oversight

Reserve Forces: Follow-up on the Ready Reserve Mobilization Income Insurance Program

Published by the Government Accountability Office on 1997-07-18.

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

                                                   .,          .*    9                                .
                                                           .              ..:.




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

      National Security and
      International Affairs Division

      B-277461


      July 18, 1997


      The Honorable Steve Buyer
      Chairman, Subcommittee on M ilitary Personnel
      Committee on National Security
      House of Representatives

      Subject:   Reserve Forces: Follow-up on the Readv Reserve Mobilization
                 Income Insurance Prouram

      Dear M r. Chairman:

      On January 9, 1997, you asked our office to review the Ready Reserve
      Mobilization Income Insurance Program to assess the need for the program , the
      Department of Defense’s (DOD) implementation of the program , and the
      program ’s actuarial soundness. As we began planning for the review, we
      learned that the,DOD Inspector General (IG) had already begun a detailed
      examination of the program . In a meeting on January 24 with your staff, DOD
      IG representatives, and our office, it was agreed that, to avoid possible
      duplication, the IG would continue its review and we would participate, to the
      extent necessary, to ensure that the Subcommittee’s concerns were addressed.

      The IG issued its final report on the program on June 18, 1997. This letter
      summarizes our views on the report and on the IG’s work to address the
      Subcommittee’s concerns. This letter also responds to a question posed to us
      during the Subcommittee’s May 8, 1997, hearing on the program . That
      question relates to the government’s potential liability for insurance payouts to
      reservists who were activated for Bosnia and may claim that they were never
      provided an opportunity to enroll in the insurance program .

      OUR VIEWS ON DOD IG’S REPORT

      As agreed with the Subcommittee and summarized in a February IO, 1997,
      letter to you, we did not independently review the Ready Reserve Mobilization
      Income Insurance Program or meet with DOD officials to verify the accuracy of
      the IG’s work. Rather, our role was to help ensure that the IG’s examination of


                                       GAO/NSIAD-97-203R   Mobilization    Income Insurance Program
B-277461


the program adequately addressed the Subcommittee’s concerns. To that end,
we reviewed the IG’s audit plan, obtained background information and key
documents related to the program, observed several DOD working group
meetings where problems in the program were discussed, obtained two
briefings from the IG staff, and reviewed the IG staff’s draft and final reports.

The IG staff incorporated several of our suggestions into their audit plan, and
we believe that they used a reasonable methodology in their review to address
the Subcommittee’s concerns. After reviewing the IG staff’s draft report, we
provided detailed comments suggesting minor changes or additional information
that could add clarity or make the report more compl.te.. The. IG staff
incorporated several of our comments into their final report.

Overall, we believe that the DOD IG’s final report provides a balanced overview
of the design, implementation, tind future viability of the program. We also
believe information presented in the report addresses the Subcommittee’s
concerns about the program as expressed in the Chairman’s January 9, 1997,
letter. Further, based on our knowledge of the DOD IG staff’s work and on our
limited work, we agree with the report’s conclusion that the program is not
actuarially or fiscally sound and should be suspended while DOD reexamines
the need for and possible alternatives to the program.’

We believe the report would have been more thorough had the IG incorporated
two additional comments we made on their draft report. First, the report states
that the program suffered from the consequences of circumstances beyond the
control of its managers. We agree that once the program was implemented in
October 1996, there was little that DOD could have done to change the
outcome. However, as we noted in our May 8, 1997, testimony before the
Subcommittee, warnings of potential program problems were made to DOD
managers prior to program implementation, but little was done to address the
warnings.*




‘The Senate Armed Services Committee and the House National Security
Committee have proposed termination of this program in their reports on the
National Defense Authorization Act for Fiscal Year 1998.

*Reserve Forces: Observations on the Readv Reserve Mobilization          Income
Insurance Proaram (GAO/T-NSIAD-97-144,   May 8, 1997).

2                             GAO/NSlAd-97-203R   Mobilization Income Insurance Program
B-277461


Minutes from the August 1995 meeting of the DOD Education Benefits Board of
Actuaries generally discussed and the Board’s August 9, 1996, letter specifically
stated the following four concerns about the mobilization income insurance
program:

           “1. Volatility: Benefit payments are caused by mobilizations that are
           very infrequent, but that can produce large numbers of benefit claims
           when they occur. The Fund could easily be exhausted by unfavorable
           experience in the early years despite a premium rate that would be
           adequate over a longer period.

           “2. Experience data: Mobilization experience depends on the
           changing world situation and the role of the reserves, which
           may vary substantially from previous experience used to
           compute premiums.

           “3. Anti-selection: Reservists who perceive a substantial risk
           of mobilization will enroll in greater numbers and buy more
           insurance. This phenomenon could result because of their
           military specialty or because mobilization seems likely at the
           time of enrollment.

           “4. Pre-existing condition: The Bosnia call-up appears likely
           to extend beyond October 1, 1996, when the insurance
           program takes effect. Although reservists then on active
           duty are ineligible, others who replace them can purchase
           insurance and trigger substantial benefits in fiscal year 1997.
           Such outlays may endanger the Fund right away.”

Since the enactment of the mobilization insurance program, all of these
concerns have been realized. In view of the Board’s expressed concerns, DOD
could have discussed the issues with the Congress prior to program
implementation to determine whether the program needed to be modified in any
way. However, to our knowledge, this step was not taken.

Second, the IG’s report concluded that DOD did not have sufficient time to
successfully market the program to reservists because the DOD Education
Benefits Board of Actuaries did not finalize premium rates until August 9, 1996.
As a result, reservists did not have sufficient information or time to make an



                              GAO/NSIAd-97-203R   Mobiiization   Income Insurance Program
B-277461


informed decision about enrollment, and in some cases, reservists may not
have been offered an opportunity to enroll in the program.

While we agree that the program suffered because of poor marketing, we
believe that DOD had sufficient time to develop a successful marketing plan.
For example, according to the IG report, (1) the Congress initially directed DOD
to investigate the feasibility of a mobilization income insurance program in 1991;
(2) initial legislative proposals to establish a program were developed in June
1994; (3) hearings on the program were held in March and April 1995; and (4)
the program was enacted on February IO, 1996, as a part of the National
Defense Authorization Act for Fiscal Year 1996 (P-L. 104-i 06). Even though
the precise premium rates were not known until August 9, 1996, DOD could
have provided general information about the program much earlier as part of an
orchestrated marketing strategy. This would have given potential enrollees
more time to consider the program. This would be especially important since
DOD knew potential enrollees would have only 60 days to decide once they had
an opportunity to enroll.

Moreover, DOD could have taken steps to establish the premium rates earlier.
For example, shortly after the legislation was enacted, DOD could have called a
special meeting of the DOD Education Benefits Board of Actuaries to establish
premium rates.

POTENTIAL LIABILITY FROM THE
PROGRAM’S IMPLEMENTATION

During the Subcommittee’s May 8, 1997, hearing on the Ready Reserve
Mobilization Income Insurance Program, you asked us whether the government
could be liable for the payment of benefits to reservists who were activated for
Bosnia and may claim they had not been given an opportunity to enroll in the
program. We found nothing in section 512 of the National Defense
Authorization Act for Fiscal Year 1996 (P.L. 104-l 06) or in DOD’s implementing
instructions that would authorize retroactive enrollment in the program or give
rise to government liability for payment to reservists in Bosnia who were not
enrolled when activated.

The law required the Secretary of Defense to establish the program and to offer
eligible members of the reserve components an opportunity to enrolt for
coverage “promptly after the insurance program is established” (see 10 U.S.C.
12524(a)(2). To implement the program, DOD issued Instruction 1341 .I0 on


4                            GAO/NSIAD-97-203R   Mobilization   Income Insurance Program
B-27746 1


July 5, 1996. The instruction provided that members of the Ready Reserve, as
of September 30, 1996, other than those on full-time active duty, were to be
offered an opportunity to enroll for coverage under the program. Members who
failed to fill out the appropriate insurance form within 60 days after being offered
the opportunity were deemed to have declined coverage under the program.
An election to decline coverage may not be revoked (see 10 U.S.C. 12524(c),

To be entitled to the payment of benefits, a reservist must have already been
enrolled in the program when ordered involuntarily into covered service. More
specifically, to be covered, the reservist must have completed the enrollment
process, elected the amount of benefit, and paid the corresponding monthly
premiums. Otherwise, DOD has no basis to determine whether the reservist is
entitled to payment or the amount owed, if any.

In our view, if a reservist could show that DOD had failed to offer an opportunity
to enroll in the program, the reservist may be entitled to enroll in the program
for future coverage. However, we are unaware of a basis in law to provide
retroactive coverage for an individual who was not enrolled in the program
before being activated for duty in Bosnia or elsewhere.

AGENCY COMMENTS         AND OUR EVALUATION

In commenting on a draft of this report, the DOD IG stated that the report fairly
presented the results of its evaluation and the working relationship established
between the IG and our office. However, the IG made comments about our two
concerns with its report. First, the IG believed that its report appropriately
incorporated the DOD Education Benefits Board of Actuaries’ concerns about
the program. The IG stated that (1) the Board’s concerns in its August 1996
letter primarily related to the difficulties in determining program premium rates;
(2) minutes from the Board’s 1995 meeting should not be viewed in the same
context as the Board’s 1996 letter because details of the program were not
established at that time; and (3) since the executive branch’s policy in August
1996 was that the Bosnia operation would end in December 1996, DOD had no
reason to ask the Congress to alter the program.

We agree that the Board’s 1996 concerns were expressed in the context of the
difficulty in determining rates for the program and that the Board’s 1995
discussions concerning the program were more general in nature.
Nevertheless, in both instances, the Board presented clear warnings about
potential problems in the program. We continue to believe that the significance


5                            GAO/NSIAD;-97-203R   Mobilization Income Insurance Program
B-27746 1


of the problems noted by the Board warranted DOD action, such as discussing
the issues with the Congress prior to program implementation.

Second, the IG stated that it is not feasible to market any insurance product
until the premium rates are known. Since the premiums for the mobilization
income insurance program were not established until August 1996, DOD had
insufficient time to market the program.

We agree that DOD had little time to market the program after August 1996
because the program was implemented in October 1996. However, our point is
that DOD could have taken steps to establish premium rates earlier. For
example, shortly after the authorizing legislation was enacted in February 1996,
DOD could have called a special meeting of the DOD Education Benefits Board
of Actuaries to establish premiums for the program. This would have allowed
significantly more time to market the program.



We are sending copies of this letter to the Ranking Minority Member of your
subcommittee; the Chairmen and Ranking Minority Members of the Senate
Armed Services and the House National Security Committees; the Inspector
General, Department of Defense; the Secretary of Defense; and the Assistant
Secretary of Defense for Reserve Affairs. We wilt make copies available to
others upon request.

Please contact me at (202) 5125140 if you or your staff have any questions on
this letter. Major contributors to this letter were Valeria G. Gist, Mark C.
Speight, and Gary W. Phillips.

Sincerely yours,




Mark E. Gebicke
Director, Military Operations
and Capabilities Issues


(703206)


6                               GAO/NSIAd-97-203R   Mobilization Income Insurance Program
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) 2534066, 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:

infoQwww.gao.gov

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

http://www.gao.gov
United States                              B&Rate
General Accounting  Office           Postage$)ees     Paid
Washington, D.C. 20548-0001
                                       Permit   No. GlOO
Official   Business
Penalty    for Private   Use $300

Address    Correction    Requested