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

Published by the Government Accountability Office on 1999-05-04.

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

                          United States General Accounting Office

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

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

                          DOD Experience and
                          Lessons for Possible VA
                          Statement of Stephen P. Backhus, Director
                          Veterans’ Affairs and Military Health Care Issues and
                          William J. Scanlon, Director
                          Health Financing and Public Health Issues
                          Health, Education, and Human Services Division

Medicare Subvention Demonstration: DOD
Experience and Lessons for Possible VA
             Mr. Chairman and Members of the Committee:

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

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

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

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             Medicare Subvention Demonstration: DOD
             Experience and Lessons for Possible VA

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

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

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


Medicare     Most military retirees age 65 and over are eligible for Medicare, a federally
             financed health insurance program for the elderly, some disabled people,
             and people with end-stage kidney disease. Medicare covers about

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                  Medicare Subvention Demonstration: DOD
                  Experience and Lessons for Possible VA

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

                  Original, or traditional, Medicare reimburses private providers on a
                  fee-for-service basis and allows Medicare beneficiaries to choose their
                  own providers without restriction. A newer option within Medicare1 allows
                  beneficiaries to choose among private, managed care health plans.
                  Currently, 17 percent of beneficiaries use Medicare managed care. In
                  original Medicare, beneficiaries must pay a share of the costs for various
                  services. Most Medicare managed care plans have only modest beneficiary
                  cost-sharing and many offer extra benefits, such as prescription drugs.

DOD Health Care   DOD  received an appropriation for military health care of almost $16 billion
                  in fiscal year 1999. Of that, an estimated $1.2 billion is spent on the
                  1.3 million Medicare-eligible military retirees. Under its TRICARE
                  program, DOD provides health benefits to active duty military, retirees, and
                  their dependents, but most retirees 65 and over lose their eligibility for
                  comprehensive, DOD-sponsored health coverage. DOD delivers most of the
                  health care needed by active duty personnel and military retirees2 through
                  its military hospitals and clinics. DOD gives priority for care to active duty
                  personnel and their dependents, and to certain retirees under 65. Retirees
                  who turn 65 and become eligible for Medicare can get military care if
                  space is available (called space-available care)—that is, after other DOD
                  beneficiaries are treated.3 Some military facilities have little or no
                  space-available care.

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

                   The BBA expanded this option to include plans in addition to health maintenance organizations and
                  labeled it “Medicare+Choice.”
                   We use “retirees” to refer to military retirees, their dependents, and their survivors.
                   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.
                   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.

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                     Medicare Subvention Demonstration: DOD
                     Experience and Lessons for Possible VA

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

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

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

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

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

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

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

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

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

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

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

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

Possible VA Subvention       The structure of any VA subvention demonstration would depend upon the
Demonstration                principles and directions that the Congress incorporates in authorizing
                             legislation. We have found certain common elements in all demonstration
                             proposals we reviewed. A VA subvention demonstration would serve
                             certain higher-income6, Medicare-eligible veterans (effectively, Priority
                             Group 7 veterans):

                         •   for a limited time period, such as 3 years;
                         •   in a limited number of locations; and
                         •   in compliance with Medicare rules that HCFA applies to the private sector,
                             although HCFA could waive rules that were inappropriate or irrelevant to

                             Regarding Medicare payments to VA,

                         •   HCFA would pay VA at a lower rate than it currently pays to private
                             Medicare providers or health plans;
                         •   HCFA would pay VA for care of veterans in the demonstration only after VA
                             exceeds its historic spending, or level of effort, for higher-income
                             veterans; and
                         •   HCFA payments to VA would be limited to a predetermined annual amount,
                             such as $50 million.

                             Several current proposals also

                         •   direct VA to establish at least one demonstration site near a closed military
                         •   direct VA to establish at least one demonstration site that serves a
                             predominantly rural area; and

                             Those who exceed VA’s income thresholds. For example, the current threshold for a single veteran
                             without dependents is $22,350.

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

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

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

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

                         •   Delayed notification to sites of their selection for the demonstration.

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                              Medicare Subvention Demonstration: DOD
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                          •   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
                          •   Difficulties due to shifts in Medicare requirements. All sites started
                              planning as HCFA was developing the new Medicare managed care
                              regulations to replace the rules for the former risk contract managed care
                              program. Consequently, the sites had to adapt to changed rules when they
                              were published.

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

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

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

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

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

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                                           50 percent of dual eligibles are in private Medicare managed care
                                           plans—to two sites with higher percentages of enrollees (Keesler and
                                           Dover)—where no one is in managed care because no plans are available.
                                     •     The availability of military care varies. Several sites emphasized in their
                                           marketing that retirees who did not enroll could not count on receiving
                                           space-available care. This information might spur retirees who prefer
                                           military care to enroll in Senior Prime. At other sites, space-available care
                                           was less of an issue. At these sites, prospective enrollees who believe that
                                           they can continue to receive space-available care may not see an
                                           advantage in enrollment but rather a disadvantage—especially because
                                           enrolling in Senior Prime locks them out of other Medicare-paid care.
                                     •     Sites may differ in the amount of space-available care they have given in
                                           the past and in beneficiaries’ satisfaction with that care. These factors
                                           could also affect the decision to enroll.
                                     •     Some retirees expressed reluctance to enroll because the demonstration is
                                           due to end in December 2000. They also noted that they did not get
                                           information about how, after the demonstration ends, enrollees would
                                           transition back to space-available care, traditional fee-for-service
                                           Medicare, or a Medicare managed care organization.

Table 1: TRICARE Senior Prime Enrollment
                                                                                 Enrolled as a                                  Enrolled as a
                                                                                percentage of                                  percentage of
                                     Enrolleda                Capacityb              capacity          Total eligible              eligibility
Madigan Army Medical Center,
WA                                         3,296                   3,300                   99.9%               21,709                    15.2%
San Antonio, TX                          11,534                   12,700                   90.8%               41,215                    28.0%
Naval Medical Center, San
Diego, CA                                  2,767                   4,000                   69.2%               35,619                        7.8%
Keesler Medical Center, MS                 2,563                   3,100                   82.7%                7,361                    34.8%
Colorado Springs, CO                       2,744                   3,200                   85.8%               13,689                    20.0%
Dover, DE                                      661                 1,500                   44.1%                3,905                    16.9%
Total                                    23,565                   27,800                   84.8%              123,498                    19.1%
                                           Note: Status as of April 26, 1999.
                                           Includes only people who were 65 years old at the beginning of the demonstration.
                                            Capacity at the beginning of the demonstration. Does not include capacity for those who turned
                                           65 after the demonstration started.

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

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

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

                       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.

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

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

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

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

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

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

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

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

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

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

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

                        Page 12                                                                  GAO/T-HEHS/GGD-99-119
                         Medicare Subvention Demonstration: DOD
                         Experience and Lessons for Possible VA

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

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

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

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

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

                         Page 13                                                                 GAO/T-HEHS/GGD-99-119
                               Medicare Subvention Demonstration: DOD
                               Experience and Lessons for Possible VA

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

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

Lessons From DOD               We see three main lessons for VA in DOD’s experience in establishing its
Subvention Demonstration       subvention demonstration.

                           •   Officials at every DOD site told us that establishing a Medicare managed
                               care organization was more difficult and required more effort than they
                               had expected. Months into the implementation, they continue to encounter
                               new issues. Even though the sites took 13 to 17 months after the
                               legislation was passed to establish Senior Prime, hindsight suggest that the
                               goals to get it running earlier were unrealistic. If a VA demonstration is
                               authorized, it should have 12 to 18 months to implement its plans for the
                               demonstration; both VA headquarters and the sites will need that much
                           •   The complexity of the LOE definition and Medicare payment rules, as well
                               as ambiguity about what sites could earn and whether earnings would be
                               distributed to the sites, were issues for DOD. These factors caused many
                               site managers and physicians to largely disregard the potential changes in
                               available financial resources and focus their attention primarily on
                               implementation and patient care issues. As a result, the demonstration
                               may not produce the cost savings and efficiencies that are expected from
                               managed care. VA and HCFA have tentatively agreed to rules that are
                               consistent with the DOD rules and still contain many of the elements that
                               have made it difficult for DOD to manage the demonstration. In particular,
                               payments would be retrospective and an annual reconciliation process
                               could lead to VA returning money to HCFA.

                               Page 14                                                GAO/T-HEHS/GGD-99-119
                   Medicare Subvention Demonstration: DOD
                   Experience and Lessons for Possible VA

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

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

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

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

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