TRICARE Administrative Prices in the Northwest Region May Be Too High

Published by the Government Accountability Office on 1997-06-24.

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

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

      Health, Education   and Human Services Division


      June 24, 1997
      The Honorable William S. Cohen
      The Secretary of Defense
                             . .
      Subject: TRICARE Adnumstrau ‘ve Prices in the Northwest Region Mav Be Too
      Dear Mr. Secretary:
      The Department of Defense (DOD) initiated TRICARE-its nationwide managed
      health care program-to improve accessfor the military community while
      maintaining quality and controlling costs. This broad reform of DOD’s $16
      billion health care system is changing the way it delivers services to 8.3 million
      beneficiaries. In authorizing the shift to managed care, the Congress directed
      that the cost of DOD’s new TRICAREprogram be budget neutral-that is, costs
      not increase over what they would have been without the program.’ To help
      achieve this goal, TRICARE managersare seeking opportunities to contain
      During the course of our work on TRICARE’s managed care support contracts,2
      we observed that DOD did not take advantage of its contractual authority to
      adjust administrative support prices in the Northwest Region (Oregon,
      Washington, and part of Idaho) to correspond with a large health care price
      reduction. As a result, administrative support prices in the Northwest region
      may be up to an estimated $26 million too high over the byear contract period.
      Once negotiated, services to be provided under the TRICARE managed care
      support (MCS) contracts have fixed prices, including payments to providers for

      ‘The National DefenseAuthorization Acts for fiscal years 1994and 1996 (P.L.
      103-160and P.L. 104-106,respectively).
      2Weplan to r epox-tshortly on DOD’s overall management of TRICARE contract
      change orders.

                            GAOMEHS-97-149R             TRICARE   Administrative   Prices
delivery of health care services, as well as administrative support items, such as
marketing, enrollment, and claims processing. In these contracts, health care services
and administrative support are separately itemized and priced.Though contract prices
are fixed when the contract is signed, the contracts are designed to be modified to
accommodate such unforeseen events as shifts in the population served, new medical
technologies, or military hospital workload changes. The bid price adjustment (BPA)
is a contract provision that establishes a means to amend the health care price to
account for factors beyond the contractor’s control.

Though the BPA provision in this contract does not apply to administrative support
prices, provisions in the TRICARE MCS contracts allow for adjustments to
administrative support prices that result from contract changes. These acfjustments
differ from the formal bid price aqiustment process and are to be negotiated
separately in accordance with Federal Acquisition Regulation (FAR) section 62.243-1,
Changes-Fixed-Price. Also, the prices of health care and administrative support
functions are not linked, so changesin health care prices would not automatically
generate a change in administrative support prices, or vice versa.
FAR section 62.243-l authorizes contracting officers to make changes within the
general scope of the contract at any time. Paragraph 62.243-l (b) states, “If any such
change causesan increase or decreasein the cost of, or the time required for,
performance of any part of the work under this contract, whether or not changed by
the order, the Contracting Officer shall make an equitable adjustment in the contract
price, delivery schedule, or both, and shall modify the contract.” According to the
TRICARE Support Office (TSO) official in charge of negotiating change orders, typical
change orders to TRICARE contracts-those not part of the BPA process-are firm
fixed price and include both health care and administrative support prices.

The purpose of our review was to determine if TRICARE managers had taken
advantageof DOD’s contractual authority to adjust administrative prices to correspond
with a large health care price decrease. We interviewed officials from the Northwest
Region Lead Agent, TSO, and Health Affairs. We performed our work between
January and May 1997in accordance with generally accepted government audit&g
The largest contract change to date in the Northwest Region (modification POOO08,
effective Feb. 1, 1996)reduced the health care price by a total of $169 million (33
percent) over the five option periods (see table 1). The reduction was calculated to

2                            GAOMEHS-970149R        TRICARE    Administrative   Prices
reflect lower baseline population and military treatment facility utilization estimates.3
According to a TSO contracting officer, this modification was subject to the
requirements in FAR section 62.243-l.
Table 1: Health Care Price Reduction in the Northwest Region

        Option period            Original price        Revised price         Price decrease
    1                               $89,933,261          $66,767,312              $24,166,939
    2                       I        96,388,048I          66,268,6461             29,119,60211
    3                               104,666,876           69,203,221              36,362,664
    Total               I        $618,216,649     1   $348,967&X4      1      $169,249,10;]1

Note: Table 1 includes only health care prices and does not reflect other contract
items, such as administrative support and resource sharing, which were not affected
by modification POOO08.
“I‘S0 requested that we not publish annual prices for future option period 4 and 6.

Despite a 33-percent reduction in health care prices, TRICARE contracting officers, as
we discuss later, did not propose a second action to reduce administrative support
prices. For example, the administrative support price remained at $18.9million for the
first option period. As a result, administrative support prices (as a percentage of total
contract price) increased from 16 to 21 percent for the iirst option period. Similarly,
the administrative cost percentage increased about 6 percent for each of the 6 option
periods (see table 2).                                                                           ,

me purpose of modification PO0008was to determine a price for an earlier
modification (POOO03)   that revised baseline population and military treatment facility
utilization estimates using more recent data sources. The change took effect prior to
the Mar. 1, 1996,start of health care delivery.

3                               GAO/IIEHS-97.149R     TRICARE    Administrative     Prices
Table 2: Northwest Region Administrative SUDDOK~
                                              Price as a Percentage               of O&inal
and Modified Contract Pna

 Option period              Administrative price As a percentage of         As a percentage of
                                                 original price             modified price
 1                                    $18,914,180                     16                          21
 2                                     19,086,071                     16                          21
 3                      I              19432,740                      16                          20

“rS0 requested that we not publish future option period prices. The percentage
increase, however, remained constant at about 6 percent per year.

The increased proportion spent for administrative support in the Northwest Region is
also the highest among TRICARE regions (see table 3).

Table 3: Administrative     SUDDOI~   Price as a Percentageof Total Contract Price for
Option Period 1”

 TRICARE MCS                 Total contract         Administrative          Administrative
 contract                    price (in millions)    price (in millions)     percentage
 Southwest                                $361.1                   $46.7                      13
    Golden Gate, Region                     609.7                   66.4                      13
    9, and Hawaii-Pacific
    North Central and                       446.6                   64.2                      14
    Desert States
    Gulf South and                          683.8                   124.2                     18
    Northwest                                92.0                   18.9                      21

Note: Data are as of the beginning of option period 1 for each contract (start dates
differ for each contract and modifications can affect the total contract price).

“rhe total contract price for option period 1 includes prices for health care,
administrative support, and other items such as resource sharing and start-up costs.

4                                GAO/HEHS-97-149R         TRICARE     Administrative     Prices
TRICARE MCS contracts do not require that health care price reductions automatically
trigger a corresponding reduction in the administrative support prices, nor do
contracts require the reasons administrative prices are not reduced be documented.
Without such records, TSO contracting officers were unable to explain why a
reduction in the Northwest Region’s administrative support price was not proposed or
why further analysis was not conducted to determine if a price reduction was
warranted. Documentation supporting modification PO0008showed detailed analysis
of health care prices but did not include an analysis of administrative support prices.

According to a DOD contractor hired to calculate the effects of contract modifications
(independent of the MCS contractor), modification PO0008included changesln both
the process and the resulting prices-but did not consider adjusting administrative
prices. While administrative price adjustments are not part of the BPA process,
     . .
admmmtrative   support price acijustmentsare not precluded under the FAR changes
provisions. Because modification PO0008was issued under the authority of FAR
section 62.243-1,it is a change order that allows TSO contracting officers to adjust
administrative support prices.

While health care costs are not directly linked to administrative support costs in
existing TRICARE MCS contracts, there is a clear relationship between the two. For
example, such administrative cost elements as advertising and developing a utilization
management program appear to be of a fixed cost nature, but administrative cost
elements such as beneficiary enrollment, claims processing, and premium collection
would vary depending, for example, on the number of beneficiaries. Since the
contract was modified to reflect a smaller number of people to be served, resulting in
lower utilization and fewer claims, it seemsthat there should be less administrative
The Defense Contract Audit Agency (DCAA) and Lead Agent officials also told us that
a 33-percent reduction in the health care price should have been accompanied by a
reduction, perhaps proportionally smaller, in the administrative support price.” Or, at

4DCAAis the cognizant audit agencyfor TRICARE MCScontracts. It audits
administrative support costs in TRICARE bid proposals as well as contract
modifications in excess of $600,000.
6                            GAOMEHS-97-149R        TRICARE    Administrative   Prices
a minimum, TSO contracting officers should have conducted further analysis to
determine the extent to which an administrative support price reduction was
warranted. TSO’sanalysis would most likely require a DCAA audit of the contractor’s
administrative expenditures.
Had TRICARE contracting officials applied the contractor’s original administrative
support rates to the reduced health care prices in modification POOO08, administrative
support prices might be as much as $26 million less over the 6 years of the contract.
This projection, moreover, is at the upper range of potential savings because
administrative support costs would likely not decreasein the same proportion as
health care costs. Savingscould further decreaseif the contractor could justify and
negotiate higher administrative support prices. Nevertheless,renegotiating
administrative support prices would not only give DOD valuable information on the
true cost of administrative servicesin the Northwest Region, but also would ensure
DOD pays fair and reasonable prices for these services.
The Principal Director for Health ServicesFinancing, Office of the Assistant Secretary
of Defense (Health Affairs), told us the office now recognizes that having all
administrative prices fixed and unrelated to health care prices is a tlaw in current
     . . MCSsupport
                contracts. To correct this shortcoming, the office plans to link
adnum&rative             and health care prices, based on variables such as claims
volume, number of enrollees, or other indicators, in future MCS contracts. Regarding
the large health care price reduction in the Northwest Region, Health Affairs officials
said that TSO contracting officials should consider renegotiating the administrative
support price.

According to a senior contractor official, the contractor also recognizes the need to
have health care and administrative support prices linked. Furthermore, the
contractor would not be opposed to reexamining the impact of modification PO0008on
administrative support prices in the Northwest Region. He said, however, that savings
resulting from this particular modification might be offset by increased administrative
support costs in other areas such as claims processing.
BecauseTRICARE contracting officers did not seek an administrative support price
reduction to correspond with a 33-percenthealth care price reduction, DOD may be
paying too much for administrative support services in the Northwest Region. To help
ensure DOD pays fair and reasonableprices for administrative support in the
Northwest Region, we recommend that you direct the Acting Assistant Secretary of
Defense for Health Affairs to initiate action to determine the extent to which
administrative support prices could be reduced as a result of the $169 million health
care price reduction in modification POOO08.

6                            GAOB-IEHS-97-149R      TRICARE    Administrative    Prices
Similarly, to better match administrative support prices with workload, we support
current Health Affairs efforts to develop contractual links between administrative
support and health care workload and prices. We recommend that you consider
incorporating such a requirement in future cycles of TRICARE MCS contracts and, to
the extent possible, in contracts currently under negotiation in the Northeast, Mid-
Atlantic, and Heartland regions where it would not compromise the competitive
procurement process.
We obtained oral comments from Health Affairs officials. They generally agreed that
administrative support prices should have been considered at the time of modification
PO0008and could not comment further on why this did not occur. They also said that
the evidence was convincing that they should revisit the regional contractor’s
administrative costs. But they said such other matters as resolving resource sharing
and contract modification problems, negotiating current bid proposals, and developing
the next cycle of TRICARE contracts now have their attention and likely would
receive near-term priority over renegotiating the subject administrative costs. While
we recognize that DOD officials must prioritize their work as appropriate, we note that
the subject change is almost 2-l/2 years old and the passageof time tends to further
complicate reaching an equitable settlement for both parties. DOD officials also made
other technical comments that we incorporated where appropriate.

We would appreciate being apprised of your disposition of these matters. If you have
any questions or would like to discuss the matters further, please call me at
(202) 612-7111or Dan Brier, Assistant Director, at (202) 612-6803.
Sincerely yours,

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


                            GAOKHEHS-97-149R       TRICARE    Administrative   Prices
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