DOD must at least match its baseline costs, or level of effort--that
is, devote at least the same resources as it did in the recent past
to providing care to retirees aged 65 and older.  The memorandum of
agreement translates 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 the baseline level of effort.  But at the end of the year, DOD
can only retain a portion of these payments if that year's costs for
the six sites together exceed the baseline level of effort.\7

--------------------
\7 These issues are discussed in greater detail in GAO/HEHS-99-39. 

   PROPOSALS FOR VA DEMONSTRATION
   DIFFER BUT SHARE KEY FEATURES
---------------------------------------------------------- Chapter 0:2

Although several proposals for VA Medicare subvention have been
developed recently, our analysis focuses on two:  a House Ways and
Means Committee bill (H.R.  3828) passed by the House in 1998 and a
proposal adopted by the Senate Finance Committee on June 24, 1999. 
While similar in key respects, the two proposals also differ in
several significant ways, including whether VA subvention would
include a fee-for-service model and whether a permanent program--in
addition to a demonstration targeting certain veterans--would be
established in rural areas for higher-
priority veterans.  The two proposals share certain features,
including a managed care model (which the Finance Committee calls
coordinated care) for at least part of the subvention proposal, a
demonstration targeting lowest priority veterans, and a cap on annual
Medicare payments to VA under the demonstration. 

      H.R.  3828 (105TH CONGRESS)
-------------------------------------------------------- Chapter 0:2.1

The House bill is distinctive in authorizing both a permanent
subvention program and a demonstration project: 

  -- The permanent subvention program would follow a managed care (or
     coordinated care) model.  It would target VA's higher-priority
     veterans (for example, people with severe service-related
     disabilities or low incomes) in rural areas and could be
     continued indefinitely.  It would begin with up to three sites,
     but more sites could be added after 2003.  VA would have to
     maintain its level of effort--its historical resource
     commitment--to the targeted group of veterans in the sites. 
     Medicare payments would be capped at $50 million the first year,
     $75 million the second year, and $100 million in subsequent
     years.  No cap would apply if the program were expanded to more
     sites, subject to certification by the Department of Health and
     Human Services' (HHS) Inspector General (IG) that VA could
     measure its costs in a reasonably reliable and accurate manner. 

  -- By contrast, the demonstration would be limited to veterans in
     the lowest priority level for VA care at no more than three
     sites and would deliver services for not more than 3 years.  One
     site would have to be an area previously served by a military
     health facility shut down in the military base closing process,
     known as the BRAC (Base Realignment and Closure) process. 
     Unlike the permanent program, no rural sites are required. 
     Medicare payments to VA under the demonstration would be capped
     at $50 million annually.  The bill would allow requiring
     veterans to pay enrollment fees and copayments that could vary
     with income. 

For both the demonstration and the permanent program, the House bill
emphasizes that, if practicable, VA should use its outpatient
clinics.  However, VA could still contract with private providers and
health plans to supply services as needed. 

      THE SENATE FINANCE PROPOSAL
-------------------------------------------------------- Chapter 0:2.2

The scope of the Finance Committee proposal\8 is in some respects
narrower--its demonstration is limited to the lowest priority
veterans (priority group 7:  higher-income veterans who mostly lack a
service-connected disability).  In other respects, it is
broader--authorizing a test of two subvention models.  The proposal
would require VA to establish, first, a coordinated care model of
subvention and, a year later, a fee-for-service model.  It would
authorize a VA subvention demonstration in, at most, eight sites but
would require equal numbers of sites for the two models.  The
proposal would allow up to a year for implementing each model, which
would operate for up to 3 years after enrollment started. 

Medicare's rules for paying VA would resemble those in the DOD
subvention demonstration:  To guard against the same VA care being
paid for by both VA appropriated funds and Medicare, the proposal
would require VA to demonstrate maintenance of its effort on behalf
of the demonstration population.  HCFA would pay VA for the care of
veterans in the demonstration only after VA exceeded its historical
spending, or level of effort, for higher-income veterans. 

--------------------
\8 The text of this bill is not yet available.  Our description is
based on a summary, prepared by Committee staff for the markup on
June 24, 1999, of the proposal contained in the Chairman's Mark.  The
Committee adopted the proposal. 

      COMMON FEATURES OF THE TWO
      PROPOSED DEMONSTRATIONS
-------------------------------------------------------- Chapter 0:2.3

The House bill and Senate proposal share certain common elements.  In
each, a VA subvention demonstration would include a managed care (or
coordinated care) model and serve certain higher-income\9 veterans
(effectively, priority group 7) who are Medicare beneficiaries

  -- for a limited time period--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 for VA). 

Regarding Medicare payments to VA,

  -- HCFA would pay VA at 95 percent of the applicable Medicare rate
     paid to private providers or health plans--less certain
     exclusions, such as payments for disproportionate share
     hospitals and graduate medical education;

  -- HCFA payments to VA would be limited to a predetermined annual
     amount, such as $50 million; and

  -- VA must meet its previous level of effort in providing services
     to Medicare-eligible veterans. 

(For a more extensive comparison of the two proposals, see app.  I.)

--------------------
\9 Higher-income veterans are those who exceed VA's income thresholds
for cash benefits.  For example, the current threshold for a single
veteran without dependents is $22,351. 

   VA DEMONSTRATION WOULD FACE
   CHALLENGES CONCERNING
   PARTICIPATION, BILLING, AND
   ACCESS
---------------------------------------------------------- Chapter 0:3

A proposed VA demonstration holds several challenges.  First,
veterans may see no advantage in enrolling in a subvention managed
care plan because everyone eligible for the demonstration currently
has both VA and Medicare benefits.  Second, VA's past difficulties in
billing insurance companies suggest that VA may have difficulty
billing Medicare for services provided to veterans.  Finally, if
subvention enrollees prove to be heavy users of VA services, they may
crowd out or limit the access of other, higher-priority veterans. 

For VA, an important issue to consider is whether veterans would
enroll in a subvention managed care plan that would not give them
significantly more services than they currently receive from VA and
that would restrict their freedom to use other providers.  Priority
group 7 veteransthe only ones eligible for a subvention
demonstrationcan now obtain all services in VA's Uniform Benefits
Package (although not always in a timely manner).  Like Medicare, VA
benefits cover a broad range, including inpatient and ambulatory
medical and surgical care, certain plastic surgery, and durable
medical equipment.  VA benefits are particularly strong, compared to
Medicare, in mental health care, comprehensive rehabilitative care
and services, preventive services, and respite care.  The VA benefit
also--unlike Medicare--covers drugs.  Copayments are generally no
greater than under Medicare fee-for-service.  Additionally, 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--whereas, under subvention, members would be locked out of using
other Medicare plans and providers.  If it needed to make subvention
benefits more attractive, VA could either reduce copayments or
increase benefits, but these actions would increase VA's costs. 

In the future, however, VA benefits, as well as the number of
priority groups served, may be reduced.  Paradoxically, the less
generous the VA package for all veterans, the greater their incentive
to participate in the demonstration, because that would be the only
way they could obtain the full range of VA care.  VA is authorized to
reduce its Uniform Benefits Package and stop serving lower-priority
veterans, including priority group 7.  VA officials tell us that, due
to resource constraints, VA may not serve priority group 7 veterans
in the future and may reduce the benefits covered under the benefits
package.  If this happens, priority group 7 veterans could only get
VA services through a subvention demonstration and, hence, would
probably be more likely to join the VA Medicare subvention
demonstration.\10 Furthermore, 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. 

Current proposals for a VA subvention demonstration, such as the
Senate Finance Committee's, 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 VA to submit claims for
covered services to HCFA for payment.  It does not require the
veteran to join a VA-operated managed care plan and forego access to
other providers.  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).\11 While VA is moving toward a
system that will more closely approximate private sector billing
procedures, its success remains to be seen. 

The greatest concern in a VA subvention program--either coordinated
care or fee-for-service--is that subvention enrollees could consume
so many services that veterans in higher priority groups would be
crowded out or their access to care restricted.  This concern is
particularly great in the case of VA, both because of its constrained
resources and its current policy of not denying care to any veterans. 
VA's budget has been essentially flat for the last 3 years, and the
President's budget proposes the same amount for medical care in
fiscal year 2000 as was appropriated to VA for fiscal year 1999. 
However, VA has not only restructured and moved resources from
inpatient to outpatient care, it also increased the number of
veterans served and is considering several expensive new initiatives,
such as a hepatitis C program.  One result has been pressure on
resources and, in some areas, increased waiting times for
appointments.  Furthermore, according to its policy, VA does not deny
care to any veteran, although veterans may have to wait longer to
obtain the care.  In the short term, if subvention absorbed more
resources than a medical facility had available, waiting times for
appointments would probably increase or care could be limited to
certain facilities, which might be inconvenient for some veterans. 
It is unclear how much of an impact increases in waiting times or
other types of decreased access would have on enrollees in the
demonstration.  VA would probably try to ensure that access was
maintained for demonstration participants, since their continued
participation increases VA resources. 

--------------------
\10 Since many veterans obtain only part of their care from VA, this
still might not be sufficient incentive. 

\11 See VA Medical Care:  Increasing Recoveries From Private Health
Insurers Will Prove Difficult (GAO/HEHS-98-4, Oct.  17, 1997). 

   PROPOSED VA DEMONSTRATION CAN
   BENEFIT FROM DOD EXPERIENCE
---------------------------------------------------------- Chapter 0:4

Taking account of DOD's experience in establishing a subvention
demonstration could strengthen proposals for a VA demonstration.  In
particular, DOD experience shows that implementation is difficult and
that enough time should be allowed to undertake the numerous steps
needed to get a demonstration started.  Furthermore, an adequate
payment method is essential to protect the Medicare trust funds, and
payment rules need to be as simple and straightforward as possible. 
Finally, accurate and reliable data systems are needed to manage
demonstration costs and health care effectively. 

A detailed discussion of these issues is in appendix II.  The
following summarizes the main lessons from DOD's experience. 

  -- Time needed for implementation should be recognized.  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 suggests 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 sites
     would need that much time.\12

  -- Payment methods need careful design and oversight.  In any
     demonstration of Medicare subvention, adequate payment methods
     are needed to protect the Medicare trust funds.  The DOD
     demonstration stipulated that Medicare would not pay DOD unless
     DOD had provided its Medicare-eligible retirees an amount of
     care exceeding its historical level of effort for these
     retirees.  Under a VA demonstration, a similar requirement would
     be desirable.  An accurate estimate of VA's baseline costs would
     reduce the chance that Medicare would overpay or underpay VA
     under a subvention demonstration.\13

DOD and HCFA also encountered difficulties due to (1) the complexity
of the Medicare payment rules for subvention, (2) the definition and
measurement of baseline costs, and (3) ambiguity about what sites
could earn and whether earnings would be distributed to the sites. 
As a result of these factors, many DOD site managers and physicians
have largely disregarded the uncertain gain in financial resources
from possible Medicare payments and have focused primarily on
implementation and patient care issues.  Consequently, the DOD
demonstration may not produce the full savings and efficiencies that
are expected from managed care. 

DOD's experience can be used in designing a possible VA
demonstration.  First, payment rules should give VA and its sites
greater certainty about their earnings.  Second, if a VA
demonstration had a level-of-effort requirement, the baseline costs
should be for a period as close as possible to the start of the
demonstration.  This would minimize problems of comparing current and
baseline costs.  It would also facilitate audits of the data.  Third,
sites should be informed in advance what proportion (if any) of their
Medicare earnings would be retained centrally or regionally.\14

  -- Accuracy of data systems relies on agency commitment.  DOD's
     experience shows that data systems are a point of vulnerability
     for a successful and credible program.  Inadequate data quality
     can weaken the management of a demonstration and raise questions
     about reports of its favorable results.  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
     general, solving data quality problems requires commitment and
     follow-through of agency management. 

In addition, DOD experience suggests that veterans in a potential VA
subvention demonstration would benefit if VA were to develop a
strategy to inform and assist them with their options after the
demonstration ends.  Furthermore, as Medicare enrollment in managed
care plans is shifting to an annual open season, coordinating
enrollment in and termination of the demonstration with Medicare's
open season would help demonstration participants. 

--------------------
\12 The Finance Committee proposal provides a year for start-up and
initial implementation of the demonstration.  It also would stagger
the start of the two models:  the fee-for-service model would start a
year after the coordinated care model. 

\13 The payment rules in the DOD demonstration are, at least in
principle, adequate for the short term but would be undesirable for a
longer-term program.  A different payment method, with more
understandable rules and viable for the longer term, would need to be
developed if the DOD demonstration were extended. 

\14 VA calls the regional level a Veterans Integrated Service
Network, or VISN. 

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

Subvention holds significant potential for giving veterans an
additional option for health care coverage, for saving Medicare
money, and for giving VA additional funds.  However, these favorable
outcomes are not guaranteed.  We have identified several challenges,
based on the particular characteristics of VA as well as the
experience of DOD subvention.  If a VA subvention demonstration were
designed to take account of the issues we have raised, its chance for
success would be greater.  In particular, for a managed (or
coordinated) care demonstration, veterans need to have sufficient
incentivescompared to the standard VA benefitsto enroll.  For a
fee-for-service demonstration, VA needs adequate billing systems to
ensure that it receives the money it earns.  And, as with any
demonstration, it will be important to protect both participants' and
other veterans' access to care.  DOD's experience with subvention to
date shows the importance of sound data systems that consistently and
accurately capture financial and workload data.  It also underscores
the importance of straightforward and easy-to-understand payment
rules and a clearly defined level of effort that creates a level
playing field for both VA and Medicare. 

-------------------------------------------------------- Chapter 0:5.1

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

   GAO CONTACTS AND
   ACKNOWLEDGMENTS
---------------------------------------------------------- Chapter 0:6

For future contacts regarding this testimony, please call William J. 
Scanlon at (202) 512-7114 or Stephen P.  Backhus at (202) 512-7101. 
Key contributors to this testimony include Gail MacColl, Jonathan
Ratner, Dayna Shah, and Phyllis Thorburn. 

COMPARISON OF 1998 WAYS AND MEANS
BILL AND 1999 SENATE FINANCE
PROPOSAL ON VA SUBVENTION
=========================================================== Appendix I

                    H.R. 3828 (105th\ Congress)\a           Senate Finance proposal summary\b
--------------  --  ----------------------------------  --  ---------------------------------
What would be       --A demonstration project under         A demonstration project under
authorized and      which Medicare would reimburse VA       which Medicare would reimburse VA
who would be        for care provided to veterans           for care provided to veterans
targeted?           enrolled in Medicare parts A and B      enrolled in Medicare parts A and
                    who have no service-connected           B who have no compensable
                    disability and who do not meet          service-connected disability and
                    VA's low-income threshold.              do not meet VA's low-income
                    --A program under which Medicare        threshold.
                    would reimburse VA for care
                    provided to veterans enrolled in
                    Medicare parts A and B who have
                    service-connected disabilities or
                    who are low-income and who live
                    far from a VA medical center.

How would           To the extent practicable, VA           --Fee-for-service model.
health care be      would use its outpatient clinics        --Coordinated care model
delivered?          to provide services under the           consistent with Medicare+Choice
                    program. VA may enter into              requirements.
                    contracts and arrangements with
                    entities such as private
                    practitioners, providers,
                    preferred provider organizations,
                    and health care plans to provide
                    health care under the program or
                    demonstration project.

How many            --Up to three demonstration             --Up to four fee-for-service
health care         project sites, at least one of          sites, at least one of which must
delivery            which must encompass the area           be operated in a predominantly
sites?              served by a military medical            rural area.
                    facility closed pursuant to BRAC.       --Up to four coordinated care
                    --Initially, no more than three         sites, at least one of which must
                    program sites, but additional           be operated in a predominantly
                    sites could be designated starting      rural area.
                    in 2003.                                An equal number of sites would
                                                            represent each model.

When would the      --Demonstration would begin Jan.        --Fee-for-service model would
demonstration       1, 1999, and end Dec. 31, 2001.         start Jan. 1, 2001, and end the
or program          --Program would begin Jan. 1,           earlier of 3 years after first
begin and end?      2000, and may continue                  enrollment or Dec. 31, 2004.
                    indefinitely.                           --Coordinated care model would
                                                            begin Jan. 1, 2000, and end 3
                                                            years after enrollment begins or,
                                                            if earlier, Dec. 31, 2003.

Would the           Yes. HHS' Office of Inspector           Yes. HHS' OIG must certify VA has
start of the        General (OIG) must certify that VA      (1) cost accounting systems for
demonstration       and HHS have established a data-        each demonstration site; (2)
or program be       matching program to identify            reliable, accurate, and
contingent on       veterans eligible for Medicare and      consistent data across sites; (3)
VA meeting          entitled to VA benefits and have        minimized the risk that VA
certain             performed such a comparison.            appropriations will be used for
requirements?                                               the demonstration; (4) the
                                                            capacity at each site to provide
                                                            benefits to sufficient numbers of
                                                            targeted Medicare-eligible
                                                            veterans; and (5) sufficient
                                                            safeguards at each site to
                                                            minimize reduction in quality or
                                                            access to care to veterans
                                                            (participating and not
                                                            participating in the
                                                            demonstration.)

How would an        Participation in the program or         Eligible veterans must enroll in
eligible            demonstration project is                the demonstration. Eligibility
veteran             voluntary. Enrollment is implied.       must be verified prior to
participate?                                                receiving services.

How much would      95 percent of amount paid to            --Under fee-for-service, 95
Medicare pay        Medicare+Choice organizations           percent of Medicare rate.
to VA?              (excluding payments for medical         --Under the coordinated care
                    education and disproportionate          model, 95 percent of amount
                    share and capital-related payments      payable to Medicare+Choice
                    to hospitals for inpatient              organizations.
                    services).                              Payments for medical education
                                                            and disproportionate share
                                                            excluded from reimbursements;
                                                            one-third of capital-related
                                                            costs included.

Would there be      Yes:                                    Yes; $50 million for each year of
a cap on            --For demonstration project, not        the demonstration.
Medicare            more than $50 million annually for
reimbursements      1999 through 2001.
?                   --For program, not more than $50
                    million for 2000; $75 million for
                    2001; and $100 million for 2002
                    and each succeeding year, but no
                    cap if program expands to
                    additional sites, subject to HHS'
                    IG certification.

What would          For the demonstration project,          (Not specified in the Senate
veterans be         veterans may be required to pay         Finance proposal summary.)
required to         enrollment fees and to make
pay?                copayments, which can vary based
                    on income. Fees and copayments
                    must be consistent with
                    Medicare+Choice requirements,
                    except as waived by HHS.

Would VA be         Requires that VA and HHS agreement      Yes. VA expenditures at any site
required to         describe how maintenance of effort      must exceed an established
maintain its        will be implemented in both the         baseline amount before Medicare
historical          demonstration and program.              reimbursement will occur.
level of            However, only implementation of
health care         the program is conditioned on VA
services to         reporting to the Congress and GAO
Medicare-           on steps taken to prevent
eligible            reduction in type or amount of
veterans?           health care services provided. An
                    agreement entered into by VA and
                    HHS would determine a base year
                    against which VA must maintain
                    overall the level of effort for
                    services.

How would the       VA and HHS would jointly determine      (Not specified in the Senate
baseline level      a base year. VA would report to         Finance proposal summary.)
of effort be        the Congress and GAO on its
calculated?         methodology and basis for
                    calculating level of effort.

Would Medicare      Yes. Both the demonstration             Yes. Coordinated care
requirements        project and program must meet all       demonstration must provide, at a
apply?              requirements of Medicare+Choice         minimum, Medicare benefits under
                    plans. (HHS may waive any               Medicare+Choice rules and
                    requirement if waiver reflects          regulations, unless waived by HHS
                    VA's status as a federal agency         for specific reasons.
                    and is necessary to carry out the
                    program or demonstration project.)

How would           GAO would report annually on cost       Annual reconciliation process to
costs to            increases to Medicare under the         ensure no increase in costs to
Medicare be         demonstration or program. If VA         Medicare. GAO must report
monitored?          and HHS conclude that the               annually on the extent, if any,
                    demonstration or program has            to which costs to the Medicare
                    increased Medicare spending, VA         program under the demonstration
                    must reimburse Medicare and adjust      have increased.
                    future Medicare payments.
---------------------------------------------------------------------------------------------
\a The provisions of H.R.  3828 were incorporated into H.R.  4567,
which passed the House on Oct.  10, 1998. 

\b The text of this bill is not yet available.  Our description is
based on a summary of a proposal titled Chairman's Mark:  The
Medicare Subvention Demonstration for Veterans Act of 1999, prepared
by the staff of the Senate Committee on Finance, June 24, 1999.  The
Committee adopted the proposal on that date. 

EXPERIENCE IMPLEMENTING DOD
SUBVENTION DEMONSTRATION
========================================================== Appendix II

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 level of effort 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
------------------------------------------------------ Appendix II:0.1

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.  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. 

  -- 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
------------------------------------------------------ Appendix II:0.2

Sites vary significantly in (1) their capacity for caring for
Medicare-eligible retirees, (2) how close enrollment is to capacity,
and (3) 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, DOD may
be able to influence; others, such as the extent of managed care
presence in an area, are outside its control. 

In establishing their enrollment capacitywhich effectively became an
enrollment targetsome 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 level-of-effort
threshold and start receiving increased resources from subvention,
and these results were made available to sites.  Capacity varied from
San Antonio, Texas, the largest site with four hospitals and a
capacity of 12,700, to Dover, Delaware, 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 has reached capacity, but only after
several months.  Other sites have enrolled between 46 percent and 92
percent of capacity as of the end of June 1999. 

As table II.1 shows, there is a fourfold difference in sites'
enrollment as a percentage of eligibles in their catchment areasfrom
8 percent (San Diego, California) to 36 percent (Keesler,
Mississippi).  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 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 II.1
                          
                              TRICARE Senior Prime Enrollment

                                                       Enrolled                   Enrolled
                                                           as a                       as a
                                                  percentage of       Total  percentage of
                          Enrolled\a  Capacity\b       capacity    eligible    eligibility
------------------------  ----------  ----------  -------------  ----------  -------------
Madigan Army Medical           3,313       3,300         100.4%      21,709          15.3%
 Center, Wash.
San Antonio, Tex.             11,638      12,700           91.6      41,215           28.2
Naval Medical Center,          2,879       4,000           72.0      35,619            8.1
 San Diego, Calif.
Keesler Medical Center,        2,617       3,100           84.4       7,361           35.6
 Miss.
Colorado Springs, Colo.        2,823       3,200           88.2      13,689           20.6
Dover, Del.                      685       1,500           45.7       3,905           17.5
==========================================================================================
Total demonstration           23,955      27,800          86.2%     123,498          19.4%
------------------------------------------------------------------------------------------
Note:  Status as of June 21, 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. 

      MANAGED CARE ISSUES
------------------------------------------------------ Appendix II:0.3

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 a 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
enabled it to accomplish key managed care tasks.  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.\15 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. 

--------------------
\15 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. 

      PAYMENT ISSUES
------------------------------------------------------ Appendix II:0.4

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 level of effort.  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 level-of-effort 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 level of
effort 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).\16

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 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 level of effort, is functional in the
short term--although the calculation of level of effort has
weaknesses.\17 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. 

--------------------
\16 The enrollment targets for each site reflect the statutory caps. 
Rebates (from DOD to Medicare) as a result of payments exceeding the
cap are unlikely. 

\17 These issues were discussed more fully in GAO/HEHS-99-39. 

*** End of document. ***