Defense Health Care: Actions Under Way to Address Many TRICARE Contract Change Order Problems

Published by the Government Accountability Office on 1997-07-14.

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
July 1997
                  DEFENSE HEALTH
                  Actions Under Way to
                  Address Many
                  TRICARE Contract
                  Change Order

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

      Health, Education, and
      Human Services Division


      July 14, 1997

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

      To help contain health care costs, in late 1993 the Department of Defense
      (DOD) initiated TRICARE, its nationwide managed health care program for
      military beneficiaries. Under TRICARE, health care for about 8 million
      eligible beneficiaries is coordinated and managed on a regional basis using
      all available military hospitals and clinics, supplemented by contracted
      civilian services. By mid-1998, DOD expects to have implemented seven
      TRICARE managed care support contracts at an estimated total cost of
      $17 billion. The dynamic nature of health care, the fact that contracts are
      awarded for 5-year periods, the uniqueness of the contracts, and other
      factors have resulted in the contracts’ being continually modified. Change
      orders are a mechanism used by DOD to require its contractors to accept a
      DOD modification of the original contract.

      Because of the large volume of change orders and their potential costs,
      you requested that we review DOD’s process for managing change orders to
      determine (1) the number of, nature of, and reasons for the orders;
      (2) whether DOD is adequately managing the change order process; and
      (3) if appropriate, how DOD can improve the process.

      To do this work, we interviewed DOD Health Affairs and TRICARE Support
      Office (TSO) officials as well as TRICARE contractors. We reviewed
      individual change orders and related DOD policies and regulations that
      apply to the orders and examined pertinent contract files for the five DOD
      TRICARE contracts that have been awarded. We also obtained and
      analyzed statistical data from DOD monthly change order status reports and
      discussed with officials the number of change orders, how long DOD has
      taken to settle—or complete negotiations with the contractors on—the
      orders, and reasons for the changes.

      During our review, DOD instituted many actions to address problems we
      identified with the change order process. We discussed these efforts with
      DOD officials. Accordingly, to prepare a more timely report on the issues

      Page 1                         GAO/HEHS-97-141 TRICARE Contract Change Orders

                   being addressed, we reduced the scope of our work, including our review
                   of the appropriateness of individual orders. Also, as agreed with your
                   office, we did not attempt to independently estimate the orders’ costs or
                   their possible effects on TRICARE’s need to be budget neutral.1 We
                   conducted our review between October 1996 and May 1997 in accordance
                   with generally accepted government auditing standards.

                   Since the 1994 award of the first TRICARE contract, 357 change orders,
Results in Brief   which cumulatively have increased tasks and overall costs, have been
                   made to the five TRICARE contracts now in place.2 DOD has settled 134 of
                   the orders at a cost of about $336,000. DOD estimated costs for the 223
                   orders that are yet to be settled at $38 million. But DOD’s initial cost
                   estimates differ markedly from contractors’ estimates. For example,
                   contractor-submitted cost proposals for 85 of the 223 orders amounted to
                   $423 million.

                   The change orders, which averaged 43 per contract in 1996, have entailed
                   policy, automated data processing (ADP), and operational changes to the
                   contracts. About one-third have resulted from legislative or regulatory
                   requirements; for example, legislation establishing a hospice benefit.3 The
                   remainder were DOD-initiated changes, such as changing contractor
                   reporting requirements.

                   Although there have been numerous change orders, DOD has not
                   adequately managed the process. For example, rather than separately
                   budgeting for the costs of individual change orders, DOD has used funds
                   budgeted for other Defense Health Program (DHP) activities to pay for
                   them—an approach that could potentially create a need for supplemental
                   funding. In addition, DOD’s initial cost estimates for new orders, the basis
                   for obligating funds for the orders, have not been sound. As a result, DOD
                   has not developed a reliable estimate of the total federal liability for the
                   contract changes.

                    In referring to the TRICARE program and its health maintenance organization (HMO) type option, sec.
                   731 of the National Defense Authorization Act for FY 1994 (as amended) states that the HMO option
                   must be administered so that the costs incurred under TRICARE are no greater than the costs that
                   would otherwise have been incurred to provide health care to covered beneficiaries.
                    In addition to the 357 change orders that require cost estimates and negotiated prices, DOD has issued
                   over 70 change orders that typically involve minor changes related to administrative information
                   contained in the contractual documents and that do not materially affect the requirements of the
                   contracts or contract prices.
                    The National Defense Authorization Act for fiscal years 1992 and 1993, P.L. 102-190, authorized a
                   hospice benefit for beneficiaries.

                   Page 2                                     GAO/HEHS-97-141 TRICARE Contract Change Orders

             Also, DOD has neither systematically reviewed the need for each order nor
             considered its likely costs and other effects. Moreover, DOD has not
             evaluated alternatives to amending the contracts that could achieve the
             same end. Thus, DOD has no assurance that only needed orders are issued
             and that their costs are minimized.

             Finally, although DOD’s goal is to settle orders within 180 days of issuance,4
             the average TRICARE order settlement time has been 340 days. As of
             May 1, 1997, the average age of the 223 orders yet to be settled was 273
             days. Failure to settle orders on time can reduce the contractors’ cost
             control incentives and limit DOD’s ability to negotiate prices after the
             contractor has incurred actual costs.

             During our review, DOD attempted to address the problems we were
             identifying. For example, regarding budgeting for the orders, DOD is now
             developing a method to estimate anticipated change order costs for
             inclusion in future DOD budgets. To prepare new order cost estimates, DOD
             has engaged a consultant to independently estimate the cost of
             implementing each order before its issuance. Also, DOD now requires that,
             once a potential order’s cost has been estimated, the Deputy Assistant
             Secretary of Defense for Health Services Financing review its
             appropriateness before approval. Finally, DOD has formed a task force and
             engaged an outside contractor to settle the orders in a more timely way
             and suggest ways to streamline the overall process.

             We believe that DOD is taking needed steps to improve the change order
             process, and we urge DOD’s continued efforts to bring the process under
             control. But the longer term efficacy of these efforts remains to be seen. In
             view of the leadership changes under way in DOD offices that manage the
             change order process, DOD’s continued high-level management attention to
             implementing needed process improvements is essential.

             TRICARE is DOD’s managed health care program operated in partnership
Background   with civilian contractors. The goals of TRICARE are to ensure high-quality,
             consistent health care benefits; preserve beneficiaries’ choice of health
             care providers; improve access to care; and contain health care costs.
             Under TRICARE, seven managed care support contracts covering DOD’s 12
             health care regions will have been awarded to civilian contractors by
             mid-1998. Contracts are awarded for 5 years (1 year plus 4 option years),

              Sec. 43.204(b)(1) of the Federal Acquisition Regulation states that “contracting officers shall negotiate
             equitable adjustments resulting from change orders in the shortest practicable time.”

             Page 3                                      GAO/HEHS-97-141 TRICARE Contract Change Orders

                                   and DOD estimates that these contracts together will cost about $17 billion.
                                   TSO, within DOD’s Office of the Assistant Secretary of Defense (Health
                                   Affairs), has the responsibility for administering the TRICARE contracts.
                                   Each contract is administered by a contracting officer. An administrative
                                   organization, called a lead agent, is designated for each of the 12 regions to
                                   coordinate the health care provided by all military treatment facilities in
                                   the region.

                                   Since September 1994, DOD has awarded five TRICARE contracts totaling
                                   over $11 billion: three contracts were awarded to Foundation Health
                                   Federal Services, one contract was awarded to Humana Military
                                   Healthcare Services, and one contract was awarded to TriWest Healthcare
                                   Alliance (see table 1).

Table 1: TRICARE Contracts, 1997
                                   Dollars in Billions
                                                                   Date of contract
                                   Region/area of coverage         award                   Contractor                Amount of award
                                   11/Northwest                    September 1994          Foundation Health
                                                                                           Federal Services                        $0.66
                                   6/Southwest                     April 1995              Foundation Health
                                                                                           Federal Services                          1.81
                                   9, 10, and 12/ California       August 1995             Foundation Health
                                   and Hawaii                                              Federal Services                          2.59
                                   3 and 4/Southeast and           November 1995           Humana Military
                                   Gulf South                                              Healthcare
                                                                                           Services                                  3.65
                                   7 and 8/Desert States and June 1996                     TriWest Healthcare
                                   North Central                                           Alliance                                  2.32
                                   Total                                                                                          $11.03

                                   Two additional TRICARE contracts are scheduled for implementation by

                                   Because the nature of health care is dynamic, the contracts are awarded
                                   for 5-year periods, and the contracts are unique, contracts are continually
                                   being modified. Change orders, which are issued by contracting officers at
                                   TSO,5 are a mechanism DOD uses to require its contractors to accept a DOD
                                   modification of the original contract. Typically, change orders are the
                                   result of policy, ADP, operations, and other changes to the TRICARE
                                   program. Some orders occur because of new laws or regulations. Most
                                   change orders affect all of the TRICARE contracts.

                                    Lead agents can issue change orders that are small in scope and pertain to lead agent requirements in
                                   the contracts. However, we included in our review only those change orders issued by TSO.

                                   Page 4                                     GAO/HEHS-97-141 TRICARE Contract Change Orders

                     The Federal Acquisition Regulation (FAR), the Defense Federal Acquisition
                     Regulation Supplement (DFAR), and other internal DOD guidance set forth
                     the requirements governing the administration of change orders. The
                     requirements include time frames within which government cost estimates
                     must be obtained, orders must be settled, and interim payments to
                     contractors must be made.

                     The change order process involves many steps. First, DOD Health Affairs
                     directs TSO to initiate an order, which involves drafting language; obtaining
                     comments from contractors; and, when costs are involved, developing the
                     government cost estimate. On the basis of this estimate, funds are
                     obligated. At this point, the TSO contracting officers provide the change
                     order to their contractors. The contractors must respond with a cost
                     proposal within 60 days. After receiving the contractors’ cost proposal,
                     DOD conducts a technical review and cost analysis and then negotiates
                     with the contractors to determine the final price of the order.

                     In many cases, Health Affairs directs TSO to implement a single change to
                     the TRICARE program but that change necessitates a separate change
                     order for each contract. When this occurs, each of the orders has to be
                     negotiated separately because the change’s costs can vary by contract.

                     In October 1996, at the start of our review, TSO had 722 change orders that
                     needed to be negotiated with contractors. Of these, 226 were for TRICARE
                     contracts, and 496 were for other contracts that TSO administers, such as
                     fiscal intermediary and dental contracts.

                     Changes in the leadership of DHP are now under way. The Assistant
                     Secretary of Defense (Health Affairs) retired in March 1997, and, as of
                     June 1, 1997, a permanent replacement had not been nominated. In
                     January 1997, a new director reported to TSO and was charged with, among
                     other matters, streamlining the change order process.

                     As of October 1996, a total of 248 change orders that could affect the cost
Hundreds of Change   of the TRICARE contracts had been issued. By May 1997, this number had
Orders Issued to     increased to 357. Table 2 shows the number of orders issued for each
Modify TRICARE       TRICARE contract and region.


                     Page 5                          GAO/HEHS-97-141 TRICARE Contract Change Orders

Table 2: TRICARE Change Orders by
Contractor, Region, and Status, May 1,   Contractor/region           To be settled          Settled              Total
1997                                     Foundation/11                         56                56               112
                                         Foundation/6                          46                30                76
                                         Foundation/9, 10, and 12              47                29                76
                                         Humana/3 and 4                        52                19                71
                                         TriWest/7 and 8                       22                 0                22
                                         Total                                223               134               357

                                         For the 134 settled orders, most of which cost DOD little or nothing, the
                                         total negotiated price was about $336,000. DOD’s estimated costs for the
                                         223 to-be-settled orders is $38 million. But this estimate differs markedly
                                         from the contractors’ estimates. At the time of our review, contractors had
                                         submitted cost proposals for only 85 of the 223 open orders, and their
                                         estimates amounted to $423 million.

                                         TRICARE contract change orders averaged 43 per contract in 1996. Figure
                                         1 shows the variety of kinds of change orders for TRICARE contracts.

                                         Page 6                         GAO/HEHS-97-141 TRICARE Contract Change Orders

Figure 1: Types of TRICARE Change
Orders, May 1997

                                                             •                      6%
                                          • 35%




                                                                                    Multiple (Various Mixes of ADP,
                                                                                    Operational, and Policy)

                                    Source: GAO analysis of data provided by TSO.

                                    Policy changes include the authorization of new benefits or changes in the
                                    administration or payment of current benefits. Examples of such orders
                                    include revising the definition of medically necessary ambulance services
                                    and issuing new guidance on heart and lung transplants.

                                    ADP orders involve creating, maintaining, or reporting data and changes to
                                    systems requirements. Such orders have included changes to the Defense
                                    Enrollment Eligibility Reporting System and changes to implement the
                                    Health Care Service Records.

                                    Page 7                                 GAO/HEHS-97-141 TRICARE Contract Change Orders

                                      Change orders classified by TSO as operational in nature include changes
                                      to the administration of the TRICARE program. Such orders have included
                                      changes to regional participation in clinical trials for a cancer
                                      demonstration project and revisions to home health care billing

                                      Some orders incorporate policy and ADP changes, for example, or ADP and
                                      operational changes. An example is an order expanding the definition of
                                      foreign medical claims to include claims for services provided on a ship
                                      outside U.S. territorial waters.

                                      In addition to these types of orders, DOD has issued others applicable to
                                      one or more contracts. Examples include authorizing travel costs incurred
                                      by contractors for government training and orders directing contractors to
                                      report information about ongoing provider fraud investigations. Table 3
                                      shows the number of each type of change order that has not yet been

Table 3: Types of Change Orders Not
Yet Settled, May 1, 1997              Type                                                                  Number
                                      Policy                                                                     31
                                      ADP                                                                        14
                                      Operations                                                                 22
                                      Multiple                                                                   77
                                      Other                                                                      79
                                      Total                                                                     223

                                      TSO data indicate that about one-third of all TRICARE change orders were
                                      required by law or regulation. Examples are implementation of a hospice
                                      benefit and revision of the active duty dependent inpatient cost-sharing
                                      provisions for mental health services. Two-thirds were DOD-initiated
                                      change orders, such as changing contractor reporting requirements,
                                      establishing a new TRICARE logo, and requiring contractors to distribute
                                      dental program brochures.

                                      DOD has not managed change orders in an effective manner. Among the
DOD Not Managing                      problems are, first, that DOD has not separately budgeted for the estimated
Process Effectively                   costs of orders, so its budget does not reflect TRICARE’s total cost.
                                      Second, DOD has not methodically estimated costs of new orders;
                                      therefore, its estimates have not reliably reflected the actual federal
                                      liability for the orders. Also, DOD has issued orders without a formal review

                                      Page 8                          GAO/HEHS-97-141 TRICARE Contract Change Orders

                           of their impact on TRICARE, their costs, and the availability of funds.
                           Consequently, DOD cannot be assured that each change order is necessary,
                           is issued at the most reasonable cost, and can be funded. Finally, DOD has
                           not settled orders within its own time frame of 180 days. Of the 134 orders
                           settled as of May 1, 1997, the average finalization time was 340 days. Such
                           delays in settling costs may reduce the contractor’s incentive to control
                           costs and place DOD at a disadvantage when negotiating change orders
                           because contractors have already incurred actual costs.

DOD Not Budgeting for      DOD does not include in its budget the estimated costs for new change
Orders                     orders or the out-year costs of settled orders. Only the award price of
                           TRICARE contracts is reflected in DOD’s budget justification documents.
                           Thus, DHP’s budget does not reflect the TRICARE program’s total cost.
                           Although the 134 change orders settled so far have increased TRICARE’s
                           price by about $336,000, the change orders still outstanding are potentially
                           far more costly: Contractors’ estimates for about 38 percent of the open
                           orders amount to $423 million.

                           Since orders are not separately budgeted for, when new orders have been
                           obligated or settled, they have been funded from monies budgeted for
                           other DHP programs.6 While significant funding problems have not yet
                           surfaced, the potential for them has increased considerably now that DOD
                           is actively seeking to reduce its order backlog and is settling many more
                           orders far sooner than it had been. And, a number of costly orders
                           simultaneously going to settlement could potentially create the need for
                           supplemental funding. Similarly, the failure to reliably estimate the costs
                           of new orders and adequately fund them can delay their implementation
                           and protract their settlement times.

                           According to a DOD official, change orders have not been budgeted for
                           because DOD has lacked a reliable basis for projecting the cost of change
                           orders. DOD has also lacked experience predicting the volume, frequency,
                           and types of changes that would be made to the TRICARE contracts once
                           under way.

New Order Cost Estimates   DOD has not had a reliable approach for estimating the costs of new orders
Have Been Unreliable       because, according to DOD officials, it has lacked the in-house expertise.
                           TSO personnel, who initiate the change order paperwork and make the

                            Ninety-seven percent of the FY 1997 DHP appropriation of $10.2 billion is operations and maintenance
                           funds. The TRICARE program, including TRICARE contract change orders, is funded with operations
                           and maintenance monies.

                           Page 9                                    GAO/HEHS-97-141 TRICARE Contract Change Orders

                            initial estimates, told us they were unschooled in estimating such costs.
                            They told us they often guessed at what the government’s costs might be
                            or requested an informal estimate from the contractor and used a variation
                            of that figure for their estimate. As a result, DOD has had little confidence
                            in the reliability of individual order estimates and less in the potential
                            aggregate government costs of unsettled orders. Thus, DOD has lacked a
                            sound estimate of the actual federal liability for the contract changes it has

                            DOD requirements state that when each change order is initiated, a
                            government cost estimate should be prepared. This estimate becomes the
                            basis for obligating funds for the order. A poor estimate can result in
                            either underobligating funds for the order, resulting in the need for more
                            funds upon the order’s settlement, or overobligating funds, resulting in
                            unnecessarily tying up funds needed for another DHP program activity.
                            These cost estimates also provide the basis for contractors to receive
                            provisional payments for work completed before the order has been
                            settled. Contractors may receive from 50 to 75 percent of the government
                            cost estimate upon submission of valid invoices. Poor cost estimates result
                            in overpaying or underpaying contractors for work completed on the order
                            before it is settled, at which time an adjustment is made on the basis of the
                            final negotiated amount.

Cost/Benefit Analyses Not   DOD has modified TRICARE contracts without first reviewing the potential
Performed                   effects on the program of each order, its cost, whether less costly
                            alternatives were available, or the availability of funds. Thus, DOD has had
                            no assurance that each change order is needed, its costs have been
                            minimized, potentially more cost-effective alternatives to the order have
                            been considered, or funds are available. Under these conditions, Health
                            Affairs has initiated about two-thirds of the contract change orders. And,
                            once directed to go ahead with the order, TSO has then attempted to
                            estimate the order’s costs, obligate funds, and instruct the contractor to
                            submit a cost proposal and proceed with the new work tasks.

                            Knowing the likely costs and other information about the orders would
                            position Health Affairs to consider changing an order in some way to
                            lessen its prospective expense. In some cases, it would also allow Health
                            Affairs to wait until the region’s contract was re-bid and build the change
                            into the new request for proposal, thus subjecting the order to the
                            competitive bid process. In other cases, Health Affairs could simply not
                            proceed with the order. Moreover, knowing the funding availability for

                            Page 10                          GAO/HEHS-97-141 TRICARE Contract Change Orders

                          each new order would enable Health Affairs to consider delaying,
                          expediting, or otherwise timing change order issuance to correspond with
                          availability of funds. Finally, more complete information would position
                          DOD officials to weigh an order’s effects on the entire program.

Orders Not Settled in a   DOD’s goal is to settle orders within 180 days after issuance. But only 23 of
Timely Way                the 134 orders settled as of May 1, 1997, have met this timeframe. As a
                          result, at our review’s outset, DOD had a backlog of over 226 TRICARE
                          contract orders and 496 outstanding orders from other contracts. Delaying
                          the settlement of orders can reduce the contractor’s incentive to control
                          costs and places the government at a disadvantage when negotiating
                          orders because the contractor has performed the work at no risk and is
                          paid for actual costs incurred.

                          DOD’s average settlement time for the 134 settled orders was 340 days.
                          Change orders were settled in as few as 17 or as many as 1,055 days. As of
                          May 1, 1997, the average age of the 223 orders to be settled was 273 days.
                          Historically, TSO has not achieved its settlement time goal either. We
                          analyzed change orders to a Civilian Health and Medical Program of the
                          Uniformed Services (CHAMPUS) Reform Initiative contract under which
                          health care services were delivered between August 1988 and
                          January 1994.7 We found that DOD’s average settlement time for 41 change
                          orders was 1,504 days—over 4 years.

                          Failure to promptly settle orders is problematic for both DOD and the
                          contractors. First, DOD funds are tied up for long periods, since final prices
                          remain unknown until orders are settled. In addition, contractors who
                          submit initial cost proposals later have to update their estimates to reflect
                          actual costs incurred. This takes contractor time and resources and can
                          potentially increase DOD costs because the contractors’ cost control
                          incentive has been reduced.

                          DOD officials told us that the order backlog was caused by staff shortages
                          and the generally ambitious schedule to award all the TRICARE contracts
                          before the end of fiscal year 1997. They said that TSO staff, normally
                          assigned to contract administration functions, including change order
                          management, were diverted by tasks associated with awarding the new
                          TRICARE contracts.

                           The CHAMPUS Reform Initiative contract was a forerunner of the TRICARE contracts.

                          Page 11                                 GAO/HEHS-97-141 TRICARE Contract Change Orders

Other Related Problems       Since many of the change orders must be implemented upon issuance,
                             contractors essentially have been funding the contract changes with little
                             or no DOD reimbursement until the orders are settled. Contractors are
                             entitled to receive provisional payments for actual work completed before
                             orders are settled. So far, only one contractor has done so. However, it
                             took DOD 8 months to pay four of the invoices submitted by this contractor
                             because the invoices were not properly tracked by TSO. Finally, by delaying
                             order settlement, some smaller health care companies lacking the capital
                             to fund orders for such protracted periods may be discouraged from
                             bidding on TRICARE contracts.

                             Relatedly, DOD requires contractors to submit cost proposals within 60
                             days of an order’s issuance, but DOD has not enforced this requirement.
                             Currently, contractor cost proposals have yet to be submitted on 186
                             orders that are older than 60 days. Without such proposals, settlement
                             negotiations cannot begin. A representative of one contractor told us it has
                             not submitted cost proposals in a timely way because (1) it has not
                             received needed clarification from DOD on the orders’ specifics and (2) it
                             did not anticipate the volume of DOD orders and lacked the staff to cost out
                             new contract changes.

                             During our review, DOD initiated a host of actions to address the problems
DOD Is Acting to             we identified in the change order process. Specifically, Health Affairs is
Correct Identified           developing a methodology to estimate and budget for the cost of new
Problems                     orders; has engaged a consulting firm to prepare independent government
                             cost estimates for new change orders; and has implemented procedures to
                             review and evaluate proposed orders before going ahead with them. Also,
                             a team of contract specialists was formed at TSO to focus on and expedite
                             the settlement of open orders, and other efforts are under way to
                             streamline the process.

Fiscal Year 1999 Budget to   Health Affairs is now attempting to develop a methodology that will enable
Include Cost Estimate for    it to budget for orders expected to be issued in future years. DOD officials
Anticipated Orders           told us that its implementation goal is fall 1997. Thus, DOD plans to include
                             such order cost estimates in its fiscal year 1999 budget. Also, DOD will
                             include out-year costs for settled orders beginning with its fiscal year 1999

                             DOD officials told us that budgeting for the change orders will provide a
                             more structured funding process. It will also facilitate order issuance

                             Page 12                         GAO/HEHS-97-141 TRICARE Contract Change Orders

                           decisions with improved information on whether funds are available to
                           support the TRICARE contracts.

New Order Cost Estimates   Instead of continuing to make “guesstimates” or basing its cost estimates
to Be Improved             for new orders on contractors’ informal cost estimates, DOD has acted to
                           obtain independent government cost estimates for TRICARE change
                           orders. In November 1996, DOD engaged a consulting firm to prepare cost
                           impact statements for each order and to analyze contract cost effects for
                           use in developing independent government cost estimates. This
                           information should enable DOD to assess the costs and technical effects of
                           new changes, and it should be especially useful in negotiating orders with
                           the contractors. As of April 1997, the consultant had been assigned to
                           prepare 22 cost estimates on proposed change orders.

Health Affairs to Review   In March 1997, DOD established a new requirement that all proposed orders
and Approve Orders         be reviewed and approved by Health Affairs before issuance. The review
Before Issuance            will evaluate each order’s effects on the health care system, its costs, and
                           the availability of funds. In short, the Deputy Assistant Secretary, Health
                           Services Financing, will evaluate the need for the order and decide
                           whether to implement it.

                           Thus, program managers initiating orders are now required to provide
                           documentation (1) describing the proposed change in detail and including
                           draft contract modification language, (2) ensuring that an independent
                           government cost estimate has been performed, and (3) earmarking funding
                           sources to defray the order’s estimated cost. According to DOD, the new
                           procedures are aimed at bringing discipline to the process and ensuring
                           that appropriate funding is available for each TRICARE contract change.

Team Formed to Expedite    A team of contract specialists has been assembled at TSO to expedite the
Order Settlement           settlement of all open change orders. TSO officials told us that the team is
                           focused on reducing the order backlog to a manageable and consistent
                           level—the goal is 100 to 150 open orders—by 1999.

                           In August 1996, TSO formed a team to settle the mounting change order
                           backlog. In October 1996, the team had 7 members; by May 1997, it had 10
                           members. The team consists of five specialists hired under contract with
                           TSO, three TSO employees, and two specialists temporarily assigned from

                           Page 13                          GAO/HEHS-97-141 TRICARE Contract Change Orders

                                    the Defense Contract Management Command.8 A TSO official told us it
                                    plans to hire two additional team members to help reduce the change
                                    order backlog. Before October 1996, only 22 TRICARE orders had been
                                    settled. As figure 2 shows, the team has increased the number of TRICARE
                                    orders settled since that time and has settled orders for other contracts
                                    administered by TSO as well.

Figure 2: Number of Change Orders
Settled, October 1996-April 1997    Number of Change Orders Settled


























                                                             TRICARE Contract Change Orders

                                                             Other Contract Change Orders

                                    Source: GAO Analysis of data provided by TSO.

                                    Figure 3 shows the number of change orders that remained to be settled,
                                    by month.

                                     Defense Contract Management Command is located within the Defense Logistics Agency. Its mission
                                    is to provide contract administration services in support of DOD and other designated federal
                                    organizations. The Denver Defense Contract Management Command office does price and cost
                                    analysis work for TSO.

                                    Page 14                                            GAO/HEHS-97-141 TRICARE Contract Change Orders

Figure 3: Number of Change Orders
That Remained to Be Settled, October   800    Number of Open Change Orders
1, 1996-May 1, 1997
























                                                             TRICARE Contract Change Orders

                                                             Other Contract Change Orders

                                       Source: GAO analysis of data provided by TSO.

Other Corrective Actions               In March 1997, DOD hired a management consulting firm to review and
Taken                                  recommend improvements to TSO’s change order process. The firm’s study
                                       is to develop ways to help further reduce the current backlog and prevent
                                       future backlogs.

                                       TSO also notified contractors to begin submitting overdue (beyond the 60
                                       day post-issuance requirement) cost proposals for low-cost or no-cost
                                       change orders. Contractors were told that proposals not received within
                                       30 days could be unilaterally settled by DOD. A TSO official told us most
                                       contractors have attempted to respond to this effort to reduce the backlog.

                                       Additionally, TSO is revising its provisional payment procedures so that
                                       contractors can be paid more quickly for actual costs incurred. Further,
                                       TSO is attempting to develop a standard format for contractors’ use when

                                       Page 15                                         GAO/HEHS-97-141 TRICARE Contract Change Orders

                  submitting cost proposals in order to expedite TSO’s evaluation of
                  proposals and shorten order settlement times.

                  The hundreds of change orders that have been made to the TRICARE
Conclusions       contracts are likely to have a significant effect on program costs and
                  operations. Yet DOD has not reliably estimated the costs of the orders,
                  separately budgeted for such costs, or systematically reviewed the need
                  for each order and whether more cost-effective alternatives existed.
                  Moreover, new TRICARE change orders and previously existing orders
                  have backlogged, and change order settlement times have greatly
                  exceeded requirements. The process, in short, has been managed

                  DOD has now initiated actions to reduce the number of orders that have not
                  been settled and address the other problems we identified with the change
                  order process. When fully implemented, these actions should bring needed
                  discipline to the system: They should position DOD to better ensure the
                  need for, cost-effectiveness of, and timely settlement of contract change
                  orders. But the long-term efficacy of these efforts remains to be seen.

                  We recommend that the Secretary of Defense direct the Assistant
Recommendation    Secretary of Defense (Health Affairs) to continue providing the high-level
                  management attention that DOD has begun to focus on implementing the
                  needed change order process improvements.

                  In commenting on a draft of this report, DOD officials concurred with our
Agency Comments   recommendation that both the Acting and incoming Assistant Secretary of
                  Defense (Health Affairs) continue providing high-level management
                  attention to needed change order process improvements. DOD officials also
                  raised four points related to technical accuracy.

                  First, DOD officials took exception to our assertion that DOD’s corrective
                  actions were initiated during our review, pointing out that DOD acted to
                  improve the change order process well before our review began. While it is
                  true that in 1995 DOD assigned one TSO individual to negotiate all change
                  orders, as the report indicates, the change order settlement team was not
                  formed until August of 1996 or expanded to its needed strength until
                  October 1996. DOD’s other actions, such as its attempt to develop budgeting
                  methodologies for orders slated for issuance in future years and for settled

                  Page 16                         GAO/HEHS-97-141 TRICARE Contract Change Orders

orders’ out-year costs in future years’ budgets; its new requirement that
Health Affairs review and approve all proposed orders before issuance; its
revision of provisional payment procedures; and its hiring of a consulting
firm to recommend improvements to the entire process each occurred
during our review. Rather than disputing when DOD took these actions, our
more important concerns—and we believe DOD’s, as well—are such issues
as the yet-unknown extent of federal liability for TRICARE contract
change orders and whether DOD’s actions to fix the broken process will

DOD  officials also believed our report did not adequately convey that DOD
now has an approach for reliably estimating new order costs. We disagree.
As we reported, not until November 1996, when DOD’s hired consultant
started preparing Independent Government Cost Estimates for new
orders, did DOD have a reliable approach for estimating new order costs
because it lacked the needed in-house expertise. We believe that this effort
appears to be working reasonably well and should help DOD make sound
cost estimates for each new order and, in time, for the total federal liability
for the numerous contract changes DOD has made.

Further, regarding our references to contractors’ estimated costs of
$423 million for only a fraction of the open orders, DOD officials said we
should have pointed out that contractors have an incentive to submit high
estimates to build a bargaining position for negotiating with the
government. We agree that contractors may behave this way in some
cases, but certainly not in all. We found, moreover, that for about
91 percent of the settled TRICARE orders, contractors’ initial cost
estimates were the same as or lower than DOD’s estimates. Also, for the
32 percent of settled orders for which contractors’ estimates were lower
than DOD’s estimates, all were settled at or below the contractors’
estimates. For example, for Foundation Health Federal Services’ region 11
contract, the contractor’s initial estimate for an order requiring shockwave
lithotripsy reimbursement was $9,067, while DOD’s cost proposal was
$125,000, yet the final settled price was $9,067. Similarly, the contractor’s
initial estimate for a change order implementing hospice benefits was
$30,971, while DOD’s estimate was $265,563, yet the final settled price was
$28,758. Thus, we did not make the change to our report that DOD

Finally, DOD pointed out that the report’s reference to DFAR change order
settlement times was incorrect, and we corrected the citation.

Page 17                          GAO/HEHS-97-141 TRICARE Contract Change Orders

DOD’s   comments appear in the appendix in their entirety.

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) 512-7101 if you or your staff have any questions concerning this
report. Other major contributors to this report include Daniel M. Brier,
Assistant Director; Cheryl A. Brand, Evaluator-in-Charge; William
Temmler; Arthur Trapp; and Alan Wernz.

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

Page 18                           GAO/HEHS-97-141 TRICARE Contract Change Orders
Page 19   GAO/HEHS-97-141 TRICARE Contract Change Orders

Letter                                                                                         1

Appendix I                                                                                    22

Comments From the
Department of
Tables              Table 1: TRICARE Contracts, 1997                                           4
                    Table 2: TRICARE Change Orders by Contractor, Region, and                  6
                      Status, May 1, 1997
                    Table 3: Types of Change Orders Not Yet Settled, May 1, 1997               8

Figures             Figure 1: Types of TRICARE Change Orders, May 1997                         7
                    Figure 2: Number of Change Orders Settled, October                        14
                      1996-April 1997
                    Figure 3: Number of Change Orders That Remained to Be Settled,            15
                      October 1, 1996-May 1, 1997


                    ADP          automated data processing
                    CHAMPUS      Civilian Health and Medical Program of the Uniformed
                    DFAR         Defense Federal Acquisiton Regulation Supplement
                    DHP          Defense Health Program
                    DOD          Department of Defense
                    FAR          Federal Acquisition Regulation
                    HMO          health maintenance organization
                    TSO          TRICARE Support Office

                    Page 20                        GAO/HEHS-97-141 TRICARE Contract Change Orders
Page 21   GAO/HEHS-97-141 TRICARE Contract Change Orders
Appendix I

Comments From the Department of Defense

Now on pp. 2 and 6.

                      Page 22   GAO/HEHS-97-141 TRICARE Contract Change Orders
           Appendix I
           Comments From the Department of Defense

(101498)   Page 23                           GAO/HEHS-97-141 TRICARE Contract Change Orders
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:


or visit GAO’s World Wide Web Home Page at:


United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested