Defense Health Care: TRICARE Resource Sharing Program Failing to Achieve Expected Savings

Published by the Government Accountability Office on 1997-08-22.

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

                  United States General Accounting Office

GAO               Report to the Chairman and Ranking
                  Minority Member, Subcommittee on
                  Military Personnel, Committee on
                  National Security, House of
August 1997
                  DEFENSE HEALTH
                  TRICARE Resource
                  Sharing Program
                  Failing to Achieve
                  Expected Savings

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division


      August 22, 1997

      The Honorable Stephen E. Buyer
      The Honorable Gene Taylor
      Ranking Minority Member
      Subcommittee on Military Personnel
      Committee on National Security
      House of Representatives

      The Department of Defense’s (DOD) nationwide managed care program,
      called TRICARE, is intended to improve the military community’s access
      to health care while maintaining quality and controlling costs. TRICARE
      represents a significant effort to reform DOD’s $15 billion per year health
      system. DOD’s approach to this reform involves a unique partnership
      between military and civilian health care entities that will include seven
      multistate managed care support contracts together estimated to cost
      about $17 billion over 5 years. In that partnership arrangement, resource
      sharing is an important cost-saving feature. To share resources, the
      contractor supplements the capacity of a military hospital or clinic by
      providing civilian personnel, equipment, or supplies. DOD has estimated
      that resource sharing could save about $700 million1 over 5 years for the
      contracts under way during our review.

      Because of your Subcommittee’s continuing interest in DOD’s use of
      support contracts to help deliver health care and, specifically, to control
      costs, we reviewed the cost-saving feature of resource sharing. In
      particular, we focused on (1) whether resource sharing savings are
      meeting DOD’s projections and thus helping control TRICARE costs,
      (2) what problems DOD might be encountering in pursuing resource
      sharing, and (3) actions and alternatives pursued by DOD to overcome
      those problems. Also, we considered the implications of resource sharing
      within the broader context of TRICARE’s overall cost-effectiveness.

      In doing our work, we held discussions and examined records at DOD
      headquarters in Washington, D.C.; TRICARE regional offices; military
      hospitals and clinics; and contractor offices. We focused on resource
      sharing experiences under the first four contracts, involving seven
      TRICARE regions that had been active long enough for us to draw
      conclusions about the progress of resource sharing. We also examined

       This does not include expected savings from the most recently awarded contract, which began
      operating April 1, 1997, or from the remaining two contracts yet to be awarded.

      Page 1                                           GAO/HEHS-97-130 TRICARE Resource Sharing

                   TRICARE policies and plans DOD has devised or is considering that will
                   affect resource sharing’s future. Finally, we reviewed data, which DOD
                   provided in response to our findings, suggesting that TRICARE savings
                   other than from resource sharing were occurring. Appendix I further
                   describes our work’s scope and methodology. Appendix III shows the
                   contract start dates and related TRICARE regions.

                   Thus far, DOD and the contractors have made agreements likely to save
Results in Brief   about 5 percent of DOD’s overall resource sharing savings goal.2 At that
                   rate, after 9 to 24 months of operations, about $36 million of the expected
                   $700 million in savings will be realized. New agreements are being
                   considered, but neither DOD nor the contractors are confident that pending
                   agreements will be reached or that further cost savings can be attained.
                   Because resulting TRICARE contract costs may be greater than
                   anticipated, both parties may experience related financial losses.

                   Problems impeding progress on resource sharing agreements and the
                   related savings have included lack of clear program policies and priorities,
                   uncertainty about cost effects on military hospitals, lack of financial
                   rewards for the hospitals entering into such agreements, and changes in
                   military hospital capacities after contractors developed bids. In response,
                   DOD has revised policies, improved training and analytical tools, and taken
                   other steps to promote resource sharing under the contracts, but to date,
                   these efforts have not been sufficient to bring needed results.

                   For the last two contracts, soon to be awarded, DOD is applying a revised
                   financing approach that includes resource sharing but at a reduced level.
                   The new approach allocates more funds to the military hospitals and less
                   to the contractors, enabling the hospitals to directly acquire and use
                   outside resources rather than use resource sharing with the contractor.
                   But how the military hospitals, other sources, and contractors would
                   interact under the new approach is still being defined and has not been
                   tested. Therefore, it is not possible to say whether it will work. Moreover,
                   resource sharing problems will not be automatically eliminated and may
                   be exacerbated when used in combination with revised financing.

                   For the future, DOD plans even broader changes intended to simplify
                   military hospital budgeting and support contract operations. DOD has
                   concluded that the current approach, including resource sharing, does not

                    Resource sharing also includes support contractor conversions of previous agreements DOD hospitals
                   had with civilian providers. But these agreements existed before TRICARE, such that savings
                   associated with them were not part of DOD’s new projected TRICARE resource sharing savings.

                   Page 2                                           GAO/HEHS-97-130 TRICARE Resource Sharing

             provide adequate accountability and incentives for delivering
             cost-effective care. While the military hospitals and contractors could still
             use resource sharing, it no longer would be the basis for projecting major
             savings and lowering bids at the contract’s outset. But, as DOD goes about
             the budgeting and contracting changes, unless they are specifically
             addressed, the kinds of policy, priority, and procedural problems that
             plagued resource sharing may continue to impair any new initiatives’
             cost-savings efforts. In addition, such TRICARE efforts may be made even
             more challenging by leadership changes in health care management now
             under way in DOD.

             DOD officials acknowledged their resource sharing savings problems but
             told us that lower than expected contract award prices have led to over
             $2 billion in unexpected, offsetting savings. They said that the contract
             amounts have underrun cost projections, made as early as 1993, of what
             CHAMPUS3 costs would have been during the contract periods. While
             TRICARE’s overall cost-effectiveness was beyond our review’s scope,
             there are reasons to question the currency and analytical completeness of
             DOD’s preliminary savings claims. Thus, we support DOD’s current plans4 to
             undertake a detailed analysis, based on more up-to-date cost data and
             estimates, of TRICARE’s overall cost-effectiveness.

             DOD’s primary medical mission is to maintain the health of 1.6 million
Background   active duty service personnel5 and provide health care during military
             operations. Also, as an employer, DOD offers health care to 6.6 million
             other military-related beneficiaries, including dependents of active duty
             personnel and military retirees and their dependents. Most care is
             provided in about 115 hospitals and 470 clinics—referred to as military
             treatment facilities, or MTFs—worldwide, operated by the Army, Navy, and
             Air Force. DOD’s direct care system is supplemented by care paid for by
             DOD but provided in civilian facilities. In fiscal year 1997, DOD expects to
             spend about $12 billion providing care directly and about $3.5 billion for
             care in civilian facilities.

              The Civilian Health and Medical Program of the Uniformed Services, a DOD-administered
             insurance-like program that has traditionally supplemented DOD’s direct care system.
              Also, as required by the National Defense Authorization Act for Fiscal Year 1996, DOD has contracted
             for an independent study to, among other things, review TRICARE’s cost-effectiveness. Under the
             contract, the first results report is due by January 31, 1998.
              Also includes members of the Coast Guard and the Commissioned Corps of the Public Health Service
             and the National Oceanic and Atmospheric Administration, who are also eligible for military health

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In response to increasing health care costs and uneven access to care, in
the late 1980s, DOD initiated, under congressional authority, a series of
demonstration programs to evaluate alternative health care delivery
approaches. On the basis of this experience, DOD designed TRICARE as its
managed health care program.

The TRICARE program uses regional managed care support contracts to
augment its MTFs’ capacities by having contractors perform some managed
care functions, including arranging civilian sector care. Altogether, seven
managed care support contracts will be awarded covering 11 TRICARE
regions (see app. II). To coordinate MTF and contractor services and
monitor care delivery, each region is headed by a joint-service
administrative organization called a “lead agent.”

Thus far, DOD has awarded five contracts to three health care companies
covering eight TRICARE regions. The contracts are competitively awarded
and fixed price, although the price is subject to specified adjustments for
changes in beneficiary population, MTF workload, and other factors beyond
the contractor’s control.

DOD officials believe that care provided to its patients at military facilities
is less expensive than such patients’ care at civilian facilities. Resource
sharing arrangements are designed to permit DOD and the contractor to
share contractor-provided personnel, equipment, supplies, and other items
in an effort to maximize savings. To identify resource sharing
opportunities, contractors analyze such data as historical health care
costs, workload, and care use, and visit military facilities. They then
project the expected savings from providing care in military facilities
rather than in potentially more expensive civilian settings. The contract is
designed so that the contractor’s expected savings over the contract’s life
from the resource sharing are deducted from the contractor’s final offer
when bidding on a contract. The contract price thus reflects such
anticipated savings through shared resources.

The contract also is subject to a risk-sharing arrangement under which the
government and the contractor share responsibility for health costs that
overrun the contract price. Contractors are at risk for their bid amount of
health care profit plus up to 1 percent of the bid health care price. Beyond
that, the contractor and the government share in losses until an amount
prepledged by the contractor, called “contractor equity,” is depleted. At
that time the government becomes fully responsible for any further losses.

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                        Thus, DOD’s initially realized savings in the form of a lower contract price
                        could be reduced or lost if actual health care expenses are higher than
                        anticipated. Accordingly, DOD encourages MTFs to help the contractor
                        achieve projected resource sharing volume and savings.

                        Resource sharing savings, along with expected savings from other sources,
                        such as negotiated provider discounts; better health care utilization
                        management; and better claims management, including collections from
                        other health insurance plans, contribute to government and contractors’
                        overall financial gains. The combined expected savings from resource
                        sharing and other sources are important as offsets to the increased costs
                        of managing care under TRICARE. Also, statutorily, TRICARE costs
                        cannot be greater than the health costs DOD otherwise would have incurred
                        under CHAMPUS and the direct care system in the program’s absence
                        (National Defense Authorization Acts for Fiscal Years 1994 and 1996, P.L.
                        103-160 and P.L. 104-106, 10 U.S.C. 1073 note).

                        We reported last year that lack of resource sharing progress was one area
                        that could impair efforts to contain related TRICARE costs and achieve
                        savings. We reported that resource sharing was a complex and difficult
                        process and that the process’ details were not well developed or
                        understood, including uncertainty about how resource sharing agreements
                        may affect contract price adjustments.6

                        DOD and the contractors are not attaining major new savings through
Resource Sharing        resource sharing agreements, and the potential for new agreements and
Savings Falling Short   further savings appears limited. On the basis of progress to date and
of Projections          discussions with DOD and contractor officials, achieving overall projected
                        resource sharing savings appears highly unlikely.

                        For the contracts under way, DOD projected saving about $700 million,
                        including $116 million through the current operating years. The
                        contractors’ projections were similar. But by March 1997, after 9- to
                        24-month contract operating periods, new resource sharing agreements
                        represented only about 5 percent of the savings needed to achieve DOD’s
                        projected savings. In addition to the new agreements, contractors have
                        also converted into resource sharing agreements previously existing
                        agreements that MTFs had with civilian providers before TRICARE became
                        operational. At one MTF, for example, on the day the support contract

                         Defense Health Care: Managed Care Plan Progressing, but Cost and Performance Issues Remain
                        (GAO/HEHS-96-128, June 14, 1996).

                        Page 5                                          GAO/HEHS-97-130 TRICARE Resource Sharing

                 became operational, seven existing agreements were converted to
                 resource sharing agreements. But savings associated with those converted
                 agreements do not represent new TRICARE savings and thus were not
                 part of DOD’s new projected savings.

                 Support contractors and DOD are aware of the lack of progress in resource
                 sharing. One contractor’s representative told us that achievements so far
                 are just previous agreement conversions and that a more aggressive
                 approach toward new agreements is needed. Another said lack of progress
                 in negotiating new agreements remains their greatest TRICARE contract
                 concern. DOD officials expressed mixed views ranging from optimism that
                 resource sharing momentum will build to the belief that the approach
                 simply will not work as envisioned.

                 At this time, the potential for further resource sharing savings appears
                 limited. In March 1997, the contractors had about 170 new resource
                 sharing possibilities in some stage of cost and workload data gathering or
                 analysis, or in some way being considered as potential agreements. For
                 example, one region had 39 resource sharing possibilities under
                 development, covering an array of services such as cardiology, radiology,
                 and internal medicine. Officials told us, however, that considerable
                 analysis was needed before potential savings could be reliably estimated
                 and that some of the proposals likely would not prove cost-effective.
                 Meanwhile, additional proposals are being added and existing ones
                 deleted as the proposal and evaluation processes continue. But, as
                 previously indicated, savings to date show that not enough is being done
                 to reach DOD’s projected resource sharing savings levels.

                 In addition to agreements already implemented or under consideration, by
Problems         March 1997, over 260 other resource sharing proposals had been either
Encountered in   rejected or otherwise not further pursued. Our analysis indicated that
Establishing     various impediments exist to resource sharing, including lack of clear
                 policies, program complexity, lack of MTF incentives, and military
Agreements       downsizing.

                 Issued in December 1994, DOD resource sharing guidance stated that MTFs
                 had an obligation to help contractors reach the bid amount of resource
                 sharing savings. But the guidance also instructed MTFs to look for other,
                 possibly more cost-effective ways to increase MTF resource use, such as by
                 reallocating existing resources, referring patients to other MTFs, or directly
                 contracting with civilian care providers other than the support contractor.

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When some MTFs pursued such alternatives, one contractor objected,
stating its belief that resource sharing was the first alternative for
increasing MTF use. In November 1996, DOD issued new guidance stating
that resource sharing was the first alternative and that MTF commanders
should make good faith efforts to work with contractors to execute such

MTF  and contractor officials cited the resource sharing approach’s
complexity as another factor limiting progress. The agreements require
considerable financial analysis to assess their cost-effectiveness potential
(see app. IV). Also, the agreements involve intricate issues of how much
credit contractors should receive for adding to the MTFs’ workload and
how that credited workload will affect the contract price. MTF officials told
us they did not understand all of the agreements’ financial implications,
largely because they did not control or understand all the data and
analyses used. They were concerned that workload shifts between MTFs
and contractors, and ensuing bid price adjustments, would enable
contractors to gain at MTFs’ workload and budgetary expense. At two MTFs,
for example, proposed gastroenterology assistance agreements, projected
to save over $400,000, were rejected because of unresolvable MTF concerns
about possible effects on the overall contract price.

Both contractor and MTF officials expressed concerns—and resulting
hesitance to enter into agreements—about the reliability of data used to
analyze agreements’ potential cost-effectiveness. According to contractors,
for example, several MTFs supplied inappropriate data, such as personnel
salaries and hospital maintenance, that hampered their analyses of the
proposals’ likely costs and other effects. At one of the MTFs, eight proposed
agreements were rejected because of data problems.

Tied to the complexity and data problems, a lack of incentive to enter into
agreements because MTFs do not share in resulting savings was also cited
by MTF officials. DOD and the Services have not established a savings return
policy for MTFs that have resource sharing agreements. Instead, after
consideration, the Services decided that any such savings are to be
retained at the Service level for reallocation as needed within the system.

Still another MTF resource sharing disincentive is that the agreements can
actually increase facility costs. For example, an agreement to provide an
anesthesiologist, so the MTF can do more surgeries, will in turn result in
related radiology, laboratory, and pharmacy costs. Unless contractors
compensate MTFs for such costs, MTFs’ overall costs may increase. While

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                         the contracts provide for such contractor compensatory payments, a
                         July 1996 DOD policy clarification was issued to help facilitate such
                         payments. A remaining challenge has been MTF and contractor negotiations
                         on what costs to apply to individual agreements.

                         Both DOD and the contractors cited military downsizing, including at the
                         MTFs, as another limiting factor. Resource sharing opportunities identified
                         during the contract bidding process may no longer exist as military forces
                         are reduced or relocated and as MTFs are closed, downsized, or converted
                         to clinics. For example, one MTF rejected five proposals because it had
                         subsequently reduced its operating rooms from eight to four, thus
                         obviating the need for agreements.

                         Resource sharing problems have prompted one contractor to request a
                         contract price adjustment. In June 1996, near the start date of health care
                         delivery, the contractor reported that while the other care delivery
                         preparations had progressed well, the lack of resource sharing progress
                         was a major problem. Projecting millions of dollars in financial losses, the
                         contractor requested a price renegotiation. In a letter to DOD, the
                         contractor complained about changing DOD rules on how the approach was
                         to work, inadequate data, improper MTF incentives, insufficient MTF
                         training in developing agreements, and postaward MTF workload and
                         capacity changes that reduced resource sharing opportunities. DOD
                         generally agreed that problems existed, committed to work collaboratively
                         to resolve them, and scheduled meetings with the contractor to pursue the
                         issues in more detail. DOD said, however, that a price renegotiation was
                         premature at the time. As of May 1997, the contractor was still pursuing a
                         price adjustment.

                         DOD  has acted to increase resource sharing under current contracts. For
DOD’s Actions to         the latest two contracts, soon to be awarded, DOD will be applying an
Address Resource         alternative approach, referred to as “revised financing,” that relies less on
Sharing Problems         resource sharing for savings but adds other challenges. For the future, DOD
                         is planning far broader changes in MTF budgeting and support contracting,
                         which are expected to further reduce reliance on resource sharing.

Attempts to Improve      DOD has worked to facilitate resource sharing through policy issuances and
Resource Sharing Under   provision of analytical tools. Since issuing resource sharing guidance in
Current Contracts        December 1994, DOD headquarters officials visited the regions to provide
                         briefings, used a focus group to help make resource sharing easier to use,

                         Page 8                                GAO/HEHS-97-130 TRICARE Resource Sharing

developed standardized training, and attempted to promote better DOD and
contractor cooperation. Also, the contractors have continued to work with
the MTFs to identify and pursue resource sharing opportunities.

In November 1996, DOD issued clarifying policy stating that resource
sharing is to be the first alternative for recapturing private sector
workload into the MTF. Lead agents and MTFs are to ensure that any other
MTF actions to add or retain workload do not prevent the TRICARE
support contractor from entering into cost-effective agreements and
reaching their resource sharing bid amounts.

In July 1996, DOD clarified its policy regarding cash payments by support
contractors to MTFs for marginal costs stemming from agreements. In a
related move, DOD recently made available $25 million to the Services to
help pay such marginal costs, or for the MTFs to otherwise invest in
agreements, and asked the Services to submit potential projects for the
funds’ use. In April 1997, DOD told us that some funds had been approved
for only two or three requests.

To help reduce resource sharing complexities, DOD provided a financial
analysis worksheet for determining whether an agreement might be
cost-effective and whether the amount of recaptured workload credited to
the contractor is appropriate (see app. IV). DOD later revised the worksheet
to, among other things, account for different agreement types. DOD also
provided an analytical model further showing the MTFs’ resource sharing’s
potential financial effects. The model was introduced to the MTFs in
July 1996.

DOD created a resource sharing focus group after a lead agent reported in
January 1996 that resource sharing was complicated and presented MTFs
with disincentives. The group worked for about 6 months and
recommended improvements in such areas as training, the financial
analysis worksheet, and the data used to make agreements.

In early 1996, DOD began developing a TRICARE Financial Management
Education Program curriculum that included resource sharing and the bid
price adjustment process. Program testing was completed in December
and presentations have begun.

In November 1996, DOD initiated a new “partnering” effort with the
contractors. DOD saw a need to help MTFs and contractors work through
data problems, contract ambiguities, resource constraints, and other

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                             TRICARE difficulties. The partnering approach calls for a more
                             cooperative, trusting, teamwork relationship between MTFs and support
                             contractors, including ways to avoid disputes and to informally resolve,
                             rather than possibly litigate, those that occur. Early actions included DOD
                             meetings with contractors at headquarters and regional levels, contractor
                             participation in a national TRICARE conference, and consideration of
                             assigning representatives of lead agents and the contractors to work
                             together at each other’s locations.

                             The bottom-line measure of DOD’s and the contractors’ efforts is in the
                             progress made entering new resource sharing agreements. But progress
                             remains slow, and the prospects for additional agreements are
                             questionable. These outcomes, along with one contractor’s request for
                             financial relief and DOD’s recognized need to improve teamwork, indicate a
                             need for more concerted efforts under the current contracts to reach the
                             agreements that are pending while seeking acceptable alternatives to
                             resource sharing.

Revisions Under the Latest   DOD’s revised financing approach, conceived before the first support
Contracts Reduce Reliance    contract began operating but applied only in the latest two, is intended to
on Resource Sharing but      strengthen MTF health care management. Under this approach, MTFs’ direct
                             funding and financial responsibilities will be increased. The funding
Add Complications            increase will be determined by the amount of previous CHAMPUS
                             expenditures for MTF-based TRICARE Prime7 enrollees, which DOD expects
                             will include most MTF service areas’ beneficiaries. Thus, rather than
                             sharing responsibility for Prime enrollees with the support contractor, the
                             MTFs will have full funding and full responsibility for their Prime enrollees
                             and will pay the contractor for care required from the contractor’s
                             network. One result of this approach will be to reduce reliance on
                             resource sharing to lower support contract costs; but it also adds new
                             challenges and does not eliminate, and may even exacerbate, resource
                             sharing problems.

                             Giving the MTFs direct financial control for TRICARE Prime enrollees is
                             aimed at providing them with clearer incentives to efficiently manage care
                             use and to behave more like private sector HMOs. DOD saw the need for this
                             while still arranging the earlier contracts and later viewed it as a way to
                             relieve emerging resource sharing problems. But, under revised financing’s

                              TRICARE is designed to give beneficiaries a choice among TRICARE Prime, which is similar to a
                             health maintenance organization (HMO); TRICARE Extra, which is similar to a preferred provider
                             organization; and TRICARE Standard, which is the current fee-for-service-type benefit. Beneficiaries
                             who select TRICARE Prime must enroll to receive care under this option.

                             Page 10                                            GAO/HEHS-97-130 TRICARE Resource Sharing

current approach, DOD will continue sharing care costs with the contractor
for beneficiaries not enrolled with the MTFs. Also, the MTFs will continue
working with the new contractor toward signing resource sharing
agreements. Thus, to the extent contractor reliance on resource sharing
continues, the difficulties already experienced are also likely to continue.

DOD believes revised financing gives MTFs added cost-saving incentives to
engage in resource sharing by reducing the need for referral of their
enrollees to the TRICARE support contractor. However, revised financing
may add further complexity to resource sharing’s use. Because the new
approach’s potential effects on resource sharing are not now known,
TRICARE contract offerors must make their own assumptions and
projections about such effects. Much will depend, for example, on how
MTFs’ funding levels may change and the consequent alterations in their
beneficiary service priorities. And the added extent of funding going to
MTFs rather than to contractors will in turn depend on the MTFs’ capacities
and ability to enroll beneficiaries and serve as their primary care
manager—all of which have yet to be determined.

Revised financing’s effects on resource sharing are uncertain and were at
issue during the two affected contracts’ bidding processes. One bidder, a
current TRICARE contractor, wrote to DOD to clarify what portion of the
funds the MTFs and contractor respectively would control and how revised
financing would affect resource sharing. In earlier discussions, the bidder
told DOD the company could be creative and assume resource sharing
opportunities would still exist or assume none would exist. DOD replied
that the new approach’s effects on resource sharing were uncertain but
that the successful bidder should work creatively with the MTFs to achieve
resource sharing. DOD also amended the request for a bid proposal to
provide more description and examples of how revised financing and
resource sharing might be integrated. But, as with resource sharing under
the current contracts, the new approach’s actual effects will not be known
until it is implemented.

While DOD officials in regions with contracts generally favored revised
financing, they expressed concerns about poor accounting systems and
lack of data on patient care costs and outcomes that MTFs will need to
become effective, cost-competitive providers. Some had concerns about
the general lack of MTF health care management experience and control
over their staffing. MTF officials in regions about to apply revised financing
have stated that they recognize their increased need for accountability,

Page 11                                GAO/HEHS-97-130 TRICARE Resource Sharing

                        adequate staffing to support their enrollees, and better information
                        systems to support resource sharing decisions.

                        While theoretically possible, revised financing’s potential has yet to be
                        demonstrated. Also, while revised financing reduces reliance on resource
                        sharing, it does not eliminate or necessarily alleviate resource sharing
                        problems and may exacerbate such problems under the new contracts.

More Contracting and    For the future, DOD plans other changes to simplify TRICARE contracting
Related Budgeting       and MTF budgeting. The changes would incorporate revised financing and
Changes Planned, With   further reduce reliance on resource sharing but also would have far
                        broader implications for current and future contracts. Adding to such
Broader Implications    TRICARE initiatives’ challenges are changes in DOD’s top leadership in
                        Health Affairs.

                        DOD is now considering alternative structures for future contracts, on the
                        basis of our recommendations8 and those from lead agents, contractors,
                        and others in the health care industry. The alternatives include smaller,
                        shorter, and less prescriptive contracts, allowing contractors to rely more
                        on their own “off-the-shelf” commercial practices. DOD has held several
                        forums to discuss ideas and the alternative approaches’ potential
                        advantages and disadvantages. The issues involved include effects on
                        beneficiary choice of providers, assurance of contractor qualifications,
                        quality of care, DOD and contractors’ risk sharing, administrative
                        complexity, adequacy of bid competition, and DOD costs. No final decisions
                        have been made yet.

                        The new contract structures likely will include an approach similar to
                        revised financing. Basically, each MTF would be funded to cover all its
                        enrollees in TRICARE Prime, and the contractor would be funded for all
                        other beneficiaries. Thus, each MTF and contractor would be responsible
                        for its share of the beneficiary population’s care costs, and would
                        reimburse each other when one provides services to the other’s
                        beneficiaries. For example, the contractor would reimburse an MTF for
                        caring for a nonenrollee, and one MTF would reimburse another upon
                        referring its own enrollee for care there. One aim of the funding approach
                        would be to eliminate reliance on resource sharing as a major source for
                        TRICARE savings.

                         Defense Health Care: Despite TRICARE Procurement Improvements, Problems Remain
                        (GAO/HEHS-95-142, Aug. 3, 1995).

                        Page 12                                      GAO/HEHS-97-130 TRICARE Resource Sharing

In April 1997, DOD accelerated the planned change in MTF budgeting and
contract financing and announced it would be effective at the start of
fiscal year 1998. This means that not only will the changes apply to future
contracts but also current contracts will have to be amended. DOD expects
that changing the current contracts may have cost implications of
unknown extent at this time for both the government and the contractors.

Commenting on a February 1997 DOD policy draft, one contractor said that
any change that would avoid reliance on resource sharing, bid price
adjustments, and resulting MTF disincentives would be positive. The
contractor added, however, that DOD needs to involve the contractors in
weighing the new budgeting and financing approach’s assumptions and
risks to ensure it will work; otherwise contract prices may increase to
cover the unknown risks. Another contractor said that many of the details
had yet to be worked out and that two remaining questions are how
funding will be split between MTFs and contractors and how resource
sharing will be affected.

Such budgeting and contracting changes reach far beyond an expectation
that they will reduce the need for resource sharing. This notwithstanding,
DOD lacks a simple, stable, long-term approach to TRICARE budgeting and
contracting that provides clear managed care incentives and
accountability and avoids the complexities and disincentives of resource
sharing. As the contractors indicated, whether the contemplated system
changes succeed will depend upon how these details are worked out and
how well DOD and the contractors manage the system and support each

In addition, both the Assistant Secretary of Defense (Health Affairs) and
the Principal Deputy Assistant Secretary, who have actively and forcefully
led TRICARE since its beginning, have left their positions. The former
Principal Deputy has taken the Assistant Secretary position in an acting
capacity. The Principal Deputy position has been filled, but to date no
successor to the Assistant Secretary has been nominated. These top DOD
leadership changes may add to the challenge of successfully reducing
reliance on resource sharing and adopting broader budgeting and
contracting changes.

Page 13                              GAO/HEHS-97-130 TRICARE Resource Sharing

                      DOD officials acknowledged that resource sharing has not achieved the
DOD Views Resource    expected savings, but told us that lower than expected contract award
Sharing as One of     amounts have led to more than $2 billion in other savings. They explained
Several Cost-Saving   that the contract award amounts consistently have underrun DOD’s
                      projections, required before each contract is awarded, of what CHAMPUS
Features              costs would be over the contracts’ lives. As an example, one region’s
                      estimated CHAMPUS costs without the contract would have been about
                      $2.1 billion, compared with the contract award amount of $1.8 billion; so,
                      according to DOD, the savings would be $0.3 billion. These officials also
                      said that overall health care data show downward MTF cost trends, further
                      supporting managed care’s cost-saving effects—despite resource sharing’s
                      limited showing. For example, they provided a graph showing that both
                      direct care and CHAMPUS total costs declined steadily—by 10 percent
                      overall—from fiscal years 1991 through 1996.

                      While assessing TRICARE’s overall cost-effectiveness was beyond our
                      review’s scope, there are reasons at this time to question the currency and
                      analytical completeness of DOD’s savings claims. First, DOD’s preaward
                      estimates of CHAMPUS costs, a key component of its savings claim, may now
                      be outdated. The first estimate—for the Northwest Region contract—was
                      based on cost data prior to August 1993. Over the 4 years since then,
                      changes in such areas as benefits and allowed payments to providers
                      would affect the results of that estimate. Second, in a separate review,9 we
                      found that as of May 1997, the existing five contracts had been modified as
                      many as 350 times, with the resulting potential for substantial contract
                      cost increases attributable to TRICARE. These potential cost increases,
                      just like the potential losses from lack of resource sharing, also would
                      offset DOD’s projected savings.

                      Furthermore, we recently questioned10 DOD’s cumulative 5- to 7-percent
                      utilization management11 savings estimate in its near $15 billion to
                      $18 billion health care budget totals for fiscal years 1998 to 2003. We
                      reported that DOD lacked a formal methodology for developing the
                      estimates, and we concluded overall that future health care costs likely
                      would be greater. Lastly, DOD’s available health care cost data do not
                      indicate whether apparent downward shifts might be due to managed care

                       We plan to report shortly on DOD’s overall management of TRICARE contract change orders.
                       Defense Health Care: Future Costs Are Likely to Be Greater Than Estimated (GAO/NSIAD-97-83BR,
                      Feb. 21, 1997).
                       Utilization management employs such techniques as preadmission hospital certification, concurrent
                      and retrospective reviews, and case management to determine the appropriateness, timeliness, and
                      medical necessity of an individual’s care.

                      Page 14                                          GAO/HEHS-97-130 TRICARE Resource Sharing

              effectiveness or to such other factors as reductions in allowed provider
              payments that would have occurred in TRICARE’s absence. Thus, we
              support DOD’s plans to undertake a more current and complete cost
              analysis of MTF direct and contractor-provided care, based on recent
              program data, to bottom-line TRICARE’s current and future-year

              At their present results levels, for the existing contracts, DOD and the
Conclusions   support contractor will achieve only about 5 percent of the expected
              $700 million in new savings, potentially causing shared financial losses and
              higher TRICARE costs. Progress in achieving new agreements is slow, and
              neither DOD nor the contractors know what resource sharing potential
              remains under these contracts. While DOD now seems to be moving toward
              a view that the approach will not work as designed, the contractors and
              DOD are still pursuing about 170 resource sharing possibilities in an effort
              to discover additional savings with which to reduce their costs.

              Many problems have contributed to resource sharing’s lack of success.
              DOD’s policies, processes, and tools for use at the local level as well as the
              degree of DOD and contractor collaboration have not yet been sufficient to
              effectively resolve the approach’s obstacles.

              While revised financing is feasible though unproven, its potential effects
              on resource sharing and on other expected savings under the latest two
              contracts remain to be seen. Under the new approach, resource sharing
              may be reduced, but its problems will remain and may become more
              complex as new MTF and contractor management responsibilities are

              DOD’s more broadly proposed MTF budgeting and support contracting
              changes would greatly affect future and current contracts, including
              further reducing resource sharing. Clearly, a simple, accountable,
              incentive-based approach is lacking, yet the potential effectiveness of
              DOD’s considered changes will largely depend on how well they are
              designed and implemented. As such changes further reduce resource
              sharing as a potential savings mechanism and as DOD looks to alternative
              savings sources, lessons learned from resource sharing will need to be
              carefully heeded and skillfully incorporated. Carrying such lessons
              forward may be particularly challenging as DOD changes the top leadership
              in Health Affairs.

              Page 15                                GAO/HEHS-97-130 TRICARE Resource Sharing

                         DOD officials acknowledged that resource sharing has not, and likely will
                         not, produce the projected savings, but contended that TRICARE’s
                         managed care approach has produced offsetting savings in other ways. We
                         question, however, the currency and analytical completeness of these
                         claims and thus believe it is important that DOD proceed with its plans to
                         reestimate TRICARE costs versus projected costs without TRICARE.

                         We recommend that the Secretary of Defense direct the Assistant
Recommendations          Secretary of Defense (Health Affairs) to

                     •   determine whether any further resource sharing savings remain under the
                         current contracts and, as appropriate, consummate promising agreements
                         while seeking other mutually acceptable alternatives to resource sharing;
                     •   determine, to the extent the new contracts with revised financing use
                         resource sharing, whether any such agreements are available and, as
                         appropriate, enter promising agreements while seeking effective
                         alternatives to resource sharing; and
                     •   incorporate, while planning for and implementing the next wave of MTF
                         financing and contract management initiatives, such resource sharing
                         lessons learned as the need for coherent, timely policies; clearly
                         understood procedures; mutually beneficial incentives; and effective

                         DOD agreed with our recommendations and said, without elaborating, it
Agency Comments          had already implemented each of them. Nevertheless, while agreeing with
and Our Evaluation       the recommendations, DOD disagreed with the way we presented certain

                         DOD said, for example, that the report does not note the tremendous
                         resource sharing success during the “CHAMPUS Reform Initiative” (CRI) in
                         California and Hawaii (which preceded TRICARE) and does not note the
                         continued success in region 9 (Southern California). Thus, DOD said the
                         reader is led to assume that problems occurred in other regions because
                         resource sharing was implemented on a broad scale without the requisite
                         examination. We did not evaluate CRI resource sharing because our focus
                         was whether resource sharing under TRICARE was producing new savings
                         to help offset added TRICARE costs. Also, as the report notes, DOD’s
                         reference to continued success in region 9 is basically a conversion of CRI
                         resource sharing agreements, which do not reflect new savings under

                         Page 16                              GAO/HEHS-97-130 TRICARE Resource Sharing

Furthermore, DOD said the resource sharing program as currently
structured was based on the best available information at the time and that
the report should note that the TRICARE support contractors came to the
same conclusion as DOD regarding resource sharing’s potential
cost-effectiveness, even with their years of experience with managed care.
But our report does not question whether DOD’s structure for TRICARE
resource sharing was based on the best information available at the time.
Instead, the report discusses the complex issues that arose during the
implementation of resource sharing. Also, the report notes that the
contractors as well initially concluded that resource sharing would be

Also, DOD said the report treats resource sharing in isolation, as opposed to
one component of a comprehensive system that has proven to be
cost-effective. While we focused on resource sharing because it was
expected to be a major cost-saving mechanism, we also noted that it was
one of several ways in which DOD expected to achieve savings to offset
TRICARE’s costs. DOD went on to state that efficiencies not achieved
through resource sharing were otherwise achieved by increased MTF
capability and efficiency brought about by TRICARE. As the report points
out, during our review DOD presented information showing downward MTF
cost trends, but these data do not show whether the trends were due to
TRICARE managed care efforts or whether the costs would have declined
anyway in TRICARE’s absence.

DOD said managed care support (MCS) contracts have resulted in savings of
$2.3 billion when compared with projected costs without the contracts. It
said that we acknowledged this savings estimate but that our placement of
it in the report diluted its significance. While a detailed review of overall
TRICARE savings was beyond the scope of our review, as our report
states, we question that savings estimate’s currency and analytical
completeness, and we support DOD’s plans to undertake more current and
complete analysis of TRICARE’s cost-effectiveness. We have revised the
report to discuss DOD’s overall savings estimate in a separate section.

DOD took issue with the report statement that, while revised financing
reduces reliance on resource sharing, it does not eliminate or necessarily
alleviate resource sharing problems and may exacerbate such problems
under the new contracts. DOD said revised financing, in conjunction with
its planned change to enrollment-based capitated budgeting for MTFs,
increases incentives for MTFs to engage in resource sharing by expanding
MTF funding while reducing support contractor costs. We agree that

Page 17                               GAO/HEHS-97-130 TRICARE Resource Sharing

revised financing, in conjunction with enrollment-based capitation, has the
potential to create more incentive for the MTFs to engage in resource
sharing and may similarly provide incentive to the support contractors.
Still, those approaches add their own complexities and do not
automatically eliminate the difficulties experienced with resource sharing.
As we said in the report, the approaches are still being defined and are yet
to be tested. Nonetheless, we revised the relevant text to better recognize
DOD’s views on revised financing’s potential.

DOD’s   comments in their entirety are included as appendix V.

We also obtained comments from the three current TRICARE support
contractors. All expressed general agreement with the report’s overall
content and completeness of subject coverage.

In its comments, one contractor also offered a minor technical comment
about lack of clarity in a statement defining limits on resource sharing
agreement profits, which is part of the procedural description in appendix
IV. The contractor pointed out, however, that there is no misunderstanding
between it and DOD as to what is intended. We made no change because
the appendix was presented to illustrate DOD’s guidance as it was offered.

A second contractor expressed concern about its limited progress in
resource sharing and about the problems and lack of success in resource
sharing elsewhere, as conveyed in our report, and expressed hope that the
report would help bring about favorable resolution of the problems.

While stating that the report otherwise accurately portrays the resource
sharing situation, the third contractor disagreed with the report’s
statement that the prospects for additional resource sharing agreements
are questionable. The contractor informed us that it had recently made a
presentation to DOD on resource sharing shortfalls, but it also asserted
that, with the right incentives and education at the MTF commander level,
resource sharing is still an extremely viable program with current savings
opportunities. On the basis of our analysis of the problems and overall
limited resource sharing progress, the prospects for reaching new
agreements seem to us to be limited. Still, the report urges DOD to identify
and pursue promising resource sharing opportunities while also seeking
other mutually acceptable alternatives to resource sharing.

Page 18                                GAO/HEHS-97-130 TRICARE Resource Sharing

We are sending copies of this report to the Secretary of Defense and
interested congressional committees, and will make copies available to
others upon request.

Please contact me at (202) 512-7111 or Dan Brier, Assistant Director, at
(202) 512-6803 if you or your staff have any questions concerning this
report. Other major contributors are Elkins Cox, Evaluator-in-Charge;
Allan Richardson; Beverly Brooks-Hall; and Sylvia Jones.

Stephen P. Backhus
Director, Veterans’ Affairs and
  Military Health Care Issues

Page 19                              GAO/HEHS-97-130 TRICARE Resource Sharing

Letter                                                                                          1

Appendix I                                                                                     22

Scope and
Appendix II                                                                                    24

Regions Served by the
Seven Managed Care
Support Contracts
Appendix III                                                                                   25

Contracts and Start
Appendix IV                                                                                    26

Guidance on
Developing Resource
Sharing Agreements
Appendix V                                                                                     37

Comments From the
Department of
Figure                  Figure IV.1: Resource Sharing Development Flowchart                    31

                        Page 20                           GAO/HEHS-97-130 TRICARE Resource Sharing


ADD        active duty dependent
CHAMPUS    Civilian Health and Medical Program of the Uniformed
CPT        current procedural terminology
CRI        CHAMPUS Reform Initiative
DCP        data collection period
DOD        Department of Defense
DRG        diagnosis-related group
HCF        Health Care Finder
HMO        health maintenance organization
MCS        managed care support
MEPRS      Medical Expense and Performance Reporting System
MHSS       Military Health Services System
MTF        military treatment facility
NADD       nonactive duty dependent
NAS        Non-Availability Statement
RSA        resource sharing agreement

Page 21                          GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix I

Scope and Methodology

             To assess the Department of Defense’s (DOD) experiences with resource
             sharing, we visited 5 (of the 7) regions where TRICARE support
             contractors had begun delivering health care and 11 military treatment
             facilities (MTF) within those regions. We also met with the two civilian
             TRICARE contractors that were providing health care support to the MTFs.
             A third contractor began providing health care on April 1, 1997, in two
             other regions (since combined into one region), but because of the
             newness of the operations, we met with this contractor briefly but did not
             include it in our detailed assessment of resource sharing progress and
             problems. Two other contracts, covering the remaining three regions,
             were still pending at the time of our review.

             We reviewed DOD and contractor projections of resource sharing costs and
             savings, TRICARE policies and guidance, and various efforts by DOD to
             promote the overall resource sharing effort. This included discussions
             with officials of the Office of the Assistant Secretary of Defense for Health
             Affairs, DOD’s TRICARE cost consultant, and contractor officials. At the
             contractors’ offices, we reviewed individual resource sharing project files
             to analyze the progress being made and determine the specific reasons
             why some potential agreements were not being implemented. The project
             files consisted of both agreements existing before TRICARE, referred to as
             “partnerships,” and new resource sharing agreements. Many of the
             partnership agreements were converted to resource sharing agreements as
             TRICARE became operational. To assess progress in achieving new
             savings under TRICARE, we identified the expected savings from the new
             agreements and compared the result to DOD’s overall projected TRICARE

             We discussed information, training, and other needs with DOD officials at
             DOD’s Washington, D.C., headquarters and at regional and MTF levels,
             focusing on the factors that affected progress in resource sharing.
             Especially at the MTF level, we discussed officials’ understanding of, and
             amount of confidence in, the financial aspects of resource sharing
             agreements, including effects on the MTF workload and bid price
             adjustment. Through discussions with DOD and contractor officials and
             examination of records, we reviewed their experiences with planning and
             establishing resource sharing agreements, including the problems they
             encountered. We also discussed with DOD and contractor officials
             alternatives DOD has undertaken for the current contracts as well as
             policies and plans DOD has devised or is considering that will affect the
             future of resource sharing.

             Page 22                               GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix I
Scope and Methodology

At the completion of our work, we briefly reviewed DOD-provided data
suggesting that TRICARE savings other than from resource sharing were
occurring that more than offset the resource sharing savings shortfalls we
had found. Determining TRICARE’s overall cost-effectiveness was beyond
the scope of our review. Nonetheless, upon reviewing the data, we asked
follow-up questions of DOD, obtained status information on DOD’s planned
and under way internal and contracted studies aimed in whole or in part at
determining TRICARE’s cost-effectiveness, and reviewed pertinent
information from our other work in process and our issued reports.

We conducted our review between June 1996 and May 1997 in accordance
with generally accepted government auditing standards.

Page 23                             GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix II

Regions Served by the Seven Managed Care
Support Contracts

              Page 24       GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix III

TRICARE Support Contracts and Start Dates

                                                                                        Health care
               Region                 Lead agent          Contract status               start date
               Northwest              Madigan             Awarded to Foundation         March 1995
                                                          Health Federal Services,
                                                          Inc., September 1994, for
                                                          $475 million
               Southwest              Wilford Hall        Awarded to Foundation         November
                                                          Health Federal Services,      1995
                                                          Inc., April 1995, for $1.8
               Southern California,   San Diego,          Awarded to Foundation         April 1996
               Golden Gate, and       David Grant,        Health Federal Services,
               Hawaii-Pacific         Tripler             Inc., September 1995, for
                                                          $2.5 billion
               Southeast and          Eisenhower,         Awarded to Humana             July 1996
               Gulf South             Keesler             Military Healthcare
                                                          Services, November 1995,
                                                          for $3.8 billion
               Central                Evans               Awarded to Triwest            April 1997
                                                          Healthcare Alliance, Inc.,
                                                          July 1996, for $2.3 billion
               Northeast              National Capital    Award expected by             May 1998
                                                          September 1997
               Mid-Atlantic and       Portsmouth,         Award expected by             May 1998
               Heartland              Wright-Patterson    September 1997

               Page 25                                   GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV

Guidance on Developing Resource Sharing

                            To further explain the resource sharing agreement development process,
                            the following information was condensed from selected guidance offered
                            by lead agents. The guidance includes preparation of proposals, a chart
                            showing the flow of agreement development (fig. IV.1), and application of
                            a financial analysis worksheet.

                            The Resource Sharing Program is a mechanism for providing contracted
Guidance on                 civilian health care personnel, equipment, and/or supplies to enhance the
Preparation of              capabilities of MTFs to provide necessary inpatient and outpatient care to
Proposals                   beneficiaries of the Civilian Health and Medical Program of the Uniformed
                            Services (CHAMPUS).

                            Resource sharing is a cooperative activity between the contractor, the lead
                            agent, and the MTF commander. A variety of information sources and
                            databases may be examined in looking for and evaluating resource sharing
                            opportunities that may subsequently be developed into resource sharing
                            proposals and agreements.

Analysis of CHAMPUS         Analysis of CHAMPUS utilization and cost data may identify diagnoses,
Utilization and Cost Data   procedures, or specialty health care, which account for significant
                            numbers of patient encounters or high costs. A variety of reports may be
                            useful in this regard.

                            CHAMPUS Cost and Utilization Reports. These reports are generated by the
                            Office of the Civilian Health and Medical Program of the Uniformed
                            Services from health care service record data to show CHAMPUS costs and
                            utilization, by type of health care service, for each catchment area. Those
                            services showing high costs and/or utilization may be excellent candidates
                            for resource sharing considerations.

                            Non-Availability Statement (NAS) Reports. NASs authorize beneficiaries to
                            seek certain care in civilian facilities when the MTF cannot provide the
                            care. These reports show the numbers and types of NASs generated by each
                            MTF. Those health care services showing large numbers of NASs being
                            issued over time may be excellent candidates for resource sharing

                            Health Care Finder (HCF) Referral Reports. These reports show the
                            numbers and types of referrals of CHAMPUS-eligible beneficiaries to both
                            MTF and civilian health care providers. High numbers of referrals to civilian

                            Page 26                               GAO/HEHS-97-130 TRICARE Resource Sharing
                  Appendix IV
                  Guidance on Developing Resource Sharing

                  providers for specific health care services may indicate resource sharing

                  CHAMPUS Ad Hoc Claims Reports. CHAMPUS historical data may be obtained
                  from claims data files. These data can be tailored to provide greater detail
                  for the types of services being provided under CHAMPUS. Information from
                  CHAMPUS Cost and Utilization Reports, NAS Reports, and HCF Referral
                  Reports may indicate those health care specialties that warrant more
                  detailed examination to identify potential resource sharing opportunities.

                  MTF Capability Reports. These reports are developed by HCFs and indicate
                  MTF capabilities. They are used by the HCFs to guide referrals into and out
                  of MTFs. They may also provide insight into potential resource sharing

                  Composite Health Care System Professional Activity Study Reports. These
                  reports may be used to identify gaps in MTF services or high referral
                  patterns from the MTF to outside health care providers. These gaps and
                  referral patterns may indicate additional opportunities for resource

                  Network Provider Directory. This directory provides the numbers and
                  types of health care providers by location. Gaps and shortages in the
                  civilian provider network may be identified that may indicate resource
                  sharing opportunities.

Analysis of MTF   MTF capabilities, staffing, workload, and backlog—both current and
Capabilities      projected—should be identified and evaluated to determine potential
                  opportunities for resource sharing. MTF capabilities may be assessed using
                  the following reports:

                  MTF   Capability Reports. (See prior description of reports.)

                  MTF Staffing Reports. These reports are developed by MTFs and show the
                  numbers and types of personnel assigned to, and employed by, the MTF.
                  Careful review of staffing reports over time may indicate staffing trends,
                  which may provide insight into both current and future resource sharing
                  opportunities. A baseline report of regionwide staffing, by MTF, was
                  compiled from computer tapes provided by the government to the
                  contractor for fiscal year 1993.

                  Page 27                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                       Appendix IV
                       Guidance on Developing Resource Sharing

                       MTF Operations Study. This report shows the historical number of health
                       care services provided by MTFs for both inpatient and outpatient services.
                       This report is derived from data compiled on a computer tape provided to
                       the contractor by the government for fiscal year 1993. This information
                       can be used to identify both current and future opportunities for resource

                       Potential Resource Sharing Opportunities List. This list, developed during
                       site visits at each MTF, provides resource sharing opportunities that had
                       been identified by the MTF, after examining the demand for services and
                       identifying shortfalls in meeting those demands.

The Written Resource   Once a resource sharing opportunity has been identified, the MTF
Sharing Proposal       completes a written request for consideration of the potential resource
                       sharing agreement (RSA).

                       The proposal is to show the project title, requesting MTF, point of contact,
                       and desired start date. The expected accomplishment is to be described.
                       For example, “This project is intended to expand Family Practice services
                       within the hospital. This MTF currently averages 200 ambulatory care visits
                       a month, and the implementation of this project should increase the
                       monthly visits by an additional 200 visits. This should decrease the number
                       of NASs issued and the concomitant CHAMPUS visits and costs.”

                       The proposal is to include the estimated resources required, including
                       personnel, equipment, and supplies, along with the following:

                       Direct Workload. Provide the number of outpatient visits and/or inpatient
                       admissions, by type of CHAMPUS beneficiary (active duty dependent [ADD],
                       or nonactive duty dependent [NADD]) that the project is expected to
                       provide per year. Note that the NADD category includes retirees, family
                       members of retirees, survivors of deceased service members, and others.
                       If possible, provide a detailed breakdown of workload numbers by current
                       procedural terminology (CPT) or diagnosis-related group (DRG). If possible,
                       provide the estimated cost to the MTF for each CPT and DRG code.

                       Ancillary Workload. Provide the anticipated additional ancillary workload
                       that the project will develop for the MTF, by type of CHAMPUS beneficiary
                       (ADD or NADD), per year. If possible, provide a detailed breakdown of
                       ancillary workload numbers by CPT or DRG. If possible, also provide the
                       estimated cost to the MTF for each CPT and DRG code.

                       Page 28                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                        Appendix IV
                        Guidance on Developing Resource Sharing

                        MTF Cost/Expense Data. Provide specific Medical Expense and
                        Performance Reporting System (MEPRS) cost elements for the clinical
                        function of the project. If possible, provide a detailed breakdown of MEPRS
                        cost elements by CPT or DRG.

                        CHAMPUS Workload Data. Provide CHAMPUS workload, within the catchment
                        area, currently being accomplished for the clinical function of the project.
                        If possible, provide a detailed breakdown of CHAMPUS workload and cost
                        data by CPT or DRG.

                        Signature and Date. Provide signature of the MTF commander, or his agent,
                        and the date the document was signed.

Example of a Resource   Project Title. Internal Medicine Augmentation and Support.
Sharing Proposal
                        Purpose. The MTF had three internists assigned in fiscal year 1994, two in
                        fiscal year 1995, and will decrease to one by June 1996. MTF workload has
                        shown a concomitant decrease in the average number of outpatient visits,
                        admissions, and occupied bed days. The number of NASs and visits to
                        civilian providers under CHAMPUS has risen to absorb the demand for
                        internal medicine services in the face of decreasing supply within the MTF.

                        This proposed RSA, if approved, would expand the internal medicine
                        services within the MTF and should increase the number of monthly
                        outpatient visits by approximately 900 per month and the number of
                        inpatient admissions by 37 per month. These increases should avoid a shift
                        of approximately 425 outpatient visits per month to CHAMPUS with the loss
                        of a military provider. They should also add an additional 475 outpatient
                        visits per month to the MTF workload. Recognizing that approximately
                        44 percent of our CHAMPUS beneficiaries are ADDs and that 56 percent are
                        NADDs, and using the appropriate volume trade-off factors, it should also
                        reduce the number of visits that had previously been paid for through
                        CHAMPUS by approximately 212 visits per month.

                        Resources Required. To implement the proposed RSA, additional providers
                        and support personnel will be required. Also, a financial offset for
                        increased costs in ancillary services and supply costs will be necessary.
                        Facility space and equipment are adequate to support the additional

                        Page 29                                   GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV
Guidance on Developing Resource Sharing

Personnel. Internist (board certified or eligible), Nurse (Licensed
Vocational Nurse), with attached example of position description.

Equipment. None.

Supplies. No direct supplies, but, based on fiscal year 1995 MEPRS data,
reimbursement for the costs of ancillary services and supplies for
outpatient visits above that achieved during the data collection period,
fiscal year 1995 (10,188 outpatient visits per year). Estimated at up to 5,700
visits. (For outpatient visits, example shows costs per procedure and per
visit for pharmacy, laboratory, radiology, medical supplies, and other

Also, reimbursement for the cost of ancillary services and supplies for
inpatient admissions above that achieved during the data collection
period, fiscal year 1995 (404 admissions per year). Estimated at up to 226
admissions. (Example shows ancillary service and supply costs—based
upon fiscal year 1995 MEPRS data—per procedure and per admission for
same categories as for outpatient admissions.)

MTF Workload Data. (Example shows internal medicine direct workload,
based on fiscal year 1995 MEPRS data, in terms of outpatient visits and
inpatient admissions. It shows also the internal medicine ancillary
workload, based on fiscal year 1995 MEPRS data, in terms of pharmacy
prescriptions, laboratory procedures, and radiology films per year for
outpatient visits and inpatient admissions.)

MTF Cost/Expense Data. (Example refers to attachments for MEPRS data for
outpatient and inpatient care, based on fiscal year 1995 MEPRS data.)

CHAMPUS  Workload Data. (Example refers to attachment for CHAMPUS
claims data for this catchment area based on claims data from September
1994 through August 1995.)

Page 30                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                                        Appendix IV
                                        Guidance on Developing Resource Sharing

Figure IV.1: Resource Sharing Development Flowchart

                                        Source: TRICARE Desert States Financial Guide (Jan. 1997).

Using the Financial
Analysis Worksheet

Purpose of Worksheet                    The standardized Internal Resource Sharing Financial Analysis Worksheet
                                        is structured to take into account three different types of proposed
                                        agreements: (1) the recapture of new workload, (2) the conversion of a
                                        partnership agreement, and (3) the replacement of a lost provider.

                                        Page 31                                        GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV
Guidance on Developing Resource Sharing

For all of these different situations, the resource sharing worksheet is
designed to help the MTF answer two questions: (1) Is the proposed
agreement projected to be cost-effective and (2) is the proposed
contractor workload credit appropriate?

An agreement is deemed cost-effective from the Military Health Services
System (MHSS) perspective if the MHSS cost for the agreement (the sum of
the MTF’s marginal expenditures and the contractor’s expenditures for the
proposed RSA) is less than the government’s share of projected CHAMPUS

Assuming the cost-effectiveness test is satisfied, there are two additional
criteria for evaluating whether the contractor’s workload credit is
appropriate. First, the contractor credit shall not exceed the full credit
(that is, 100 percent credit) that would be counted under the Guidelines
for Resource Sharing Workload Reporting. Second, a prospective profit
rate limit applies to RSAs for which the savings exceed those assumed in
the contractor’s best and final offer. For these agreements, the
contractor’s projected profit rate on resource sharing expenditures (as
calculated by the worksheet) should not exceed the contractor’s overall
proposed health care profit rate (on a prospective basis). For example, if a
contractor proposed a 5-percent profit rate for health care costs, then the
projected contractor profit on resource sharing expenditures exceeding
the up-front bid price assumptions should also not exceed 5 percent.

A prospective profit limit also applies to an RSA that converts an inpatient
partnership agreement that existed in the data collection period (DCP) and
for which CHAMPUS admissions were not counted in the DCP data. (In this
case, workload credit should be negotiated as necessary to produce a
projected contractor net gain approximately equal to zero, since otherwise
the contractor would receive an upward price adjustment for additional
NASs simply for maintaining the same workload done in the DCP under the
partnership agreement.)

If both of the previous questions cannot be answered “yes” for the
proposed RSA, then the MTF should either renegotiate some of the terms of
the proposed agreement (for example, the contractor’s workload credit)
or consider other alternatives to the proposed agreement (for example, the
task order resource support option).

In addition to answering both previous questions for resource sharing in
isolation, the resource sharing worksheet is designed to project the cost

Page 32                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                         Appendix IV
                         Guidance on Developing Resource Sharing

                         impact of implementing the agreement under task order resource support
                         rather than resource sharing, including a summary comparison of
                         cost-effectiveness under the two options. Similarly, the worksheet shows
                         the relative financial impact on the managed care support (MCS) contractor
                         of resource sharing versus resource support. (Details on resource support
                         analysis are excluded from this condensed version of the guidance.)

Accrual of Savings       Under the MCS contracts, resource sharing savings can accrue to the
                         government in three ways, each of which is addressed in the worksheet.

                         First, for those resource sharing savings investments assumed as part of
                         the contractor’s best and final offer proposal, the contractor’s bid price
                         includes a cost-per-eligible trend factor for resource sharing savings (that
                         is, claims avoidance). Net of the contractor’s expected expenditures on
                         resource sharing, this creates a lower up-front bid price (claims
                         avoidance - resource sharing expenditures = net savings). These net
                         savings are calculated in section I of the worksheet on an average basis
                         (that is, using the contractor’s best and final offer assumption about the
                         average savings to cost ratio for resource sharing).

                         Second, if partial contractor workload credit is negotiated, the government
                         will realize savings in the bid price adjustment for MTF utilization (the “O”
                         factor). This can result in a more favorable bid price adjustment for the
                         government. These savings are calculated in section II of the worksheet.

                         Third, the government will also realize 0, 80, 90, or 100 percent of any
                         residual savings in the risk-sharing corridor, depending on which tier of
                         the risk-sharing corridor applies to the bid price adjustment for the option
                         period. (The contract’s risk-sharing provisions are specified in detail in
                         section G-5 and in appendix C in the Bid Price Adjustment Procedures
                         Manual.) This will result in the government sharing any risk-sharing
                         savings realized by the contractor. These savings are calculated in section
                         IV of the worksheet.

Required Completion of   MTF commanders or their designated representatives are required to
the Financial Analysis   complete the standardized Resource Sharing Financial Analysis Worksheet
Worksheet                in negotiating each proposed RSA, in addition to any other analyses
                         prepared by the contractor or the MTF (as specified in section G-5g(2) of
                         the contract).

                         Page 33                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                      Appendix IV
                      Guidance on Developing Resource Sharing

                      In completing the resource sharing worksheet, users should not be lulled
                      into a false sense of security by focusing on numerical results rather than
                      on underlying assumptions. The accuracy of assumptions such as the
                      number of admissions and/or visits to be recaptured, the MTF’s marginal
                      costs in recapturing these units, and the costs avoided in CHAMPUS are
                      crucial to the accuracy of the spreadsheet’s projections. If estimates are
                      too optimistic, even though the spreadsheet may project net gains for the
                      government, in reality the government may experience net losses. Of
                      course, overly pessimistic estimates can lead the government to miss out
                      on cost-effective opportunities.

The MTF Inputs Page   To use the Financial Analysis Worksheet, the MTF must enter the boxed
                      values on the “MTF Inputs” page. These include (1) the type of RSA,
                      (2) whether the agreement converts an inpatient partnership agreement
                      that previously existed, (3) the option period (year) covered by the
                      proposed agreement, (4) the number of outpatient visits or inpatient
                      admissions enabled by the agreement, (5) the expected government
                      risk-sharing responsibility percentage, (6) the estimated volume trade-off
                      factor used to estimate CHAMPUS avoidance savings, (7) the estimated
                      average government cost per unit for admissions and/or outpatient visits
                      avoided in CHAMPUS for care covered by the agreement, (8) the expected
                      contractor expenditure under the agreement, (9) the projected MTF
                      marginal expenditures, (10) the contractor resource sharing workload
                      credit assumed in the analysis, (11) the sum of the projected resource
                      sharing expenditures for those agreements approved for the lead agent
                      region as a whole, and (12) the expected MTF payment for the contractor’s
                      costs and the MTF’s marginal costs if the resource is acquired under task
                      order resource support rather than resource sharing.

                      As part of the negotiation of the RSA, the MTF commander and the
                      contractor must agree on each estimate or assumption entered on the “MTF
                      Inputs” page before the worksheet is finalized.

                      The remaining sections of the Financial Analysis Worksheet do not require
                      the MTF to enter any data or assumptions. Depending on the results shown
                      on the “summary” page for resource sharing, however, it may be
                      appropriate to revise some of the MTF inputs (for example, the contractor
                      workload credit) on an iterative basis.

Resource Sharing      The “Summary—Resource Sharing” page lists the key results for the
Summary Page          proposed agreement under resource sharing. This summary shows

                      Page 34                                   GAO/HEHS-97-130 TRICARE Resource Sharing
                        Appendix IV
                        Guidance on Developing Resource Sharing

                        (1) whether the proposed contractor workload credit is appropriate,
                        (2) whether government gains exceed government expenditures, (3) the
                        projected contractor net gain under the RSA, (4) the projected government
                        net gain, and (5) whether the proposed agreement reduces the contractor’s
                        actual costs even if the contractor’s net gain is negative due to the average
                        savings assumed up front in the contractor’s best and final offer. (Because
                        the contractor reduced its best and final offer bid price based on an
                        assumption about average savings for each RSA, some actual agreements
                        are expected to produce savings that are smaller than this assumed
                        average, but are still positive. This perspective is particularly relevant for
                        conversion of partnership agreements, since the contractor is not likely to
                        achieve new savings simply for continuing previous partnership
                        agreements under the same terms as RSAs. The net contractor gain after
                        taking account of average up-front savings from the best and final offer is
                        likely to be negative, yet converting a cost-effective partnership agreement
                        allows the contractor to avoid an increase in CHAMPUS claims costs that
                        would otherwise result.)

                        If the “Summary—Resource Sharing” page shows that the contractor
                        workload credit is not appropriate and/or government gains do not exceed
                        government expenditures, then one option for the MTF is to adjust the
                        proposed contractor workload credit on an iterative basis until the
                        proposed agreement satisfies both requirements. It may also be
                        appropriate for the MTF to renegotiate other terms of the proposed
                        agreement (for example, the level of resources to be provided by the
                        contractor). If it is not possible to determine a workload credit percentage
                        that results in a “yes” response to both questions, given all of the other
                        input assumptions agreed upon by the MTF commander and the contractor,
                        then the proposed RSA should not be approved (unless the lead agent
                        determines that the proposed agreement still warrants approval due to
                        compelling circumstances).

Resource Sharing Page   The resource sharing worksheet page has five sections. Section I estimates
                        the net resource sharing savings under this agreement that would already
                        be reflected in the contractor’s proposed bid price, based on the
                        average-savings-to-cost ratio used to develop the resource sharing savings
                        trend factor in the contractor’s best and final offer.

                        Section II estimates the effect of the RSA, including the contractor’s
                        workload credit, on the MTF utilization adjustment in the bid price
                        adjustment formula (that is, the “O” factor adjustment).

                        Page 35                                   GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV
Guidance on Developing Resource Sharing

Section III estimates the actual savings (that is, cost avoidance) in CHAMPUS
health care costs as a result of the RSA.

Section IV estimates the residual gain in CHAMPUS (that is, the difference
between the adjusted bid price for health care costs and the actual health
care costs) under the proposed RSA. The section also estimates the
government and contractor portions of these gains, since the gains would
be subject to risk sharing between the government and contractors.

Section V provides the two necessary results of this analysis (for an
assessment of resource sharing in isolation). First, is the contractor credit
for resource sharing workload assumed in the analysis appropriate?
Second, does the analysis indicate that the proposed RSA would be
cost-effective for the government from the MHSS perspective?

Page 36                                   GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix V

Comments From the Department of Defense

             Page 37       GAO/HEHS-97-130 TRICARE Resource Sharing
                Appendix V
                Comments From the Department of Defense

Now on p. 12.

(101493)        Page 38                                   GAO/HEHS-97-130 TRICARE Resource Sharing
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