oversight

Military Retirees' Health Care: Costs and Other Implications of Options to Enhance Older Retirees' Benefits

Published by the Government Accountability Office on 1997-06-20.

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
                  Representatives
June 1997
                  MILITARY RETIREES’
                  HEALTH CARE
                  Costs and Other
                  Implications of Options
                  to Enhance Older
                  Retirees’ Benefits




GAO/HEHS-97-134
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-276905

      June 20, 1997

      The Honorable Steve Buyer
      Chairman
      The Honorable Gene Taylor
      Ranking Minority Member
      Subcommittee on Military Personnel
      Committee on National Security
      House of Representatives

      Today, 4.3 million military retirees,1 their dependents, and survivors are
      eligible for care under the Department of Defense’s (DOD) health care
      system. But this system has changed significantly in the last decade. As a
      result of these changes, which include the establishment of a nationwide
      managed care program called TRICARE and the closing or downsizing of
      many medical facilities, many military retirees, especially those aged 65
      and older, fear they will lose the access they now have to care in military
      medical facilities.

      In recent testimony before your Subcommittee,2 we reported that military
      facilities and resources available to care for older retirees will decrease
      and eventually disappear in many locations as enrollment in TRICARE
      increases, leaving many retirees without DOD-sponsored health care.
      Because of your concern about this issue, we agreed with your office to
      describe various proposals that have been made to enhance older retirees’
      DOD health care benefits, as well as to provide cost estimates, where
      possible, for implementing the options, based on specific variables and
      assumptions. The options, each of which would require legislative action
      to implement, include (1) enrolling Medicare-eligible3 retirees in TRICARE
      Prime, TRICARE’s health maintenance organization (HMO), and paying for
      their care with Medicare funds (referred to as “Medicare subvention”);
      (2) using DOD funds to pay retirees’ Medicare part B premiums and to
      furnish Medigap policies; (3) providing the Civilian Health and Medical
      Program of the Uniformed Services (CHAMPUS)4 as a Medicare supplement;

      1
       For the remainder of this report, the term “retirees” refers to retirees and their dependents and
      survivors. Further, the term “older retirees” refers to retirees who are aged 65 or older.
      2
       Defense Health Care: Limits to Older Retirees’ Access to Care and Proposals for Change
      (GAO/T-HEHS-97-84, Feb. 27, 1997).
      3
       Medicare is a national health insurance program for people 65 years of age and older, certain younger
      disabled people, and people with kidney failure.
      4
      CHAMPUS is an insurance-like program administered by DOD that pays for a portion of the care
      military families and retirees under age 65 receive from private sector health care providers.



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                   (4) extending the Federal Employees Health Benefits Program (FEHBP) to
                   retirees as a Medicare supplement and using DOD funds to pay part of the
                   premium; and (5) expanding DOD’s current mail-order prescription
                   program to Medicare-eligibles who do not live near military medical
                   facilities. This report also discusses the uncertainties about and limitations
                   of these options, including their potential effects on cost and
                   administrative requirements as well as considerations surrounding the
                   military medical system’s size and mission.

                   To do our work, we examined legislative proposals and available studies
                   relating to each option; analyzed DOD data; and interviewed DOD health
                   experts and officials from DOD, the Office of Personnel Management (OPM),
                   the Congressional Budget Office (CBO), the Congressional Research
                   Service (CRS), and military beneficiary associations. A more detailed
                   discussion of our scope and methodology and cost estimates for the
                   options examined appear in appendix I.5


                   Our analyses of the various proposals to improve DOD-sponsored health
Results in Brief   care benefits for older retirees and their dependents indicate that the
                   proposals vary in their potential costs; coverage; and other effects on DOD,
                   eligible beneficiaries, and Medicare (see table 1). For example, Medicare
                   subvention, under which DOD would receive payment from Medicare for
                   treating Medicare-eligible retirees in TRICARE Prime, seeks to ensure that
                   neither DOD nor the Health Care Financing Administration (HCFA)6 would
                   incur added costs by enrolling retirees. However, DOD lacks the cost and
                   care use data needed to estimate its current spending level for
                   Medicare-eligible retirees—the level that would be DOD’s spending limit
                   under this proposal and that, once reached, would trigger HCFA’s payments
                   to begin. Moreover, it is uncertain whether HCFA’s subvention payment
                   rates, which would be lower than those it pays to Medicare HMOs, would
                   equal DOD’s actual care costs. Finally, relatively few retirees (about
                   75,000) could be accommodated by subvention at military medical
                   facilities because of facility capacity and financial constraints.




                   5
                    We did not attempt to estimate the cost of implementing the Medicare subvention option, for the
                   reasons given in app. I.
                   6
                    HCFA is the agency in the Department of Health and Human Services responsible for administering
                   the Medicare program.



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Table 1: Comparison of Proposed Military Retiree Health Care Options
Option                    Benefit description               Estimated annual cost to DOD              Estimated cost to beneficiary
Medicare subvention        Using Medicare funds, this option    The goal is to be budget neutral,     Medicare part B is required,
                           guarantees inpatient and             but uncertainties remain              costing $526/year for each
                           outpatient care and prescriptions    regarding (1) DOD’s actual costs      covered beneficiary. The
                           at military medical facilities or    for providing full care for all       beneficiary pays TRICARE Prime
                           through the TRICARE network.         enrollees and the resulting           copayments when care is
                           We estimated subvention at           difficulty in setting DOD’s           received outside DOD facilities:
                           military facilities would            baseline spending level and (2)       $12 per outpatient visit; $11 per
                           accommodate about 75,000             whether HCFA’s payment levels         day, minimum $25 per inpatient
                           participants.                        would be appropriately set to         admission; and $9 per
                                                                ensure cost-neutrality.               prescription.
Medicare part B and        DOD pays for Medicare part B         $2.2 billion per year ($629 million   Participant pays no copayments
Medigap policy             premium and a Medigap policy to      for part B premiums and $1.6          for Medicare-covered inpatient
                           supplement Medicare for              billion for Medigap policies);        and outpatient care but does pay
                           inpatient and outpatient care and    $1,833 per participant ($526 for      a 50-percent prescription
                           prescription drugs. Offered to all   part B premium and $1,307 for         copayment, with annual dollar
                           Medicare-eligible retirees.          Medigap policy).                      limits.
CHAMPUS as a Medicare      DOD extends CHAMPUS to               $1.8 billion per year; $1,520 per     Medicare part B is required,
supplement                 supplement Medicare for              participant.                          costing $526/year for each
                           inpatient and outpatient care and                                          covered beneficiary. CHAMPUS
                           prescription drugs. Offered to all                                         covers most out-of-pocket costs;
                           Medicare-eligible retirees.                                                under the standard CHAMPUS
                                                                                                      program, there is a 25-percent
                                                                                                      copayment for prescriptions.
FEHBP as a Medicare        DOD pays part of the premium for $1.6 billion per year; $1,571 per         The participant pays about 29
supplement                 the participants’ choice of FEHBP participant.                             percent of the plan
                           plans, which typically cover                                               premium—single annuitant
                           Medicare deductibles and                                                   average is about $680—just as a
                           coinsurance, prescription drugs,                                           federal employee does.
                           and some dental care. Offered to                                           Copayments and deductibles
                           all Medicare-eligible retirees, but                                        vary but are close to $0 if the
                           we assumed 83-percent                                                      participant also has optional
                           participation.                                                             Medicare part B.
Mail-order pharmacy plan   DOD provides mail-order plan for     $229 million per year; $561 per       $8 per 90-day prescription.
                           prescription drugs, primarily for    participant.
                           recurring medications, to all
                           Medicare-eligible beneficiaries
                           not living near a military
                           pharmacy and not having
                           mail-order service under a base
                           closure plan (about 408,000
                           retirees).

                                           The three proposals to have DOD fund Medicare supplemental coverage
                                           would cover all older retirees, and estimated additional DOD costs would
                                           range from $1.6 billion to $2.2 billion per year, in 1996 dollars, after they
                                           were fully implemented. Costs would be likely to rise over time as health
                                           care costs rose and greater numbers of Medicare-eligible retirees became




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             eligible for the programs. Specifically, the proposal to have DOD fund
             retirees’ Medicare part B premiums and a private Medigap policy,
             including prescription coverage, would cost an estimated $2.2 billion per
             year. A second alternative—extending CHAMPUS coverage to older retirees
             as a Medicare supplement—could cost as much as $1.8 billion per year.
             The third option—offering older military retirees a Medicare supplement
             through enrollment in FEHBP—is attractive for its broad coverage and
             cost-sharing provisions, but it could cost as much as $1.6 billion per year.
             Moreover, all three of these options could inadvertently create a disparity
             in retirees’ health care benefits by, in effect, providing older retirees with
             more comprehensive benefits than younger retirees. Further, while these
             options would provide retirees with enhanced benefits, none would
             increase retirees’ access to care in military medical facilities.

             Finally, the mail-order pharmacy option would address a significant gap in
             older retirees’ health coverage—Medicare’s lack of outpatient prescription
             drug coverage. This proposal is unlike the others, which involve many
             uncertainties or high potential costs. Under this proposal, for an estimated
             cost of $229 million per year, DOD could extend the current mail-order
             pharmacy program in base closure areas to Medicare-eligible retirees who
             live far from military facility pharmacies. This option would reduce
             prescription expenses for retirees living far from military pharmacies who
             have limited or no prescription coverage. And, because the approach
             could be implemented fairly easily as an extension of the current program,
             it would offer some relief to beneficiaries without major system changes.


             Today’s DOD health care system provides coverage for about 8.2 million
Background   people, of whom over half are retirees and their dependents and survivors.
             (App. II includes more detailed information on military retirees, including
             population size and growth projections, demographics, use of DOD health
             care, and extent of other insurance coverage.) Under the terms of the 1956
             Dependents’ Medical Care Act, DOD has authority to provide retirees of any
             age health care in its medical facilities as long as space and resources are
             available. Retirees receive this care, referred to as “space-available” care,
             at little or no cost. The statute, however, does not entitle retirees to care in
             military facilities.

             When DOD was given the authority to provide care to military retirees,
             retirees made up only 8 percent of the population eligible for military
             health care. At that time, the military health care system was sized for a
             large active-duty force, with enough capacity that retirees were almost



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assured health care in military facilities on a space-available basis. Since
then, however, downsizing of the military medical system, coupled with
increases in the size of the retiree population, have contributed to a
reduction in the availability of care for retirees in DOD facilities.

The introduction of TRICARE has also affected the amount of
space-available care in medical facilities. The legislation authorizing
TRICARE gives beneficiaries who enroll in its HMO benefit program called
TRICARE Prime priority for care in military medical facilities. However,
because retirees aged 65 and older are ineligible for TRICARE Prime, they
can obtain care in military facilities only if space and resources remain
after care is provided to enrolled beneficiaries. As TRICARE enrollment
increases, the amount of space-available care will decline.

When space and resources are not available in DOD facilities, retirees not
enrolled in TRICARE Prime must seek care from other providers. DOD pays
most of the cost of the care of those under age 65 who receive care from
private health care providers through CHAMPUS. CHAMPUS was established in
part so that military members, once retired, could have health care
coverage until eligible at age 65 for Medicare. Retirees lose their CHAMPUS
coverage at age 65, and, when space and resources are not available within
DOD facilities, these older retirees must depend on non-DOD sources, such
as Medicare, Department of Veterans’ Affairs facilities, and other
government-sponsored or private health insurance, for their health care.

As we reported in our February 1997 testimony, using a blend of military
facilities and other sources has created a patchwork system that
Medicare-eligible retirees must learn to navigate to receive care.
Space-available care is episodic and lacks the regularity and continuity
that are often important to older retirees, who have more frequent and
chronic medical problems than younger ones. And, although retirees may
also access care through Medicare and private supplemental health
insurance, many retirees experience coverage gaps and high out-of-pocket
costs. Even older military retirees with more generous coverage through
private or other government employer-sponsored insurance that acts as a
Medicare supplement could experience relatively high costs depending on
the extent to which their former employers share the costs. To address
these availability, cost, and coverage issues, DOD and members of the
Congress have developed several proposals with various health care
program options for Medicare-eligible retirees.




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                         Under Medicare subvention, DOD’s HMO option—TRICARE Prime—would
Despite Cost-Neutral     be opened to Medicare-eligible retirees and would operate essentially as a
Intent, Medicare         Medicare HMO—that is, as HMOs that are currently operated by private
Subvention Poses         companies under contract with HCFA and available to many of DOD’s older
                         retirees. DOD’s subvention plan attempts to ensure cost-neutrality for both
Financial Risk to the    DOD and HCFA in two ways. First, it would require DOD to maintain its
Government               current spending, or “level of effort,” on Medicare-eligible retirees treated
                         in military medical facilities. Second, the plan would require that HCFA’s
                         payment rate be set lower than the per-person rate HCFA currently pays to
                         private Medicare HMOs. If DOD’s level of effort was accurately determined
                         and the Medicare payment rate was appropriately set, neither DOD or HCFA
                         would experience increased costs. However, DOD’s lack of information
                         with which to accurately determine its current level of effort raises
                         questions about whether the program would actually be cost neutral.
                         Furthermore, DOD’s capacity and financing constraints could significantly
                         limit the number of older retirees who would benefit from this program.


Accurately Determining   DOD’s role in attaining cost-neutrality under the subvention plan would be
DOD’s Level-of-Effort    to maintain its historic level of spending, or “level of effort,” for care it
Baseline Would Be        provided to Medicare-eligible retirees. According to the proposal, once the
                         level of effort in dollar terms was determined, it would be divided into two
Difficult                portions: one that would continue to fund space-available care for older
                         retirees and one devoted to fund care for beneficiaries who enrolled in
                         TRICARE Prime through subvention.7 The dollars allocated for TRICARE
                         enrollees’ care would then be divided by HCFA’s per-person payment,
                         yielding the number of subvention enrollees that DOD remained responsible
                         for funding. Once DOD’s subvention enrollees reached that number, DOD
                         would receive monthly per-enrollee payments from HCFA for each enrollee
                         over the target. At the end of each year, a level-of-effort spending
                         reconciliation would be conducted. If DOD had not spent all of its
                         level-of-effort dollars, even if it had enrolled more than the target number
                         of beneficiaries, it would have to reimburse HCFA for payments it made up
                         to DOD’s level-of-effort threshold.

                         After its review of Medicare subvention legislation, CBO reported that the
                         program’s potential cost-neutrality critically hinges on how accurately DOD
                         would be able to establish its level-of-effort baseline spending on



                         7
                          Under proposed legislation for a test of the subvention program, the proportions for space-available
                         care and enrolled care would be 70 percent/30 percent in the first year of subvention,
                         60 percent/40 percent in the second year, and 50 percent/50 percent in the third year.



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                            Medicare-eligibles.8 The risk of establishing an inaccurate level-of-effort
                            baseline would be great because of the limitations of DOD’s cost and
                            utilization data. DOD’s current systems capture information on the types
                            and costs of medical services provided by individual facilities but cannot
                            attribute those facility costs to specific patients or groups of patients. If
                            the current spending was overestimated, the level-of-effort baseline would
                            be set too high, putting DOD at risk of guaranteeing care to enrolled retirees
                            without having adequate funding to provide it. If DOD underestimated its
                            current spending, the level-of-effort baseline would be set too low, and
                            HCFA would pay for services that DOD now pays for. This would exacerbate
                            the problems of the Medicare Hospital Insurance trust fund, which is
                            expected to be depleted in 2001.

                            Even if the baseline was accurately set, DOD’s historic level of spending
                            might not reflect the actual costs of guaranteeing comprehensive health
                            care coverage to retirees enrolled under subvention. That is, the level of
                            effort reflects the past spending on space-available care for
                            Medicare-eligible beneficiaries. If the costs to provide the full range of
                            Medicare-covered services to the targeted number of enrollees were
                            greater than the spending level established by the baseline, DOD would
                            have to find funds to provide enrollees’ care, possibly by taking funds from
                            other DOD health programs, by reducing space-available care for
                            nonenrollees, or by asking for supplemental appropriations.


Medicare Payment Level Is   HCFA’s role in attaining cost-neutrality under this proposal would be to
Critical to Proposal’s      provide per-person payments for additional enrollees. These payments,
Cost-Neutrality             which would be intended to reimburse DOD for the cost of the care
                            provided to Medicare-eligible enrollees above the level of effort, are
                            critical to the cost-neutrality of this proposal. HCFA currently pays
                            Medicare HMOs a flat fee for each enrolled beneficiary that is equal to
                            95 percent of Medicare’s estimated average cost of treating a similar
                            beneficiary in the fee-for-service sector. Under this proposal, DOD has
                            agreed to accept a payment rate from HCFA that would be at least
                            2 percentage points lower than the rate HCFA pays to private Medicare
                            HMOs.9 After the first year, HCFA’s payment rate would be further reduced
                            by excluding allocations for graduate medical education, indigent care,
                            and capital costs—costs that DOD does not incur or for which it is
                            separately funded. DOD has estimated that, because of these adjustments,

                            8
                             CBO, memorandum for the record, Feb. 21, 1996, and cost estimate on H.R. 3142, Sept. 17, 1996.
                            9
                             Current proposals for Medicare subvention contain payment rates ranging from 90.25 percent to
                            93 percent.



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the resulting payment rate could be 7 to 13 percent less than the rates HCFA
pays private Medicare HMOs.

It is uncertain whether the proposed payment rates would be appropriate
to ensure that neither DOD nor HCFA incurred costs greater than it would
otherwise have incurred to care for this population. For example, DOD
could incur additional costs if the payment rate was lower than the actual
cost of providing the full range of care that Medicare subvention promises
to the newly enrolled beneficiaries, both at military facilities and through
civilian providers. DOD believes that it can provide care to older retirees in
military medical facilities at a lower cost than Medicare HMOs can. This
contention is based on the “733 study,” which compared the cost of
providing care to DOD beneficiaries in military medical facilities with the
cost of providing care in the civilian sector.10 The study compared military
medical facilities only with the CHAMPUS fee-for-service program, however,
and not with Medicare fee-for-service or HMO providers. Moreover, the
study developed average costs of care as they pertain to the overall
military community, not to older retirees as a separate population.
Therefore, the cost advantage attributed to military medical facilities by
the 733 study may not accurately reflect DOD’s costs in comparison with
private sector HMOs or be generalizable to older retirees treated in DOD
facilities.11

Even if DOD did not incur additional costs in delivering medical facility
care, it could incur additional costs if the cost of using civilian providers
was higher than the payment rate. Although DOD’s intention under
Medicare subvention is to enroll older retirees and provide most of their
care in military medical facilities, not all facilities have the resources to
provide the full range of enrollees’ care. To meet its obligation, therefore,
DOD would supplement facility care with care purchased from private
providers. To ensure that it did not incur additional costs, DOD would need
to purchase this care at rates commensurate with the rates HCFA would pay
DOD. It is uncertain whether DOD could find providers who would accept
these lower rates. If DOD could not find providers who would accept the
lower rates, it would either incur additional costs by buying those services
guaranteed under subvention at the higher rates or be unable to offer
subvention at some facilities.

10
 Office of Program Analysis and Evaluation, “The Economics of Sizing the Military Medical
Establishment,” Executive Report of the Comprehensive Study of the Military Medical Care System
(Washington, D.C.: DOD, Apr. 1994).
11
 DOD officials told us that they are in the process of developing patient-level accounting systems that
may provide better information on the cost of providing care to specific groups of patients, such as
older retirees.



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                         On the other hand, because many enrollees in a Medicare subvention
                         program would presumably be diverted from civilian fee-for-service
                         Medicare providers, HCFA could incur additional costs if its payments to
                         DOD were higher than what HCFA would have paid under standard
                         fee-for-service Medicare. In April 1997, we reported that HCFA’s method for
                         establishing HMO payment rates overstates the average cost of all Medicare
                         beneficiaries and leads to excess payments because it does not fully
                         correct for HMOs enrolling a less costly—more favorable—selection of
                         beneficiaries.12 Thus, it would remain to be seen whether the proposed
                         payment rates for DOD would result in excess payments.


Comparatively Few        Under DOD’s current proposal, subvention would only be offered to
Retirees Would Benefit   Medicare-eligible beneficiaries who live near military medical facilities.13
From Subvention          Moreover, for the reasons described above, subvention would be less
                         financially feasible for facilities that had to purchase significant amounts
                         of care from private providers. DOD officials told us that each medical
                         facility would have to carry out a financial analysis before starting a
                         subvention program to determine the amount and cost of care it would
                         have to purchase. They told us that, from a financial perspective, many
                         smaller facilities would not be able to afford to offer enrollment under
                         subvention. It appears, then, that a smaller number of retirees than is now
                         being served—approximately 300,000—would be likely to benefit from
                         subvention. In its plan for a test of the subvention program at seven
                         facilities, the number of enrollees that DOD estimated it could
                         accommodate equated to about 20 percent of the Medicare-eligible
                         beneficiaries in those areas, and DOD expected that a similar proportion
                         could be accommodated under a nationwide implementation. On the basis
                         of the numbers of retirees living near military facilities with sufficient
                         capacity to operate a subvention program, we estimated that about 75,000
                         older retirees could participate nationwide if the subvention program was
                         offered at all but DOD’s smallest hospitals.14




                         12
                          Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments
                         (GAO/HEHS-97-16, Apr. 25, 1997).
                         13
                          According to DOD officials, over the longer term DOD would seek to offer subvention outside of
                         military medical facilities using civilian providers, if the program proved feasible once tested.
                         14
                           We defined “smallest hospitals” as those with fewer than 50 beds. According to DOD population data
                         for 1996, 381,788 Medicare-eligible retirees lived within the DOD-designated 40-mile catchment area of
                         a military hospital with 50 beds or more. DOD defines “catchment area” as the area within a 40-mile
                         radius surrounding a military medical facility. In addition, we removed from consideration any
                         facilities that were currently in operation but scheduled to close because of base closure actions.



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                             Uncertainties about DOD’s ability to establish a reliable level-of-effort
                             baseline and otherwise estimate its costs under subvention point up the
                             need for DOD to test this concept before nationwide implementation. DOD
                             agrees and has already begun exploring within its system the possible
                             financial and capacity limitations to subvention and planning for the
                             administrative and reimbursement mechanisms needed to test the concept
                             in limited areas.


                             Another option to improve older retirees’ DOD-sponsored health benefits is
Supplemental                 for DOD to offer increased insurance coverage beyond that provided
Insurance Would Fill         through the Medicare program, given the likelihood that many older
Medicare Gaps but Be         retirees will be unable to access care from military facilities. As suggested
                             in three proposals, if DOD funded the cost of supplemental insurance
Expensive                    provided by private insurers, CHAMPUS, or FEHBP, many of the gaps in
                             Medicare coverage could be filled, and some retirees could experience
                             lower out-of-pocket costs. However, DOD’s costs to provide this additional
                             coverage could be substantial, from $1.6 billion to $2.2 billion per year,
                             depending on the type of supplemental insurance plan offered. Moreover,
                             the costs of these programs would probably rise with health care costs and
                             as greater numbers of retirees reached age 65 and became eligible for the
                             benefits. Providing this type of supplemental coverage would require some
                             changes in the current administrative systems, but the administrative costs
                             should be relatively minor for the CHAMPUS and FEHBP options, with
                             somewhat higher administrative costs associated with the private
                             supplemental insurance option.


Paying for Medicare Part B   Upon reaching age 65, retirees’ eligibility for CHAMPUS ends, and Medicare
Premiums and Private         becomes the primary insurer. Under Medicare part A, which is paid for
Medigap Policies             through employer/employee payroll taxes, retirees receive coverage for
                             inpatient hospital, skilled nursing facility, home health, and hospice care.
                             Most retirees also purchase Medicare part B (which costs $525.60 per
                             person in 1997) to receive coverage for services including physician visits,
                             outpatient care, laboratory tests, and medical equipment needed in the
                             home. However, requirements for copayments and deductibles and
                             limitations in the Medicare benefit, such as no coverage for outpatient
                             prescriptions and no cap on out-of-pocket costs, have led many retirees to
                             purchase additional insurance policies—“Medigap” policies—specifically
                             to fill the gaps in coverage. According to a 1995 survey of military
                             beneficiaries, about 31 percent of those aged 65 and older reported having
                             this supplemental insurance.



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The cost of these supplemental policies can be significant to the retiree.
The annual premiums of plans that include coverage for prescription drugs
can range from $750 to almost $3,000, with the more expensive plans
generally providing the greatest coverage and filling in more of the gaps in
Medicare coverage. We calculated the 1996 average annual premium for a
Medigap policy that included coverage for outpatient prescriptions to be
approximately $1,307.15

Assuming financial responsibility for part B premiums as well as paying
for Medigap policies for all Medicare-eligible retirees would cost DOD an
estimated $2.2 billion, or about $1,833 per participant. This cost estimate is
based on coverage under a Medigap policy that includes a prescription
benefit.

The cost for this option could be even higher if DOD also paid the premium
penalty assessed for late enrollment in Medicare part B. Retirees who do
not enroll in Medicare part B during their initial enrollment period16 are
subject to a 10-percent surcharge on their monthly premiums for each year
between the one in which they turned age 65 and the one in which they
enrolled. Paying these additional surcharges could be a significant cost to
DOD. In a report on a 1995 study related to base closure activities,17 DOD
estimated that the 11,000 Medicare-eligible beneficiaries living near
military medical facilities who did not enroll in Medicare part B during
their initial enrollment period would be subject to $10 million in
surcharges over a 5-year period. According to a recent DOD survey of
beneficiaries, about 10 percent of retirees aged 65 and older, or
approximately 120,000, did not have Medicare part B.

To offer Medigap policies, DOD would need to establish some new
administrative structures. Because Medigap policies’ premiums and
insurers vary across the states, DOD would need to establish a mechanism
for coordinating and managing the program, such as OPM has for
administering FEHBP. The cost to create this mechanism is unknown but
could be considerable. An alternative would be to solicit bids on and

15
  We based our calculation on the premiums of plans offered through Blue Cross/Blue Shield and
Prudential in most states, as presented in a study by the Families USA Foundation, a health care
advocacy group, and weighted those premiums to reflect differences in plan costs by age relative to
the age distribution of DOD retirees.
16
  The initial enrollment period is generally a 7-month period that begins 3 months before the retiree
turns age 65.
17
 Office of the Assistant Secretary for Health Affairs, DOD, “Possible Financial Relief From Medicare
Part B Late Enrollment Surcharges for Medicare-eligible Military Retirees Who Have Been Adversely
Affected by a BRAC,” Report to Congress (Washington, D.C.: DOD, 1996).



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                          B-276905




                          award a national contract for a Medigap policy, although this would not be
                          without cost.


Extending CHAMPUS as a    Another option to increase insurance coverage of military retirees is to
Medicare Supplemental     extend their coverage under the CHAMPUS program beyond age 64. Under
Policy                    this extension, the CHAMPUS benefit would serve as a supplemental policy
                          to Medicare, covering most out-of-pocket costs as well as medical services
                          included in CHAMPUS but not covered by Medicare, such as prescriptions.
                          The extension of CHAMPUS would provide retirees continued coverage
                          under a plan familiar to many of them. Additionally, even though current
                          legislative proposals would require retirees to enroll in Medicare part B,
                          retirees could experience lower out-of-pocket costs.

                          Providing CHAMPUS as a supplemental policy to all Medicare-eligible
                          beneficiaries could cost DOD as much as $1.8 billion, or about $1,520 per
                          participant. This estimate is based on the assumption that CHAMPUS would
                          pay the costs remaining after Medicare paid its allowable amount for
                          covered services and that CHAMPUS would pay for the services not covered
                          by Medicare. As a result, retirees would generally have no out-of-pocket
                          costs for Medicare-covered services. For example, if the cost of a medical
                          procedure was $100 and the maximum amount allowed by Medicare and
                          CHAMPUS was $100, Medicare would first pay its customary 80 percent of
                          the allowable ($80) and CHAMPUS would pay the difference, up to its
                          customary 75 percent of the allowable. In this example, the retiree would
                          have no out-of-pocket costs. For those services covered by CHAMPUS but
                          not by Medicare, such as prescription drugs, retirees would pay the
                          customary CHAMPUS copayment of 25 percent.

                          Because CHAMPUS is an established program within DOD, the existing
                          administrative structure could be used after modifications were made to
                          various information and claims processing systems. According to DOD,
                          these modifications would not significantly increase the costs of the
                          program but could take between 6 and 12 months to implement.


Offering Enrollment in    Another option is to offer military retirees enrollment in FEHBP, the
FEHBP to Older Retirees   nationwide health care plan administered by OPM that is available to
                          federal civil servants during employment and, as a supplement to
                          Medicare, after retirement. Through FEHBP, military retirees could choose
                          from at least a dozen plan options including fee-for-service plans such as
                          Blue Cross/Blue Shield and the Government Employees Hospital



                          Page 12                            GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905




Association, regional HMOs, and point-of-service plans.18 As with active and
retired federal employees, military retirees who enrolled would be
required to pay a premium. The amount of the premium would vary
depending on which plan was chosen and the government and beneficiary
share in the cost of the selected plan. In 1996, for example, the government
paid, on average, 71 percent of the premium for non-Postal Service federal
employees and retirees, and beneficiaries were responsible for the
remaining 29 percent.

Offering Medicare-eligible retirees the opportunity to participate in FEHBP
could provide additional coverage for services not covered under
Medicare. For example, many of the plans provide coverage for
prescriptions and have catastrophic limits on out-of-pocket costs, and
some offer dental benefits, none of which is covered by Medicare.
Additionally, even with the same cost-sharing provision as federal
employees have, under FEHBP, retirees could pay a lower premium for
increased coverage than they would under private Medigap policies,
depending on the plan chosen. For example, in 1997 an enrollee’s share of
premiums for the five largest plans in FEHBP with comprehensive coverage,
including prescription and dental coverage, ranges from about $370 to
$1,750, compared with Medigap plans, which have premiums ranging from
$750 to almost $3,000 but offer no dental benefits and have limits on
prescription coverage.

Providing this additional coverage to Medicare-eligible retirees, however,
could cost DOD as much as $1.6 billion, or about $1,571 per beneficiary.
This estimate is based on our assumption that 83 percent of DOD’s
Medicare-eligible population would enroll in FEHBP.19 Because the
remaining 17 percent would have insurance paid in full or in part by their
former employers, and most employer-sponsored plans require lower
out-of-pocket costs than FEHBP, we assumed that very few of these retirees
would opt for FEHBP coverage.

Premium amounts, and thus the government and beneficiary costs, are
determined by such characteristics of the covered beneficiary population
as gender mix, health status, and health care utilization. According to OPM,
however, this information has not been developed for the military retiree
population. Therefore, the legislative proposals for this option require that

18
 Point-of-service plans are HMOs that permit enrollees to use non-HMO providers if they pay higher
copayments.
19
  This is based on our analysis of the 1994-95 Health Care Survey of DOD Beneficiaries, which
indicates that 17 percent of military retirees have private health insurance for which the premiums are
paid either in full or in part by their former employer.



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                       B-276905




                       the premiums for DOD retirees be determined separately from the
                       premiums for the retired federal employee population covered through
                       FEHBP. As a result, the cost for this option could be affected by the extent
                       to which certain characteristics of the military retiree population are
                       similar to or different from those of retired federal employees. If military
                       retirees and other FEHBP participants, on average, used the same types and
                       amounts of health care, then their premiums would be similar.20

                       Offering Medicare-eligible retirees enrollment in FEHBP would impose new
                       administrative responsibilities and related costs on DOD and OPM, such as
                       managing enrollments, withholding premiums from annuities, and
                       preparing and distributing plan materials. Although the administrative
                       costs associated with this option have not been determined, they should
                       not be substantial, according to DOD and OPM.

                       Another consideration related to the supplemental coverage approach
                       used in all these proposals is whether DOD would be creating a disparity
                       between the benefits offered to its Medicare-eligible retirees and those
                       offered to its other beneficiaries. For example, organizations representing
                       military beneficiaries have reported that many retirees under the age of 65
                       would prefer FEHBP coverage to CHAMPUS because under FEHBP, for
                       example, they would not have to pay for additional supplemental
                       insurance, as some do under CHAMPUS. To the extent that DOD funds
                       supplemental coverage for older retirees, younger retirees could view this
                       as an inequity in benefits.


                       The Medicare program does not provide coverage for outpatient
Mail-Order Pharmacy    prescriptions, a major expense for older people, who tend to use more
Benefit Would Fill a   prescription drugs as they age. Military retirees can get prescriptions filled
Major Coverage Gap     at military treatment facility pharmacies for free, but these facilities are
                       not readily accessible to all older retirees. Retirees who live near facilities
                       that have been closed through base closure actions can get prescription
                       drug refills through the base closure mail-order benefit program. Further
                       expanding this mail-order benefit to those who do not live near military
                       facilities and do not currently have a mail-order benefit would fill an
                       important health coverage gap. It would cost about $229 million per year
                       and would not require major changes in the DOD medical program.


                       20
                         A study by the Rand Corporation (Susan D. Hosek and others, The Demand for Health Care:
                       Supporting Research for a Comprehensive Study of the Military Health-Care System (Santa Monica,
                       CA: RAND Corporation, 1994)) provides evidence that military families tend to use more health care
                       than comparable civilian families. However, it is not clear whether this pattern holds for older retirees,
                       let alone whether it would persist under the conditions of the proposed FEHBP option.



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                           B-276905




Current Mail-Order         DOD currently operates a mail-order prescription program in base closure
Program Could Be           areas for all beneficiaries affected by the closing of military medical
Expanded at Relatively     facilities. Older retirees who live in these areas or who can demonstrate
                           prior use of a now-closed military pharmacy are eligible to use this
Modest Cost                mail-order benefit. By expanding this mail-order program, this benefit
                           could be provided to older retirees outside base closure areas who live too
                           far from a military pharmacy to easily use that source for recurring
                           prescriptions.

                           Expanding the current program would result in additional cost to DOD. We
                           calculated the added annual cost of expanding the current mail-order
                           benefit to older retirees who live outside the catchment area of a military
                           facility, and who do not already have the benefit through the base closure
                           medical program, at about $229 million, or about $561 per participant. The
                           mail-order pharmacy proposal would allow these retirees to receive a
                           90-day supply of a drug for an $8 copayment. We assumed that all the
                           beneficiaries eligible for the program would participate because there
                           would be no premium and a small copayment. However, it is possible that
                           fewer would actually participate. According to DOD officials, only about
                           half of those eligible for the existing mail-order program in base closure
                           areas have used it. Many choose not to participate either because they
                           prefer to travel to a military facility to receive their prescriptions for free
                           or because they are using other health insurance that they currently hold
                           for their prescriptions. To the extent that beneficiaries chose to continue
                           using other health care coverage, the added costs to DOD for this program
                           would be less. And, if beneficiaries chose to no longer travel to military
                           facilities to refill their prescriptions, the added cost of implementing this
                           proposal would be somewhat offset by savings at those military facilities’
                           pharmacies. We were not able to estimate this effect because DOD
                           currently does not collect data on the amount or cost of prescriptions
                           supplied to older retirees through its military pharmacies.


A Formulary and a Drug     A common method used by private sector payers to control prescription
Utilization System Could   drug costs is a formulary—a list of prescription drugs that are preferred by
Help DOD Manage            a health plan sponsor for reasons of medical value and price.21 The
                           mail-order pharmacy programs now operating in base closure sites allow
Mail-Order Program Costs   beneficiaries to obtain the broad selection of pharmaceuticals available
                           under CHAMPUS. The one exception is that pharmacies that contract with

                           21
                            For more information on formularies and their use in managing pharmacy costs, see Pharmacy
                           Benefit Managers: Early Results on Ventures With Drug Manufacturers (GAO/HEHS-96-45, Nov. 9,
                           1995) and Pharmacy Benefit Managers: FEHBP Plans Satisfied With Savings and Services, but Retail
                           Pharmacies Have Concerns (GAO/HEHS-97-47, Feb. 21, 1997).



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                         B-276905




                         DOD to carry out these programs are required to dispense the generic
                         equivalent of a brand-name drug unless a doctor specifically requires that
                         the brand-name item be dispensed as written for clinical reasons. The use
                         of a formulary appropriate for older retirees would be one way for DOD to
                         contain the costs of a mail-order program.

                         Carefully tracking the number of older retirees using pharmacy
                         benefits—collecting data on where they receive their prescriptions, what
                         types of medications they use, and what those prescriptions cost DOD—is
                         another way to manage the cost of a pharmacy program. DOD could use
                         this information to develop a cost-effective formulary and to adjust
                         copayments to control costs. Although DOD currently has no drug
                         utilization information system in place, we believe DOD could use a
                         participant enrollment mechanism and point-of-service software to better
                         track the use of a mail-order pharmacy benefit.


                         As we testified in February 1997, the military health system’s current size
Medical System Size,     and structure relative to its primary wartime mission are now being
Structure, and Mission   evaluated. Further downsizing and restructuring of the system in line with
Considerations           reduced wartime requirements are being predicted. It is important to
                         factor the potential for such changes into the choices DOD makes about
                         providing care for its aging population through major new benefit
                         programs. Before deciding on proposals that either retain care for older
                         beneficiaries in military facilities or provide for them entirely through
                         civilian sources, the training needs of DOD physicians may have to be
                         evaluated. Upholding the “medical readiness” tenet that military medical
                         facilities have a mix of patients of all ages to keep physicians prepared for
                         wartime may be difficult if more care for older beneficiaries is provided
                         through civilian sources. Moreover, it is important to consider the broad
                         issue of whether the physician mix of the military medical system is
                         adequately equipped or trained for geriatric care, and whether it should be
                         realigned to be so in light of its primary wartime mission.


                         Over the last decade, DOD health care system changes have included the
Conclusions              introduction of managed care programs that altered access-to-care
                         priorities, numerous facility closures, and significant downsizing of
                         military medical staff. Older retirees, who cannot participate in TRICARE
                         Prime, have grown concerned about their current, and even more so, their
                         future ability to access space-available care in military facilities. The
                         proposals made thus far to improve older retirees’ health benefits and



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                     B-276905




                     access to DOD-sponsored health care to varying degrees increase either the
                     number of retirees receiving such care or the amount of care that many
                     now receive. The proposals’ anticipated costs would vary markedly, from
                     the Medicare subvention option, which is designed to be budget neutral, to
                     the relatively moderately priced mail-order pharmacy option, to the
                     high-price-tag options of using Medigap, CHAMPUS, or FEHBP as Medicare
                     supplements. Each of the options would have differing effects on the
                     military health system. All would introduce the need for such structural
                     changes as new enrollment and reimbursement mechanisms, and some
                     raise questions about the “military readiness” consequences of caring for
                     all older retirees outside military facilities. Furthermore, the Medicare
                     subvention option has generated concern about the system’s ability to
                     provide comprehensive geriatric care at its facilities. Given these
                     considerations and the likelihood that the military medical system will
                     undergo further downsizing, the mail-order pharmacy option appears
                     comparatively attractive for the near term. The lack of a prescription
                     benefit under Medicare is a major void in older retirees’ coverage that
                     could be filled at a comparatively modest cost and without major system
                     change.


                     In commenting on a draft of this report, DOD generally agreed with our
Agency Comments      representation of the issues. It did, however, have several concerns. First,
and Our Evaluation   DOD suggested that our mail-order pharmacy cost estimate be updated and
                     provided us with more current prescription expenditure and usage data
                     for the current base closure area program. As appropriate, we used these
                     more recent data to recalculate our estimate.

                     Relatedly, DOD stated that our apparent assumption that catchment area
                     retirees now have 100 percent of their prescription drug needs met by
                     military facilities was incorrect. Also, DOD questioned the feasibility—from
                     an operational and customer service standpoint—of offering the
                     mail-order program only to retirees living outside catchment areas and
                     thus denying it to those within such areas. We were asked to evaluate the
                     pharmacy option only as it pertained to retirees outside catchment areas
                     and not to all retirees regardless of their proximity to military facilities. In
                     doing so, our evaluation did not assume that those within catchment areas
                     now have all of their prescription drug needs met, nor did it assume that
                     those who would receive the mail-order pharmacy benefit would have
                     100 percent of their prescription drug needs met. We do believe, however,
                     that such a program would help fill a major Medicare coverage gap for
                     those most needing such coverage. We are currently planning a review of



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B-276905




all of DOD’s pharmacy operations that will include such issues as current
benefit uniformity. Regarding the operational difficulties of establishing
geographic eligibility for the mail-order program, we note that the existing
base closure area program defines eligibility primarily by service area.
Thus, we believe any such eligibility-related difficulties could be overcome
for a limited expansion of this program to beneficiaries outside catchment
areas.

DOD also commented that our report failed to mention that, under the
Medicare subvention proposal, DOD’s ultimate goal would be to offer
enrollment in TRICARE Prime to Medicare-eligible beneficiaries wherever
TRICARE Prime was offered. We agree, and have amended the text
accordingly. DOD went on to say that such an expansion could be made by
using the TRICARE contractors or existing Medicare HMOs. Regarding such
an expansion, however, even if subvention was tested at military facilities
and proved cost neutral, it would remain to be seen whether DOD could
administer subvention using civilian providers and achieve the same
cost-neutral result—that is, provide services costing less than or the same
as services from other Medicare providers. We continue to question
whether any government cost advantage would result from DOD’s making
such arrangements with civilian providers. Further, extending subvention
this way could involve a rather complex financing arrangement whereby
HCFA might provide payments to DOD for its use in paying civilian
contractors or HMOs. These organizations might, in turn, reimburse DOD for
any care DOD provided in its own facilities. And each year, DOD would
attempt to reconcile these funding transfers with HCFA to ensure
cost-neutrality. Moreover, DOD’s use of civilian providers for this purpose
could duplicate, and thus compete with, the existing Medicare HMO
program administered by HCFA.

Finally, DOD stated that the option providing CHAMPUS as a Medicare
supplement might enable beneficiaries to obtain prescription drugs with a
lower copayment than the standard CHAMPUS copayment of
25 percent—the percentage we used to estimate costs—from retail
pharmacies and mail-order programs operating under TRICARE. DOD said
that, if beneficiaries were able to take advantage of these programs, their
costs would be lower, but the cost to DOD would increase. While we agree
that beneficiaries might avail themselves of TRICARE pharmacy programs
under this option, we disagree that DOD’s costs would necessarily increase.
TRICARE programs are aimed at reducing DOD and beneficiary costs
through negotiated discounts such that providing prescription benefits
through these programs might not be more costly than under standard



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B-276905




CHAMPUS.  For these reasons, and because DOD does not have data available
on how many prescriptions retirees would obtain at various copayment
amounts or what DOD’s cost would be, we continue to believe that using
the standard CHAMPUS copayment is a reasonable approach to estimating
this option.

DOD also made several technical comments, which we incorporated as
appropriate. DOD’s comments in their entirety are included as appendix III.


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

Please contact me on (202) 512-7111 or Dan Brier, Assistant Director, on
(202) 512-6803 if you or your staff have any questions concerning this
report. Other contributors to this report include Catherine O’Hara,
Evaluator-in-Charge; Timothy Carr; Sandra Davis; James Espinoza; Elsie
Picyk; Mary Reich; Dayna Shah; and Nancy Toolan.




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




Page 19                            GAO/HEHS-97-134 Military Retirees’ Health Care
Contents



Letter                                                                                                    1


Appendix I                                                                                               22

Scope and
Methodology
Appendix II                                                                                              27
                          Retiree Population, More Than Half of DOD Beneficiaries, Is                    27
Profile of the Military     Expected to Grow
Retiree Population        Most Older Retirees Do Not Live Near Large Military Medical                    30
                            Facilities
                          Few Older Retirees Use the Military Medical System; Many Use                   32
                            Only Pharmacy Services
                          Almost Half of Military Retirees Have Private Health Insurance                 34

Appendix III                                                                                             37

Comments From the
Department of
Defense
Table                     Table 1: Comparison of Proposed Military Retiree Health Care                    3
                            Options

Figures                   Figure II.1: Population Eligible for Military Health Care by                   27
                            Beneficiary Category, 1996
                          Figure II.2: Active Duty and Retiree Population Trends, 1994-2004              28
                          Figure II.3: Age Distribution of Retiree Population, 1996                      29
                          Figure II.4: Projected Change in Retiree Population Through 2004               30
                          Figure II.5: Proximity of Retirees to Military Medical Facilities by           31
                            Retirees’ Age, 1996
                          Figure II.6: Percentage of Older Retirees Living Near a Military               32
                            Medical Facility, by Facility Size, 1996
                          Figure II.7: Retirees’ Use of Military Health System by Retiree                33
                            Age, 1996
                          Figure II.8: Type of Service Older Retirees Received at Military               34
                            Medical Facilities by Retirees’ Proximity to Facility, 1996
                          Figure II.9: Retiree Private and Supplemental Insurance Coverage               35
                            by Age, 1994-95




                          Page 20                             GAO/HEHS-97-134 Military Retirees’ Health Care
Contents




Figure II.10: Retirees With Private Insurance by Age and by Who              36
  Paid the Premium, 1994-95




Abbreviations

CBO          Congressional Budget Office
CHAMPUS      Civilian Health and Medical Program of the Uniformed
                   Services
CRS          Congressional Research Service
DOD          Department of Defense
FEHBP        Federal Employees Health Benefits Program
HCFA         Health Care Financing Administration
HMO          health maintenance organization
OPM          Office of Personnel Management


Page 21                           GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I

Scope and Methodology


                      In conducting our review, we examined, where available, the legislative
                      history of each proposal under consideration. We interviewed Department
                      of Defense (DOD) headquarters officials, military medical facility managers,
                      and health care providers nationwide to gain perspective on the effects of
                      system changes on retirees and to obtain cost data relevant to the different
                      proposals. We analyzed DOD population and health care use data for the
                      period between 1994 and 2004 and the results of the 1994-95 Health Care
                      Survey of DOD Beneficiaries to obtain demographic characteristics and
                      information about sources of care and insurance coverage relating to
                      eligible retiree populations. We did not verify DOD’s data for accuracy or
                      consistency.

                      We also interviewed Department of Veterans Affairs officials regarding the
                      Department’s pharmacy program, and reviewed DOD contractor reports
                      and studies of the military health system and interviewed their authors.
                      These contractors included the Rand Corporation, the Institute for
                      Defense Analyses, the Logistics Management Institute, and the Center for
                      Naval Analysis. We also interviewed representatives of military retiree
                      associations and advocacy groups to obtain their perceptions of problems
                      Medicare-eligible retirees face and solutions to improve their health care
                      benefits. In addition, we interviewed Health Care Financing
                      Administration (HCFA) officials and reviewed agreements between HCFA
                      and DOD regarding the Medicare subvention proposal. We also interviewed
                      Congressional Budget Office (CBO) officials about CBO’s efforts to estimate
                      the budgetary effects of Medicare subvention and Office of Personnel
                      Management (OPM) officials about the cost and structural implications of
                      the Federal Employees Health Benefits Plan (FEHBP) option. In addition,
                      we reviewed our reports on the military health care system and those of
                      DOD, the Congressional Research Service (CRS), and CBO. We conducted our
                      work from June 1996 through May 1997 in accordance with generally
                      accepted government auditing standards.


Methodology for       The information and assumptions we used to estimate the cost of the
Estimating Costs of   various options were derived from studies and evaluations conducted by
                      DOD, CBO, CRS, and private consultants as well as from DOD data systems.
Proposals
                      We made certain general assumptions, in addition to assumptions that are
                      specific to the analysis of each of the options. First, we assumed that these
                      options would be implemented in an environment in which very little or no
                      space-available medical care could be provided to older retirees in military
                      medical facilities, because virtually all available care would be devoted to
                      TRICARE Prime enrollees. Thus, the cost of each option was evaluated



                      Page 22                             GAO/HEHS-97-134 Military Retirees’ Health Care
                            Appendix I
                            Scope and Methodology




                            relative to a baseline scenario in which older retirees relied almost
                            exclusively on civilian Medicare-funded care.

                            Also, we recognized that, to the extent that each of these options would
                            lower beneficiaries’ cost of health care, beneficiaries could use more
                            health care, a phenomenon known as induced demand. However, we did
                            not incorporate induced demand effects in our estimates because we
                            lacked specific data on the behavior of DOD’s Medicare-eligible population,
                            its total health care use, and its current insurance coverage and cost.
                            Further, we recognized that a change in the benefit options offered to
                            older retirees might result in an increased use of Medicare-funded health
                            care services by beneficiaries who previously were reliant on DOD for care.
                            However, because of the lack of appropriate data, we have not estimated
                            the potential increases in costs to the Medicare program. Neither did we
                            assess the impact that these proposed changes might have on the future
                            solvency of the Medicare Hospital Insurance trust fund.

                            Finally, we did not attempt to produce an estimate of the cost of
                            implementing a Medicare subvention program because we determined that
                            sufficient data are not available on certain crucial variables (for example,
                            the cost of treating older retirees inside DOD facilities). Further, a
                            substantial portion of the effect of implementing a subvention option
                            would consist of the effect on the Medicare Hospital Insurance trust fund.
                            But uncertainties related to DOD’s ability to reliably set its level-of-effort
                            baseline and price out its per-enrollee care, as well as other problems
                            discussed in this text, seriously limit the reliability of estimates of
                            subvention’s potential effects on the Medicare Hospital Insurance trust
                            fund.


Estimating the Population   To determine the population eligible for each option, we used DOD’s
                            Resource Analysis and Planning System, Version 10.0.1 (Feb. 1997). We
                            limited the population for each proposal to the 1,196,346 Medicare-eligible
                            retirees, their dependents, and survivors (referred to hereafter as
                            “retirees”) living in the continental United States. We excluded those living
                            overseas (about 12,000) because their health care options differ
                            significantly from those of retirees in the United States. For example,
                            Medicare is not available overseas, and few military facilities are available.




                            Page 23                             GAO/HEHS-97-134 Military Retirees’ Health Care
                              Appendix I
                              Scope and Methodology




Cost for DOD to Pay the       Medigap policies are offered by private insurers under 10 standard plans,
Medicare Part B Premium       referred to as plans A through J, which provide progressively greater
and Purchase Medigap          coverage at increasingly higher premiums. Only plans H, I, and J offer
                              coverage for outpatient prescription drugs. We assumed that DOD would
Policies for Older Retirees   purchase the lowest cost plan providing prescription coverage: plan H. For
                              our estimate, we used the 1996 average annual premium of $1,307 for plan
                              H policies offered by Blue Cross/Blue Shield and Prudential. We obtained
                              this figure from the Families USA Foundation, a national nonprofit
                              consumer health care organization.

                              Further, to purchase a Medigap policy, beneficiaries are required to enroll
                              in Medicare part B. The 1997 annual premium for Medicare part B is
                              $525.60. We assumed that DOD would offer this benefit to the entire
                              population of Medicare-eligible retirees. Although many retirees already
                              have both Medicare part B and Medigap coverage, because DOD would pay
                              the premiums for both the Medigap policy and the Medicare part B
                              premium, unlike most employers, we assumed that all 1,196,346
                              beneficiaries would participate.22

Medicare Part B and Medigap   $525.60 (annual Medicare part B premium) x 1,196,346 (Medicare-eligible
Plan H Cost Estimate          beneficiaries) = $628,799,458.
Calculation
                              $1,307 (average annual Medigap plan H premium) x 1,196,346
                              (Medicare-eligible beneficiaries) = $1,563,624,222.

                              $628,799,458 (for Medicare part B) + $1,563,624,222 (for Medigap plan H) =
                              $2,192,423,680 (total estimated cost).


Cost for CHAMPUS as a         Under the proposal that would make the Civilian Health and Medical
Medicare Supplement           Program of the Uniformed Services (CHAMPUS) a Medicare supplement, DOD
                              would pay beneficiaries’ out-of-pocket costs for copayments and
                              deductibles for services covered by Medicare parts A and B and a portion
                              of the cost of outpatient prescription drugs, which are not covered by
                              Medicare. HCFA estimates that aged Medicare-eligible beneficiaries’
                              out-of-pocket costs for Medicare-covered services will be $877.44 in 1997.
                              Annual prescription costs for Medicare-eligible beneficiaries in 1997 are
                              estimated to be $819, according to HCFA. Under this proposal, beneficiaries
                              would pay the standard CHAMPUS copayment of 25 percent for prescription
                              drugs, with DOD paying the remaining 75 percent, or $614.25. Finally,

                              22
                                Because some retirees would not have previously elected Medicare part B coverage, they would face
                              penalties for late enrollment. If DOD paid the cost of these penalties, there would be an additional cost
                              in the initial years of the program.



                              Page 24                                          GAO/HEHS-97-134 Military Retirees’ Health Care
                           Appendix I
                           Scope and Methodology




                           because physicians can charge more than the maximum amount Medicare
                           allows—up to 115 percent—CHAMPUS, as supplementary coverage to
                           Medicare, would pay these additional costs up to its allowed amount. DOD
                           estimates that these additional physician charges would amount to about
                           $34 million.

                           We assumed DOD would offer this benefit to the entire population of
                           Medicare-eligible retirees. Because there are no premiums for CHAMPUS
                           coverage and DOD would pay most of the out-of-pocket costs for retirees,
                           we assumed that all 1,196,346 Medicare-eligible beneficiaries would
                           participate.

CHAMPUS as a Medicare      $877.44 (average Medicare beneficiary out-of-pocket cost per year) x
Supplement Cost Estimate   1,196,346 (Medicare-eligible beneficiaries) = $1,049,721,834 (for medical
Calculation                costs).

                           $819.00 (annual retail prescription cost for each Medicare-eligible
                           beneficiary) - 25 percent (beneficiary copayment) = $614.25 (DOD annual
                           prescription cost for each Medicare-eligible beneficiary).

                           $614.25 (DOD annual prescription cost for each Medicare-eligible
                           beneficiary) x 1,196,346 (Medicare-eligible beneficiaries) = $734,855,531
                           (total annual cost of prescription coverage).

                           $1,049,721,834 (medical costs) + $734,855,531 (prescription coverage) +
                           $34,000,000 (additional physician charges) = $1,818,577,365 (total
                           estimated cost).


Cost to Enroll Older       For our estimate, we assumed DOD would pay an annual premium of $1,571
Retirees in FEHBP          per person. This represents the government’s portion of the fiscal year
                           1996 self-only premium for federal government retirees enrolled in FEHBP,
                           of whom about 75 percent are aged 65 or older. We obtained this figure
                           from OPM. This premium cost could be higher or lower for DOD, depending
                           upon demographic and medical use characteristics as well as beneficiary
                           plan choices. In the absence of a specific plan and beneficiary data, OPM
                           could not provide us with an estimate of the actual premiums, so we
                           assumed that the costs would be the same as for the federal retiree
                           population.

                           We assumed that DOD would offer this benefit to the entire population of
                           Medicare-eligible retirees. According to a DOD survey, 17 percent of



                           Page 25                            GAO/HEHS-97-134 Military Retirees’ Health Care
                              Appendix I
                              Scope and Methodology




                              Medicare-eligible retirees have insurance coverage fully or partially paid
                              by their post-military employers. Because FEHBP requires beneficiaries to
                              pay a higher portion of the premium than most private employers do, it is
                              likely that the 17 percent would not enroll in FEHBP. Therefore, we
                              assumed that 992,967, or 83 percent of the 1,196,346 Medicare-eligible
                              retirees, would participate.

FEHBP Cost Estimate           $1,571 (average annual premium cost to DOD) x 992,967 (83 percent of
Calculation                   Medicare-eligible beneficiaries) = $1,559,951,157.


Cost for the Mail-Order       For our estimate, we used DOD’s cost per prescription, dispensing fee,
Pharmacy Benefit              copayment, and prescription usage rates under the current base closure
                              mail-order pharmacy benefit program. We assumed that the benefit would
                              be provided to all Medicare-eligible beneficiaries aged 65 and older who
                              live outside a DOD military treatment facility catchment area (568,885 of
                              the total 1,196,346). But, 160,531 of these are already eligible for the
                              benefit under the current base closure mail-order program. Therefore, we
                              assumed that a maximum of 408,354 older retirees would participate in the
                              program.

Mail-Order Pharmacy Benefit   $35.00 (average cost per 90-day supply prescription) + $7.00 (dispensing
Cost Estimate Calculation     fee) - $8.00 (copayment) = $34 (average cost per 90-day supply
                              prescription).

                              $34.00 (average cost per 90-day supply prescription) x 16.5 (average
                              number of 90-day supply prescriptions per person annually) = $561.00
                              (average annual prescription cost for each Medicare-eligible beneficiary).

                              $561.00 (average annual prescription cost for each Medicare-eligible
                              beneficiary) x 408,354 (Medicare-eligible beneficiaries) = $229,086,594
                              (total estimated cost).




                              Page 26                            GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II

Profile of the Military Retiree Population


                                       In 1996, military retirees23 made up over 50 percent of the population
Retiree Population,                    eligible for DOD health care (see fig. II.1). Since 1994, the number of
More Than Half of                      retirees and their families has increased 5 percent, and the number of
DOD Beneficiaries, Is                  active duty members and their families has decreased about 12 percent;
                                       this trend is projected to continue (see fig. II.2). Most of the 1996 retiree
Expected to Grow                       population was younger than age 65 (see fig. II.3). However, the number of
                                       retirees aged 65 and older is expected to increase dramatically, while the
                                       number of those under age 65 remains essentially the same (see fig. II.4).


Figure II.1: Population Eligible for
Military Health Care by Beneficiary
                                                      Retirees Aged 65 and Older
Category, 1996
                                                                             15%



                                                                                                                      Active Duty Dependents
                                                                                                                      28%




                                       Retirees Under Age 65
                                                         37%
                                                                                                                  Active Duty Members
                                                                                                                 20%

                                       Source: Our analysis of DOD’s Resource Analysis and Planning System data.




                                       23
                                         We continue to use the term “retirees” to refer to retirees and their dependents and survivors.



                                       Page 27                                          GAO/HEHS-97-134 Military Retirees’ Health Care
                                                 Appendix II
                                                 Profile of the Military Retiree Population




Figure II.2: Active Duty and Retiree Population Trends, 1994-2004

Number

4,600,000




4,400,000




4,200,000




4,000,000




3,800,000




3,600,000
        1994    1995      1996       1997       1998       1999     2000     2001      2002      2003      2004
                                                           Year

                Active Duty Members and Families

               Retirees, Their Families, and Survivors



                                                 Source: Our analysis of DOD’s Resource Analysis and Planning System data.




                                                 Page 28                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                            Appendix II
                                            Profile of the Military Retiree Population




Figure II.3: Age Distribution of Retiree Population, 1996

Number
600,000



500,000



400,000



300,000



200,000



100,000



     0
     30-34 35-39 40-44 45-49 50-54 55-59 60-64      65-69 70-74 75-79 80-84 85-89 90-94 95-99 100 +
                                          Age Group

                                            Source: Our analysis of DOD’s Defense Medical Information System data.




                                            Page 29                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                              Appendix II
                                              Profile of the Military Retiree Population




Figure II.4: Projected Change in Retiree Population Through 2004

Cumulative Percentage of Change

50



40



30



20



10



 0



-10
  1995       1996       1997           1998        1999          2000      2001         2002         2003          2004
                                                          Year

           Retirees Under Age 65
           Retirees Aged 65 and Over


                                              Source: Our analysis of DOD’s Resource Analysis and Planning System data.



                                              In 1996, about 60 percent of retirees under age 65 lived within the 40-mile
Most Older Retirees                           catchment area24 of a military medical facility, as compared with slightly
Do Not Live Near                              more than half (52 percent) of the retirees aged 65 and older (see fig. II.5).
Large Military Medical                        Of the older retirees, about 14 percent lived near a large facility (200 beds
                                              or more) that offered a wide variety of specialty care services. About
Facilities                                    10 percent lived near facilities with 100 to 199 beds, about 8 percent lived
                                              near facilities with 50 to 99 beds, and about 21 percent lived near small
                                              medical facilities of less than 50 beds that had little inpatient capacity.
                                              (See fig. II.6.)



                                              24
                                                A catchment area is defined as the area within a 40-mile radius surrounding a military medical
                                              facility.



                                              Page 30                                          GAO/HEHS-97-134 Military Retirees’ Health Care
                                           Appendix II
                                           Profile of the Military Retiree Population




Figure II.5: Proximity of Retirees to
Military Medical Facilities by Retirees’
Age, 1996                                    Less Than 65 Years Old                                 65 Years Old or Older

                                                 60%                                                        52%




                                                                 40%                                               48%


                                                                                  In Catchment Area
                                                                                  Outside Catchment Area


                                           Note: Retirees living outside the continental United States are not included.

                                           Source: Our analysis of DOD’s Resource Analysis and Planning System data.




                                           Page 31                                         GAO/HEHS-97-134 Military Retirees’ Health Care
                                          Appendix II
                                          Profile of the Military Retiree Population




Figure II.6: Percentage of Older
Retirees Living Near a Military Medical
Facility, by Facility Size, 1996                                                                   < 50 Bed Facility
                                                                                                   21%




                                                                                                                 50-99 Bed Facility
                                                                                                                 8%
                                          No Facility
                                                48%


                                                                                                                100-199 Bed Facility
                                                                                                                10%




                                                                                                  200+ Bed Facility
                                                                                                   14%


                                          Source: Our analysis of DOD’s Resource Analysis and Planning System and the Joint Cross
                                          Service Working Group on Military Medical Facilities of the Base Realignment and Closure
                                          Commission data.



                                          In 1996, about two thirds of retirees under age 65 used the military health
Few Older Retirees                        system, including military medical facilities and the CHAMPUS program. In
Use the Military                          comparison, only about a quarter of the retirees aged 65 and older used
Medical System; Many                      military medical facilities for their care (CHAMPUS eligibility ends at age 65).
                                          (See fig. II.7.) For retirees aged 65 and older who did use the military
Use Only Pharmacy                         medical system, a significant percentage used pharmacy services only,
Services                                  regardless of their proximity to a military medical facility (see fig. II.8).




                                          Page 32                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                         Appendix II
                                         Profile of the Military Retiree Population




Figure II.7: Retirees’ Use of Military
Health System by Retiree Age, 1996
                                               Less Than 65 Years Old                            65 Years Old or Older


                                               64%
                                                                                                                          27%




                                                                                           73%
                                                                     36%



                                                                                Use System
                                                                                Do Not Use System
                                         Source: DOD’s Resource Analysis and Planning System data.




                                         Page 33                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                        Appendix II
                                        Profile of the Military Retiree Population




Figure II.8: Type of Service Older
Retirees Received at Military Medical
                                                  In Catchment Area                             Outside Catchment Area
Facilities by Retirees’ Proximity to
Facility, 1996
                                                      46%                                                       57%




                                                              54%                                     43%



                                                                                Medical Care
                                                                                Pharmacy Only

                                        Source: Our analysis of DOD’s Semi-Annual User Survey data.



                                        According to a 1994-95 survey of DOD beneficiaries, over 40 percent of
Almost Half of                          military retirees, regardless of age, had private health insurance coverage.
Military Retirees Have                  About a third of retirees aged 65 and older also reported having additional
Private Health                          insurance coverage to supplement their Medicare benefits. A smaller
                                        proportion of retirees under age 65, about 14 percent, also had insurance
Insurance                               to supplement their CHAMPUS coverage. (See fig. II.9.) For those retirees
                                        who had private health insurance, many had part or all of that coverage
                                        paid for by their current or former employer; however, many more older
                                        retirees paid the entire cost of that coverage themselves (see fig. II.10).




                                        Page 34                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                     Appendix II
                                     Profile of the Military Retiree Population




Figure II.9: Retiree Private and
Supplemental Insurance Coverage by
                                     Percentage With Coverage
Age, 1994-95
                                     50

                                                                     44
                                                     42
                                     40


                                                                                                                  31
                                     30



                                     20

                                                                                              14

                                     10



                                      0
                                                           Private                                 Supplemental

                                            Less Than 65 Years Old
                                            65 Years Old and Older

                                     Source: Our analysis of DOD’s 1994-95 Survey of DOD Beneficiaries data.




                                     Page 35                                      GAO/HEHS-97-134 Military Retirees’ Health Care
                                       Appendix II
                                       Profile of the Military Retiree Population




Figure II.10: Retirees With Private
Insurance by Age and by Who Paid the
                                                      Less Than 65 Years Old                            65 Years Old or Older
Premium, 1994-95
                                                               2% 3%                                              6%
                                                  14%
                                                                                                                           9%




                                       18%                                            47%

                                                                                                                                28%



                                                                               63%


                                                                                                                  11%
                                                                                     Beneficiary Paid

                                                                                     Employer Paid

                                                                                     Shared Cost

                                                                                     Other

                                                                                     Did Not Indicate

                                       Source: Our analysis of DOD’s 1994-95 Survey of DOD Beneficiaries data.




                                       Page 36                                       GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix III

Comments From the Department of Defense




               Page 37    GAO/HEHS-97-134 Military Retirees’ Health Care
           Appendix III
           Comments From the Department of Defense




(101491)   Page 38                               GAO/HEHS-97-134 Military Retirees’ Health Care
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