oversight

Defense Health Program: Future Costs Are Likely to Be Greater than Estimated

Published by the Government Accountability Office on 1997-02-21.

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

                    United States General Accounting Office

GAO                 Briefing Report to the Chairman and
                    Ranking Minority Member,
                    Subcommittee on National Security,
                    Committee on Appropriations, House of
                    Representatives
February 1997
                    DEFENSE HEALTH
                    PROGRAM
                    Future Costs Are
                    Likely to Be Greater
                    Than Estimated




GAO/NSIAD-97-83BR
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-275854

             February 21, 1997

             The Honorable C.W. Bill Young
             Chairman
             The Honorable John P. Murtha
             Ranking Minority Member
             Subcommittee on National Security
             Committee on Appropriations
             House of Representatives

             We recently briefed your subcommittee staff on our analysis of budgetary
             trends of the Defense Health Program. This report summarizes the content
             of that briefing. Because the Department of Defense (DOD) wants to reduce
             spending for infrastructure activities to pay for modern weapon systems,
             we have been reviewing how DOD categorizes and budgets for
             infrastructure functions. Last year we reported that DOD will realize no
             significant net infrastructure savings in its budget estimates between fiscal
             year 1996 and 2001.1 DOD defines infrastructure as activities that provide
             support services to mission programs and primarily operate from fixed
             locations. It assigns infrastructure activities among eight categories, one of
             which is central medical. Central medical is the third largest infrastructure
             category, and nearly all the funds within that category are used for the
             Defense Health Program.


             The $15-billion Defense Health Program accounts for about 6 percent of
Background   DOD’s total budget. The Defense Health 1998 Program Objective
             Memorandum (POM) shows that total obligational authority is projected to
             increase by about $2.7 billion, or 18 percent, from $15.1 billion in 1997 to
             $17.8 billion in 2003, in current dollars.2 The POM reflects no program
             growth when expressed in constant dollars. In addition to meeting
             wartime patient care requirements, the program provides health care
             benefits for active duty personnel and their dependents as well as for
             retirees and their dependents. Beneficiaries may receive health care
             through DOD’s new managed health care system called TRICARE. They
             may use DOD facilities and/or one of three options under DOD contract: a


             1
              Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization
             (GAO/NSIAD-96-131, Apr. 4, 1996) and Defense Infrastructure: Costs Projected to Increase Between
             1997 and 2001 (GAO/NSIAD-96-174, May 31, 1996).
             2
              We based our analysis on the Fiscal Year 1998 POM, the most current data available at the time of our
             review. During the course of our review, DOD revised the POM estimates as it developed the
             President’s Budget and the 1998 Future Years Defense Program. We provide information on these
             revised estimates in our report.



             Page 1                                             GAO/NSIAD-97-83BR Defense Health Program
                   B-275854




                   health maintenance organization, a preferred provider, and a
                   fee-for-service option, formerly known as the Civilian Health and Medical
                   Program of the Uniformed Services (CHAMPUS). Retirees and dependents
                   over age 65 are not eligible for TRICARE because they receive Medicare
                   benefits. However, they may receive health care in DOD medical facilities
                   on a space-available basis. DOD has managed care initiatives in place that it
                   hopes will result in efficiencies and savings.


                   Future Defense Health Program costs are likely to be greater than DOD has
Results in Brief   estimated. Our analysis showed that one key assumption DOD used to
                   estimate future program costs appeared to be unrealistic and another was
                   questionable. First, DOD assumed that no cost growth would be
                   attributable to advances in medical technology and the intensity of
                   treatment, an important and valid health care cost growth factor.3 Second,
                   DOD assumed that a certain level of savings would be achieved from its
                   new emphasis on utilization management techniques to reduce
                   unnecessary treatment and testing, although it did not use a formal
                   methodology or analysis to derive the savings. DOD’s projection that health
                   program budgets will not increase in constant dollars during fiscal years
                   1998-2003 also appears to be unrealistic, given that during fiscal years
                   1985-96, the operation and maintenance funds in DOD’s health program
                   increased by 73 percent in real terms (operation and maintenance funds
                   take about two-thirds of the Defense Health Program budget).

                   In developing its budget estimates, DOD applied a factor of zero for
                   technology and intensity. According to health care financing experts, DOD’s
                   Defense Health Program is subject to some level of cost growth because of
                   the addition of new technology and increased intensity of treatment. These
                   experts agreed that a factor of between 1 and 2 percent would be
                   appropriate to apply to DOD’s program. Also, DOD assumed in its POM
                   estimate that it would save 5 percent from utilization management
                   techniques, even though it did not have a formal methodology for
                   estimating this level of savings. For example, DOD could have derived
                   utilization management savings estimates from analogous private sector
                   health care programs with an adjustment for DOD-unique aspects. Instead,
                   DOD officials discussed and agreed on the target number from a range of
                   savings (2 to 14 percent) reported by private sector managed health care
                   organizations. Later, in a revised health program budget estimate, DOD
                   projected a 7-percent savings during fiscal years 1998-2003 from utilization

                   3
                    Technological advances such as CAT scans, magnetic resonance imaging, organ transplants, and new
                   drug treatments increase costs. Costs are often compounded when new procedures increase the
                   intensity of treatment.



                   Page 2                                           GAO/NSIAD-97-83BR Defense Health Program
                  B-275854




                  management techniques and its prime vendor program that uses best
                  management practices to buy medical supplies and pharmaceuticals. The
                  revised projected savings, along with other measures, effectively reduced
                  health program budget projections below POM estimates.

                  Although DOD’s budget assumptions appear to be optimistic, the extent to
                  which future costs might exceed the budget estimates is unknown. We
                  analyzed the effects of using different assumptions on the budget
                  estimates for fiscal years 1998-2003. If DOD had accounted for technology
                  and intensity of treatment at a rate of 1.5 percent, for example, in
                  constructing its initial estimates, the projections would have been
                  $3.2 billion higher cumulatively. And if DOD is unable to achieve the level of
                  estimated savings it anticipates from utilization management techniques,
                  program costs would exceed the budget estimate by an additional amount.
                  For example, if DOD achieves a 3-percent savings from utilization
                  management over fiscal years 1998-2003 (instead of the 5-percent
                  assumption it used in initial estimates) and accounts for technology and
                  intensity of treatment at the 1.5 percent rate, program costs would be
                  $4.5 billion greater than estimated. We also compared the 1998 POM—with
                  the 1.5 percent technology factor and the reduced 3-percent savings from
                  utilization management—to revised budget estimates from the
                  post-program and budget decision cycle. This comparison showed that
                  health program costs for fiscal years 1998-2003 could be $8.4 billion
                  greater than estimated. However, the extent to which future costs exceed
                  the Defense Health Program budget estimates depends on the specific
                  assumptions applied.


                  We discussed our draft report with DOD officials, who partially concurred
Agency Comments   with the findings. We incorporated their suggestions into this report as
                  appropriate. DOD commented that it is not appropriate to include an
                  additional cost growth factor for technology and intensity at this time
                  because the matter is still under study. However, our analysis of the
                  literature and discussions with experts show that technology and intensity
                  is widely recognized as a health care cost growth factor that is by
                  definition beyond medical inflation in the private and public sectors.
                  Health care financing experts and Defense Health Affairs officials agree
                  that cost growth from technology and intensity of treatment affects the
                  Defense Health Program. While DOD has not yet determined the specific
                  rate to apply to its program, experts told us a factor of about 1 or 2 percent
                  would be appropriate to apply to the capitation model. As a result, we
                  believe that while the study has not yet been completed, it is reasonable



                  Page 3                                 GAO/NSIAD-97-83BR Defense Health Program
              B-275854




              for DOD to include a factor for cost growth from technology and intensity
              in the budget estimates.

              DOD  also commented that the 73-percent real growth in operation and
              maintenance spending in the health program between 1985 and 1996
              reflects the consolidation in 1991 of the various medical programs in the
              military services into the Defense Health Program and that earlier data on
              costs were compiled from inconsistent historical data. While DOD correctly
              points out that its health and medical program spending was spread
              among the military services until the Defense Health Program was created,
              our analysis of this cost growth was taken from various DOD Future Years
              Defense Programs using defense mission categories that cut across
              military service-specific programs.

              DOD agreed that it had no formal methodology or analysis to support its
              assumptions of 5 percent and 7 percent utilization management savings
              through fiscal year 2003. DOD also commented that while the DOD
              Comptroller supports the capitation model concept for budgeting
              purposes, that office does not necessarily agree with the data or
              assumptions currently being used to generate the estimate.


              We extracted and analyzed estimated total obligational authority data for
Scope and     the Defense Health Program from the 1998 POM. As DOD revised its
Methodology   estimates to prepare the President’s budget and the 1998 Future Years
              Defense Program, we obtained updated information and compared it to
              the original POM. We also obtained information on the capitation model
              concept that DOD Health Affairs uses to make program budget projections
              and discussed the factors and assumptions used in the model with DOD
              Health Affairs and DOD Program Analysis and Evaluation officials. At our
              request, DOD Health Affairs applied the model using a technology and
              intensity of treatment cost growth factor and a lower rate of utilization
              management savings in order for us to estimate the health program
              budgets under different assumptions. We also discussed the model with
              knowledgeable experts outside DOD and reviewed reports on health care
              costs available from federal agencies and private organizations. However,
              we did not validate the accuracy or completeness of DOD’s capitation
              model.

              We performed our review between September 1996 and January 1997 in
              accordance with generally accepted government auditing standards.




              Page 4                                GAO/NSIAD-97-83BR Defense Health Program
B-275854




We are providing copies of this report to the Chairmen and Ranking
Minority Members of the House Committee on National Security, the
Senate Committee on Armed Services, and the Senate Committee on
Appropriations; the Secretaries of Defense, the Army, the Navy, and the
Air Force; and the Director, Office of Management and Budget. Copies will
also be made available to others upon request.

If you have any questions about this report, please contact me at
(202) 512-3504. The major contributors to this report were Davi M.
D’Agostino and Richard A. McGeary.




Richard Davis
Director, National Security
  Analysis




Page 5                               GAO/NSIAD-97-83BR Defense Health Program
Contents



Letter                                                                                          1


Briefing Section I                                                                              8
                       Defense Health Progam in the Defense Budget                              8
Background             Most Defense Health Spending is for Patient Care                        10
                       Defense Health Care Benefits and TRICARE Program                        12
                         Components

Briefing Section II                                                                            14
                       Projected Total Obligational Authority for Defense Health               14
Budget Trends            Program
                       Distribution of Defense Health Program Funds by Major Cost              16
                         Categories
                       Trends in Defense Health Program TOA by Category                        18
                       Trends in Patient Care by Source                                        20
                       Distribution of Defense Health Program Beneficiaries                    22
                       Historical Defense Health TOA Trends                                    24
                       Historical and Projected Defense Health Share of DOD’s TOA              26
                       History of DOD’s Underestimated Defense Medical Program TOA             28

Briefing Section III                                                                           30
                       DOD’s Methodology and Assumptions in Constructing the                   30
Model and                Estimate
Assumptions            DOD’s Methodology and Assumptions in Constructing the                   32
                         Estimate
                       DOD’s Methodology and Assumptions in Constructing the                   34
                         Estimate
                       Defense Health POM Estimate, Adding 1.5 Percent for                     36
                         Technology and Intensity
                       Defense Health POM With 3 Percent Utilization Savings and 1.5           38
                         Percent Technology Cost
                       1998 POM and 1998 Post-Program Budget Decision Cycle Data               40
                       Updated Budget Estimate and 1998 POM With 3 Percent                     42
                         Utilization Management Savings and 1.5 Percent Technology Cost




                       Page 6                             GAO/NSIAD-97-83BR Defense Health Program
Contents




Abbreviations

CHAMPUS    Civilian Health and Medical Program of the Uniformed
                 Services
DOD        Department of Defense
PA&E       Program Analysis and Evaluation
POM        Program Objective Memorandum
PBD        program budget decision
TOA        total obligational authority


Page 7                            GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I

Background




      GAO            Defense Health Program in the Defense
                     Budget
                 Central medical is DOD's third largest
                 infrastructure category.
                 Defense Health Program captures 98 percent
                 of central medical infrastructure for fiscal year
                 1997 and consumes about 6 percent of the
                 DOD budget.
                 DOD Health Affairs, Program Analysis and
                 Evaluation, and Defense Comptroller have key
                 roles in Defense Health Program budget
                 estimates.




                              Page 8                GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I
Background




Central medical is the third largest of eight infrastructure categories, after
installation support and central training, and is expected to remain the
third largest for the foreseeable future. Most of the central medical
infrastructure category consists of the Defense Health Program. The
Department of Defense (DOD) projects that the program will represent
about 6 percent of DOD’s total budget through at least fiscal year 2003.

DOD Health Affairs develops the Defense Health Program budget consistent
with guidance and direction from the DOD Program Analysis and
Evaluation (PA&E) directorate and the DOD Comptroller.




Page 9                                  GAO/NSIAD-97-83BR Defense Health Program
                 Briefing Section I
                 Background




GAO   Most Defense Health Spending Is for Patient
      Care

      About 73 percent of Defense Health Program
      costs are for patient care.
      Patient care is medical benefits for active duty and
      retired military and their dependents through
      military hospitals and clinics and DOD-contracted
      care.
      Some patient care is required for wartime
      readiness; the rest is for peacetime medical
      benefits.
      The program is regarded as an entitlement
      program within the discretionary DOD budget.




                 Page 10                GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I
Background




The majority of the Defense Health Program budget is dedicated to patient
care. In addition to providing patient care to meet wartime readiness
requirements, the program also serves the peacetime health care needs of
its beneficiaries. Active duty and retired military personnel under age 65
and dependents are eligible for care in DOD medical facilities under title 10,
U.S.C., or they may choose DOD-contracted care in the private sector.
Military retirees over age 65 are eligible for treatment in DOD medical
facilities on a space-available basis.

Although the DOD budget is discretionary, active duty and retired military
personnel and their dependents consider the Defense Health Program to
be an integral part of their employment and retirement benefits. For this
reason, the Defense Health Program is regarded somewhat like an
entitlement program.




Page 11                                GAO/NSIAD-97-83BR Defense Health Program
             Briefing Section I
             Background




GAO Defense Health Care Benefits and
     TRICARE Program Components

     Direct care is medical care provided by
     DOD personnel in DOD military medical
     facilities.
     DOD's new TRICARE program includes
      a health maintenance organization,
      a preferred provider organization, and
      CHAMPUS fee-for-service coverage.




             Page 12              GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I
Background




Direct care (patient care provided in DOD medical facilities) is very
inexpensive to the beneficiary. For example, outpatient care provided in
DOD medical facilities is free. Inpatient care for retired enlisted personnel
is also free. Retired officers pay $4.75 per day, and dependents pay $9.50
per day for inpatient care.

Beneficiaries may also choose one of the three options in DOD’s new
TRICARE system. TRICARE Prime is a health maintenance organization
type of plan. Retirees pay $230 per year ($460 for families), $12 per
outpatient visit, and the greater of $25 per hospital admission or
$11 per day. Members can also enroll in Prime with a military treatment
facility and avoid the per visit charges. TRICARE Extra is a preferred
provider organization plan. It has a $300 deductible per family and a $150
deductible per person, along with a 15-percent co-payment for active duty
families and a 20-percent co-payment for retirees for outpatient care.
Inpatient care costs $250 per day or 25 percent of the charge. Lastly,
TRICARE Standard is the former Civilian Health and Medical Program of
the Uniformed Services (CHAMPUS). It has a maximum $300 deductible and
a 20-percent co-payment for active duty family members’ outpatient care,
and a 25-percent co-payment for retirees and their dependents. Inpatient
care costs $323 per day or 25 percent of the charge.




Page 13                                 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II

Budget Trends




      GAO             Projected Total Obligational Authority
                      for Defense Health Program
        Current-year dollars in billions
        18.5

         18

        17.5

         17

        16.5

         16

        15.5

         15

        14.5
               1997        1998              1999              2000                2001         2002           2003
                                                            Fiscal year




                                           Note: Total Obligational Authority (TOA).

                                           Source: 1998 Program Objective Memorandum (POM).




                                           Page 14                                        GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




The 1998 POM shows that DOD projects the Defense Health Program to
increase by about $2.7 billion, or 18 percent, from fiscal year 1998 to fiscal
year 2003, in current-year dollars. When viewed in constant dollars, DOD
projects no program growth. However, between fiscal year 1985 and 1996,
the operation and maintenance funds in DOD’s health program increased by
73 percent in real terms. Operation and maintenance funds account for
about two-thirds of the Defense Health Program budget.




Page 15                                GAO/NSIAD-97-83BR Defense Health Program
                                    Briefing Section II
                                    Budget Trends




GAO   Distribution of Defense Health Program
      Funds by Major Cost Categories

      72.8%                                                        73.3%




                                                            1.7%                                                 1.2%
                                                            1.3%                                                 1.3%



                                                          6.5%                                                  6.5%




                                                 7.5%                                                    7.2%



                                       10.2%                                                  10.4%


                             FY 1998                                               FY 2003


              Patient care     Patient support   Base operations    Training   Construction     Procurement




                                    Source: 1998 POM.




                                    Page 16                                       GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




The majority of the Defense Health Program budget is for total patient
care. In the fiscal year 1998 estimate, patient care accounts for
$11.2 billion of the $15.5 billion budget. This portion of the budget is
projected to remain at about 73 percent. Consequently, the driving force
behind the Defense Health Program budget is patient care, both medical
care for active duty personnel and their dependents and health care
benefits received by military retirees and their dependents.




Page 17                              GAO/NSIAD-97-83BR Defense Health Program
                                      Briefing Section II
                                      Budget Trends




GAO           Trends in Defense Health Program
              TOA by Category
Current-year dollars in billions
10



 8



 6



 4



 2



 0
     1997             1998             1999              2000             2001             2002          2003
                                                      Fiscal year

                         DOD direct care Contracted care Other costs Care support Non-DOD care




                                      Source: 1998 POM.




                                      Page 18                                      GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




Direct patient care, which DOD provides in its medical facilities, is the
largest portion of the Defense Health Program budget. The estimated TOA
for direct care is projected to increase by about 16 percent, from
$6.9 billion in fiscal year 1997 to $7.9 billion in fiscal year 2003. Patient
care that is purchased or provided under contract is projected to increase
by 31 percent, from $3.5 billion to $4.6 billion. Other budget categories
within the Defense Health Program are also projected to increase, but to
less extent. For example, patient care support is projected to increase by
23 percent. Patient care support includes a number of functions such as
management headquarters, military public and occupational health,
veterinary services, examining activities, the aeromedical evacuation
system, and the Armed Forces Institute of Pathology.




Page 19                                GAO/NSIAD-97-83BR Defense Health Program
                                       Briefing Section II
                                       Budget Trends




GAO         Trends in Patient Care by Source

 Current-year dollars in billions
 16


 14
                                                                                          12.777       13.106
                                                                             12.437
                                                               11.873
 12                        11.232            11.461
           10.846
 10


  8


  6


  4


  2


  0
            1997            1998              1999              2000          2001         2002         2003
                                                             Fiscal year

                                    DOD direct care   Managed care         CHAMPUS    Non-DOD




                                       Source: 1998 POM.




                                       Page 20                                        GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




We further analyzed the patient care portion of the Defense Health
Program POM. DOD projects in the 1998 POM that TOA for all patient
care—both care in military treatment facilities and government-funded
care from civilian providers—will increase 21 percent, from $10.8 billion in
fiscal year 1997 to $13.1 billion in fiscal year 2003. Patient care consists of
care provided directly in DOD facilities, managed care provided through
contracts, the former CHAMPUS fee-for-service health care plan, and care
provided in non-DOD facilities such as emergency rooms or Uniformed
Services Treatment Facilities.1

DOD  direct care is the largest portion of the patient care budget category
and is projected to continue as the dominant category through
fiscal year 2003. However, managed care support spending is projected to
expand. Health care support contracts under the new TRICARE system
are projected to increase by 67 percent, from $2.4 billion to $4 billion,
while the CHAMPUS portion is projected to decrease, from $1 billion to
about $514 million.




1
 Uniformed Services Treatment Facilities are former Public Health Service hospitals now under
civilian ownership and designated by the Congress in the Military Construction Authorization Act of
1982 (42 U.S.C. 248c) to be part of the Military Health Services System.



Page 21                                            GAO/NSIAD-97-83BR Defense Health Program
                               Briefing Section II
                               Budget Trends




GAO   Distribution of Defense Health Program
      Beneficiaries

                               26.0%                                                     25.0%
      35.0%                                                     34.0%




                          39.0%                                                     41.0%

               FY 1997 users                                             FY 2003 users

         28.0%                                                       27.0%
                                  20.0%                                                     19.0%




                52.0%                                                     54.0%

              FY 1997 eligibles                                         FY 2003 eligibles

                        Active duty       Active dependents   Retirees/dependents




                               Source: 1998 POM.




                               Page 22                                         GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




Among all users of the DOD health system, DOD projects a slight decrease in
the share of active duty personnel and their dependents and a slight
increase in the share of retirees and their dependents between fiscal year
1997 and 2003. Of user beneficiaries, 61 percent are projected to be active
duty personnel and their dependents in fiscal year 1997 compared to
59 percent in fiscal year 2003. However, retired beneficiaries and their
dependents who use the system are projected to increase as a percentage
of the user population, from 39 percent in fiscal year 1997 to 41 percent in
fiscal year 2003.

More people are eligible to obtain health care benefits under the Defense
Health Program than the number who actually use the benefits. For
example, some retirees and their dependents may be eligible for non-DOD
health care benefits through their current private sector employer. Among
the total of those eligible for DOD health care benefits, the percentage of
active duty personnel and their dependents is projected to decrease by
2 percent between fiscal year 1997 and 2003, from 48 percent to
46 percent, while the percentage of retirees and their dependents is
expected to increase by 2 percent, from 52 percent to 54 percent, over the
same period.2




2
 DOD Health Affairs officials expect the number of military retirees over age 65 to increase through
2014. Although the elderly may tend to require more health care than some other segments of the
population—which could affect health care costs—military retirees receive care in DOD medical
facilities on a space-available basis. Medicare-eligible dependents and retirees are not eligible for
DOD-contracted care under the TRICARE system.




Page 23                                              GAO/NSIAD-97-83BR Defense Health Program
                                       Briefing Section II
                                       Budget Trends




GAO          Historical Defense Health TOA Trends

 Current-year dollars in billions
 20




 15




 10




  5




  0
      1970   1972   1974   1976     1978   1980   1982    1984 1986 1988      1990   1992   1994   1996   1998   2000
                                                            Fiscal year

                                                         Defense health TOA




                                       Source: DOD Health Affairs historical data and 1998 POM.




                                       Page 24                                         GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




The TOA for the medical program has increased from about $2 billion in
fiscal year 1970 to $17 billion projected for fiscal year 2001.3 (Both fiscal
years’ amounts are expressed in current dollars.) DOD Health Affairs
attributes the flattening of the curve since fiscal year 1990 to the reduced
force structure and initiatives to better manage patient care. For example,
DOD has reduced the average length of hospital stays in DOD medical
facilities.




3
 Because an appropriate DOD deflator is unavailable, we present TOA in current dollars. It should be
noted that some of the increase since 1970 is due to general price level inflation.



Page 25                                            GAO/NSIAD-97-83BR Defense Health Program
                               Briefing Section II
                               Budget Trends




GAO          Historical and Projected Defense
             Health Share of DOD's TOA
Percentage
7


6


5


4


3


2


1


0
    1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
                                            Fiscal year

                                         Percentage of DOD's TOA




                               Source: DOD Health Affairs.




                               Page 26                              GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




The medical share of DOD’s TOA has increased from 1.7 percent 30 years
ago to 6.2 percent in recent years. Although the historical data show an
upward trend in the Defense Health portion of the total DOD budget, DOD
projects a flat 6.2-percent share of TOA from fiscal year 1996 to fiscal year
2001.




Page 27                                 GAO/NSIAD-97-83BR Defense Health Program
                                      Briefing Section II
                                      Budget Trends




GAO          History of DOD's Underestimated
             Defense Medical Program TOA
Current-year dollars in millions
800




600




400




200




  0
      1986    1987      1988       1989     1990      1991     1992   1993   1994   1995     1996    1997
                                                       Fiscal year




                                      Source: DOD Health Affairs.




                                      Page 28                                  GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II
Budget Trends




DOD has a history of underestimating its medical program budget authority.
DOD officials attributed this problem to the difficulty in estimating CHAMPUS
costs. For 8 of the 12 fiscal years since 1986, DOD’s health program has
received additional funds above those budgeted. The understated budgets
were addressed by either reprogramming funds or supplemental funding in
6 years. There were appropriation adjustments in 2 years. In 4 of the past
6 years additional funding was not required.




Page 29                               GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III

Model and Assumptions




      GAO              DOD's Methodology and Assumptions
                       in Constructing the Estimate
                       Health Affairs uses a capitation financing
                       model to estimate patient care costs.
                       DOD considers the capitation financing
                       model to reasonably estimate Defense
                       Health Program costs.




                                Page 30            GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




To construct the Defense Health Program budget, DOD Health Affairs uses
a capitation financing model that estimates per capita health care costs on
the basis of the user population, adjusted for gender and age and other
factors such as inflation. The budget is constructed under the guidance
and direction of the Defense Comptroller and PA&E.

PA&E and the Defense Comptroller accept the model as a reasonable
approach for estimating patient care costs. An Institute for Defense
Analysis analyst who is familiar with the model agrees. Health Care
Financing Administration officials noted that DOD’s current approach is an
improvement over previous DOD budgeting methods, which were based on
historical workload.




Page 31                               GAO/NSIAD-97-83BR Defense Health Program
                Briefing Section III
                Model and Assumptions




GAO   DOD's Methodology and Assumptions
      in Constructing the Estimate
      DOD assumed 5 percent savings from
      utilization management for the 1998
      Defense Health Program POM and raised
      this to 7 percent for revised estimates.
      Utilization management savings are not
      derived from program performance data
      or formal methodology.
      Congressional Budget Office and Health
      Care Financing Administration suggest
      anticipated savings may be optimistic.




                Page 32                 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




Managed health care allows for the application of utilization management
techniques, such as gatekeepers, to reduce unnecessary treatment and
testing. The introduction of such techniques within the Defense Health
Program may result in lower costs. DOD initially estimated cumulative
savings of 5 percent from utilization management in the Defense Health
Program POM, but during the course of our review it increased the
projection to 7 percent in revised budget projections.

PA&E and DOD Health Affairs did not have managed care program
performance data to permit a more reliable estimate and, in the absence of
such data, did not derive the utilization management savings assumption
from a formal methodology or analysis. For example, DOD might have
derived estimated utilization management savings from an analysis of
analogous programs in the private sector, or from a blend of specific
savings from specific types of health care programs that apply utilization
management techniques similar to those being employed in DOD’s program.
DOD could have then adjusted these estimates for DOD-unique conditions.
Instead, DOD officials who constructed the estimates explained that they
discussed and agreed on savings estimates from a range of 2 to 14 percent
experienced in the private sector without a formal methodology or
analysis as a basis.

In a July 1995 study, the Congressional Budget Office stated that
depending on the assumptions, the broad application of managed care
techniques—including utilization management—under DOD’s new
TRICARE system in fiscal year 1996 could generate a savings of no more
than 1 percent under optimistic assumptions and increased costs of up to
6 percent under pessimistic assumptions. Health Care Financing
Administration officials stated that although the introduction of utilization
management generally can be expected to generate one-time savings, they
could not offer an estimate as to the extent of savings that DOD might
achieve.




Page 33                                GAO/NSIAD-97-83BR Defense Health Program
                Briefing Section III
                Model and Assumptions




GAO   DOD's Methodology and Assumptions
      in Constructing the Estimate
      DOD's model allows for a cost growth factor
      for technology and intensity of treatment, but
      the 1998 POM estimate assumes a factor of
      zero.
      A contractor is studying the extent to which
      technology and intensity affect the Defense
      Health Program budget.
      Outside experts believe that a reasonable
      estimate for cost growth from technology and
      intensity of treatment is about 1 or 2 percent.




                Page 34                 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




As health care providers adopt new and expensive medical technologies
and offer more intensive patient treatment, medical cost growth occurs
above the rate of medical inflation. Under a DOD contract, the Institute for
Defense Analysis has been studying for over a year the extent to which
new technology and increased intensity of treatment affect the Defense
Health Program budget. DOD Health Affairs has allowed for a technology
and intensity of treatment factor within its cost-estimating model.
However, because the contractor had not yet issued its report, DOD Health
Affairs applied zero for this cost growth factor.

A PA&E official stated that it is appropriate to apply a zero factor for
technology because DOD has a number of small, low-technology facilities
and performs fewer complex and expensive procedures compared to some
private sector hospitals. Further, the official stated that medical inflation
rates already account for technology cost growth.

We reviewed information on specialized units, medical procedures, and
services available at some of DOD’s larger medical facilities and found, for
example, that neonatal intensive care, oncology, HIV-AIDS, and open heart
surgery were common. All officials with whom we spoke within DOD and
outside of DOD agreed that precisely measuring the technology cost growth
factor is very complex and difficult. Nevertheless, analysts from the Health
Care Financing Administration and the Institute for Defense Analysis
estimated that a cost growth factor of about 1 or 2 percent for technology
and intensity of treatment is a reasonable factor for DOD to apply in
estimating the Defense Health Program budget. It is widely recognized in
health care financing literature that technology and intensity cost growth
occurs beyond medical inflation.




Page 35                                GAO/NSIAD-97-83BR Defense Health Program
                                    Briefing Section III
                                    Model and Assumptions




GAO            Defense Health POM Estimate, Adding
               1.5 Percent for Technology and Intensity
 Current-year dollars in billions
 20


                                                                                                $19.0
 19

                                                                              $18.2
 18
                                                                 $17.5
                                                                                                $17.9
 17
                                              $16.8                            $17.4
                                                                    $17.0
                           $16.2
       $15.9                                    $16.4
 16
                            $15.8
         $15.5
 15
      1998                 1999                2000                 2001         2002               2003
                                                      Fiscal year

                                                              With 1.5%
                                               FY 98 POM
                                                           technology cost




                                    Source: 1998 POM.




                                    Page 36                                  GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




Because DOD does not account for the technology and intensity of
treatment cost growth factor in its budget estimate, its Defense Health
Program budget is likely to be understated. To illustrate the effect of
accounting for this factor, we asked DOD Health Affairs to apply the model
using a technology cost growth factor of 1.5 percent instead of zero.1 The
addition of this technology factor to the model increased the POM estimate
by a cumulative $3.4 billion between fiscal year 1998 and 2003.




1
 A 1.5 percent factor is the approximate midpoint of the range of estimates that health care financing
experts thought was reasonable. Although DOD has not yet determined the appropriate factor for the
Defense Health Program, we believe that adding 1.5 percent illustrates the potential effect of applying
a factor within this range.



Page 37                                             GAO/NSIAD-97-83BR Defense Health Program
                                      Briefing Section III
                                      Model and Assumptions




GAO            Defense Health POM With 3 Percent Utilization
               Savings and 1.5 Percent Technology Cost
Current-year dollars in billions
20

                                                                                               $19.3
19
                                                                                 $18.5

18                                                                    $17.8

                                                $17.0                                             $17.9
17                                                                                 $17.4
                                                                        $17.0
                            $16.3
      $15.8                                      $16.4
16
                              $15.8
       $15.5
15
     1998                 1999               2000                     2001        2002                 2003
                                                        Fiscal year

                                                          3% utilization &
                                                98 POM
                                                          1.5% technology




                                      Source: 1998 POM.




                                      Page 38                                   GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




The extent of savings expected from utilization management techniques is
speculative. DOD applied a 5-percent savings rate to the 1998 POM estimate.
This estimate was not based on a study or other methodology, but rather
was a percentage DOD selected because it fell within the 2- to 14-percent
range experienced by private sector managed health care providers. We
asked DOD Health Affairs to apply the model using both a 1.5-percent
technology cost growth factor and a reduced utilization management
savings rate of 3 percent. Although the savings rate, if any, is unknown at
this time, applying a 3-percent rate illustrates the effect of a lower rate of
savings than DOD has included in its estimates. Using these two adjusted
factors, the combined cumulative underbudgeting of the Defense Health
Program between fiscal year 1998 and 2003 would be $4.5 billion.




Page 39                                GAO/NSIAD-97-83BR Defense Health Program
                                       Briefing Section III
                                       Model and Assumptions




GAO               1998 POM and 1998 Post-Program
                  Budget Decision Cycle Data
Current-year dollars in billions
18.5


 18                                                                                                  $17.9

                                                                                   $17.4
17.5
                                                                   $17.0
 17

                                                 $16.4                                                  $16.9
16.5
                                                                                           $16.6
                           $15.8                                           $16.3
 16
         $15.5
15.5                                                 $15.7

          $15.4                $15.3
 15
       1998                1999                   2000                 2001            2002               2003
                                                         Fiscal year

                                                   POM Post-PBD cycle




                                       Note: Program Budget Decision—PBD.

                                       Source: 1998 POM and post-PBD cycle data.




                                       Page 40                                     GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III
Model and Assumptions




As the programming and budgeting process continued after the Defense
Health Program POM was issued, DOD reduced its estimate of TOA for fiscal
years 1998-2003. The 1998 POM estimate for fiscal year 2003 was
$17.9 billion, for example, whereas the post-program budget decision (PBD)
estimate was $16.9 billion. DOD increased its estimated savings from
utilization management from 5 percent to 7 percent, lowered the cost of
living assumption in the base year because 1996 inflation was lower than
expected, and reduced operation and maintenance funding among other
measures.




Page 41                              GAO/NSIAD-97-83BR Defense Health Program
                                       Briefing Section III
                                       Model and Assumptions




GAO            Updated Budget Estimate and 1998 POM With
               3 Percent Utilization Management Savings and
               1.5 Percent Technology Cost
 Current-year dollars in billions
 20
                                                                                                          $19.3

 19                                                                                     $18.5

                                                                    $17.8
 18

                                               $17.0
 17
                          $16.3
                                                                                                             $16.9
             $15.8                                                                           $16.6
 16                                                                         $16.3
                                                        $15.7
         $15.4                      $15.3
 15
      1998                 1999                  2000                   2001                2002               2003
                                                          Fiscal year

                                            1998        1998 POM: 3% utilization savings
                                      Post-PBD estimate   and 1.5% technology factor




                                       Source: 1998 post-PBD cycle data and 1998 POM.




                                       Page 42                                          GAO/NSIAD-97-83BR Defense Health Program
           Briefing Section III
           Model and Assumptions




           To illustrate the effect of DOD’s lower estimate of Defense Health Program
           TOA, we compared the post-PBD cycle estimate to the POM estimate that
           incorporated a 1.5-percent technology factor and a lower utilization
           management savings of 3 percent. TOA using the post-PBD cycle data was
           $16.9 billion in 2003, for example, while the estimated program
           requirement using the revised assumptions for technology and utilization
           management savings was $19.3 billion. Using these assumptions, the
           post-PBD estimates could be understated by a cumulative $8.4 billion from
           fiscal year 1998 to fiscal year 2003.




(701102)   Page 43                               GAO/NSIAD-97-83BR Defense Health Program
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