oversight

Loss of Millions of Dollars in Revenue Because of Inadequate Charges for Medical Care

Published by the Government Accountability Office on 1977-03-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME
00508 -   LA0751626]
Loss of Millions of Dollars in Revenue Because of Inadequate
Charges for Hedical Care. B-133142; FGNSD-76-102. March 8, 1977.
17 pp.
Report to the Congress; by Robert F. Keller, Acting ccmptroller
General.
Issue Area: Accounting and Financial Reptorting (1208); Health
    Programs: ReimbursemGnt Policies and Utilization Controls
    (2800).
Contact: Financial and General Management Studies Div.
Budget Function: Health: Health Care Services (051); National
    Defense: Department of Defense - Military (except
    procurement & contracts) (551).
Organization Concerned: Department of the Air Force; Department
    of the Army; Department of the Navy; Department of Defense.
Congressional Relevance: Congress; House Committee on Armed
    Services; Senate Committee on Ar'td Services.
Authority:   (24 U.S.C. 34; P.L. 75-51). DOD Instruction 7230.7.
    Executive Order 11116. Executive Order 11609. O..BM.
    Circular A-25.
          A rev.es was conducted of pulicies and procedures used
for determining and charging rates for medical care in military
medical facilities. Pertinent accounting rcords and reports
were also reviewed. Findings/Conclusions: Persons other than
active and retired military personnel and their dependents must
pay for the nedical care they get in military medical
facilities. The rates charged paying patients are so low that
about $12 million in medical costs are not recovered annually.
Computations of full reimbursement rates excluded many costs of
medical operations because of inconsistencies in accounting data
submitted by the military services to the Department of Defense
and because of the exclusion of certain costs by the Department
in computing the rates. Reimbursements could be increased by
about $3.2 million annually if full charge rates were increased
'o recover all costs of providing medical care. Reimbursements
could be increased another $8.7 million annually if the special
charges for U.S. civilians and foreign nationals and their
dependents working for the Government overseas were revised to
recover the costs of providing the medical care. Legislative
history indicates that the charges should be high enough to
recower costs, Recommendations: The Secretary of Defese should
provide the military services with specific guidance for
reporting accountin? data so that complete and consistent costs
are used to ccmputc reimbursement rates; establish procedures so
that all applicable costs are included in rate ccmputations; and
revise the rates periodically. Rates for inpatient and
outpatient medical care which are intended to recover all ccsts
should be increased. (Author/SC)
30


                      REPORT TO THE CONGRESS

     ..       X\\BY          THE        COMPTROLLER                       GENERAL


          .           OF THE UNITED S TA TES




                      Loss Of Millions Of Dollars In
                      Revenue Because Of Inadequate
                      Charges For Medical Care
                      Department of Defense
                      Persons other than active and retired military
                      and their dependents must pay for the medi-
                      cal care they get :n military medical facilities.
                      Legislative history indicates that the charges
                      should be high enough to recover tt.e costs of
                      the medical care provided.
                      The rates charged paying patients are so low
                      that about $12 million in medical costs are
                      not recovered annually.

                      GAO is recommending that Defense use com-
                      plete cost data for determining rates to be
                      charged and revise present rates to recover
                      costs of providing medical care.
                      The Department of Defense has instructed
                      military departments to increase rates charged
                      U.S. employees overseas effective April 1,
                      1977, and is revising its accounting system to
                      provide the information necessary to develop
                      more accurate reimbursement rates.




                      FGMSD-76-102                                        '         9 7   7
               COMPTROLLER GENERAL OF THE UNITED rTATES
                          WASHINGTON, D.C.   fh41



B-133142




To the President of the Senate and the
Speaker of the House of Representatives

     Overseas military medical facilities are charging token
rates to certain categories of patients fot medical care,
which has resulted in the U.S. Government subsidizing the
cost of this care. Rates charged for medical care provided
by military medical treatment facilities to paying patients
should be higher to recover the cost of providing such care
as intended by pertinent legislation.

     The Department of Defense concurs in our proposal and
has taken actions which will increase the reimbursement
rates charged paying patients. Action is still needed to
identify all costs of providing care. We believe the re-
port will be useful to the House and Senate Appropriations
Committees in evaluating Defense's 1978 budget requests.

     We made our review pursuant to the Budget and Account-
ing Act, 1921 (31 U.S.C. 53), and The Accounting and Audit-
ing Act of 1950 (31 U.S.C. 67).

     We are sending copies of this report to the Director,
Office of Management and Budget; the Secretary of Defense;
and the Secretaries of the Army, Navy, and Air Force.




                          ACTING Comptrol r Gleneral
                                 of the United States
COMPTROLLER GENERAL'S                    LOSS OF MILLIONS OF DOLLARS IN
REPORT ')O THE CONGRESS                  REVENUE BECAUSE OF INADEQUATE
                                         CHARGES FOR MEDICAL CARE
                                         Department of Defense

           DIGEST

           The Defense Department needs to improve its
           accounting policies and increase some
           charges for medical care to recover costs
           incurred.  By doing this, Defense could in-
           crease its revenue by abtout $12 million ,n-
           nually.

           CHARGES FOR MEDICAL CARE
           SHOULD RECOVER COST

           Medical care at military facilities         is pro-
           vided on a reimbursable basis to

           -- anyone      needing emergency   care,

           --U.S. civilians and their dependents as-
             signed to Federal jobs overseas, and

           -- certain foreign nationals (military and
              civilian) and their dependents.

           Legislative history indicates that charges
           for medical care should recover costs and
           the rates charged should be changed periodi-
           cally so that free or relatively free medi-
           cal services are not given.  Regulations of
           the Office of Management and Budget and the
           Department of Defense also provide that full
           costs to the Government should be charged
           for services rendered.

           The Secretary of Defense is responsible for
           prescribing rates for hospital and dispen-
           sary services.  The rates charged by the
           Department of Defense include (1) special
           rates for certain persons at medical facili-
           ties overseas and (2) full reimbursement
           rates for individuals at U.S. and overseas
           locations who are not normally authorized
           care in military medical facilities.  Special


 Tear Sbhet. Upon removal, the reporti                     FGMSD-76-102
 cover date should be noted hereon.
rates are token charges while full reimburse-
ment rates are intended to recover the full
cost of providing medical care.

SPECIAL RATES NOT JUSTIFIED

Since 1943 U.S. civilians and foreign na-
tionals and their dependents working for
the Government overseas have paid the
special rate of only $1 a visit for out-
patient medical care. During an outpatient
visit, patients can receive doctor's care,
prescriptions, and such medical services as
laboratory tests and X-rays. Obvio-sly, the
$1 charge does not recover the cost of cut-
pat~ent medical care.  In some rases, com-
parable outpatient care obtained for $1
overseas would cost $85 in the United States.
(See p. 3.)
Foreign nationals and their dependents em-
ployed by the U.S. Government overseas are
charged a special rate of $5 a day for in-
patient care. This charge is supposed to
cover all hospital care received and has
not changed since 1943.

Reimbursements could be increased by more
than $8.7 million annually if special
charges for medical care were revised to
recover costs of providing the care.  (See
p. 3.)
In October 1976 GAO proposed to the Secretary
of Defense that rates be revised to recover
the full cost of providing medical care.
The Department of Defense informed GAO that
effective April 1, 1977, military departments
will increase (1) the special rate charged
U.S. employees from $1 for each outpatient
visit to $20 ind (2) the rate charged foreign
nationals for inpatient service from $5 to
$168.  Further, GAO found that Defense has
underway a study to develop a clear definition
of what service will be covered by the $20 fee.
In those casps where care provided involves
only minimal medical procedures, consideration
is being given to charging a nominal fee or no
fee at all.

                      '-1
Defense's action to revise the rates will
significantly increase the amount of reim-
bursements; however, GAO believes that the
new rates will not recover all costs that
should be recovered.  (See pp. 6 to 10.)
CHARGES FOR MEDICAL CARE DO NOT
RECOVER COSTS AS REQUIRED
Rates for inpatient and outpatient medical
care which are intended to recover all
costs should be increased. Computations of
full reimbursement rates excluded many costs
of medical operations because of (1) in-
consistencies in accounting data submitted by
the military services to the Department of
Defense and (2) exclusion of certain costs
by the Department in computing the rates.
Increases in the full reimbursement rates to
recover all costs of providing medical care
could bring in over $3.2 million annually.
(See pp. 6 to 10.)
GAO is recommending that the Secretary of
Defense (1) provide the military services
with specific guidance for reporting ac-
counting data so that complete and consis-
tent costs are used to compute reimburse-
ment rates, (2) establish procedures so that
all applicable costs are included in rate
computations, and (3) revise the rates
periodically. The Department of Defense
agreed that not all costs are included in
rate computations and informed GAO that it
was giving high priority to developing the
uniform accounting procedures needed to
provide more complete information for deter-
mining reimbursement rates.  Defense, in
improving its hospital accounting system,
will be able to consider whether it will
be feasible to charge rates which approxi-
mate more closely the cost of care received
by each patient in lieu of charging one
rate for all inpatient care and one rate
for all outpatient care.




 Itu-rl~ibn          iii
                      Contents
                                                         Page
OIGEST                                                       i

CHAPTER
   1       INTRODUCTION                                      1
               Persons authorized use of military
                 medi.cal facilities                         1
               Rates should recover costs of providing
                 medical services                            1

   2       SPECIAL RATES SHOULD BE ELIMINATED                3
               Conclusior s                                  4
               Agency actions                                5

      3    FULL REIMBURSEMENT RATES ARE TOO LOW              6
               Reimbursement rates do not recover
                 cost of providing medical care              6
               Government charges are low compared to
                 charges in commercial hospitals             8
               Conclusions                                   9
               Recommendations                               9
               Agency action                                 9

      4    SCOPE OF REVIEW                                11
APPENDIX

      I    Comparison of computations of reimbursement
             rates for fiscal year 1976                   12
  II       Letter dated January 11, 1977, from Assis-
             tant Secretary of Defense                    13
 III       Principal officials responsible for ad-
             ministering activities discussed in this
             report                                       16

                       ABBREVIATIONS

CHAMPUS    Civilian Health and Medical Program of the Uni-
             formed Services

GAO        General Accounting Office
                              CHAPTER 1
                         INTRODUCTION

     During fiscal year 1975, maintaining military medical
facilities overseas cost the United States about $200 mil-
lion. The primary function of these facilities is to pro-
vide medical care to U.S. military personnel and dependents.
About 8 percent of the medical care workload at these facil-
ities involved the treatment of U.S. civilians and non-U.S.
civilians working for the U.S. Government, as well as cer-
tain foreign civilian and military personnel and their d--
pendents. During fiscal year 1975, persons who were charged
for the medical care received occupied about 70,000 bed-days
and made about 686,000 visits as outpatients.

     The authority for prescribing the rates to be charged
was initially given to the President.  However, this au-
thority has been delegated to other individuals over t: e
years.  In January 1964 the Director of the Bureau oF the
Budget (now Office of Management and Budget) was given the
authority by Executive Order No. 11116, August 1963. Seven
years later, Executive Order No. 11609, July 1971, which is
currently in effect, gave the Secretary of Defense responsi-
bility for prescribing the rates.
PERSONS AUTHORIZED USE OF
MILITARY MEDICAL FACILITIES

     Public Law 78-51 (24 U.S.C. 34), enacted May 10, 1943,
authorized the treatment of other than Navy and Marine Corps
personnel and their dependents at overseas naval hospitals
and dispensaries.  Individuals authorized medical treatment
included U.S. Government employees, U.S. contractor employees
and their dependents, and anyone needing emergency care. The
legislation did not authorize medical care for such individ-
uals in Army and Air Force medical facilities, but the Army
and Air Force provided and continue to provide medical care
on a similar basis. We are not aware of any evidence that
the Congress opposes providing such care in Army and Air
Force medical facilities.
RATES SHOULD RECOVER COSTS OF
PROVIDING MEDICAL SERVICES

     Public Law 78-51 requires that charges for medical care
in military facilities shall change from time to time. House
report 193 accompanying House bill 1936, which later became
Public Law 78-51, indicated that the rates charged should be
"compensatory" so that "free or relatively free services"

                                 1
would not be given. The charges first established by Execu-
tive Order 9411 in December 1943 were $1 for an outpatient
visit and $5 a day for inpatient care.  These rates were
used until Executive Order No. 11116, August 1963, estab-
lished two rates each for inpatient and outpatient care as
follows.

     Inpatient rates
     Foreign nationals employed by the U.S. and their
       dependents--$5 a day.
     All others--$37 a day.

     Outpatient rates

     U.S. employees and dependents--$l a visit.
     All others--$8 a visit.

     The $5 and $1 rates were considered special rates ap-
plicable to specific categories of patients at overseas
medical facilities while the $37 and $8 rates were considered
full reimbursement rates applicable in the United States and
overseas to all patients not in the special categories. Defense
officials could not explain why special and full reimbursement
rates were established nor identify written justification
supporting the rationale for ucing different rates.
     Guidance in Office of Management and Budget Circular A-25,
September 1959, and Department of Defense Instruction 7230.7,
July 1973, provides that reimbursement rates should recover
the full cost of providing services.

     Since 1943 the special rates have remained the same. Full
reimbursement rates, however, have changed.  For fiscal year
1976, for example, full reimbursement rates were $147 a day for
inpatient care and $19 a visit for outpatient care. For fiscal
year 1977 the rates were increased to $168 and $20, respectively.




                              2
                          CHAPTER 2

             SPECIAL RATES SHOULD BE ELIMNATED

     Over $8.7 million in additional revenues could be col-
lected annually if the Department of Defense eliminated
special rates and established rates based on cost recovery.
Al.hough health care costs have increased substantially since
1943, the special rates of $1 a visit for outpatient care and
$5 for each day in the hospital have not changed.  We believe
that special rates are unrealistic and do not meet the intent
of existing legislation.

     Civilians working overseas for the Government and their
dependents are provided complete doctor's care, medical serv-
ices, tests, and prescriptions at the special rate of $1 an
outpatient visit.  Foreign nationals working for the U.S.
Government also receive complete inpatient care at a special
rate of $5 an inpatient day.  U.S. civilians are not author-
ized the special inpatient rate.

     An example of medical care and services given to a U.S.
civilian employee for $1 during a.i outpatient visit to a mili-
tary medical facility overseas is shown below.

      Medical care and service             Average U.S. cost

Medical examination                                $30
Electrocardiogram                                   20
Laboratory tests including chemistry I,
  urinalysis, and hematology                        25
Chest X-rays                                        10

    Total                                          $85

      The special rates at overseas medical facilities provide
civilians with relatively free medical care.   About 85 percent
of the U.S. civilians paying the $1 special rate have medical
insurance covering the cost of certain outpatient medical serv-
ices.   The U.S. Government shares with these civilians the cost
of the medical insurance coverage.   In essence, then, the Gov-
ernment is providing a  subsidy to the medical insurance com-
panies since it is also paying the medical care costs charge-
able to the insurance companies.
     Public Law 78-51, enacted in 1943, authorized hospital
and dispensary services overseas for U.S. and non-U.S. civil-
ians working for the Government.  A committee report accompany-
ing the House bill which became Public Law 78-51 contained

                                 3
provisions concerning charges for medical care. This report
stated "it is intended that these charges shall be compensa-
tory" so that medical care "will not be furnished free or
relatively free to such persons."  In keeping with this in-
tent, the law made provision to change the rates from time
to time.

     Our review showed that, if in fiscal year 1976 the
rates had been revised as intended by law, a rate to recover
costs of an outpatient visit would have been at least $23 1/ a
visit. During fiscal year 1975, patients--mostly U.S. civTl-
ians--made over 315,000 outpatient visits to medical facili-
ties overseas and paid only $1 a visit. Over $6.9 million in
additional reimbursement could have been collected in fiscal
year 1976 if the rate of $23 a visit had been charged to the
same number of persons.

     The Air Force did not maintain statistics showing how
many foreign national civilians received care at the $5
rate. However, records showed that the Army and Navy pro-
vided over 10,150 inpatient days of medical care in fiscal
year 1975 to foreign national civilians who were U.S. em-
Dloyees. We believe that over $1.8 million in additional
revenues could have been collected by the Army and Navy in
fiscal year 1976 if a cost recovery rate of $183 1/ per in-
patient day had been charged for the same number of inpatient
days. Additional revenues could also be collected by the
Air Force from the foreign national civilians who were charged
the $5 inpatient rate.

     Defense officials could not explain why the special reim-
bursement rates had not changed in 33 years nor why no action
had been taken to change the rates even though it was recog-
nized that rates for medical care should be based on full re-
covery of costs.  In January 1975 the Air Force was directed
to develop, jointly with the Army and Navy, an instruction
to simplify the reimbursement rate structure and standardize
charges. A revised instruction was proposed in May 1975,
with recommendations to the Secretary of Defense to charge full
reimbursement rates in lieu of special rates. However, no ac-
tion had been taken to implement the recommendations.
CONCLUSIONS

     To comply with the intent of the law, rates charged for
medical care given in military facilities to paying patients
should recover the cost of providing that care.


1/Our cosc analysis is discussed in ch. 3 and app. I.

                               4
     In October 1976 we proposed that the Secretary of Defense
discontinue the special $1 outpatient and $5 inpatient rates
and begin charging rates that recover the cost of providing
medical care.  (See also recommendations on p. 9.)
AGENCY ACTIONS

     In a letter dated January 11, 1977, the Assistant Secre-
tary of Defense (Health Affairs) concurred in our suggestion
and informed us that the Assistant Secretary of Defense (Comp-
troller) had issued instructions to the military departments
which will, beginning April 1, 1977, increase special rates
charged U.S. employees in overseas areas from $1 to $20 for
outpatient visits and from $5 to $168 per day for inpatient
care. Also, we found that Defense has underway a study to
develop a clear definition of what service will be covered
by the $20 fee. In those cases where care provided involves
only minimal medical procedures, consideration is being given
to charging a nominal fee or no fee at a1ll.
     Although Defense's action to change the rates will signi-
ficantly increase reimbursements, the new rates will not re-
cover complete costs of medical care provided. The accounting
system from which these rates were derived did not provide for
accumulation of all costs.   (See ch. 3.)




                              5
                          CHAPTER 3
             FULL REIMBURSEMENT RATES ARE TOO LOW
     Full reimbursement rates charged to civilians at U.s. and
overseas military facilities need to be higher to recover full
costs of medical care provided.  Many elements of cost are ex-
cluded in computing rates to be charged. Standard accounting
procedures are needed so that uniform and complete accounting
data are reported by the military services and pertinent costs
are used by the Department of Defense in determining reim-
bursement rates. Reimbursements can be increased by at
least $3.2 million annually if the development of full reim-
bursement rates is based on more complete cost information.

REIMBURSEMENT RATES DO NOT RECOVER
COST OF PROVIDING MEDICAL CARE

     Rate computations made by the Department of Defense for
fiscal year 1976 excluded over $492 million in costs applicable
to patient care. About $3.2 million of these costs applied
to paying patients and could have been recovered if complete
cost data were used for complting full reimbursement rates.
For fiscal year 1976, we estimated inpatient rates were under-
stated by $36 a day and outpatient rates by $4 a visit.

      As previously noted in this report, under Public Law
78-51, the Congress intended that rates charged for medical
services should compensate the Government for the costs in-
curred in providing the services. Office of Management and
Budget Circular A-25, dated September 1959, and Department of
Defense Instruction 7230.7, dated July 1973, also provide that
rates should recover the full cost of providing the services.
In determining which costs should be included in rate computa-
tions, we used the guidance in (1) Office of Management and
Budget Circular No. A-25 4User Charges," September 1959, (2)
Department of Defense instructions implementing the circular,
and (3) the American Hospital Association manual for hospitals
"Cost Finding and Rate Setting."

     The Office of Management and Budget Circular requires
that, for computing rates to be charged for Government serv-
ices, the cost computation shall cover the direct and indirect
costs to the Government of carrying out the activity. The
circular also requires that the cost of providing the service
shall be reviewed every year and the fees adjusted as neces-
sary. The American Hospital Association manual recommends
the specific costs which should be included when determining
rates.


                             6
     At least $3.2 million in additional revenues could have
been collected in fiscal year 1976 if all appropriate costs,
including the $492 million in costs excluded from the Depart-
ment of Defense computations, had been considered in deter-
mining full reimbursement rates and if the resulting full
reimbursement rates had been used.  (See app. I.) The $3.2
million estimate represents the portion of additional costs
we identified that could have been recovered from patients
receiving inpatient care who were charged full reimbursement
rates at U.S. and overseas military medical facilities.

     We could not determine accurately at either U.S. or
overseas military medical facilities the number of persons
provided outpatient care on a full reimbursement rate basis.
Consequently, our estimate of possible additional revenues
is understated.

     Certain costs were excluded from the amounts used by
Defense to compute full reimbursement rates because (1) there
were inconsistencies in the military medical services' ac-
counting, reporting, and budgeting systems and (2) Defense
did not identify all costs that should be recovered nor issue
specific guidance to the services for reporting these costs.

Inconsistent accounting, reporting,
and budgeting systems

      In computing reimbursement rates, the Department of
Defense used budgeted cost information provided by the mili-
tary services. Because each of the military services ac-
counted, reported, and budgeted differently for various ele-
ments of hospital cost, some elements were not included in
the budgets submitted to the Department. As a result, they
were excluded from the computation of the reimbursement
rates. Examples of costs excluded from the rate determination
due to inconsistencies in the systems employed by the military
services follow.

    1. Utility and maintenance costs for Army hospitals were
       not reported by the Army to the Department of Defense
       and were excluded from the reimbursement rate computa-
       tions. Army personnel estimated that these costs
       amounted to about $46.2 million.

    2. Food costs for patients in Army and Air Force hospitals
       were not reported, and about $26 million in such costs
       for these hospitals were excluded from the Department's
       computations.



                               7
     Also, fiscal year 1976 dental costs for the three mili-
tary services were erroneously computed, and patient care
costs were understated by approximately $36 million.

Not all recoverable costs
identified

     Defense did not identify several major elements of cost
nor include them in its computations for reimbursement rates.

     Medical training costs totaling $222 million were not
considered. The American Hospital Association manual on
"Cost Finding and Rate Setting" provides that training costs
should be considered in determining rates. According to the
Association, most authorities believe there is equity in in-
cluding training costs in patient rates when patients derive
direct benefits from training programs.

     We also found that military retirement costs were ex-
cluded from the rate computation despite the fact that De-
fense regulations require that retirement costs be included
when determining charges for reimbursement. According to a
December 1975 study by the Office of Management and Budget and
the Departments of Defense and Health, Education, and Welfare,
these excluded costs totaled at least $105 million. Also, rates
were not adjusted to include additional personnel costs for
military and civilian pay raises, which the military services
estimated at about $57 million during fiscal year 1976.



GOVERNMENT CHARGES ARE LOW COMPARED
TO CHARGES IN COMMERCIAL HOSPITALS

      Under the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS) the Government helps eligible
military personnel and their dependents pay for health care
obtained from civilian sources. To determine the reasonable-
ness of Defense's computed rates, we compared (1) the average
rates paid in fiscal year 1975 under the CHAMPUS program,
(2) the fiscal year 1976 rates used by Defense, and (3) the
rates computed by us.   Fiscal year 1975 CHAMPUS rates were
the latest available. To make them more comparable with the
fiscal year 1976 rates, we adjusted these rates by applying a
9.2 percent inflation factor furnished by the Bureau of Labor
Statistics.   The schedule below shows that the Defense rate
is low compared to the other two rates.



                             8
                          Defense-      GAO-       CHAMPUS
                         computed     computed     average
                           rate         rate        rate

Inpatient day              $147          $183      $176
Outpatient visit             19            23        40

     Using American Hcspital Association statistics, we com-
pared charges for certain inpatient treatments at commercial
hospitals with the rates charged by Defense. Commercial
hospital rates vary by the type of treatment provided. On
the average, however, Defense rates were below commercial
hospital charges for those treatments compared.

CONCLUSIONS

     The Defense Department should include more complete
cost data in computing reimbursement rates. All direct
and indirect costs associated with providing mediral care
should be determined and used. Defense should cl arly de-
fine costs to be reported by the services and useu for reim-
bursement rate computations and should require standardized
reporting of cost data. Inclusion of applicable direct and
indirect costs and use of more complete, standardized cost
information would help assure that reimbursement rates
charged cover the costs of providing medical treatment. Fur-
thermore, the rates should be revised periodically.
RECOMMENDATIONS

     We recommend that the Secretary of Defense:

     -- Identify all applicable direct and indirect costs
        associated with providing medical care to paying
        patients.

     -- Clearly define cost data to be submitted by the mili-
        tary services for use in reimbursement rate computa-
        tions and standardize reporting so that all applicable
        costs are reported completely and consistently.

     -- Use applicable direct and indirect operational cost
        when computing full reimbursement rates, including
        retirement and training costs.
     -- Periodically revise the rates.

AGENCY ACTION

     In his January 11, 1977, letter the Assistant Secretary
of Defense (Health Affairs) agreed that not all appropriate
                                  9
elements of cost have been included in the calculation of
reimbursement rates.  He agreed that standard accounting
procedures are needed and informed us that the Department
has given nigh priority to developing a uniform chart of
cost accounts which it intends to implement by October 1,
1977.  The Assistant Secretary added that our recommendations
will be considered in developing future rates.  We were in-
formed that new rates will be established on or before Octo-
ber 1, 1977.

     The decision to improve Defense's hospital accounting sys-
tem was previously conveyed to us in a letter dated October 20,
1976, from the Principal Deputy Assistant Secretary of Defense
(Health Atfairs).  This letter was in response to a report we
made to the Acting Assistant Secretary of Defense (Health Af-
fairs) on August 23, 1976, in which we cited a need for better
cost and output data.

     The actions taken by the Assistant Secretary to improve
the accounting system used to compute reimbursement rates
should, if effectively implemented, result in the establish-
ment of rates which recover full cost.  Further, Defense ill
improving its hospital accounting system will be able to
consider whether it will be feasible to charge rates for
nedical 2are which approximate more closely t.; cost of the
care received by each paying patient in lieu of charging one
rite for all inpatient care and one rate for all outpatient
care.




                             10
                          CHAPTER 4

                       SCOPE OF REVIEW
     We reviewed policies and procedures used for determining
and charging rates for medical care in military medical faci-
lities. We also reviewed pertinent accounting records and
reports.

     In our work we visited the following organizations.
    Office of the Secretary of Defense:
        Office of the Assistant Secretary of Defense, Heilth
          Affairs
        office of the Assistant Secretary of Defense, Comp-
          troller
    Department of   the Army:
        Office of   the Surgeon General
        U.S. Army   Hospital, Seoul, Korea
        U.S. Army   Hospital, Frankfurt, Germany
    Department of the Navy:
        Navy Bureau of Medicine and Surgery
        U.S. Naval Regional Medical Center, Yokosuka, Japan
        U.S. Naval Hospital, Naples, Italy

    Department of the Air Forc:
        Office of the Surgeon general
        U.S. Air Force Hospital, Clark Air Base,
          Republic of the Philippines
        U.S. Air Force Hospital, Wiesbaden, Germany




                              11
APPENDIX I                                                                             APPENDIX I
                          COMPARISON OF COMPUTATIONS

                 OF REIMBURSEMENT RATES FOR FISCAL YEAR 1976


              Estimated Costs of Inpatientand Outpatient Care

          Explanation
              of
            costs                        Defense         GAO          Difference

                                                     (thousands)

     Estimated costs submitted
       by the military services         $2,315,000 $2,315,000         $      -
     Estimated real property
       depreciation                         19,381           19,381
     Less estimated costs for
       dental care (-)                    -324,479      -288,400           36,079
     Additional costs identified
       by GAO:
         Personnel wage increases
            in fiscal year 1,76               -56,700                      56,700
         Food procurement - Army
           and Air Force                      -           26,100           26,100
         Base support for Army
           hospitals                          -           46,200           46,200
         Military retirement and
           wage acceleration                             105,000       105,000
         Medical training costs               _          222,000       222,000
             Total cost for in-
               pG:ient and out-
               paient care          $2,009,902 $2,501,981             $492,079



                 Computation of Inpatient Reimbursement Rate

                                                                                 Differ-
                                         Defense               GAO                ehce
    Costs alloca'ed to
      inpatient care (52%
      of total cost) (note a)     $1.045 billion $1.301 billion
    Estimated inpatient days       7.1 million    7.1 million
    Reimbursement rate for
      inpatient day               $147                  %183                     $36



              Computation of Outpatient Reimbursement Rate

                                                                                 Differ-
                                         Defense               GAO                ence
     ,-:ts allocated to out-
       patient care (48% of
       total cost) (note a)       $0.965 billion $1.200          billion
    I.stimated:outpatient
       visits                      51.4 million         51.4 million
    Reimbursement rate for
       outpatient visit           $19                  $23                       $4
    a/Department of Defense breakdown of total cost for inpatient a.,d
      outpatient care is based on a study prepared by the Air Force.



                                         12
APPENDIX     II                                                           APPENDIX   II




                           ASSISTANT SECRETARY OF DEFENSE
                                  WASHINGTON, D. C.20301


 HEALTH AFFAIRS                                                JAN 1977


        Mr. D. L. Scantlebury
        Division of Financial and General
          Management Studies
        United States General Accounting Office
        Washington, D.C. 20548

        Dear Mr. Scantlebury:

        This is in reply to your letter of October 19, 1976 to Secretary
        Rumsfeld regarding ycur draft GAO Report, "Loss of Millions of Dollars
        in Revenue Because of Inadequate Charges for Medical Care." (Code 90347)
       (OSD Case #4467).

        The Department of Defense concurs in the '', recommendation that rates
        charged fur medical care provided by mill. ry medical treatment facili-
        ties to paying patients should recover the cost of providing that care.

        The Assistant Secretary of Defense, Comptroller has issued instructions
        to the Military Departments which will increase the special rates charged
        employees of the United States in overseas areas from $1 and $5 to $20
        and $168 effective 1 April 1977. (See attached memorandum, 10 Nov 76).
        Exceptions will be allowed where local union contracts or agreements with
        foreign governments are in effect which incorporate the old rates of
        rcimbursement. These contracts and agreements will be honored until
        expiration.

        The report concludes that full reimbursement rates are too low, that
        all appropriate costs are not included in the calculation, and that
        standard accounting procedures are needed to help insure that uniform
        and complete accounting data are reported and used in determining
        reimbursement rates.

        The Department fully agrees that standard accounting procedures are
        needed and has given high priority to the development of a uniform
        chart of cost accounts and performance measures. An initial draft of the
        procedures is currently being reviewed with the objective of implementing
        the system on 1 October 1977.




                                            13
APPENDIX II                                                              APPENDIX II




     We would also agree that al. appropriate elements of cost have not been
     included in the calculation. Utility and maintenance costs for Army
     hospitals, food costs for patients in Army and Air Force hospitals, and
     retirement costs for medical personnel should be included in the calcu-
     lation. A portion of training costs should also be included - that
     portion which contributes directly to patl.lent care; however, we do not
     believe that the costs of conducting Milita'y unique training should be
     included. This cost element will ,t;hs'-    f 'thar study and evaluation to
     determine the percentage of tra'ning cos:'        should be included.

     Based on the abovc; it could be concluded .,t current rates are too
     low; however, until the current Inconsistencies in the accounting system
     are eliminated, we canmot determine whether the rates are in fact too low.

     The recommendations included in the report will be ccnsidered in the
     development of future rates; however, the accuracy of the rates will
     be questionable until such time as a uniform accounting system is in
     operation.

     We appreciate your analysis of this subject area.  The results of your
     review will be helpful in improving management in the Department of
     Defense.

                                                 Sincerely,




                                                 Robert P. Smith, M.D.

     Enclosure




                                        14
APPENDIX II                                                                  APPENDIX II




                                AS'.STANT SECRETARY OF DEFENSE
                                    WASIINGION. D.C.    20301

                                             . .        10 NOV1976
  COMPTROLLER



      MHEORAIPDUM FOR Assistant Secretaries of the Military Departments      (Fl)
                      Assistant Secretaries of the Military Departments      (M&RA)

      SUBJECT:   Special Reimbursement Rates for Medical Care


      Pursuant to the authority provided in 24 U.S.C. 34, as implemented by
      Executive Order No. 11116, August 5, 1963, special reimbursement rates
      for medical care of U.S. employees overseas and their dependents were
      put into effect on January 1, 1964. Because of increases in the cost
      of providing medical care, changes in international economic conditions,
      and improvements in the Federal Health Care Benefits Program such blanket
      rates are no longer valid and are in need of revision.

      Accordingly, you are advised that pursuant to the authority delegated to
      the Secretar, of Defense by Executive Order No. 11609, July 27, 1971, the
      special reimbursement rates for medical care provided to employees of the
      United States, and their dependents by hospitals and dispensaries over-
      seas are revised as follows:                4



            For inpatient care, of employees of the United States who
            are not citizens of the United States and their dependents
            (This rate is now paid by employees who are citizens)      $168.00 per day

            For each outpatient treatment, examination, or consula-
            tion of employees of the United States and their dependents
            (This rate is now paid by employees in the United States)   $ 20.00 per visit

      T11e revised reimbursement rates provided above become effective April 1,
      3977, except where local union contracts or agreements with foreign govern-
      uents are in effect which incorporate the old rates of reimbursement.
      These contracts and agreements will be honored until expiration. We need
      notification of these contracts and agreements since the authority to set
      the special rates authorized by the Executive Order cannot be redelegated
      to officers of the military departments. Requests for exceptions to the
      revised rates in all other cases shall be submitted to OASD(C) for review
      and approval.

      It is requested that prompt action be taken to notify all overseas
      employees of the revised reimbursement rates.


                                                         ,
                                                       ยท ,

                                                    Fred P. Wacker              ,        t
                                            Assistant Secrotury Of Defense
      cc:   I)irectors, IIefense Aoencies                                           1?




                                              15
APPENDIX III                                          APPENDIX III

                         PRINCIPAL OFFICIALS

                  RESPONSIBLE FOR ADMINISTERING

               ACTIVITIES DISCUSSED IN THIS REPORT

               (List current as of January 20, 1977)

                                           Tenure of office
                                           From          To
                     DEPARTMENT OF DEFENSE

SECRETARY OF DEFENSE:
    Donald H. Rumsfeld                  Nov.   1975    Present
    James R. Schlesinaer                July   1973    Nov. 1975
ASSISTANT SECRETARY OF DEFENSE
  (COMPTROLLER):
    Fred P. Wacker                     Sept.   1976    Present
    Terence E. McClary                 June    1973    Aug. 1976
    Don R. Brazier (acting)            Jan.    1973    June 1971
    Robert C. Moot                     Aug.    1968    Jan. 1973
ASSISTANT SECRETARY OF DEFENSE
  (HEiALTH AFFAIRS):
    Dr. Robert N. Smith                 Aug.   1976    Present
    Vernon McKenzie (acting)            Mar.   1976    Aug. 1976
ASSISTANT SECRETARY OF DEFENSE
  (HEALTH AND ENVIRONMENT):
    Vernon McKenzie (acting)           Mar.    1976    Mar. 1976
    James R. Cowan                     Feb.    1974    Mar. 1976
                     DEPARTMENT OF THE ARMY
SECRETARY OF THE ARMY:
    Martin R. Hoffman                  Aug.    1975    Present
    Howard H. Callaway                 May     1973    July 1975
SURGEON GENERAL OF THE ARMY:
    Lt. Gen. R. R. Taylor              Oct.    1973    Present
                    DEPARTMENT OF THE NAVY
SECRETARY OF THE NAVY:
    J. William Middendorf II           June    1974    Present
    John W. Warner                     May     1972    Apr. 1974


                               16
                                                   APPENDIX III
APPENDIX III

                                       Tenure of office
                                       From          To

                  DEPARTMENT OF THE NAVY (cont.)

CHIEF, BUREAU OF MEDICINE
  AND SURGERY:
                                     Aug. 1976       Present
    Vice Adm. W. P. Arentzen                         July 1976
    Vice Adm. D.L. Custis            Feb. 1973

                  DEPARTMENT OF THE AIR FORCE

SECRETARY OF THE AIR FORCE:
    Thomas C. Reed                   Jan. 1976       Present
    James W. Plummer (acting)        Nov. 1975       Jan. 1976
    Dr. John L. McLucas              July 1973       Nov. 1975

SURGEON GENERAL OF THE AIR FORCE:
    Lt. Gen. G. E. Schafer           Aug. 1975       Present
    Lt. Gen. Robert Patterson        Aug. 1972       July 1975




                                17