Medicare Subvention: Challenges and Opportunities Facing a Possible VA Demonstration

Published by the Government Accountability Office on 1999-07-01.

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

                          United States General Accounting Office

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

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

                          Challenges and
                          Opportunities Facing a
                          Possible VA Demonstration
                          Statement of William J. Scanlon, Director,
                          Health Financing and Public Health Issues, and
                          Stephen P. Backhus, Director,
                          Veterans’ Affairs and Military Health Care Issues,
                          Health, Education, and Human Services Division

Medicare Subvention: Challenges and
Opportunities Facing a Possible VA
              Mr. Chairman and Members of the Subcommittee:

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

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

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

              Favorable outcomes for Medicare, VA, and DOD, as well as military retirees
              and veterans1 are not, however, guaranteed. For DOD subvention, the
              Balanced Budget Act of 1997 (BBA) authorized a large-scale, 3-year
              demonstration and directed GAO to evaluate the demonstration’s effects on
              access to care, quality, and the cost to DOD and to Medicare. We have
              recently reported on data quality and payment issues affecting the DOD
              demonstration and the potential for Medicare overpayments.2 We will be
              providing you with further interim reports on aspects of the
              demonstration. Our final results will not, however, be available until
              several months after the demonstration ends in December 2000.

               Military retirees are those who have completed a military career and are entitled to retirement pay.
              Veterans include all who served and who did not receive a dishonorable discharge.
              Medicare Subvention Demonstration: DOD Data Limitations May Require Adjustment and Raise
              Broader Concerns (GAO/HEHS-99-39, May 29, 1999).

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

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


Medicare     Most military retirees aged 65 and over are eligible for Medicare—a
             federally financed health insurance program for the elderly, some disabled
             people, and people with end-stage kidney disease. Medicare covers about
             39 million beneficiaries and spends about $212 billion a year. Benefits

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                 Medicare Subvention: Challenges and
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                 include hospital, physician, and other services, such as home health and
                 limited skilled nursing facility care. The Health Care Financing
                 Administration (HCFA) administers Medicare and regulates participating
                 providers and health plans.

                 Medicare was originally set up to reimburse private providers on a
                 fee-for-service basis and to allow Medicare beneficiaries to choose their
                 own providers without restriction. A newer option3 allows Medicare
                 beneficiaries to choose among private, managed care health plans.
                 Currently, 17 percent of beneficiaries use Medicare managed care. In
                 fee-for-service Medicare, beneficiaries must pay a share of the costs for
                 various services. Most Medicare managed care plans have only modest
                 beneficiary cost-sharing, and many offer extra benefits, such as
                 prescription drugs.

VA Health Care   VA has traditionally provided a comprehensive array of health services to
                 veterans with service-connected disabilities or low incomes. Since 1986, VA
                 has also offered health care to higher-income veterans without
                 service-connected disabilities. However, those veterans must make
                 copayments for services. Overall, VA currently registers in its health care
                 system over 15 percent of the total veteran population of 25 million, with
                 the remaining veterans receiving their health care through private or
                 employer health plans or other public programs. Many of the veterans who
                 VA serves also get part of their care from other sources, such as DOD,
                 Medicare, and private insurance. The Administration has requested
                 $17.3 billion for VA medical care in fiscal year 2000. To make up the
                 differences between appropriated funds and projected costs, VA estimates
                 that, by fiscal year 2002, it can derive almost 8 percent of the medical care
                 budget from other sources, such as reimbursements from health insurers
                 and, if subvention is enacted, from Medicare.

                 Since the early 1990s, VA has shifted its focus from inpatient to outpatient
                 care. At the same time, it implemented many of the principles of
                 coordinated—that is, managed—care, emphasizing primary care, although
                 many veterans use VA for only a portion of their care. In 1995, VA
                 accelerated this transformation by realigning its medical centers and
                 outpatient clinics into 22 service delivery networks and empowering these
                 networks to restructure the delivery of health services.

                  BBA expanded this option to include plans in addition to health maintenance organizations and
                 labeled it “Medicare+Choice.”

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                  Medicare Subvention: Challenges and
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                  In 1996, the Congress passed the Veterans’ Health Care Eligibility Reform
                  Act, which established, for the first time, a system to enroll veterans.
                  Enrollment is, in effect, a registration system for veterans who want to
                  receive care. Currently, registration is continuous—a veteran may choose
                  to register at any time and start receiving services—although VA has the
                  authority to limit the enrollment period if it chooses. The law established
                  seven priority groups, with priority group 1 the highest and priority group
                  7 the lowest. Priority group 1 includes those veterans with the most severe
                  service-connected disabilities; priority group 7 includes veterans whose
                  incomes and assets exceed a specified level and who do not qualify for VA
                  payments for a service-connected disability. Priority group 7 veterans must
                  agree to make copayments for health services.

                  Each year, VA determines, on the basis of available resources, which
                  priority groups will be eligible for VA care in the coming year. Currently, VA
                  serves all seven priority categories, but in the future, that will not
                  necessarily be true. Veterans in any of the priority groups are eligible for
                  the VA Uniform Benefits Package, a comprehensive array of services
                  ranging from hospital care to home health.

                  Veterans remain free to get some or all of their care from other private or
                  public sources, including Medicare. VA, on the other hand, is committed to
                  serving all veterans within the priority groups it has designated for that
                  year, although capacity varies by region.

DOD Health Care   DOD  received an appropriation for military health care of almost $16 billion
                  in fiscal year 1999. Of that, an estimated $1.2 billion is spent on the
                  1.3 million Medicare-eligible military retirees. Under its TRICARE program,
                  DOD provides health benefits to active duty military personnel and retirees,4
                  but most retirees lose their eligibility for comprehensive, DOD-sponsored
                  health coverage at age 65. DOD delivers most of the health care needed by
                  active duty personnel through its military hospitals and clinics. DOD gives
                  priority for care at military facilities to active duty personnel and to
                  dependents of active duty personnel and those retirees under 65 who are
                  enrolled in DOD’s managed care program. Retirees who turn 65 and become
                  eligible for Medicare can get military care if space is available (called

                   We use “retirees” to refer to military retirees, their dependents, and their survivors.

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                 space-available care) after higher-priority beneficiaries are treated.5 Some
                 military facilities have little or no space-available care.

                 Since the early 1990s, DOD health care has shifted toward managed care.
                 DOD established its own managed care plan, TRICARE Prime, which uses
                 military providers, supplemented by a network of civilian providers.
                 However, it is not available to retirees aged 65 and over.6 TRICARE Prime
                 covers services of military physicians as well as civilian network providers
                 by drawing on DOD’s appropriated funds and premiums and copayments
                 charged to some enrollees. In TRICARE Prime, DOD generally organizes the
                 delivery of care on managed care principles—for example, an emphasis on
                 a primary care manager for each enrollee. DOD has gained considerable
                 experience with managed care, but it relies heavily on contractors to
                 conduct marketing, build a network of providers, and perform other
                 critical functions.

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

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

                  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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                                 BBA provides the basic rules by which, under the demonstration, Medicare
                                 pays DOD. First, Medicare is to pay DOD the Medicare managed care rate,
                                 less several adjustments and a 5-percent discount for each enrollee.
                                 Second, in order to receive Medicare payments, DOD must at least match
                                 its baseline costs, or level of effort—that is, devote at least the same
                                 resources as it did in the recent past to providing care to retirees aged 65
                                 and older. The memorandum of agreement translates these guidelines into
                                 a complex payment system. For example, it allows any demonstration site
                                 to earn monthly interim payments if its Senior Prime enrollment exceeds a
                                 threshold derived from the baseline level of effort. But at the end of the
                                 year, DOD can only retain a portion of these payments if that year’s costs
                                 for the six sites together exceed the baseline level of effort.7

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

H.R. 3828 (105th Congress)       The House bill is distinctive in authorizing both a permanent subvention
                                 program and a demonstration project:

                             •   The permanent subvention program would follow a managed care (or
                                 coordinated care) model. It would target VA’s higher-priority veterans (for
                                 example, people with severe service-related disabilities or low incomes) in
                                 rural areas and could be continued indefinitely. It would begin with up to
                                 three sites, but more sites could be added after 2003. VA would have to
                                 maintain its level of effort—its historical resource commitment—to the
                                 targeted group of veterans in the sites. Medicare payments would be
                                 capped at $50 million the first year, $75 million the second year, and
                                 $100 million in subsequent years. No cap would apply if the program were

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

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                         expanded to more sites, subject to certification by the Department of
                         Health and Human Services’ (HHS) Inspector General (IG) that VA could
                         measure its costs in a reasonably reliable and accurate manner.
                     •   By contrast, the demonstration would be limited to veterans in the lowest
                         priority level for VA care at no more than three sites and would deliver
                         services for not more than 3 years. One site would have to be an area
                         previously served by a military health facility shut down in the military
                         base closing process, known as the BRAC (Base Realignment and Closure)
                         process. Unlike the permanent program, no rural sites are required.
                         Medicare payments to VA under the demonstration would be capped at
                         $50 million annually. The bill would allow requiring veterans to pay
                         enrollment fees and copayments that could vary with income.

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

The Senate Finance       The scope of the Finance Committee proposal8 is in some respects
Proposal                 narrower—its demonstration is limited to the lowest priority veterans
                         (priority group 7: higher-income veterans who mostly lack a
                         service-connected disability). In other respects, it is broader—authorizing
                         a test of two subvention models. The proposal would require VA to
                         establish, first, a coordinated care model of subvention and, a year later, a
                         fee-for-service model. It would authorize a VA subvention demonstration
                         in, at most, eight sites but would require equal numbers of sites for the two
                         models. The proposal would allow up to a year for implementing each
                         model, which would operate for up to 3 years after enrollment started.

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

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

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                              Medicare Subvention: Challenges and
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Common Features of the        The House bill and Senate proposal share certain common elements. In
Two Proposed                  each, a VA subvention demonstration would include a managed care (or
Demonstrations                coordinated care) model and serve certain higher-income9 veterans
                              (effectively, priority group 7) who are Medicare beneficiaries

                          •   for a limited time period—3 years,
                          •   in a limited number of locations, and
                          •   in compliance with Medicare rules that HCFA applies to the private sector
                              (although HCFA could waive rules that were inappropriate for VA).

                              Regarding Medicare payments to VA,

                          •   HCFA would pay VA at 95 percent of the applicable Medicare rate paid to
                              private providers or health plans—less certain exclusions, such as
                              payments for disproportionate share hospitals and graduate medical
                          •   HCFA payments to VA would be limited to a predetermined annual amount,
                              such as $50 million; and
                          •   VA must meet its previous level of effort in providing services to
                              Medicare-eligible veterans.

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

                              A proposed VA demonstration holds several challenges. First, veterans may
VA Demonstration              see no advantage in enrolling in a subvention managed care plan because
Would Face                    everyone eligible for the demonstration currently has both VA and
Challenges                    Medicare benefits. Second, VA’s past difficulties in billing insurance
                              companies suggest that VA may have difficulty billing Medicare for services
Concerning                    provided to veterans. Finally, if subvention enrollees prove to be heavy
Participation, Billing,       users of VA services, they may crowd out or limit the access of other,
                              higher-priority veterans.
and Access
                              For VA, an important issue to consider is whether veterans would enroll in
                              a subvention managed care plan that would not give them significantly
                              more services than they currently receive from VA and that would restrict
                              their freedom to use other providers. Priority group 7 veterans–the only
                              ones eligible for a subvention demonstration–can now obtain all services
                              in VA’s Uniform Benefits Package (although not always in a timely
                              manner). Like Medicare, VA benefits cover a broad range, including

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

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inpatient and ambulatory medical and surgical care, certain plastic
surgery, and durable medical equipment. VA benefits are particularly
strong, compared to Medicare, in mental health care, comprehensive
rehabilitative care and services, preventive services, and respite care. The
VA benefit also—unlike Medicare—covers drugs. Copayments are
generally no greater than under Medicare fee-for-service. Additionally,
veterans who are eligible for Medicare can also get care from non-VA
providers—either under fee-for-service or through a managed care
plan—whereas, under subvention, members would be locked out of using
other Medicare plans and providers. If it needed to make subvention
benefits more attractive, VA could either reduce copayments or increase
benefits, but these actions would increase VA’s costs.

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

Current proposals for a VA subvention demonstration, such as the Senate
Finance Committee’s, permit both managed care and fee-for-service sites.
Of the two, fee-for-service appears to be easier to implement because it
only requires VA to submit claims for covered services to HCFA for payment.
It does not require the veteran to join a VA-operated managed care plan and
forego access to other providers. However, in the past, VA has had
difficulty in collecting from insurance companies because its bills have not
had enough detail (for example, diagnosis, service, procedure, and
individually identified provider).11 While VA is moving toward a system that

  Since many veterans obtain only part of their care from VA, this still might not be sufficient incentive.
 See VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult
(GAO/HEHS-98-4, Oct. 17, 1997).

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                    will more closely approximate private sector billing procedures, its
                    success remains to be seen.

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

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

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

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

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

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

    DOD’s  experience can be used in designing a possible VA demonstration.
    First, payment rules should give VA and its sites greater certainty about
    their earnings. Second, if a VA demonstration had a level-of-effort
    requirement, the baseline costs should be for a period as close as possible
    to the start of the demonstration. This would minimize problems of
    comparing current and baseline costs. It would also facilitate audits of the

      The Finance Committee proposal provides a year for start-up and initial implementation of the
    demonstration. It also would stagger the start of the two models: the fee-for-service model would start
    a year after the coordinated care model.
     The payment rules in the DOD demonstration are, at least in principle, adequate for the short term
    but would be undesirable for a longer-term program. A different payment method, with more
    understandable rules and viable for the longer term, would need to be developed if the DOD
    demonstration were extended.

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                   data. Third, sites should be informed in advance what proportion (if any)
                   of their Medicare earnings would be retained centrally or regionally.14

               •   Accuracy of data systems relies on agency commitment. DOD’s experience
                   shows that data systems are a point of vulnerability for a successful and
                   credible program. Inadequate data quality can weaken the management of
                   a demonstration and raise questions about reports of its favorable results.
                   The extent to which data quality would pose an obstacle to a VA
                   demonstration depends in part on how the payment rules are specified.
                   Good data, consistent across sites, would also be needed to manage and
                   evaluate the demonstration. Data quality problems would probably vary by
                   site, with some sites having better data than others. The types of data
                   systems needed would depend in part on the subvention model that is
                   selected. For example, in a fee-for-service model, billing systems are
                   critical. In general, solving data quality problems requires commitment and
                   follow-through of agency management.

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

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

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

                   Page 12                                                                    GAO/T-HEHS/GGD-99-159
                   Medicare Subvention: Challenges and
                   Opportunities Facing a Possible VA

                   easy-to-understand payment rules and a clearly defined level of effort that
                   creates a level playing field for both VA and Medicare.

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

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

                   Page 13                                               GAO/T-HEHS/GGD-99-159
Appendix I

Comparison of 1998 Ways and Means Bill
and 1999 Senate Finance Proposal on VA

                         H.R. 3828 (105th Congress)a                           Senate Finance proposal summaryb
What would be            — A demonstration project under which Medicare        A demonstration project under which Medicare
authorized and who       would reimburse VA for care provided to veterans      would reimburse VA for care provided to veterans
would be targeted?       enrolled in Medicare parts A and B who have no        enrolled in Medicare parts A and B who have no
                         service-connected disability and who do not meet      compensable service-connected disability and do
                         VA’s low-income threshold.                            not meet VA’s low-income threshold.
                         — A program under which Medicare would
                         reimburse VA for care provided to veterans enrolled
                         in Medicare parts A and B who have
                         service-connected disabilities or who are
                         low-income and who live far from a VA medical
How would health         To the extent practicable, VA would use its           — Fee-for-service model.
care be delivered?       outpatient clinics to provide services under the      — Coordinated care model consistent with
                         program. VA may enter into contracts and              Medicare+Choice requirements.
                         arrangements with entities such as private
                         practitioners, providers, preferred provider
                         organizations, and health care plans to provide
                         health care under the program or demonstration
How many health care     — Up to three demonstration project sites, at least   — Up to four fee-for-service sites, at least one of
delivery sites?          one of which must encompass the area served by a      which must be operated in a predominantly rural
                         military medical facility closed pursuant to BRAC.    area.
                         — Initially, no more than three program sites, but    — Up to four coordinated care sites, at least one
                         additional sites could be designated starting in      of which must be operated in a predominantly
                         2003.                                                 rural area.
                                                                               An equal number of sites would represent each
When would the           — Demonstration would begin Jan. 1, 1999, and         — Fee-for-service model would start Jan. 1, 2001,
demonstration or         end Dec. 31, 2001.                                    and end the earlier of 3 years after first enrollment
program begin and        — Program would begin Jan. 1, 2000, and may           or Dec. 31, 2004.
end?                     continue indefinitely.                                — Coordinated care model would begin Jan. 1,
                                                                               2000, and end 3 years after enrollment begins or,
                                                                               if earlier, Dec. 31, 2003.
Would the start of the   Yes. HHS’ Office of Inspector General (OIG) must      Yes. HHS’ OIG must certify VA has (1) cost
demonstration or         certify that VA and HHS have established a            accounting systems for each demonstration site;
program be               data-matching program to identify veterans eligible   (2) reliable, accurate, and consistent data across
contingent on VA         for Medicare and entitled to VA benefits and have     sites; (3) minimized the risk that VA appropriations
meeting certain          performed such a comparison.                          will be used for the demonstration; (4) the
requirements?                                                                  capacity at each site to provide benefits to
                                                                               sufficient numbers of targeted Medicare-eligible
                                                                               veterans; and (5) sufficient safeguards at each
                                                                               site to minimize reduction in quality or access to
                                                                               care to veterans (participating and not
                                                                               participating in the demonstration.)
How would an eligible    Participation in the program or demonstration         Eligible veterans must enroll in the demonstration.
veteran participate?     project is voluntary. Enrollment is implied.          Eligibility must be verified prior to receiving

                                          Page 14                                                         GAO/T-HEHS/GGD-99-159
                                             Appendix I
                                             Comparison of 1998 Ways and Means Bill
                                             and 1999 Senate Finance Proposal on VA

                           H.R. 3828 (105th Congress)a                              Senate Finance proposal summaryb
How much would             95 percent of amount paid to Medicare+Choice             — Under fee-for-service, 95 percent of Medicare
Medicare pay to VA?        organizations (excluding payments for medical            rate.
                           education and disproportionate share and                 — Under the coordinated care model, 95 percent
                           capital-related payments to hospitals for inpatient      of amount payable to Medicare+Choice
                           services).                                               organizations.
                                                                                    Payments for medical education and
                                                                                    disproportionate share excluded from
                                                                                    reimbursements; one-third of capital-related costs
Would there be a cap       Yes:                                                     Yes; $50 million for each year of the demonstration.
on Medicare                — For demonstration project, not more than $50
reimbursements?            million annually for 1999 through 2001.
                           — For program, not more than $50 million for 2000;
                           $75 million for 2001; and $100 million for 2002 and
                           each succeeding year, but no cap if program
                           expands to additional sites, subject to HHS’ IG
What would veterans        For the demonstration project, veterans may be           (Not specified in the Senate Finance proposal
be required to pay?        required to pay enrollment fees and to make              summary.)
                           copayments, which can vary based on income.
                           Fees and copayments must be consistent with
                           Medicare+Choice requirements, except as waived
                           by HHS.
Would VA be required       Requires that VA and HHS agreement describe how          Yes. VA expenditures at any site must exceed an
to maintain its            maintenance of effort will be implemented in both        established baseline amount before Medicare
historical level of        the demonstration and program. However, only             reimbursement will occur.
health care services       implementation of the program is conditioned on VA
to Medicare-eligible       reporting to the Congress and GAO on steps taken
veterans?                  to prevent reduction in type or amount of health
                           care services provided. An agreement entered into
                           by VA and HHS would determine a base year
                           against which VA must maintain overall the level of
                           effort for services.
How would the              VA and HHS would jointly determine a base year.          (Not specified in the Senate Finance proposal
baseline level of effort   VA would report to the Congress and GAO on its           summary.)
be calculated?             methodology and basis for calculating level of effort.
Would Medicare             Yes. Both the demonstration project and program          Yes. Coordinated care demonstration must
requirements apply?        must meet all requirements of Medicare+Choice            provide, at a minimum, Medicare benefits under
                           plans. (HHS may waive any requirement if waiver          Medicare+Choice rules and regulations, unless
                           reflects VA’s status as a federal agency and is          waived by HHS for specific reasons.
                           necessary to carry out the program or
                           demonstration project.)
How would costs to         GAO would report annually on cost increases to           Annual reconciliation process to ensure no
Medicare be                Medicare under the demonstration or program. If          increase in costs to Medicare. GAO must report
monitored?                 VA and HHS conclude that the demonstration or            annually on the extent, if any, to which costs to the
                           program has increased Medicare spending, VA              Medicare program under the demonstration have
                           must reimburse Medicare and adjust future                increased.
                           Medicare payments.

                                                                                                                (Table notes on next page)

                                             Page 15                                                          GAO/T-HEHS/GGD-99-159
Appendix I
Comparison of 1998 Ways and Means Bill
and 1999 Senate Finance Proposal on VA

 The provisions of H.R. 3828 were incorporated into H.R. 4567, which passed the House on
Oct. 10, 1998.
  The text of this bill is not yet available. Our description is based on a summary of a proposal
titled Chairman’s Mark: The Medicare Subvention Demonstration for Veterans Act of 1999,
prepared by the staff of the Senate Committee on Finance, June 24, 1999. The Committee
adopted the proposal on that date.

Page 16                                                                    GAO/T-HEHS/GGD-99-159
Appendix II

Experience Implementing DOD Subvention

                             In implementing the subvention demonstration, DOD and HCFA completed
                             numerous and substantial tasks. DOD sites had to gain familiarity with HCFA
                             regulations and processes, prepare HCFA applications, prepare for and host
                             a HCFA site visit to assess compliance with managed care plan
                             requirements, develop and implement an enrollment process, market the
                             program to potential enrollees, establish a provider network (for care that
                             cannot be provided at the military treatment facilities), assign primary
                             care managers to all enrollees, conduct orientation sessions for new
                             enrollees, and begin service. The national HCFA and DOD offices developed
                             a memorandum of agreement, spelling out program guidelines in broad
                             terms. They also developed payment mechanisms and translated the BBA
                             requirement that DOD maintain its historical level of effort in serving dual
                             eligibles into a reimbursement formula.

                             HCFA  accelerated review procedures and assigned additional staff so that
                             timelines could be met. But these accomplishments were not without
                             difficulties, and several issues remain that are likely to impact the
                             demonstration’s results. These include the extent to which payment rules
                             can be made more understandable and workable and the extent to which
                             DOD can operate successfully and efficiently as a Medicare managed care

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. 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.
                         •   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

                             Page 17                                                GAO/T-HEHS/GGD-99-159
                              Appendix II
                              Experience Implementing DOD Subvention

                              program. Consequently, the sites had to adapt to changed rules when they
                              were published.

Capacity and Enrollment       Sites vary significantly in (1) their capacity for caring for Medicare-eligible
                              retirees, (2) how close enrollment is to capacity, and (3) what fraction of
                              eligibles has enrolled. This variation suggests that potential demand for a
                              subvention program is uncertain. Retirees’ enrollment decisions reflect
                              several factors—some, DOD may be able to influence; others, such as the
                              extent of managed care presence in an area, are outside its control.

                              In establishing their enrollment 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 level-of-effort threshold and start receiving increased
                              resources from subvention, and these results were made available to sites.
                              Capacity varied from San Antonio, Texas, the largest site with four
                              hospitals and a capacity of 12,700, to Dover, Delaware, which provides
                              only outpatient care in its military health facility and set its capacity at

                              Many DOD officials and other observers expected that sites would be
                              deluged with applications and would rapidly reach capacity, but this did
                              not happen. One site has reached capacity, but only after several months.
                              Other sites have enrolled between 46 percent and 92 percent of capacity as
                              of the end of June 1999.

                              As table II.1 shows, there is a fourfold difference in sites’ enrollment as a
                              percentage of eligibles in their catchment areas–from 8 percent (San
                              Diego, California) to 36 percent (Keesler, Mississippi). Several factors may
                              explain this variation:

                          •   Enrollment in other Medicare managed care plans varies widely, from one
                              site with a low percentage of eligible enrollees (San Diego)—where nearly
                              50 percent of dual eligibles are in private Medicare managed care
                              plans—to two sites with higher percentages of enrollees (Keesler and
                              Dover)—where no one is in managed care because no plans are available.
                          •   The availability of military care varies. Several sites emphasized in their
                              marketing that retirees who did not enroll could not count on receiving

                              Page 18                                                  GAO/T-HEHS/GGD-99-159
                                       Appendix II
                                       Experience Implementing DOD Subvention

                                       space-available care. This information might spur retirees who prefer
                                       military care to enroll in Senior Prime. At other sites, space-available care
                                       was less of an issue. At these sites, prospective enrollees who believe that
                                       they can continue to receive space-available care may not see an
                                       advantage in enrollment but rather a disadvantage—especially because
                                       enrolling in Senior Prime locks them out of other Medicare-paid care.
                                   •   Sites may differ in the amount of space-available care they have given in
                                       the past and in beneficiaries’ satisfaction with that care. These factors
                                       could also affect the decision to enroll.
                                   •   Some retirees expressed reluctance to enroll because the demonstration is
                                       due to end in December 2000. They also noted that they did not get
                                       information about how, after the demonstration ends, enrollees would
                                       transition back to space-available care, traditional fee-for-service
                                       Medicare, or a Medicare managed care organization.

Table II.1: TRICARE Senior Prime
Enrollment                                                                                         Enrolled                   Enrolled
                                                                                                       as a                        as a
                                                                                                percentage          Total percentage
                                                                      Enrolleda Capacityb       of capacity      eligible of eligibility
                                       Madigan Army Medical
                                       Center, Wash.                        3,313      3,300           100.4%     21,709             15.3%
                                       San Antonio, Tex.                   11,638     12,700            91.6      41,215             28.2
                                       Naval Medical Center,
                                       San Diego, Calif.                    2,879      4,000            72.0      35,619                 8.1
                                       Keesler Medical Center,
                                       Miss.                                2,617      3,100            84.4        7,361            35.6
                                       Colorado Springs, Colo.              2,823      3,200            88.2      13,689             20.6
                                       Dover, Del.                           685       1,500            45.7        3,905            17.5
                                       Total demonstration                 23,955     27,800            86.2% 123,498                19.4%
                                       Note: Status as of June 21, 1999.
                                       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.

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 a

                                       Page 19                                                                 GAO/T-HEHS/GGD-99-159
                 Appendix II
                 Experience Implementing DOD Subvention

                 business culture that reconciles delivering services to this illness-prone
                 population with cost-consciousness.

                 DOD’s reliance on contractors (like Foundation Health and Humana) has
                 enabled it to accomplish key managed care tasks. DOD overcame obstacles
                 in launching TRICARE Senior Prime as a managed care organization.
                 Specifically, to establish and run a managed care plan requires
                 infrastructure—the ability to market the plan, enroll members, and recruit,
                 manage, and pay a provider network. In building Senior Prime
                 organizations at the six sites, DOD has benefited from its TRICARE Prime
                 experience and from its contractors who help with or perform many of
                 these tasks.15 Sites with well-established TRICARE Prime organizations that
                 had worked with the same contractor for several years seemed to us to
                 have a sizeable advantage in establishing Senior Prime. It is not yet known
                 what effect DOD’s extensive use of contractors will have on DOD costs for
                 Senior Prime. But an expanded, permanent subvention program would
                 require establishing and monitoring contractors at many new sites. That
                 would make contractor quality, relationships, and costs a pivotal and
                 uncertain feature of a potential DOD subvention program.

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 level of effort. These rules have added to the difficulty and the
                 complexity of the demonstration. Furthermore, they have resulted in
                 Medicare payments to DOD not being immediately distributed to the sites.
                 As a result, DOD site managers tend to view DOD appropriations as the sole
                 funding source for all Senior Prime care delivered at military health
                 facilities; the managers are likely to consider Medicare subvention
                 payments as irrelevant to their plans for dealing with capacity bottlenecks
                 or other resource needs in TRICARE Senior Prime.

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

                 Interim payments are made to DOD for care delivered at each site that is
                 above a monthly level-of-effort threshold. A reconciliation after the end of

                  The 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.

                 Page 20                                                                 GAO/T-HEHS/GGD-99-159
           Appendix II
           Experience Implementing DOD Subvention

           the year to determine final Medicare payments can result in DOD returning
           a portion of those interim payments if the level of effort for all sites for the
           entire year is not reached. DOD would also return Medicare payments if
           data showed that the demonstration population was in better health than
           that allowed for in the Medicare payment rates, or if payments exceed the
           statutory cap ($50 million in the first year, $60 million in the second, and
           $65 million in the third).16

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

           Based on experience to date with the demonstration, any payment
           approach for subvention must be even-handed (that is, it should favor
           neither HCFA nor DOD); straightforward and readily understandable; and
           prospective (DOD and its sites should receive payment in advance of
           delivering care to enrollees). The demonstration’s payment mechanism,
           which relies on level of effort, is functional in the short term—although
           the calculation of level of effort has weaknesses.17 However, this payment
           mechanism may not be appropriate over the longer term for an extended
           or expanded subvention program. Moreover, a credible long-term payment
           system should start with a zero-based budgeting approach: first,
           determining the cost to DOD of providing TRICARE Senior Prime care to dual
           eligibles and, then, deciding how much care will be provided from DOD’s
           appropriations and how much from Medicare reimbursement.

             The enrollment targets for each site reflect the statutory caps. Rebates (from DOD to Medicare) as a
           result of payments exceeding the cap are unlikely.
             These issues were discussed more fully in GAO/HEHS-99-39.

(101868)   Page 21                                                                   GAO/T-HEHS/GGD-99-159
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