United States GAO General Accounting Office Washington, D.C. 20548 Health, Education and Human Services Division B-276227 June 24, 1997 The Honorable William S. Cohen The Secretary of Defense . . Subject: TRICARE Adnumstrau ‘ve Prices in the Northwest Region Mav Be Too liifzh- 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 expenditures. 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. BACKGROUND 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 B-276227 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 standards. ADMINISIRATIVE SUPPORTPRICESWERE NOT ADJUSTEDTO REFLECT LOWER HEALTH CARE PRICES 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 B-276227 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 4and6” 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 B-276227 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 Southeast 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 B-276227 TRICARE MCS CONTRACTSDO NOT REQUIRE ATJTOMATICPRICE ADJUSTMENTS 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. ADMINISTRATIVE SUPPORTPRICESAND HEALTH CARE PRICES SHOULD BE LINKED 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 costs. 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 E3-276227 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 TRICARE . . 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. CONCLUSIONSAND RECOMMENDATIONS 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 B-276227 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. AGENCY COMMENTS 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. e---w 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 (101499) GAOKHEHS-97-149R TRICARE Administrative Prices 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. 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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)